Related Party Transactions

6 Months Ended

Jun. 30, 2016

Related Party Transactions [Abstract]

Related Party Transactions

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.

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 also 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 and deferred compensation program was less than $1 million for both the three and six months ended June 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 earnings and length of service. Other benefits 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 less than $1 million for both the three months ended June 30, 2016 and 2015, and less than $1 million for both the six months ended June 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 less than $1 million for both the three months ended June 30, 2016 and 2015, and $1 million for both the six months ended June 30, 2016 and 2015.

Prudential Insurance sponsors voluntary savings plans for its employees' 401(k) plans. The 401(k) plans provide for salary reduction contributions by employees and matching contributions by the Company of up to 4% of annual salary. The expense charged to the Company for the matching contribution to the 401(k) plans was less than $1 million for both the three and six months ended June 30, 2016 and 2015, respectively.

Cost Allocation Agreements with Affiliates

Certain operating costs (including rental of office space, furniture, and equipment) have been charged to the Company at cost by Prudential Annuities Information Services and Technology Corporation (“PAIST”), an affiliated company. PALAC signed a written service agreement with PAIST for these services executed and approved by the Connecticut Insurance Department in 1995. This agreement automatically continues in effect from year to year and may be terminated by either party upon 30 days written notice. Allocated lease expense was less than $0.30 million for the three and six months ended June 30, 2016 and 2015, respectively. There was no allocated sub-lease rental income, recorded as a reduction to lease expense, for the three and six months ended June 30, 2016. There was minimal sub-lease rental income for the three and six months ended June 30, 2015 since the sub-lease expired.

The Company pays commissions and certain other fees to PAD in consideration for PAD’s marketing and underwriting of the Company’s products. Commissions and fees are paid by PAD to broker-dealers who sold and service the Company’s products. Commissions and fees paid by the Company to PAD were $27 million and $42 million for the three months ended June 30, 2016 and 2015 and $54 million and $85 million for the six months ended June 30, 2016 and 2015, respectively.

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.

Joint Ventures

The Company has made investments in joint ventures with certain subsidiaries of Prudential Financial. "Other long-term investments" includes $97 million as of June 30, 2016 and $45 million as of December 31, 2015. "Net investment income" includes a net gain of $2 million and less than $1 million for the three months ended June 30, 2016 and 2015, respectively and $1 million for both the six months ended June 30, 2016 and 2015 related to these ventures.

Reinsurance Agreements

The Company uses reinsurance as part of its risk management and capital management strategies for certain of its living benefit features and variable annuity base contracts. Through March 31, 2016, the Company reinsured its living benefit guarantees on certain variable annuity products to Pruco Re and Prudential Insurance, which are the legal entities in which we previously executed our living benefit hedging program. Effective April 1, 2016 the Company recaptured the risks related to its variable annuity living benefit riders that were previously reinsured to Pruco Re and Prudential Insurance, as discussed further in Note 1. In addition, the Company reinsured variable annuity base contracts, along with the living benefit riders, from Pruco Life, excluding the PLNJ business which was reinsured to Prudential Insurance. This reinsurance covers new and in force business and excludes business reinsured externally.

Realized investment gains and losses include the impact of reinsurance agreements that are accounted for as embedded derivatives. Changes in the fair value of the embedded derivatives are recognized through "Realized investment gains (losses), net". See Note 5 for additional information related to the accounting for embedded derivatives.

Reinsurance amounts included in the Company's Unaudited Interim Statements of Financial Position as of June 30, 2016 and December 31, 2015 were as follows:

	June 30, 2016			December 31, 2015
	(in thousands)
Reinsurance recoverables	$	726,914		$	3,088,328
Deferred policy acquisition costs	3,108,741			(73,864		)
Policyholders’ account balances	2,441,768			0
Future policy benefits and other policyholder liabilities	8,369,073			0
Other liabilities (reinsurance payables)	329,520			250,277
Value of business acquired ("VOBA")	(2,335		)	(2,632		)
Deferred charges and prepaid assets	455,574			(39,253		)

The reinsurance recoverables by counterparty is broken out below.

	June 30, 2016		December 31, 2015
	(in thousands)
Prudential Insurance	$	426,599	$	323,363
Pruco Life	299,906		0
Pruco Re	0		2,764,927
Unaffiliated	409		38
Total reinsurance recoverables	$	726,914	$	3,088,328

The tables above include amounts related to the Variable Annuities Recapture effective April 1, 2016, as described in Note 1.

Reinsurance payables related to affiliated reinsurance are reflected in “Payables to parent and affiliates” in the Company’s Unaudited Interim Statements of Financial Position.

Reinsurance amounts included in the Company’s Unaudited Interim Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2016 and 2015 were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(in thousands)
Premiums:
Direct	$	11,260		$	8,110		$	17,048		$	17,302
Assumed	831,337			0			831,337			0
Ceded	0			0			(298		)	0
Net premiums	842,597			8,110			848,087			17,302
Policy charges and fee income:
Direct	163,088			192,390			324,292			384,543
Assumed	374,295			0			374,295			0
Ceded	(11,364		)	(981		)	(23,062		)	(1,751		)
Net policy charges and fee income	526,019			191,409			675,525			382,792
Interest credited to policyholders’ account balances:
Direct	8,867			16,268			151,863			107,898
Assumed	46,094			0			46,094			0
Ceded	180			0			(11,157		)	0
Net interest credited to policyholders’ account balances	55,141			16,268			186,800			107,898
Realized investment gains (losses), net:
Direct	1,547,312			1,147,303			917,202			924,091
Assumed	(3,761,202		)	0			(3,761,202		)	0
Ceded	(233,804		)	(1,156,459		)	382,064			(919,772		)
Realized investment gains (losses), net	(2,447,694		)	(9,156		)	(2,461,936		)	4,319
Net reinsurance expense allowances, net of capitalization and amortization	609			95			884			323

The table above includes amounts related to the Variable Annuities Recapture effective April 1, 2016, as described in Note 1.

