0000881453 us-gaap:FairValueMeasurementsRecurringMember us-gaap:ForeignGovernmentDebtSecuritiesMember 2019-06-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~_____________________________~~

FORM 10-Q

~~______________________________~~



ý☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2018~~2019



¨☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

Commission File Number 033-44202

~~_____________________________________~~_________________________________________________________________

Prudential Annuities Life Assurance Corporation

(Exact Name of Registrant as Specified in its Charter)



Arizona		06-1241288
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

One Corporate Drive

Shelton ~~Connecticut~~ , CT06484

~~(203)~~ (203) 926-1888

(Address and Telephone Number of Registrant’s Principal Executive Offices)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:



Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Not Applicable	Not Applicable	Not Applicable

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý☒ No ¨☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of the Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý☒ No ¨☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer", "accelerated filer", "smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large ~~accelerated filer~~Accelerated Filer	¨☐	Accelerated ~~filer~~Filer	¨
			☐
Non-accelerated ~~filer~~Filer	x☒	Smaller ~~reporting company~~Reporting Company	¨
			☐
		Emerging ~~growth company~~Growth Company	¨☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒

As of ~~November~~August 13, ~~2018,~~2019, 25,000 shares of the registrant’s Common Stock (par value $100) consisting of 100 voting shares and 24,900 non-voting shares were outstanding. As of such date, Prudential Annuities, Inc., an indirect wholly-owned subsidiary of Prudential Financial, Inc., a New Jersey corporation, owned all of the registrant’s Common Stock.

Prudential Annuities Life Assurance Corporation meets the conditions set

forth in General Instruction (H) (1) (a) and (b) on Form 10-Q and

is therefore filing this Form 10-Q in the reduced disclosure format.

Table of Contents

TABLE OF CONTENTS



			Page
PART I FINANCIAL INFORMATION
	Item 1.	Financial Statements:
		Unaudited Interim ~~Consolidated~~ Statements of Financial Position as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018	4
		Unaudited Interim ~~Consolidated~~ Statements of Operations and Comprehensive Income (Loss) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018	5
		Unaudited Interim ~~Consolidated~~ Statements of Equity for the ~~nine~~three and six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018	6
		Unaudited Interim ~~Consolidated~~ Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018	7
		Notes to Unaudited Interim ~~Consolidated~~ Financial Statements	8
		1. Business and Basis of Presentation	8
		2. Significant Accounting Policies and Pronouncements	9
		3. Investments	1811
		4. Derivative Instruments	2820
		5. Fair Value of Assets and Liabilities	3326
		6. ~~Income Taxes~~Reinsurance	5136
		7. ~~Reinsurance~~Income Taxes	5239
		8. Equity	5539
		9. Related Party Transactions	5741
		10. Commitments and Contingent Liabilities	6246
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	6347
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	7457
	Item 4.	Controls and Procedures	7457
PART II OTHER INFORMATION			7558
	Item 1.	Legal Proceedings	7558
	Item 1A.	Risk Factors	7558
	Item 6.	Exhibits	7659
SIGNATURES			7760

Table of Contents

~~FORWARD LOOKING~~FORWARD-LOOKING STATEMENTS

Certain of the statements included in this Quarterly Report on Form 10-Q, including but not limited to those in Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Prudential Annuities Life Assurance Corporation. There can be no assurance that future developments affecting Prudential Annuities Life Assurance Corporation will be those anticipated by management. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (1) losses on investments or financial contracts due to deterioration in credit quality or value, or counterparty default; (2) losses on insurance products due to mortality experience or policyholder behavior experience that differs significantly from our expectations when we price our products; (3) changes in interest rates and equity prices that may (a) adversely impact the profitability of our products, the value of separate accounts supporting these products or the value of assets we manage, (b) result in losses on derivatives we use to hedge risk or increase collateral posting requirements and (c) limit opportunities to invest at appropriate returns; (4) guarantees within certain of our products ~~in particular our variable annuities,~~ which are market sensitive and may decrease our earnings or increase the volatility of our results of operations or financial position; (5) liquidity needs resulting from (a) derivative collateral market exposure, (b) asset/liability mismatches, (c) the lack of available funding in the financial markets or (d) unexpected cash demands due to severe mortality calamity or lapse events; (6) financial or customer losses, or regulatory and legal actions, due to inadequate or failed processes or systems, external events and human error or misconduct ~~and external events,~~ such as (a) disruption of our systems and data, (b) an information security breach, (c) a failure to protect the privacy of sensitive data or (d) reliance on ~~third-parties, including to distribute our products;~~third parties; (7) changes in the regulatory landscape, including related to (a) financial sector regulatory reform, (b) changes in tax laws, ~~(b)~~(c) fiduciary ~~rule developments, (c)~~rules and other standards of care, (d) state insurance laws and developments regarding group-wide supervision, capital and reserves, and ~~(d)~~(e) privacy and cybersecurity regulation; (8) technological changes which may adversely impact companies in our investment portfolio or cause insurance experience to deviate from our assumptions; (9) ratings downgrades; (10) market conditions that may adversely affect the sales or persistency of our products; (11) competition; and (12) reputational damage. Prudential Annuities Life Assurance Corporation does not intend, and is under no obligation, to update any particular forward-looking statement included in this document. See “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018 for discussion of certain risks relating to our business and investment in our securities.

