Reinsurance

9 Months Ended

Sep. 30, 2019

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") and Dryden Arizona Reinsurance Term Company (“DART”), its parent company Prudential Insurance, as well as third parties. The reinsurance agreements provide risk diversification and additional capacity for future growth, limit the maximum net loss potential, manage statutory capital, and facilitate the Company's capital market hedging program. 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 policy charges and fee income ceded for universal life and variable annuity 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. 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 4 for additional information related to the accounting for embedded derivatives.

Reinsurance amounts included in the Company’s Unaudited Interim Consolidated Statements of Financial Position as of September 30, 2019 and December 31, 2018 were as follows:



	September 30, 2019			December 31, 2018
	(in thousands)
Reinsurance recoverables	$	42,921,981		$	34,682,127
Policy loans	(138,789		)	(130,502		)
Deferred policy acquisition costs	(6,862,482		)	(7,267,847		)
Deferred sales inducements	(528,629		)	(562,052		)
Other assets(1)	269,342			185,573
Policyholders’ account balances	4,950,024			5,004,112
Future policy benefits	4,173,094			3,376,048
Other liabilities(2)	921,850			621,856


(1)	Includes $0.0 million and $0.1 million of unaffiliated activity as of September 30, 2019 and December 31, 2018, respectively.


(2)	Includes $39 million and $27 million of unaffiliated activity as of September 30, 2019 and December 31, 2018, respectively.

The reinsurance recoverables by counterparty are broken out below:



	September 30, 2019		December 31, 2018
	(in thousands)
PAR U	$	12,277,299	$	11,444,032
PALAC	14,077,766		8,828,190
PURC	4,510,249		4,127,455
PARCC	2,666,372		2,527,690
GUL Re	2,211,909		2,017,810
PAR Term	1,827,497		1,678,745
Prudential Insurance	1,975,165		1,226,917
Prudential of Taiwan	1,439,389		1,414,669
Term Re	1,456,210		1,259,141
DART	275,156		119,946
Unaffiliated	204,969		37,532
Total reinsurance recoverables	$	42,921,981	$	34,682,127

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,
	2019			2018			2019			2018
	(in thousands)
Premiums:
Direct	$	468,900		$	451,790		$	1,408,157		$	1,343,358
Assumed(1)	51			57			157			175
Ceded(2)	(466,593		)	(437,696		)	(1,379,545		)	(1,306,564		)
Net premiums	2,358			14,151			28,769			36,969
Policy charges and fee income:
Direct	896,151			843,551			2,856,071			2,407,062
Assumed	130,113			125,079			385,820			369,483
Ceded(3)	(915,635		)	(861,704		)	(2,843,402		)	(2,371,460		)
Net policy charges and fee income	110,629			106,926			398,489			405,085
Net investment income:
Direct	96,424			87,260			297,931			249,366
Assumed	427			404			1,230			1,162
Ceded	(1,595		)	(1,478		)	(5,093		)	(4,778		)
Net investment income	95,256			86,186			294,068			245,750
Asset administration fees:
Direct	90,797			88,721			262,616			262,449
Assumed	0			0			0			0
Ceded	(86,661		)	(84,994		)	(250,862		)	(251,705		)
Net asset administration fees	4,136			3,727			11,754			10,744
Other income:
Direct	19,631			20,432			59,459			49,778
Assumed(4)	438			57			(1,033		)	(133		)
Ceded	(7		)	(219		)	(69		)	(46		)
Amortization of reinsurance income	1,180			1,493			(1,160		)	7,538
Net other income	21,242			21,763			57,197			57,137
Realized investment gains (losses), net:
Direct	(2,500,567		)	1,234,853			(4,920,019		)	3,213,137
Assumed	0			0			0			0
Ceded(5)	2,540,151			(1,284,276		)	4,858,718			(3,348,492		)
Realized investment gains (losses), net	39,584			(49,423		)	(61,301		)	(135,355		)
Policyholders’ benefits (including change in reserves):
Direct	874,424			636,021			2,671,720			1,932,194
Assumed(6)	252,424			122,727			747,135			381,934
Ceded(7)	(1,080,958		)	(748,925		)	(3,287,196		)	(2,212,128		)
Net policyholders’ benefits (including change in reserves)	45,890			9,823			131,659			102,000
Interest credited to policyholders’ account balances:
Direct	163,479			137,309			376,590			383,521
Assumed	35,575			34,414			100,744			105,780
Ceded	(119,647		)	(127,014		)	(303,020		)	(361,239		)
Net interest credited to policyholders’ account balances	79,407			44,709			174,314			128,062
Reinsurance expense allowances and general and administrative expenses, net of capitalization and amortization	(475,041		)	(420,813		)	(1,393,034		)	(1,200,005		)


