Related Party Transactions

9 Months Ended

Sep. 30, 2018

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-based awards program and a deferred compensation program issued by Prudential Financial. The expense charged to the Company for the stock-based awards program was $0.3 million and $0.2 million for the three months ended September 30, 2018 and 2017, respectively, and $1 million and $0.9 million for the nine months ended September 30, 2018 and 2017, respectively. The expense charged to the Company for the deferred compensation program was $1 million and $2 million for the three months ended September 30, 2018 and 2017, respectively, and $6 million and $7 million for the nine months ended September 30, 2018 and 2017, respectively.

The Company is charged for its share of employee benefit 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 earnings and length of service while others are based on an account balance, which takes into consideration age, service and earnings during a career. The Company’s share of net expense for the pension plans was $5 million and $6 million for the three months ended September 30, 2018 and 2017, respectively, and $17 million and $19 million for the nine months ended September 30, 2018 and 2017, 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, 2018 and 2017, and $21 million for both the nine months ended September 30, 2018 and 2017.

Prudential Insurance sponsors voluntary savings plans for its employee 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 and $3 million for the three months ended September 30, 2018 and 2017, respectively, and $7 million and $8 million for the nine months ended September 30, 2018 and 2017, 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 annuity products. Commissions and fees paid by the Company to PAD were $191 million and $150 million for the three months ended September 30, 2018 and 2017, respectively, and $554 million and $465 million for the nine months ended September 30, 2018 and 2017, respectively.

The Company is charged for its share of corporate expenses incurred by Prudential Financial to benefit its businesses, such as advertising, executive oversight, external affairs and philanthropic activity. The Company’s share of corporate expenses was $17 million for both the three months ended September 30, 2018 and 2017, and $54 million and $49 million for the nine months ended September 30, 2018 and 2017, 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 $3,884 million at September 30, 2018 and $3,688 million at December 31, 2017. Fees related to these COLI policies were $11 million for both the three months ended September 30, 2018 and 2017 and $34 million for both the nine months ended September 30, 2018 and 2017. The Company retains the majority of the mortality risk associated with these COLI policies up to $3.5 million per policy.

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, 2018 and 2017, respectively, and $10 million and $11 million for the nine months ended September 30, 2018 and 2017, respectively. These expenses are recorded as “Net investment income” in the Company's Unaudited Interim Consolidated Statements of Operations and Comprehensive Income (Loss).

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 4 for additional information.

Joint Ventures

The Company has made investments in joint ventures with certain subsidiaries of Prudential Financial. "Other invested assets" includes $95 million and $79 million as of September 30, 2018 and December 31, 2017, respectively. "Net investment income" related to these ventures includes a gain of $2 million and $1 million for the three months ended September 30, 2018 and 2017, respectively, and a gain of $4 million and $7 million for the nine months ended September 30, 2018 and 2017, respectively.

Affiliated Asset Administration Fee Income

The Company has a revenue sharing agreement with AST Investment Services, Inc. ("ASTISI") and PGIM Investments LLC ("PGIM Investments") whereby the Company receives fee income based on policyholders' separate account balances invested in the Advanced Series Trust. Income received from ASTISI and PGIM Investments related to this agreement was $85 million and $82 million for the three months ended September 30, 2018 and 2017, respectively, and $252 million and $239 million for the nine months ended September 30, 2018 and 2017, respectively. These revenues are recorded as “Asset administration fees” in the Company's Unaudited Interim Consolidated Statements of Operations and Comprehensive Income (Loss).

The Company has a revenue sharing agreement with PGIM Investments, whereby the Company receives fee income based on policyholders' separate account balances invested in The Prudential Series Fund. Income received from PGIM Investments related to this agreement was $3 million and $4 million for the three months ended September 30, 2018 and 2017, respectively, and $7 million and $11 million for the nine months ended September 30, 2018 and 2017, respectively. These revenues are recorded as “Asset administration fees” in the Company's Unaudited Interim Consolidated Statements of Operations and Comprehensive Income (Loss).