Table of Contents

PART I - Financial Information

Item 1. Financial Statements

Prudential Annuities Life Assurance Corporation

Unaudited Interim ~~Consolidated~~ Statements of Financial Position

~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 (in thousands, except share amounts)


	September 30, 2018			December 31, 2017			June 30, 2019			December 31, 2018
ASSETS
Fixed maturities, available-for-sale, at fair value (amortized cost, 2018: $9,871,624; 2017: $10,145,266)	$	9,322,358		$	10,110,786
Fixed maturities, trading, at fair value (amortized cost, 2018: $271,233; 2017: $161,393)(1)	261,226			166,360
Equity securities, at fair value (cost, 2018: $9,314; 2017: $11,614)(1)	13,164			15,375
Fixed maturities, available-for-sale, at fair value (amortized cost: 2019 – $11,857,110; 2018 – $10,186,465)							$	12,338,984		$	9,771,673
Fixed maturities, trading, at fair value (amortized cost: 2019 – $349,419; 2018 – $294,549)							372,075			289,752
Equity securities, at fair value (cost: 2019 – $43,408; 2018 – $18,765)							46,720			20,613
Commercial mortgage and other loans	1,352,403			1,387,012			1,316,611			1,353,478
Policy loans	12,656			12,558			12,239			12,805
Short-term investments	20,685			711,071			6,252			37,568
Other invested assets (includes $7,567 and $151,481 measured at fair value at September 30, 2018 and December 31, 2017, respectively)(1)	254,050			335,811
Other invested assets (includes $9,743 and $50,945 measured at fair value at June 30, 2019 and December 31, 2018, respectively)							373,782			348,541
Total investments	11,236,542			12,738,973			14,466,663			11,834,430
Cash and cash equivalents	394,262			1,639,939			3,998,400			4,503,534
Deferred policy acquisition costs	4,431,765			4,596,565			4,493,194			4,447,505
Accrued investment income	76,228			88,331			98,149			90,895
Reinsurance recoverables	487,748			563,428			646,139			572,102
Income taxes	1,372,877			1,116,735			1,054,353			964,521
Value of business acquired	34,967			35,109			31,539			33,222
Deferred sales inducements	907,575			1,020,786			863,990			889,598
Receivables from parent and affiliates	56,368			49,351			15,172			46,381
Other assets	116,861			121,086			102,493			85,310
Separate account assets	35,480,264			37,990,547			33,045,792			31,210,346
TOTAL ASSETS	$	54,595,457		$	59,960,850		$	58,815,884		$	54,677,844
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits	$	5,984,878		$	9,132,569		$	12,794,173		$	9,368,986
Policyholders’ account balances	5,062,233			4,846,152			5,732,732			5,353,596
Payables to parent and affiliates	50,967			36,026			194,344			30,846
Cash collateral for loaned securities	7,147			17,383			0			384
Short-term debt	184,303			43,734			0			140,569
Long-term debt	787,596			928,165			653,596			787,596
Reinsurance payables	214,420			262,588			251,804			232,937
Other liabilities	395,657			422,636			403,368			811,016
Separate account liabilities	35,480,264			37,990,547			33,045,792			31,210,346
Total liabilities	48,167,465			53,679,800			53,075,809			47,936,276
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 10)
EQUITY
Common stock, ($100 par value; 25,000 shares authorized, issued and outstanding)	2,500			2,500
Common stock, $100 par value; 25,000 shares authorized, issued and outstanding							2,500			2,500
Additional paid-in capital	6,345,436			7,145,436			5,628,936			6,120,436
Retained earnings (accumulated deficit)	510,750			(776,762		)
Retained earnings							(126,160		)	943,005
Accumulated other comprehensive income (loss)	(430,694		)	(90,124		)	234,799			(324,373		)
Total equity	6,427,992			6,281,050			5,740,075			6,741,568
TOTAL LIABILITIES AND EQUITY	$	54,595,457		$	59,960,850		$	58,815,884		$	54,677,844


~~(1)~~	~~Prior period amounts have been reclassified to conform to current period presentation. See "Adoption of ASU 2016-01" in Note 2 for details.~~

See Notes to Unaudited Interim ~~Consolidated~~ Financial Statements

Table of Contents

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Operations and Comprehensive Income (Loss)

Three and Six Months Ended June 30, 2019 and 2018 (in thousands)



