Related Party Transactions

9 Months Ended

Sep. 30, 2016

RELATED PARTY TRANSACTIONS

The Company has extensive transactions and relationships with Prudential Insurance and other affiliates. Although we seek to ensure that these transactions and relationships are fair and reasonable, it is possible that the terms of these transactions are not the same as those that would result from transactions among unrelated parties.

Expense Charges and Allocations

Many of the Company’s expenses are allocations or charges from Prudential Insurance or other affiliates. These expenses can be grouped into general and administrative expenses and agency distribution expenses.

The Company’s general and administrative expenses are charged to the Company using allocation methodologies based on business production processes. Management believes that the methodology is reasonable and reflects costs incurred by Prudential Insurance to process transactions on behalf of the Company. The Company operates under service and lease agreements whereby services of officers and employees, supplies, use of equipment and office space are provided by Prudential Insurance. The Company reviews its allocation methodology periodically which it may adjust accordingly. General and administrative expenses include allocations of stock compensation expenses related to a stock option program and a deferred compensation program issued by Prudential Financial. The expense charged to the Company for the stock option program was $0.3 million for both the three months ended September 30, 2016 and 2015, and $0.9 million for both the nine months ended September 30, 2016 and 2015. The expense charged to the Company for the deferred compensation program was $2 million and $1 million for the three months ended September 30, 2016 and 2015, respectively, and $6 million and $5 million for the nine months ended September 30, 2016 and 2015, respectively.

The Company is charged for its share of employee benefits expenses. These expenses include costs for funded and non-funded contributory and non-contributory defined benefit pension plans. Some of these benefits are based on final group earnings and length of service while others are based on an account balance, which takes into consideration age, service and earnings during career. The Company’s share of net expense for the pension plans was $6 million and $5 million for the three months ended September 30, 2016 and 2015, respectively, and $17 million and $16 million for the nine months ended September 30, 2016 and 2015, respectively.

The Company is also charged for its share of the costs associated with welfare plans issued by Prudential Insurance. These expenses include costs related to medical, dental, life insurance and disability. The Company's share of net expense for the welfare plans was $7 million for both the three months ended September 30, 2016 and 2015, and $21 million and $19 million for the nine months ended September 30, 2016 and 2015, respectively.

Prudential Insurance sponsors voluntary savings plans for its employees' 401(k) plans. The plans provide for salary reduction contributions by employees and matching contributions by the Company of up to 4% of annual salary. The Company’s expense for its share of the voluntary savings plan was $2 million for both the three months ended September 30, 2016 and 2015, and $7 million and $6 million for the nine months ended September 30, 2016 and 2015, respectively.

The Company is charged distribution expenses from Prudential Insurance’s agency network for both its domestic life and annuity products through a transfer pricing agreement, which is intended to reflect a market based pricing arrangement.

The Company pays commissions and certain other fees to Prudential Annuities Distributors, Inc. (“PAD”) in consideration for PAD’s marketing and underwriting of the Company’s annuity products. Commissions and fees are paid by PAD to broker-dealers who sell the Company’s products. Commissions and fees paid by the Company to PAD were $182 million and $177 million for the three months ended September 30, 2016 and 2015, respectively, and $546 million and $592 million for the nine months ended September 30, 2016 and 2015, respectively.

Corporate Owned Life Insurance

The Company has sold five Corporate Owned Life Insurance (“COLI”) policies to Prudential Insurance, and one to Prudential Financial. The cash surrender value included in separate accounts for these COLI policies was $3,317 million at September 30, 2016 and $2,873 million at December 31, 2015. Fees related to these COLI policies were $10 million and $13 million for the three months ended September 30, 2016 and 2015, respectively, and $31 million and $34 million for the nine months ended September 30, 2016 and 2015, respectively. The Company retains the majority of the mortality risk associated with these COLI policies. In October 2013, the Company increased the maximum amount of mortality risk on any life to $3.5 million for certain COLI policies.

Derivative Trades

In its ordinary course of business, the Company enters into OTC derivative contracts with an affiliate, PGF. For these OTC derivative contracts, PGF has a substantially equal and offsetting position with an external counterparty. See Note 5 for additional information.

