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, Gibraltar Universal Life Reinsurance Company ("GUL Re"), its parent company Prudential Insurance, as well as 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 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. 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 6 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 June 30, 2017 and December 31, 2016 were as follows:



	June 30, 2017			December 31, 2016
	(in thousands)
Reinsurance recoverables	$	31,695,151		$	28,674,226
Policy loans	(89,978		)	(87,112		)
Deferred policy acquisition costs	(6,855,073		)	(6,482,889		)
Deferred sales inducements	(684,452		)	(615,117		)
Other assets(1)	243,994			226,347
Policyholders’ account balances	4,993,261			4,978,859
Future policy benefits	3,056,354			2,833,327
Other liabilities(2)	379,104			410,376


(1)	“Other assets” includes $0.1 million of unaffiliated activity as of both June 30, 2017 and December 31, 2016.


(2)	“Other liabilities” includes $31 million and $28 million of unaffiliated activity as of June 30, 2017 and December 31, 2016, respectively.

The reinsurance recoverables by counterparty are broken out below:



	June 30, 2017		December 31, 2016
	(in thousands)
PAR U	$	10,788,458	$	10,514,125
PALAC	9,049,135		7,706,860
PURC	3,364,468		3,153,449
PARCC	2,561,300		2,589,397
Prudential Insurance	1,386,089		976,652
PAR Term	1,467,142		1,403,738
Prudential of Taiwan	1,347,992		1,246,241
UPARC	802,334		467,904
Term Re	780,016		593,084
GUL Re	92,284		0
Unaffiliated	55,933		22,776
Total reinsurance recoverables	$	31,695,151	$	28,674,226

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016(1)			2017			2016(1)
	(in thousands)
Premiums:
Direct	$	433,616		$	408,518		$	851,609		$	799,698
Assumed(2)	65			1			131			149
Ceded	(416,604		)	(1,260,611		)	(828,906		)	(1,634,024		)
Net premiums	17,077			(852,092		)	22,834			(834,177		)
Policy charges and fee income:
Direct	690,307			551,741			1,471,868			1,284,631
Assumed	115,955			109,910			232,294			304,223
Ceded(3)	(938,787		)	(602,720		)	(1,708,685		)	(1,003,361		)
Net policy charges and fee income	(132,525		)	58,931			(4,523		)	585,493
Net investment income:
Direct	91,993			79,518			182,394			185,656
Assumed	368			351			728			695
Ceded	(1,320		)	(1,250		)	(2,466		)	(2,280		)
Net investment income	91,041			78,619			180,656			184,071
Asset administration fees:
Direct	83,994			76,600			164,993			149,391
Assumed	0			0			0			0
Ceded	(79,604		)	(72,996		)	(156,416		)	(72,996		)
Net asset administration fees	4,390			3,604			8,577			76,395
Other income:
Direct	14,501			12,077			29,939			23,772
Assumed(4)	(342		)	425			209			384
Ceded	(11		)	0			(23		)	0
Amortization of reinsurance income	0			(21,101		)	0			(19,233		)
Net other income	14,148			(8,599		)	30,125			4,923
Realized investment gains (losses), net:
Direct	(1,569,801		)	(1,228,076		)	(947,675		)	(2,762,428		)
Assumed	0			39			0			0
Ceded(5)	1,846,391			2,088,499			1,191,686			3,678,041
Realized investment gains (losses), net	276,590			860,462			244,011			915,613
Policyholders’ benefits (including change in reserves):
Direct	548,727			178,623			1,234,222			796,766
Assumed(6)	118,499			211,699			247,636			472,575
Ceded(7)	(871,243		)	(862,932		)	(1,614,388		)	(1,641,221		)
Net policyholders’ benefits (including change in reserves)	(204,017		)	(472,610		)	(132,530		)	(371,880		)
Interest credited to policyholders’ account balances:
Direct	10,431			105,629			109,348			319,111
Assumed	33,895			31,583			67,829			65,418
Ceded	1,641			(109,236		)	(86,450		)	(170,122		)
Net interest credited to policyholders’ account balances	45,967			27,976			90,727			214,407
Reinsurance expense allowances and general and administrative expenses, net of capitalization and amortization	(104,219		)	(480,948		)	(466,455		)	(573,016		)


(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)	"Premiums assumed" includes $0.1 million and $0.0 million of unaffiliated activity for the three months ended June 30, 2017 and 2016, respectively, and $0.1 million for both the six months ended June 30, 2017 and 2016.


(3)	"Policy charges and fee income ceded" includes $0.4 million and $0.3 million of unaffiliated activity for the three months ended June 30, 2017 and 2016, respectively, and $1 million and $0.5 million for the six months ended June 30, 2017 and 2016, respectively.


(4)	"Other income assumed" includes $(0.3) million and $0.4 million of unaffiliated activity for the three months ended June 30, 2017 and 2016, respectively, and $0.2 million and $0.4 million for the six months ended June 30, 2017 and 2016, respectively.


(5)	“Realized investment gains (losses), net ceded” includes $31 million and $21 million of unaffiliated activity for the three months ended June 30, 2017 and 2016, respectively, and $22 million and $46 million for the six months ended June 30, 2017 and 2016, respectively.


(6)	"Policyholders' benefits (including change in reserves) assumed" includes $0.0 million of unaffiliated activity for both the three months ended June 30, 2017 and 2016, and $0.3 million and $0.2 million for the six months ended June 30, 2017 and 2016, respectively.


(7)	"Policyholders' benefits (including change in reserves) ceded" includes $3 million of unaffiliated activity for both the three months ended June 30, 2017 and 2016, and $6 million and $5 million for the six months ended June 30, 2017 and 2016, respectively.

The gross and net amounts of life insurance face amount in force as of June 30, 2017 and 2016 were as follows:



	2017			2016
	(in thousands)
Direct gross life insurance face amount in force	$	854,074,460		$	799,112,347
Assumed gross life insurance face amount in force	42,278,700			43,205,999
Reinsurance ceded	(829,765,651		)	(779,268,303		)
Net life insurance face amount in force	$	66,587,509		$	63,050,043

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 its Universal Plus 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 its universal life policies with PAR U.

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.

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 its Universal Plus 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 Universal Plus 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.

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

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.

UPARC

Pruco Life reinsures Universal Protector policies having no-lapse guarantees with effective dates through December 31, 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.

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.

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 Universal Plus policies, with effective dates on or after January 1, 2017.

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

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 living benefit feature. This reinsurance agreement covered most new HDI v.3.0 variable annuity business issued between April 1, 2015 and December 31, 2016 on a quota share basis, with Union Hamilton’s cumulative quota share amounting to $2.9 billion of new rider premiums as of December 31, 2016. Reinsurance on business subject to this agreement remains in force over the lives of the underlying annuity contracts. New business written subsequent to December 31, 2016 is not covered by external reinsurance. These guaranteed living benefit features are accounted for as embedded derivatives.