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
REVENUES
Premiums	$	18,471		$	13,295		$	35,736		$	34,329
Policy charges and fee income	524,788			547,343			1,032,722			1,102,633
Net investment income	131,972			100,160			257,041			196,871
Asset administration fees and other income	115,205			98,603			224,593			198,140
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities	0			(151		)	(1,857		)	(437		)
Other-than-temporary impairments on fixed maturity securities transferred to other comprehensive income (loss)	0			0			(168		)	0
Other realized investment gains (losses), net	(894,215		)	10,010			(2,234,409		)	568,986
Total realized investment gains (losses), net	(894,215		)	9,859			(2,236,434		)	568,549
Total revenues	(103,779		)	769,260			(686,342		)	2,100,522
BENEFITS AND EXPENSES
Policyholders’ benefits	47,890			28,667			55,840			63,693
Interest credited to policyholders’ account balances	33,355			62,020			43,782			131,590
Amortization of deferred policy acquisition costs	40,132			167,392			30,041			323,825
Commission expense	221,090			216,356			451,282			451,677
General, administrative and other expenses	61,810			43,184			119,973			86,161
Total benefits and expenses	404,277			517,619			700,918			1,056,946
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES	(508,056		)	251,641			(1,387,260		)	1,043,576
Income tax expense (benefit)	(339,286		)	49,095			(318,466		)	205,351
NET INCOME (LOSS)	$	(168,770	)	$	202,546		$	(1,068,794	)	$	838,225
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments	(116		)	(361		)	(16		)	(1,128		)
Net unrealized investment gains (losses)	423,402			(58,039		)	707,830			(234,318		)
Total	423,286			(58,400		)	707,814			(235,446		)
Less: Income tax expense (benefit) related to other comprehensive income (loss)	88,891			(12,265		)	148,642			(49,445		)
Other comprehensive income (loss), net of tax	334,395			(46,135		)	559,172			(186,001		)
Comprehensive income (loss)	$	165,625		$	156,411		$	(509,622	)	$	652,224

See Notes to Unaudited Interim Financial Statements

Table of Contents

Prudential Annuities Life Assurance Corporation

Unaudited Interim ~~Consolidated~~ Statements of ~~Operations and Comprehensive Income (Loss)~~Equity

Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 (in thousands)

Three Months Ended
September 30, Nine Months Ended
September 30,
2018 2017 2018 2017
REVENUES
Premiums $ 13,679
$ 12,505
$ 48,008
$ 48,666
Policy charges and fee income 550,592
555,907
1,653,225
1,646,310
Net investment income 103,164
107,953
300,035
314,310
Asset administration fees and other income 93,320
102,713
291,460
307,384
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities (2,523 ) 41
(2,960 ) (4,692 )
Other-than-temporary impairments on fixed maturity securities transferred to other comprehensive income (loss) 0
0
0
(95 )
Other realized investment gains (losses), net 67,796
1,170,036
636,782
(322,725 )
Total realized investment gains (losses), net 65,273
1,170,077
633,822
(327,512 )
Total revenues 826,028
1,949,155
2,926,550
1,989,158
BENEFITS AND EXPENSES
Policyholders’ benefits 49,931
14,056
113,624
80,251
Interest credited to policyholders’ account balances 82,313
90,499
213,903
567
Amortization of deferred policy acquisition costs 190,632
260,194
514,457
(45,981 )
Commission expense 192,951
203,619
644,628
640,612
General, administrative and other expenses 46,038
28,874
132,199
143,492
Total benefits and expenses 561,865
597,242
1,618,811
818,941
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES 264,163
1,351,913
1,307,739
1,170,217
Income tax expense (benefit) (148,073 ) 412,987
57,278
369,516
NET INCOME (LOSS) $ 412,236
$ 938,926
$ 1,250,461
$ 800,701
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments (64 ) 31
(1,192 ) 95
Net unrealized investment gains (losses) (149,116 ) (7,962 ) (383,434 ) 227,398
Total (149,180 ) (7,931 ) (384,626 ) 227,493
Less: Income tax expense (benefit) related to other comprehensive income (loss) (31,328 ) (2,776 ) (80,773 ) 79,622
Other comprehensive income (loss), net of tax (117,852 ) (5,155 ) (303,853 ) 147,871
Comprehensive income (loss) $ 294,384
$ 933,771
$ 946,608
$ 948,572



	Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Equity
Balance, December 31, 2018	$	2,500	$	6,120,436		$	943,005		$	(324,373	)	$	6,741,568
Cumulative effect of adoption of accounting changes(1)						(371		)	0			(371		)
Return of capital			(245,000		)							(245,000		)
Comprehensive income (loss):
Net income (loss)						(900,024		)				(900,024		)
Other comprehensive income (loss), net of tax									224,777			224,777
Total comprehensive income (loss)												(675,247		)
Balance, March 31, 2019	2,500		5,875,436			42,610			(99,596		)	5,820,950
Return of capital			(246,500		)							(246,500		)
Comprehensive income (loss):
Net income (loss)						(168,770		)				(168,770		)
Other comprehensive income (loss), net of tax									334,395			334,395
Total comprehensive income (loss)												165,625
Balance, June 30, 2019	$	2,500	$	5,628,936		$	(126,160	)	$	234,799		$	5,740,075



	Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Equity
Balance, December 31, 2017	$	2,500	$	7,145,436		$	(776,762	)	$	(90,124	)	$	6,281,050
Cumulative effect of adoption of ASU 2016-01						337			(3		)	334
Cumulative effect of adoption of ASU 2018-02						36,714			(36,714		)	0
Return of capital			(300,000		)							(300,000		)
Comprehensive income (loss):
Net income (loss)						635,679						635,679
Other comprehensive income (loss), net of tax									(139,866		)	(139,866		)
Total comprehensive income (loss)												495,813
Balance, March 31, 2018	2,500		6,845,436			(104,032		)	(266,707		)	6,477,197
Return of capital			(250,000		)							(250,000		)
Comprehensive income (loss):
Net income (loss)						202,546						202,546
Other comprehensive income (loss), net of tax									(46,135		)	(46,135		)
Total comprehensive income (loss)												156,411
Balance, June 30, 2018	$	2,500	$	6,595,436		$	98,514		$	(312,842	)	$	6,383,608

(1) Includes the impact from the adoption of ASUs 2017-08 and 2017-12. See Note 2.

See Notes to Unaudited Interim ~~Consolidated~~ Financial Statements

Table of Contents

Prudential Annuities Life Assurance Corporation

Unaudited Interim ~~Consolidated Statements of Equity~~

~~Nine Months Ended September 30, 2018 and 2017 (in thousands)~~

Common Stock Additional Paid-in Capital Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Income (Loss) Total Equity
Balance, December 31, 2017 $ 2,500
$ 7,145,436
$ (776,762 ) $ (90,124 ) $ 6,281,050
Cumulative effect of adoption of ASU 2016-01 337
(3 ) 334
Cumulative effect of adoption of ASU 2018-02 36,714
(36,714 ) 0
Return of capital (800,000 ) (800,000 )
Comprehensive income:
Net income (loss) 1,250,461
1,250,461
Other comprehensive income (loss), net of tax (303,853 ) (303,853 )
Total comprehensive income (loss)

946,608
Balance, September 30, 2018 $ 2,500
$ 6,345,436
$ 510,750
$ (430,694 ) $ 6,427,992

Common Stock Additional Paid-in Capital Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Income (Loss) Total Equity
Balance, December 31, 2016 $ 2,500
$ 8,095,436
$ (693,258 ) $ (314,948 ) $ 7,089,730
Return of capital (300,000 ) (300,000 )
Comprehensive income:
Net income (loss) 800,701
800,701
Other comprehensive income (loss), net of tax 147,871
147,871
Total comprehensive income (loss)

948,572
Balance, September 30, 2017 $ 2,500
$ 7,795,436
$ 107,443
$ (167,077 ) $ 7,738,302

~~See Notes to Unaudited Interim Consolidated Financial Statements~~

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Unaudited Interim Consolidated~~ Statements of Cash Flows

~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 (in thousands)



	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(1,068,794	)	$	838,225
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Policy charges and fee income	(618		)	(1,487		)
Realized investment (gains) losses, net	2,236,434			(568,549		)
Depreciation and amortization	(69		)	3,748
Interest credited to policyholders’ account balances	43,782			131,590
Change in:
Future policy benefits	518,143			516,173
Accrued investment income	(7,254		)	4,419
Net receivables from/payables to parent and affiliates	(5,904		)	(5,627		)
Deferred sales inducements	(447		)	(1,130		)
Deferred policy acquisition costs	(180,893		)	149,133
Income taxes	(238,375		)	39,928
Reinsurance recoverables, net	(3,031		)	(16,443		)
Derivatives, net	777,708			(1,599,193		)
Other, net (1)	13,117			62,550
Cash flows from (used in) operating activities	2,083,799			(446,663		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale	404,235			1,684,043
Fixed maturities, trading	73			99,590
Equity securities	2,534			3,040
Commercial mortgage and other loans	117,869			105,318
Policy loans	1,069			447
Other invested assets	20,825			2,678
Short-term investments	384,990			707,632
Payments for the purchase/origination of:
Fixed maturities, available for sale	(2,481,050		)	(1,327,238		)
Fixed maturities, trading	(54,862		)	(208,007		)
Equity securities	(26,246		)	(1,625		)
Commercial mortgage and other loans	(83,787		)	(102,854		)
Policy loans	(168		)	(104		)
Other invested assets	(74,670		)	(30,323		)
Short-term investments	(353,614		)	(281,476		)
Notes receivable from parent and affiliates, net	34,008			2,919
Derivatives, net	(31,536		)	19,801
Other, net	0			(69		)
Cash flows from (used in) investing activities	(2,140,330		)	673,772
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash collateral for loaned securities	(384		)	(5,844		)
Repayments of debt (maturities longer than 90 days)	(274,569		)	0
Net increase/(decrease) in short-term borrowing	0			3,497
Drafts outstanding	(4,650		)	1,754
Distribution to Parent	(491,500		)	(550,000		)
Policyholders' account deposits	1,981,101			1,444,673
Ceded policyholders' account deposits	(11,204		)	(27,870		)
Policyholders' account withdrawals	(1,670,995		)	(1,368,264		)
Ceded policyholders' account withdrawals	23,598			15,919
Cash flows from (used in) financing activities	(448,603		)	(486,135		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(505,134		)	(259,026		)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	4,503,534			1,639,939
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	3,998,400		$	1,380,913