Joint Ventures

The Company has made investments in joint ventures with certain subsidiaries of Prudential Financial. "Other long-term investments" includes $96 million as of September 30, 2016 and $146 million as of December 31, 2015. "Net investment income" related to these ventures includes a gain of $3 million and a loss of $5 million for the three months ended September 30, 2016 and 2015, respectively, and a loss of $0.1 million and $0.0 million for the nine months ended September 30, 2016 and 2015, respectively.

Affiliated Asset Administration Fee Income

The Company has a revenue sharing agreement with AST Investment Services, Inc. ("ASTISI") and Prudential Investments LLC ("Prudential Investments") whereby the Company receives fee income calculated on contractholder separate account balances invested in the Advanced Series Trust. Income received from ASTISI and Prudential Investments related to this agreement was $76 million and $81 million for the three months ended September 30, 2016 and 2015, respectively, and $218 million and $274 million for the nine months ended September 30, 2016 and 2015, respectively. These revenues are recorded as “Asset administration fees” in the Unaudited Interim Consolidated Statements of Operations and Comprehensive Income (Loss).

The Company has a revenue sharing agreement with Prudential Investments, whereby the Company receives fee income based on contractholders’ separate account balances invested in The Prudential Series Fund. Income received from Prudential Investments related to this agreement was $3 million for both the three months ended September 30, 2016 and 2015, and $10 million for both the nine months ended September 30, 2016 and 2015. These revenues are recorded as “Asset administration fees” in the Unaudited Interim Consolidated Statements of Operations and Comprehensive Income (Loss).

Affiliated Investment Management Expenses

In accordance with an agreement with PGIM, Inc. ("PGIM"), the Company pays investment management expenses to PGIM who acts as investment manager to certain Company general account and separate account assets. Investment management expenses paid to PGIM related to this agreement were $3 million and $4 million for the three months ended September 30, 2016 and 2015, respectively, and $12 million and $13 million for the nine months ended September 30, 2016 and 2015, respectively. These expenses are recorded as “Net investment income” in the Unaudited Interim Consolidated Statements of Operations and Comprehensive Income (Loss).

Affiliated Notes Receivable

Affiliated notes receivable included in “Other assets” at September 30, 2016 and December 31, 2015 were as follows:



	Maturity Dates			Interest Rates				September 30, 2016		December 31, 2015
								(in thousands)
U.S. Dollar floating rate notes	2025	-	2026	1.36%	-	2.34	%	$	6,492	$	23,013
U.S. Dollar fixed rate notes (1)	2022	-	2027	0.00%	-	14.85	%	141,215		139,069
Euro-denominated fixed rate notes			2025			2.30	%	559		543
Total long-term notes receivable - affiliated								$	148,266	$	162,625


(1)	All long-term notes receivable may be called for prepayment prior to the respective maturity dates under specified circumstances.

The affiliated notes receivable shown above include those classified as loans, and carried at unpaid principal balance, net of any allowance for losses and those classified as available-for-sale securities and other trading account assets carried at fair value. The Company monitors the internal and external credit ratings of these loans and loan performance. The Company also considers any guarantees made by Prudential Insurance for loans due from affiliates.

Accrued interest receivable related to these loans was $1 million at both September 30, 2016 and December 31, 2015, and is included in “Other assets”. Revenues related to these loans were $1 million and $2 million for the three months ended September 30, 2016 and 2015, respectively, and $4 million and $6 million for the nine months ended September 30, 2016 and 2015, respectively, and are included in “Other income.”

Affiliated Asset Transfers

The Company participates in affiliated asset trades with parent and sister companies. Book and market value differences for trades with a parent and sister are recognized within "Additional paid-in capital" (“APIC”) and "Realized investment gains (losses), net", respectively. The table below shows affiliated asset trades for the nine months ended September 30, 2016 and for the year ended December 31, 2015, excluding those related to the Variable Annuities Recapture effective April 1, 2016, as described in Note 1.