Fees ceded and assumed under these reinsurance agreements are included in “Realized investment gains (losses), net” on the Unaudited Interim Statements of Operations and Comprehensive Income (Loss).

In addition, the Company cedes contract fees to Prudential Insurance and assumes contract fees from Pruco Life, which are included in "Policy charges and fee income".

Affiliated Asset Administration Fee Income

In accordance with a revenue sharing agreement with AST Investment Services, Inc. (“ASTISI”) and Prudential Investments LLC (“Prudential Investments”), the Company receives fee income calculated on contractholder separate account balances invested in the Advanced Series Trust and The Prudential Series Fund. Income received from ASTISI and Prudential Investments related to this agreement was $28 million and $53 million for the three months ended June 30, 2016 and 2015, respectively, and $55 million and $106 million for the six months ended June 30, 2016 and 2015, respectively. These revenues are recorded as “Asset administration fees and other income” in the Unaudited Interim 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 $1 million for the three months ended June 30, 2016 and 2015, respectively, and $4 million and $3 million for the six months ended June 30, 2016 and 2015, respectively. These expenses are recorded as “Net investment income” in the Unaudited Interim Statements of Operations and Comprehensive Income (Loss).

Affiliated Asset Transfers

The Company participates in affiliated asset trades with parent and sister companies. Book and fair value differences for trades with a parent and sister are recognized within "Additional paid-in capital" (“APIC”) and "Realized investment gains (losses), net", respectively. Refer to Note 1 for detail on the affiliated asset transfers related to the Variable Annuities Recapture.

Debt Agreements

The Company is authorized to borrow funds up to $2 billion from Prudential Financial and its affiliates to meet its capital and other funding needs. During the three months ended June 30, 2016, the Company was assigned the below debt from its affiliates as part of its reinsurance agreement. See Note 1 for additional information on the reassignment as part of the Variable Annuity Recapture. The following table provides the breakout of the Company's short-term and long-term debt with affiliates:

Affiliate	Date Issued	Amount of Notes - June 30, 2016		Amount of Notes - December 31, 2015		Interest Rate			Date of Maturity
		(in thousands)
Prudential Insurance	4/20/2016	$	28,101	$	0		1.89	%		6/20/2017
Prudential Insurance	4/20/2016	18,734		0			2.60	%		12/15/2018
Prudential Insurance	4/20/2016	25,000		0			2.60	%		12/15/2018
Prudential Insurance	4/20/2016	46,835		0			2.80	%		6/20/2019
Prudential Insurance	4/20/2016	18,734		0			2.80	%		6/20/2019
Prudential Insurance	4/20/2016	37,468		0			3.64	%		12/6/2020
Prudential Insurance	4/20/2016	93,671		0			3.64	%		12/15/2020
Prudential Insurance	4/20/2016	103,038		0			3.64	%		12/15/2020
Prudential Insurance	4/20/2016	93,671		0			3.47	%		6/20/2021
Prudential Insurance	4/20/2016	93,671		0			4.39	%		12/15/2023
Prudential Insurance	4/20/2016	28,101		0			4.39	%		12/15/2023
Prudential Insurance	4/20/2016	37,468		0			3.95	%		6/20/2024
Prudential Insurance	4/20/2016	93,671		0			3.95	%		6/20/2024
Prudential Insurance	4/20/2016	46,835		0			3.95	%		6/20/2024
Prudential Insurance	6/28/2016	30,000		0			2.08	%		6/28/2019
Prudential Insurance	6/28/2016	50,000		0			3.87	%		6/28/2026
Prudential Insurance	6/28/2016	25,000		0			3.49	%		6/28/2026
Prudential Insurance	6/28/2016	26,000		0			2.59	%		6/28/2021
Prudential Insurance	6/28/2016	25,000		0			2.08	%		6/28/2019
Prudential Insurance	6/28/2016	20,000		0			2.08	%		6/28/2019
Prudential Insurance	6/28/2016	25,000		0			3.49	%		6/28/2026
Prudential Retirement Insurance & Annuity	6/28/2016	34,000		0			3.09	%		6/28/2023
Prudential Funding	12/30/2015	0		1,000			5.05	%		1/4/2016
Total Loans Payable to Affiliates		$	1,000,000	$	1,000

Total interest expense to the Company related to loans payable to affiliates was $18.5 million and less than $1 million for both the three and six months ended June 30, 2016 and 2015, respectively.

Contributed Capital and Dividends

In June of 2016, the Company received a capital contribution in the amount of $8,422 million from Prudential Financial. For the year ended December 31, 2015, the Company did not receive any capital contributions.

During the six months ended June 30, 2016, the Company did not pay any dividends to Prudential Financial. In June and December of 2015, the Company paid dividends in the amounts of $270 million and $180 million, respectively, to Prudential Financial.