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”), 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, Gibraltar Universal Life Reinsurance Company ("GUL Re"), Dryden Arizona Reinsurance Term Company (“DART”), its parent company Prudential Insurance, as well as third parties, and participated in reinsurance with its affiliate Pruco Re through March 31, 2016 and its affiliate UPARC through June 30, 2017. The reinsurance agreements provide risk diversification and additional capacity for future growth, limit the maximum net loss potential, manage statutory capital, facilitate the Company's capital market hedging program, and align accounting methodology for the assets and liabilities of living benefit guarantees 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, particularly reinsurance agreements involving living benefit guarantees. 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. Through June 30, 2017, the Company had an agreement with UPARC to reinsure a portion of the no-lapse guarantee provision on certain universal life products. See below for additional information on the change effective July 1, 2017 related to the recapture of the no-lapse guarantee risks that were previously reinsured to UPARC. 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”. For additional information related to the accounting for embedded derivatives, see Note 10 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

Reinsurance amounts included in the Company’s Unaudited Interim Consolidated Statements of Financial Position as of September 30, 2018 and December 31, 2017 were as follows:



	September 30, 2018			December 31, 2017
	(in thousands)
Reinsurance recoverables(1)	$	31,430,148		$	32,521,264
Policy loans	(129,636		)	(124,843		)
Deferred policy acquisition costs	(7,175,536		)	(6,832,729		)
Deferred sales inducements	(570,514		)	(638,065		)
Other assets(2)	168,397			205,430
Policyholders’ account balances	4,997,598			5,004,885
Future policy benefits	3,277,715			3,301,841
Other liabilities(1)(3)	628,105			605,155


(1)	Prior period amounts in the table above have been revised to correct previously reported numbers. These prior periods revisions have also been reflected in the Unaudited Interim Consolidated Financial Statements. See Note 11 for a more detailed description of the revision.


(2)	“Other assets” includes $0.1 million of unaffiliated activity as of both September 30, 2018 and December 31, 2017.


(3)	“Other liabilities” includes $73 million of unaffiliated activity as of both September 30, 2018 and December 31, 2017.

The reinsurance recoverables by counterparty are broken out below:



	September 30, 2018		December 31, 2017
	(in thousands)
PAR U	$	11,292,102	$	11,111,272
PALAC	6,351,987		8,388,988
PURC	3,980,335		3,577,962
PARCC	2,503,689		2,546,673
GUL Re	1,975,365		1,772,950
PAR Term	1,700,457		1,559,618
Prudential of Taiwan	1,411,997		1,406,686
Term Re	1,187,127		966,509
Prudential Insurance(1)	922,025		1,118,004
DART	79,061		0
Unaffiliated	26,003		72,602
Total reinsurance recoverables	$	31,430,148	$	32,521,264


(1)	Prior period amounts in the table above have been revised to correct previously reported numbers. These prior periods revisions have also been reflected in the Unaudited Interim Consolidated Financial Statements. See Note 11 for a more detailed description of the revision.