Affiliate	Date	Transaction	Security Type	Fair Value		Book Value		APIC, Net of Tax Increase/(Decrease)			Realized Investment Gain/(Loss), Net		Derivative Gain/(Loss)
				(in thousands)
Prudential Insurance	March-15	Purchase	Fixed Maturities & Trading Account Assets	$	91,972	$	73,849	$	(11,780	)	$	0	$	0
Prudential Insurance	June-15	Purchase	Fixed Maturities	$	11,096	$	10,480	$	(401	)	$	0	$	0
Prudential Insurance	March-16	Sale	Fixed Maturities & Short-Term Investments	$	88,783	$	88,875	$	(60	)	$	0	$	0

Debt Agreements

The Company is authorized to borrow funds up to $2.2 billion from affiliates to meet its capital and other funding needs. During the second quarter of 2016, the Company prepaid $125 million of its debt and reassigned all the remaining debt to PALAC as part of the Variable Annuities Recapture. See Note 1 for additional information on the reassignment effective April 1, 2016. The following table provides the breakout of the Company’s short-term and long-term debt with affiliates:



Affiliate	Date Issued	Amount of Notes - September 30, 2016		Amount of Notes - December 31, 2015		Interest Rate					Date of Maturity
		(in thousands)
Prudential Financial	12/15/2011	$	0	$	11,000				3.61	%			12/15/2016
Prudential Financial	12/16/2011	0		11,000					3.61	%			12/16/2016
Prudential Financial	11/15/2013	0		9,000					2.24	%			12/15/2018
Prudential Financial	11/15/2013	0		23,000					3.19	%			12/15/2020
Prudential Insurance	12/6/2013	0		120,000					2.60	%			12/15/2018
Prudential Insurance	12/6/2013	0		130,000					4.39	%			12/15/2023
Prudential Insurance	12/6/2013	0		250,000					3.64	%			12/15/2020
Prudential Insurance	9/25/2014	0		30,000					1.89	%			6/20/2017
Prudential Insurance	9/25/2014	0		40,000					3.95	%			6/20/2024
Prudential Insurance	9/25/2014	0		20,000					2.80	%			6/20/2019
Prudential Insurance	9/25/2014	0		50,000					3.95	%			6/20/2024
Prudential Insurance	9/25/2014	0		50,000					2.80	%			6/20/2019
Prudential Insurance	9/25/2014	0		100,000					3.47	%			6/20/2021
Prudential Insurance	9/25/2014	0		100,000					3.95	%			6/20/2024
Prudential Financial	12/15/2014	0		5,000					2.57	%			12/15/2019
Prudential Financial	12/15/2014	0		23,000					3.14	%			12/15/2021
Prudential Financial	6/15/2015	0		66,000					3.52	%			6/15/2022
Prudential Financial	6/15/2015	0		6,000					2.86	%			6/15/2020
Prudential Financial	9/21/2015	0		158,000		1.09	%	-	1.63	%	6/15/2016	-	6/15/2017
Prudential Financial	9/21/2015	0		132,000		1.40	%	-	1.93	%	12/17/2016	-	12/17/2017
Prudential Financial	9/21/2015	0		26,000		1.40	%	-	1.93	%	12/17/2016	-	12/17/2017
Prudential Financial	12/16/2015	0		5,000					2.85	%			12/16/2020
Prudential Financial	12/16/2015	0		1,000					2.85	%			12/16/2020
Prudential Financial	12/16/2015	0		18,000					3.37	%			12/16/2022
Total Loans Payable to Affiliates		$	0	$	1,384,000

The total interest expense to the Company related to loans payable to affiliates was $0 million and $13 million for the three months ended September 30, 2016 and 2015, respectively, and $13 million and $39 million for the nine months ended September 30, 2016 and 2015, respectively.

Contributed Capital and Dividends

In June and March of 2016, the Company received capital contributions in the amounts of $200 million and $5 million, respectively, from Prudential Insurance. For the year ended December 31, 2015, the Company did not receive any capital contributions.

During the nine months ended September 30, 2016, the Company paid dividends in the amount of $2.6 billion to Prudential Insurance. In September and December of 2015, the Company paid dividends in the amounts of $230 million and $200 million, respectively, to Prudential Insurance.

Reinsurance with affiliates

As discussed in Note 7, the Company participates in reinsurance transactions with certain affiliates.