2018 2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,250,461
$ 800,701
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Policy charges and fee income (2,147 ) (761 )
Realized investment (gains) losses, net (633,822 ) 327,512
Depreciation and amortization 6,227
(7,781 )
Interest credited to policyholders’ account balances 213,903
567
Change in:

Future policy benefits 795,294
728,762
Accrued investment income 12,103
16,263
Net receivables from/payables to parent and affiliates 1,490
12,391
Deferred sales inducements (1,836 ) (993 )
Deferred policy acquisition costs 241,665
(248,160 )
Income taxes (175,460 ) 22,224
Reinsurance recoverables, net (52,210 ) (3,342 )
Derivatives, net (3,094,289 ) (615,583 )
Deferred (gain) loss on reinsurance (23,108 ) 5,448
Other, net 133,306
58,395
Cash flows from (used in) operating activities (1,328,423 ) 1,095,643
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity/prepayment of:

Fixed maturities, available-for-sale 2,144,273
854,872
Fixed maturities, trading(1) 99,623
1,728
Equity securities(1) 6,280
2,271
Commercial mortgage and other loans 137,766
56,883
Policy loans 553
956
Other invested assets(1) 16,864
71,152
Short-term investments 981,355
1,556,173
Payments for the purchase/origination of:

Fixed maturities, available for sale (1,939,203 ) (1,109,624 )
Fixed maturities, trading(1) (208,007 ) (15,964 )
Equity securities(1) (3,253 ) (1,761 )
Commercial mortgage and other loans (113,638 ) (228,825 )
Policy loans (110 ) (330 )
Other invested assets(1) (99,983 ) (5,115 )
Short-term investments (291,399 ) (1,003,242 )
Notes receivable from parent and affiliates, net 2,967
521
Derivatives, net 19,929
18,029
Other, net (69 ) 2,992
Cash flows from (used in) investing activities 753,948
200,716
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash collateral for loaned securities (10,236 ) (15,515 )
Net increase (decrease) in short-term borrowing 0
(28,101 )
Drafts outstanding (2,550 ) 6,790
Distribution to Parent (800,000 ) (300,000 )
Policyholders' account deposits 2,128,976
1,905,487
Ceded policyholders' account deposits (28,992 ) (6,818 )
Policyholders' account withdrawals (1,979,186 ) (1,950,184 )
Ceded policyholders' account withdrawals 20,786
18,421
Cash flows from (used in) financing activities (671,202 ) (369,920 )
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,245,677 ) 926,439
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,639,939
1,848,039
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 394,262
$ 2,774,478

(1) Prior period amounts have been reclassified to conform to current period presentation.


~~(1)~~	~~Prior period amounts have been reclassified to conform to current period presentation. See Note 2 for details.~~

Significant Non-Cash Transactions

There were no significant non-cash transactions for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~2018.

See Notes to Unaudited Interim ~~Consolidated~~ Financial Statements

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)

1. BUSINESS AND BASIS OF PRESENTATION

Prudential Annuities Life Assurance Corporation (the “Company” or “PALAC”), with its principal offices in Shelton, Connecticut, is a wholly-owned subsidiary of Prudential Annuities, Inc. (“PAI”), which in turn is an indirect wholly-owned subsidiary of Prudential Financial, Inc. ("Prudential Financial"), a New Jersey corporation.

PALAC has one subsidiary, which began operating in 2018 for the purpose of holding agricultural properties in the state of Florida. PALAC and its subsidiary are together referred to as the "Company”, "we" or "our" and all financial information is shown on a consolidated basis.

The Company has developed long-term savings and retirement products, which were distributed through its affiliated broker/dealer company, Prudential Annuities Distributors, Inc. (“PAD”). The Company issued variable and fixed deferred and immediate annuities for individuals and groups in the United States of America ~~District of Columbia~~ and Puerto Rico. In addition, the Company has a relatively small in force block of variable life insurance policies. The Company stopped actively selling ~~such~~annuity products in March 2010.

In March 2010, the Company ceased offering its variable annuity products (and where offered, the companion market value adjustment option) to new investors upon the launch of a new product line by each of Pruco Life Insurance Company ("Pruco Life") and its wholly-owned subsidiary Pruco Life Insurance Company of New Jersey ("PLNJ") (which are affiliates of the Company). These initiatives were implemented to create operational and administrative efficiencies by offering a single product line of annuity products from a more limited group of legal entities. During 2012, the Company suspended additional customer deposits for variable annuities with certain living benefit guarantees. However, the Company continues to accept additional customer deposits on certain in force contracts, subject to applicable contract provisions and administrative rules.