Affiliated Notes Receivable

Affiliated notes receivable included in “Receivables from parent and affiliates” at September 30, 2018 and December 31, 2017 were as follows:



	Maturity Dates			Interest Rates				September 30, 2018		December 31, 2017
								(in thousands)
U.S. dollar floating rate notes			2028	3.74%	-	3.83	%	$	6,507	$	6,551
U.S. dollar fixed rate notes	2022	-	2027	0.00%	-	14.85	%	120,674		126,020
Total long-term notes receivable - affiliated(1)								$	127,181	$	132,571


(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 are classified as available-for-sale securities and other trading 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 $0.9 million and $1 million at September 30, 2018 and December 31, 2017, respectively, and is included in “Other assets”. Revenues related to these assets were $1 million for both the three months ended September 30, 2018 and 2017, and $4 million for both the nine months ended September 30, 2018 and 2017, 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, 2018 and for the year ended December 31, 2017.



Affiliate	Date	Transaction	Security Type	Fair Value		Book Value		APIC, Net of Tax Increase/(Decrease)		Realized Investment Gain (Loss)
				(in thousands)
PALAC	January 2017	Purchase	Fixed Maturities & Short-Term Investments	$	29	$	29	$	0	$	0
Prudential Insurance	June 2017	Sale	Fixed Maturities & Short-Term Investments	$	16,965	$	16,515	$	293	$	0
Prudential Insurance	June 2017	Sale	Commercial Mortgages	$	43,198	$	42,301	$	584	$	0
UPARC	September 2017	Transfer In	Other Invested Assets	$	37,354	$	37,354	$	0	$	0
GUL Re	September 2017	Transfer Out	Other Invested Assets	$	72,354	$	72,354	$	0	$	0
GUL Re	September 2017	Transfer Out	Fixed Maturities & Short-Term Investments	$	1,254,457	$	1,195,697	$	0	$	58,760
Prudential Financial	September 2017	Transfer In	Fixed Maturities & Short-Term Investments	$	415,271	$	376,412	$	25,259	$	0
Prudential Financial	September 2017	Transfer Out	Fixed Maturities & Short-Term Investments	$	415,271	$	376,412	$	25,259	$	0
UPARC	September 2017	Transfer In	Fixed Maturities & Short-Term Investments	$	417,067	$	385,459	$	0	$	31,608
UPARC	September 2017	Transfer In	Trading Account Assets	$	6,225	$	5,002	$	0	$	1,223
GUL Re	September 2017	Transfer Out	Trading Account Assets	$	6,225	$	5,002	$	0	$	1,223
UPARC	September 2017	Purchase	Other Invested Assets - Derivatives	$	20,685	$	20,685	$	0	$	0
UPARC	November 2017	Purchase	Fixed Maturities & Short-Term Investments	$	41,250	$	34,332	$	0	$	6,919
Prudential Insurance	December 2017	Sale	Commercial Mortgages	$	106,199	$	105,191	$	655	$	0
DART	January 2018	Purchase	Other Invested Assets	$	21,457	$	21,457	$	0	$	0
PALAC	April 2018	Purchase	Fixed Maturities	$	64,313	$	64,313	$	0	$	0
GUL Re	May 2018	Purchase	Fixed Maturities	$	87,486	$	87,486	$	0	$	0
GUL Re	May 2018	Purchase	Fixed Maturities	$	37,921	$	37,921	$	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. The following table provides the breakout of the Company's short-term debt to affiliates as of September 30, 2018 and December 31, 2017.



Affiliate	Date Issued	Amount of Notes - September 30, 2018		Amount of Notes - December 31, 2017		Interest Rate		Date of Maturity
		(in thousands)
Prudential Funding, LLC	9/28/2018	$	1,744	$	0	0.23	%	10/1/2018
Total Loans Payable to Affiliates		$	1,744	$	0

The total interest expense to the Company related to loans payable to affiliates was $0.2 million and $0.1 million for the three months ended September 30, 2018 and 2017, respectively and $0.6 million and $0.7 million for the nine months ended September 30, 2018 and 2017, respectively.

Contributed Capital and Dividends

In March 2018, the Company received a capital contribution in the amount of $6 million from Prudential Insurance. In March 2017 and July 2017, the Company received capital contributions in the amounts of $5 million and $149 million, respectively, from Prudential Insurance.

Through September 30, 2018, the Company did not pay any dividends. In December of 2017, the Company paid a dividend in the amount of $250 million to Prudential Insurance.

Reinsurance with Affiliates

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