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, were as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017(8)			2018			2017(8)
	(in thousands)
Premiums:
Direct	$	451,790		$	428,684		$	1,343,358		$	1,280,293
Assumed(1)	57			63			175			194
Ceded(2)	(437,696		)	(413,623		)	(1,306,564		)	(1,242,529		)
Net premiums	14,151			15,124			36,969			37,958
Policy charges and fee income:
Direct	843,551			816,191			2,407,062			2,593,583
Assumed	125,079			127,493			369,483			351,464
Ceded(3)	(861,704		)	(814,579		)	(2,371,460		)	(2,804,107		)
Net policy charges and fee income	106,926			129,105			405,085			140,940
Net investment income:
Direct	87,260			87,605			249,366			269,999
Assumed	404			376			1,162			1,104
Ceded	(1,478		)	(1,459		)	(4,778		)	(3,925		)
Net investment income	86,186			86,522			245,750			267,178
Asset administration fees:
Direct	88,721			86,716			262,449			251,709
Assumed	0			0			0			0
Ceded	(84,994		)	(82,161		)	(251,705		)	(238,577		)
Net asset administration fees	3,727			4,555			10,744			13,132
Other income:
Direct	20,432			16,678			49,778			46,617
Assumed(4)	57			(25		)	(133		)	184
Ceded	(219		)	19			(46		)	(4		)
Amortization of reinsurance income	1,493			1,348			7,538			1,348
Net other income	21,763			18,020			57,137			48,145
Realized investment gains (losses), net:
Direct	1,234,853			1,390,083			3,213,137			442,408
Assumed	0			0			0			0
Ceded(5)	(1,284,276		)	(1,665,269		)	(3,348,492		)	(473,583		)
Realized investment gains (losses), net	(49,423		)	(275,186		)	(135,355		)	(31,175		)
Policyholders’ benefits (including change in reserves):
Direct	636,021			560,252			1,932,194			1,787,338
Assumed(6)	122,727			154,389			381,934			402,025
Ceded(7)	(748,925		)	(659,697		)	(2,212,128		)	(2,247,598		)
Net policyholders’ benefits (including change in reserves)	9,823			54,944			102,000			(58,235		)
Interest credited to policyholders’ account balances:
Direct	137,309			139,715			383,521			249,063
Assumed	34,414			33,858			105,780			101,687
Ceded	(127,014		)	(135,377		)	(361,239		)	(221,827		)
Net interest credited to policyholders’ account balances	44,709			38,196			128,062			128,923
Reinsurance expense allowances and general and administrative expenses, net of capitalization and amortization	(420,813		)	(502,172		)	(1,200,005		)	(968,627		)


(1)	"Premiums assumed" includes $0.1 million of unaffiliated activity for both the three months ended September 30, 2018 and 2017, and $0.2 million of unaffiliated activity for both the nine months ended September 30, 2018 and 2017.


(2)	"Premiums ceded" includes $(0.1) million and $0 million of unaffiliated activity for both the three and nine months ended September 30, 2018 and 2017, respectively.


(3)	"Policy charges and fee income ceded" includes $(8) million and $(4) million of unaffiliated activity for the three months ended September 30, 2018 and 2017, respectively, and $(14) million and $(5) million for the nine months ended September 30, 2018 and 2017, respectively.


(4)	"Other income assumed" includes $(0.1) million and $0 million of unaffiliated activity for the three months ended September 30, 2018 and 2017, respectively, and $(0.1) million and $0.2 million for the nine months ended September 30, 2018 and 2017, respectively.


(5)	“Realized investment gains (losses), net ceded” includes $(33) million and $(49) million of unaffiliated activity for the three months ended September 30, 2018 and 2017, respectively, and $(81) million and $(26) million for the nine months ended September 30, 2018 and 2017, respectively.


(6)	"Policyholders' benefits (including change in reserves) assumed" includes $0.1 million and $0 million of unaffiliated activity for the three months ended September 30, 2018 and 2017, respectively, and $0 million and $0.4 million for the nine months ended September 30, 2018 and 2017, respectively.


(7)	"Policyholders' benefits (including change in reserves) ceded" includes $(4) million and $(1) million of unaffiliated activity for the three months ended September 30, 2018 and 2017, respectively, and $(8) million and $5 million for the nine months ended September 30, 2018 and 2017, respectively.


(8)	Prior period amounts in the table above have been revised to correct previously reported numbers. These prior periods revisions have also been reflected in the Unaudited Interim Consolidated Financial Statements. See Note 11 for a more detailed description of the revision.

The gross and net amounts of life insurance face amount in force as of September 30, 2018 and 2017 were as follows:



	2018			2017
	(in thousands)
Direct gross life insurance face amount in force	$	922,386,427		$	868,069,034
Assumed gross life insurance face amount in force	41,088,914			42,061,830
Reinsurance ceded	(889,021,800		)	(844,683,670		)
Net life insurance face amount in force	$	74,453,541		$	65,447,194

Information regarding significant affiliated reinsurance agreements is described below.