The Company ~~has~~ resumed offering annuity products to new investors (except in New York)~~. It~~ when it launched a new fixed ~~index~~indexed annuity ~~in January 2018~~ and a new deferred income annuity in ~~March~~ 2018.

The Company is engaged in a business that is highly competitive because of the large number of stock and mutual life insurance companies and other entities engaged in marketing long-term savings and retirement products, including insurance products, and individual and group annuities.

~~As disclosed in Note 1 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015, the~~The Company surrendered its New York license effective December 31, 2015, and reinsured the majority of its New York business to an affiliate, The Prudential Insurance Company of America (“Prudential Insurance”). The license surrender relieves the Company of the requirement to hold New York statutory reserves on its business in excess of the statutory reserves required by its domiciliary regulator, the Arizona Department of Insurance. For the small portion of New York business retained by the Company, a custodial account has been established to hold collateral assets in an amount equal to a percentage of the reserves associated with such business, as calculated in accordance with PALAC's New York Regulation 109 Plan approved by the New York Department of Financial Services.

~~Variable Annuities Recapture~~

~~Through March 31, 2016, the Company reinsured the majority of its variable annuity living benefit guarantees to its affiliated companies, Pruco Reinsurance, Ltd. ("Pruco Re") and Prudential Insurance.~~ Effective April 1, 2016, ~~the Company recaptured the risks related to its variable annuity living benefit guarantees that were previously reinsured to Pruco Re and Prudential Insurance. In addition,~~ the Company reinsured the variable annuity base contracts, along with the living benefit guarantees, from Pruco Life, excluding the PLNJ business which was reinsured to Prudential Insurance, in each case under a coinsurance and modified coinsurance ~~agreements.~~agreement. This reinsurance agreement covers new and in force business and excludes business reinsured externally. ~~The product risks related to the reinsured business are being managed in the Company.~~ In addition, the living benefit hedging program related to the ~~reinsured~~ living benefit guarantees isas well as the product risks for retained and reinsured businesses are being managed within the ~~Company. These series of transactions are collectively referred to~~Company and Prudential Insurance, as ~~the "Variable Annuities Recapture".~~applicable.

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Unaudited Interim Consolidated Financial Statements—(Continued)~~

Basis of Presentation

The Unaudited Interim ~~Consolidated~~ Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) on a basis consistent with reporting interim financial information in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”).

In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations have been made. All such adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Company’s Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The most significant estimates include those used in determining deferred policy acquisition costs ("DAC") and related amortization; value of business acquired and its amortization; amortization of deferred sales ~~inducements;~~inducements ("DSI"); valuation of investments including derivatives and the recognition of other-than-temporary impairments (“OTTI”); future policy benefits including guarantees; reinsurance recoverables; provision for income taxes and valuation of deferred tax assets; and accruals for contingent liabilities, including estimates for losses in connection with unresolved legal and regulatory matters.

Reclassifications

Certain amounts in prior periods have been reclassified to conform to the current period presentation.

2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS

Recent Accounting Pronouncements

Changes to U.S. GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of Accounting Standards Updates ("ASU") to the FASB Accounting Standards Codification. The Company considers the applicability and impact of all ASU. ASU listed below include those that have been adopted during the current fiscal year and/or those that have been issued but not yet adopted as of the date of this filing. ASU not listed below were assessed and determined to be either not applicable or not material.

~~Adoption of ASU 2016-01~~

Effective January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities using a modified retrospective method. Adoption of this ASU impacted the Company’s accounting and presentation related to equity investments. The most significant impact is that the changes in fair value of equity securities previously classified as “available-for-sale” are to be reported in net income within “Asset administration fees and other income” in the Consolidated Statements of Operations. Prior to this, the changes in fair value on equity securities classified as “available-for-sale” were reported in “Accumulated other comprehensive income”.

The impacts of this ASU on the Company’s Consolidated Financial Statements can be categorized as follows: (1) Changes to the presentation within the Consolidated Statements of Financial Position; (2) Cumulative-effect Adjustment Upon Adoption; and (3) Changes to Accounting Policies. Each of these components is described below. This section is meant to serve as an update to, and should be read in conjunction with, Note 2 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Unaudited Interim Consolidated Financial Statements—(Continued)~~

~~(1) Changes to the presentation within the Consolidated Statements of Financial Position~~

Because of the fundamental accounting changes as described in section "(3) Changes to Accounting Policies" below, the Company determined that changes to the presentation of certain balances in the investment section of the Company’s Consolidated Statements of Financial Position were also necessary to maintain clarity and logical presentation. The table below illustrates these changes by presenting the balances as previously reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 and the reclassifications that were made, along with a footnote explanation of each reclassification.

