Prudential Financial Inc., the second-largest U.S. life insurer, defended its use of reinsurance subsidiaries to transfer liabilities, a week after New York’s financial regulator said such deals can mask risk.

“We don’t use captives to reduce the reserves that we hold, and we don’t use captives to reduce the capital that we hold.” Prudential Vice Chairman Mark Grier said today in a presentation held by the Newark, New Jersey-based insurer. “The economic benefit to us arises from the efficiency that we get from isolating and managing certain kinds of risk in separate entities, and that’s the end of the story.”

Some insurers use captives to lower the amount of capital they’re required to hold, New York Department of Financial Services Superintendent Benjamin Lawsky said in a report last week that didn’t identify the firms. He said the subsidiaries, typically based in other jurisdictions, are sometimes capitalized with letters of credit or intra-company guarantees, which can leave the parent vulnerable if losses mount.

Grier said that Prudential bases its captives in the same locations as the entities that are offloading risk. That helps provide transparency to regulators and ratings companies, he said. Prudential avoids risky assets in the captives, he said.

“We hold appropriate assets backing reserves in our captives,” he said. “No letters of credit, no naked parental guarantees, no hollow assets.”

Prudential has advanced 35 percent this year through yesterday, and MetLife Inc., the largest U.S. life insurer, has gained 36 percent.

MetLife (MET), based in New York, announced plans last month to combine an offshore reinsurer with U.S. units, citing the regulatory review and derivatives rules.

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