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 certain of its universal policies, with effective dates prior to January 1, 2011.

Effective July 1, 2011, PLNJ reinsures an amount equal to 95% of all the risks associated with Universal Protector policies having no-lapse guarantees as well as certain of its universal policies, excluding those policies that are subject to principles-based reserving.

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.

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 guarantees, 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.

PURC

Pruco Life reinsures an amount equal to 70% of all the risks associated with its Universal Protector policies having no-lapse guarantees as well as certain of its universal policies, with effective dates from January 1, 2011 through December 31, 2013, with PURC and 95% of all the risks associated with Universal Protector policies having no-lapse guarantees, as well as certain of its universal policies, with effective dates from January 1, 2014 through December 31, 2016.

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.

GUL Re

Effective January 1, 2017, Pruco Life entered into an automatic coinsurance agreement with GUL Re to reinsure an amount equal to 95% of all the risks associated with Universal Protector policies having no-lapse guarantees, as well as certain of its universal policies, with effective dates on or after January 1, 2017, excluding those policies that are subject to principles-based reserving.

Effective July 1, 2017, Pruco Life amended this agreement to include 30% of Universal Protector policies having no-lapse guarantees as well as certain of its universal policies with effective dates prior to January 1, 2014.

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.

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 December 31, 2017, through an automatic coinsurance agreement with Term Re.

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. Effective July 1, 2017, this agreement has been terminated for certain new business, primarily Universal Life insurance policies. Effective July 1, 2017, the Company will reinsure a portion of the mortality risk directly to third-party reinsurers and retain all of the non-reinsured portion of the mortality risk.

On January 2, 2013, Pruco Life began to assume GUL business from Prudential Insurance in connection with the acquisition of the Hartford Financial Services Group, Inc. ("Hartford Financial"). The GUL business assumed from Prudential Insurance was subsequently retroceded to PAR U. In May 2018, Hartford Financial sold a group of operating subsidiaries, which includes two of Prudential Insurance's counterparties to these reinsurance arrangements. There is no impact to the terms, rights or obligations of Prudential Insurance, or operation of these reinsurance arrangements, as a result of this change in control of such counterparties. Similarly, there is no impact to the Company's reinsurance arrangements with respect to such GUL business as a result of this change in control.

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 guarantees. See Note 1 for additional information related to the Variable Annuities Recapture.

DART

Effective January 1, 2018, the Company entered into an automatic coinsurance agreement with DART to reinsure an amount equal to 95% of the risks associated with its term life insurance policies with effective dates on or after January 1, 2018.

UPARC

Through June 30, 2017, Pruco Life reinsured Universal Protector policies having no-lapse guarantees with effective dates through December 31, 2013 with UPARC. UPARC reinsured 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 July 1, 2017, Pruco Life recaptured the risks related to the no-lapse guarantees that were previously reinsured to UPARC and subsequently included these risks as part of the business ceded to GUL Re under the amended coinsurance agreement on that date. As part of the recapture, the Company received invested assets of $557 million as consideration from UPARC and unwound the associated reinsurance recoverable of $760 million. As a result, the Company recognized a loss of $203 million immediately.

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 guarantees 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

Between April 1, 2015 and December 31, 2016, the Company, excluding its subsidiaries, reinsured approximately 50% of the new business related to “highest daily” living benefits rider guarantees on HDI v.3.0 product, available with Prudential Premier Retirement Variable Annuity, to Union Hamilton. During that time period, the Company ceded approximately $2.9 billion of new rider premiums to Union Hamilton under this agreement. This reinsurance remains in force for the duration of the underlying annuity contracts. New sales of HDI v.3.0 subsequent to December 31, 2016 are not covered by this external reinsurance agreement. As of September 30, 2018, $3.2 billion of HDI v.3.0 account values are reinsured to Union Hamilton.