December 31, 2017
As previously reported Reclassifications As currently reported
Statement of Financial Position Line Items (1) (2) (3)
(in thousands)
Fixed maturities, available-for-sale, at fair value $ 10,110,786
$ 10,110,786
*Fixed maturities, trading, at fair value 0
166,360
166,360
Trading account assets, at fair value 181,717
(181,717 ) 0
Equity securities, available-for-sale, at fair value 18
(18 ) 0
*Equity securities, at fair value 0
18
15,357
15,375
Commercial mortgage and other loans 1,387,012
1,387,012
Policy loans 12,558
12,558
Short-term investments 711,071
711,071
Other long-term investments 335,811
(335,811 ) 0
*Other invested assets 0
335,811
335,811
Total investments $ 12,738,973
$ 0
$ 0
$ 0
$ 12,738,973

* - New line item effective January 1, 2018.

~~Strikethrough~~ ~~- Eliminated line item effective January 1, 2018.~~


~~(1)~~	~~Retitled “Equity securities, available-for-sale, at fair value” to “Equity securities, at fair value” as equity securities can no longer be described as available-for-sale.~~


~~(2)~~	~~Eliminated the line item “Trading account assets, at fair value” and reclassified each component to another line item.~~


~~(3)~~	~~Retitled “Other long-term investments” to “Other invested assets”.~~

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Unaudited Interim Consolidated Financial Statements—(Continued)~~

~~(2) Cumulative-effect Adjustment Upon Adoption~~

The provisions of ASU 2016-01 require that the Company apply the amendments through a cumulative-effect adjustment to the Consolidated Statements of Financial Position as of the beginning of the fiscal year of adoption. The following table illustrates the impact on the Company’s Consolidated Statement of Financial Position as a result of recording this cumulative-effect adjustment on January 1, 2018.

Summary of ASU 2016-01 Transition Impacts on the Consolidated Statement
of Financial Position upon Adoption on January 1, 2018
(in thousands)
Increase / (Decrease)
Other invested assets $ 423
Total assets $ 423
Income taxes $ 89
Total liabilities 89
Accumulated other comprehensive income (loss) (3 )
Retained earnings 337
Total equity 334
Total liabilities and equity $ 423

~~(3) Changes to Accounting Policies~~

This section summarizes the changes in our accounting policies resulting from the adoption of ASU 2016-01 as well as an update to the components of the financial statement line items impacted by the Company’s Consolidated Statements of Financial Position presentation changes described above.

~~ASSETS~~

~~Fixed maturities, trading~~ is a new financial statement line item comprised of fixed maturities that are carried at fair value. Prior to the adoption of the standard, these fixed maturities were reported in “Trading account assets, at fair value”. Realized and unrealized gains and losses on these investments are reported in “Asset administration fees and other income”, and interest and dividend income from these investments is reported in “Net investment income”.

~~Equity securities, at fairvalue~~ is the new title of the financial statement line item formerly titled “Equity securities, available for sale, at fair value”. As a result of the adoption of the standard, equity securities previously reported in “Trading account assets, at fair value” were reclassified to “Equity securities, at fair value”. The retitled financial statement line is comprised of common stock, mutual fund shares, and preferred stock, which are carried at fair value. Realized and unrealized gains and losses on these investments are reported in “Asset administration fees and other income”, and dividend income is reported in “Net investment income” on the ex-dividend date. Prior to the adoption of the standard, for the equity investments reported in the financial statement line formerly titled “Equity securities, available for sale, at fair value”, the associated net realized gains and losses were included in “Realized investment gains (losses), net” and the associated net unrealized gains and losses were included in “Accumulated other comprehensive income (loss)” (“AOCI”). In addition, with the adoption of the standard, the identification of OTTI for these investments is no longer needed as all of these investments are now measured at fair value with changes in fair value reported in earnings.

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Unaudited Interim Consolidated Financial Statements—(Continued)~~

~~Other invested assets~~ is the new title of the financial statement line formerly titled “Other long-term investments”. Investments previously reported in “Other long-term investments” were reclassified to “Other invested assets”. The retitled financial statement line consists of the Company’s non-coupon investments in Limited Partnerships and Limited Liability Companies ("LPs/LLCs") (other than operating joint ventures), wholly-owned investment real estate and derivative assets. LPs/LLCs interests are accounted for using either the equity method of accounting, or at fair value with changes in fair value reported in “Asset administration fees and other income”. Prior to the adoption of the standard, the Company applied the cost method of accounting for certain LPs/LLCs interest when its partnership interest was considered minor. The standard effectively eliminated the cost method of accounting for these equity investments. The Company’s income from investments in LPs/LLCs accounted for using the equity method, other than the Company’s investments in operating joint ventures, is included in “Net investment income.” The carrying value of these investments is written down, or impaired, to fair value when a decline in value is considered to be other-than-temporary. In applying the equity method (including assessment for OTTI), the Company uses financial information provided by the investee, generally on a one to three month lag. For the investments reported at fair value with changes in fair value reported in current earnings, the associated realized and unrealized gains and losses are reported in “Asset administration fees and other income”.

~~REVENUES AND BENEFITS AND EXPENSES~~

~~Asset administration fees and other income~~ principally includes asset-based asset management fees, which are recognized in the period in which the services are performed. This financial statement line also includes realized and unrealized gains or losses from investments reported as “Fixed maturities, trading”, “Equity securities, at fair value”, and “Other invested assets” that are measured at fair value.

