Related Party Transactions

6 Months Ended

Jun. 30, 2019

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 $0.1 million and $0.0 million for the three months ended June 30, 2019 and 2018, respectively, and $0.1 million for both the six months ended June 30, 2019 and 2018. The expense charged to the Company for the deferred compensation program was $0.2 million and $0.1 million for the three months ended June 30, 2019 and 2018, respectively, and $0.5 million and $0.3 million for the six months ended June 30, 2019 and 2018, 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 $0.6 million and $0.5 million for the three months ended June 30, 2019 and 2018, respectively, and $1.1 million and $0.9 million for the six months ended June 30, 2019 and 2018, 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 $0.5 million for both the three months ended June 30, 2019 and 2018 and $1.1 million for both the six months ended June 30, 2019 and 2018.

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 $0.3 million and $0.2 million for the three months ended June 30, 2019 and 2018, respectively, and $0.5 million and $0.4 million for the six months ended June 30, 2019 and 2018, respectively.

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 sell the Company’s products. Commissions and fees paid by the Company to PAD was $25 million and $29 million for the three months ended June 30, 2019 and 2018, respectively, and $49 million and $59 million for the six months ended June 30, 2019 and 2018, 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 $4 million for both the three months ended June 30, 2019 and 2018, and $8 million for both the six months ended June 30, 2019 and 2018.

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 $4 million and $3 million for the three months ended June 30, 2019 and 2018, respectively, and $8 million and $6 million for the six months ended June 30, 2019 and 2018, respectively. These expenses are recorded as “Net investment income” in the Company's Unaudited Interim 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 $294 million and $228 million as of June 30, 2019 and December 31, 2018, respectively. "Net investment income" related to these ventures includes $4 million and $2 million for the three months ended June 30, 2019 and 2018, respectively, and $9 million and $2 million for the six months ended June 30, 2019 and 2018, 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 and The Prudential Series Fund. Income received from ASTISI and PGIM Investments related to this agreement was $24 million and $27 million for the three months ended June 30, 2019 and 2018, respectively, and $48 million and $54 million for the six months ended June 30, 2019 and 2018, respectively. These revenues are recorded as “Asset administration fees and other income” in the Company's Unaudited Interim Statements of Operations and Comprehensive Income (Loss).

Affiliated Notes Receivable

Affiliated notes receivable included in "Receivables from parent and affiliates" at June 30, 2019 and December 31, 2018 were as follows:



	Maturity Dates	Interest Rates				June 30, 2019		December 31, 2018
						(in thousands)
U.S. dollar floating rate notes	2028	3.74%	-	4.03	%	$	0	$	34,008
U.S. dollar fixed rate notes	2027	8.15%	-	14.85	%	3,198		3,184
Total notes receivable - affiliated(1)						$	3,198	$	37,192


(1)	All 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 $0.1 million and $0.3 million at June 30, 2019 and December 31, 2018, respectively, and is included in “Other assets”. Revenues related to these assets were a gain of $0.1 million for both the three months ended June 30, 2019 and 2018, and a loss of $0.2 million for the six months ended June 30, 2019, and a gain of $0.2 million for the six months ended June 30, 2018, and are included in “Asset administration fees and 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 six months ended June 30, 2019 and for the year ended December 31, 2018.