(1)	Includes $0.1 million of unaffiliated activity for both the three months ended September 30, 2019 and 2018 and $0.2 million for both the nine months ended September 30, 2019 and 2018.


(2)	Includes $(0.1) million of unaffiliated activity for both the three months ended September 30, 2019, and 2018 and $(0.3) million and $(0.1) million for the nine months ended September 30, 2019 and 2018, respectively.


(3)	Includes $(13) million and $(8) million of unaffiliated activity for the three months ended September 30, 2019 and 2018, respectively, and $(25) million and $(14) million for the nine months ended September 30, 2019 and 2018, respectively.


(4)	Includes $1 million and $(0.1) million of unaffiliated activity for the three months ended September 30, 2019 and 2018, respectively, and $(1) million and $(0.1) million for the nine months ended September 30, 2019 and 2018, respectively.


(5)	Includes $61 million and $(33) million of unaffiliated activity for the three months ended September 30, 2019 and 2018, respectively, and $117 million and $(81) million for the nine months ended September 30, 2019 and 2018, respectively.


(6)	Includes $1 million and $0.1 million of unaffiliated activity for the three months ended September 30, 2019 and 2018, respectively, and $1 million and $0 million for the nine months ended September 30, 2019, and 2018, respectively.


(7)	Includes $(8) million and $(4) million of unaffiliated activity for the three months ended September 30, 2019 and 2018, respectively, and $(12) million and $(8) million for the nine months ended September 30, 2019 and 2018, respectively.

The gross and net amounts of life insurance face amount in force as of September 30, 2019 and 2018 were as follows:



	2019			2018
	(in thousands)
Direct gross life insurance face amount in force	$	979,079,094		$	922,386,427
Assumed gross life insurance face amount in force	40,137,874			41,088,914
Reinsurance ceded	(954,117,728		)	(889,021,800		)
Net life insurance face amount in force	$	65,099,240		$	74,453,541

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, 2012, 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 to reinsure its variable annuity base contracts, along with the living benefit guarantees to PALAC, excluding the PLNJ business, which was reinsured to Prudential Insurance. This reinsurance agreement covers new and in force business and excludes business reinsured externally.

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

Prior to July 1, 2019, the Company reinsured 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. Effective July 1, 2019, the Company amended the coinsurance agreement to increase the percentage from 90% to 100% of the policy risk amount reinsured, which resulted in an initial transfer of $476 million in premiums and $409 million in expenses ceded with the difference being deferred and subsequently amortized through income.

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

Prior to July 1, 2019, 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. Effective July 1, 2019, the Company amended the coinsurance agreement to increase the percentage from 95% to 100% of the policy risk amount reinsured, which resulted in an initial transfer of $150 million in premiums and $115 million in expenses ceded with the difference being deferred and subsequently amortized through income.

Prudential of Taiwan

On January 31, 2001, Pruco Life transferred all of its assets and liabilities associated with its Taiwanese branch, including its Taiwanese 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 reinsures a portion of the mortality risk directly to third-party reinsurers and retains all of the non-reinsured portion of the mortality risk. Effective July 1, 2019, this agreement has been recaptured for certain term life insurance policies which are now reinsured to PARCC and PAR Term as noted above.

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 to reinsure its variable annuity base contracts, along with the living benefit guarantees to Prudential Insurance. This reinsurance agreement covers new and in force business.

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.

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. 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, 2019, $3.1 billion of HDI v.3.0 account values are reinsured to Union Hamilton.