Affiliate	Date	Transaction	Security Type	Fair Value		Book Value		APIC, Net of Tax Increase/(Decrease)		Realized Investment Gain (Loss)
				(in thousands)
Prudential Insurance	February 2018	Purchase	Fixed Maturities	$	136,963	$	136,963	$	0	$	0
Pruco Life Insurance Company of Arizona	April 2018	Sale	Fixed Maturities	$	64,313	$	64,514	$	0	$	(159	)
Prudential Insurance	April 2018	Sale	Fixed Maturities	$	57,747	$	43,434	$	0	$	11,308
Prudential Insurance	May 2018	Sale	Fixed Maturity & Commercial Mortgages	$	162,111	$	159,237	$	0	$	2,271
Passaic Fund LLC	June 2018	Transfer Out	Other Invested Assets - Privates	$	15,281	$	15,281	$	0	$	0
Prudential Insurance	July 2018	Sale	Fixed Maturities	$	11,160	$	9,277	$	0	$	1,488
Prudential Insurance	August 2018	Sale	Commercial Mortgages	$	13,414	$	13,165	$	0	$	196
Prudential Insurance	December 2018	Purchase	Fixed Maturities	$	33,256	$	33,166	$	0	$	(71	)
Prudential Agricultural Investors LP	December 2018	Transfer Out	Other Invested Assets - Privates	$	7,324	$	7,324	$	0	$	0
Prudential Insurance	January 2019	Sale	Fixed Maturities	$	20,504	$	20,781	$	0	$	(277	)
Prudential Insurance	February 2019	Sale	Commercial Mortgages	$	97,953	$	98,506	$	0	$	(554	)
Prudential Insurance	March 2019	Purchase	Fixed Maturities	$	141,476	$	141,476	$	0	$	7,776
Prudential Insurance	April 2019	Purchase	Equity Securities	$	4,300	$	4,300	$	0	$	0
Prudential Retirement Insurance and Annuity Company	April 2019	Purchase	Equity Securities	$	1,258	$	1,258	$	0	$	0
Pruco Life Insurance Company	April 2019	Purchase	Equity Securities	$	14,525	$	14,525	$	0	$	0
Prudential Insurance	June 2019	Transfer out	Fixed Maturities	$	23,066	$	23,002	$	0	$	64
Prudential Insurance	June 2019	Transfer In	Fixed Maturities	$	19,919	$	19,919	$	0	$	0

Debt Agreements

The Company is authorized to borrow funds up to $9 billion from Prudential Financial and its affiliates to meet its capital and other funding needs. The following table provides the breakout of the Company's short and long-term debt to affiliates as of June 30, 2019 and December 31, 2018:



Affiliate	Date Issued	Amount of Notes - June 30, 2019		Amount of Notes - December 31, 2018		Interest Rate			Date of Maturity
		(in thousands)
Prudential Insurance	4/20/2016	$	0	$	46,835		2.80	%		6/20/2019
Prudential Insurance	4/20/2016	0		18,734			2.80	%		6/20/2019
Prudential Insurance	4/20/2016	37,468		37,468			3.64	%		12/6/2020
Prudential Insurance	4/20/2016	103,039		103,039			3.64	%		12/15/2020
Prudential Insurance	4/20/2016	93,671		93,671			3.64	%		12/15/2020
Prudential Insurance	4/20/2016	93,671		93,671			3.47	%		6/20/2021
Prudential Insurance	4/20/2016	93,671		93,671			4.39	%		12/15/2023
Prudential Insurance	4/20/2016	28,102		28,102			4.39	%		12/15/2023
Prudential Insurance	4/20/2016	93,671		93,671			3.95	%		6/20/2024
Prudential Insurance	4/20/2016	37,468		37,468			3.95	%		6/20/2024
Prudential Insurance	4/20/2016	46,835		46,835			3.95	%		6/20/2024
Prudential Insurance	6/28/2016	0		20,000			2.08	%		6/28/2019
Prudential Insurance	6/28/2016	0		30,000			2.08	%		6/28/2019
Prudential Insurance	6/28/2016	0		25,000			2.08	%		6/28/2019
Prudential Insurance	6/28/2016	26,000		26,000			2.59	%		6/28/2021
Prudential Insurance	6/28/2016	0		50,000			3.49	%		6/28/2026
Prudential Insurance	6/28/2016	0		25,000			3.49	%		6/28/2026
Prudential Insurance	6/28/2016	0		25,000			3.49	%		6/28/2026
Prudential Retirement Insurance & Annuity Company	6/28/2016	0		34,000			3.09	%		6/28/2023
Total Loans Payable to Affiliates		$	653,596	$	928,165

The total interest expense to the Company related to loans and other payables to affiliates was $24 million and $15 million for the three months ended June 30, 2019 and 2018, respectively, and $40 million and $30 million for the six months ended June 30, 2019 and 2018, respectively.

Contributed Capital and Dividends

Through June 2019 and December 31, 2018, the Company did not receive any capital contributions.

In March and June 2019, there was a $245 million and $247 million return of capital, respectively, to PAI. In March, June, September and December of 2018, there was a $300 million, $250 million, $250 million and $225 million return of capital, respectively, to PAI.

Reinsurance with Affiliates

As discussed in Note 6, the Company participates in reinsurance transactions with certain affiliates.