~~Other~~ ASU adopted during the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019.

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Unaudited Interim Consolidated Financial Statements—(Continued)~~



~~ASU 2016-15~~, ~~Statement of Cash~~ ~~Flows (Topic 230):~~ ~~Classification of Certain Cash Receipts and Cash~~ ~~Payments (a~~ ~~Consensus of the~~ ~~Emerging Issues~~ ~~Task Force)~~	This ASU addresses diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard provides clarity on the treatment of eight specifically defined types of cash inflows and outflows.	~~January 1, 2018 using the retrospective method (with early adoption permitted provided that all amendments are adopted in the same period).~~	Adoption of the ASU did not have a significant impact on the Company’s ~~Consolidated~~ Financial Statements and Notes to the ~~Consolidated~~ Financial Statements. The impact of the cumulative-effect adjustment to retained earnings was immaterial.
ASU ~~2016-18, Statement of Cash Flows~~2017-12, Derivatives and Hedging (Topic ~~230)~~ 815): ~~Restricted Cash~~Targeted Improvements to Accounting for Hedging Activities	~~In November 2016,~~ This ASU makes targeted changes to the ~~FASB issued this~~existing hedge accounting model to better portray the economics of an entity’s risk management activities and to simplify the use of hedge accounting. The ASU ~~to address diversity in practice from entities classifying~~eliminates separate measurement and ~~presenting transfers between cash and restricted cash as operating, investing, or financing activities, or as a combination~~recording of ~~those activities in the Statement of Cash Flows. The ASU~~hedge ineffectiveness. It requires entities to ~~show~~present the ~~changes~~earnings effect of the hedging instrument in the ~~total of cash, cash equivalents, restricted cash,~~same income statement line item in which the hedged item is reported and ~~restricted cash equivalents in the Statement of Cash Flows. As a result, transfers between such categories will no longer be presented in the Statement of Cash Flows.~~also requires expanded disclosures.	January 1, ~~2018~~2019 using the modified retrospective method ~~(with early adoption permitted).~~which included cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption.	Adoption of the ASU did not have a significant impact on the Company’s ~~Consolidated~~ Financial Statements and Notes to the ~~Consolidated~~ Financial Statements.
~~ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income~~	~~In February 2018, this ASU was issued following the enactment~~ The impact of the ~~Tax Act of 2017. This ASU allows an entity~~cumulative-effect adjustment to ~~elect a reclassification from~~retained earnings and accumulated other comprehensive income (loss) ("AOCI") related to ~~retained earnings for stranded effects resulting from the Tax Act of 2017.~~	~~January 1, 2019 with early adoption permitted. The ASU should be applied either in the period of adoption or retrospectively to each period in which the effect~~ineffectiveness of the ~~change in~~hedge instruments outstanding at the ~~U.S. federal corporate income tax rate in the Tax Act~~date of ~~2017 is recognized.~~	~~The Company early adopted the ASU effective January 1, 2018 and elected to apply the ASU in the period of adoption subsequent to recording~~ the adoption impacts of ASU 2016-01 as described above. As a result, the Company reclassified stranded effects resulting from the Tax Act of 2017 by decreasing accumulated other comprehensive income and increasing retained earnings, each by$36.7 million. Stranded effects unrelated to the Tax Act of 2017 are generally released from accumulated other comprehensive income when an entire portfolio of the type of item related to the stranded effect is liquidated, sold or extinguished (i.e., portfolio approach). was immaterial. See Note 4 for additional required disclosures.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)

ASU issued but not yet adopted as of ~~September~~June 30, ~~2018~~2019 — ASU 2018-12

ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the FASB on August 15, 2018 and is expected to have a significant impact on the Company’s ~~Consolidated~~ Financial Statements and Notes to the ~~Consolidated~~ Financial Statements. ~~The~~In July 2019, the FASB made a tentative decision to defer the effective date of this ASU ~~is effective~~to January 1, ~~2021~~2022 (with early adoption permitted), ~~and~~representing a one year extension from the original effective date of January 1, 2021. A final decision regarding the effective date is expected in the third quarter of 2019. This ASU will impact, at least to some extent, the accounting and disclosure requirements for all long-duration insurance and investment contracts issued by the Company. Outlined below are four key areas of change, although there are other ~~less significant~~ changes not noted below. In addition to the impacts to the balance sheet upon adoption, the Company also expects an impact to how earnings emerge thereafter.

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Unaudited Interim Consolidated Financial Statements—(Continued)~~

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Unaudited Interim Consolidated Financial Statements—(Continued)~~



Market Risk Benefits	Requires an entity to measure all market risk benefits (e.g., living benefit and death benefit guarantees associated with variable annuities) at fair value with changes in value attributable to changes in an entity’s non-performance risk ("NPR") to be recognized in OCI.	An entity will apply a retrospective transition method which will include a cumulative-effect adjustment on the balance sheet as of the earliest period presented.	Upon adoption, the Company expects an impact to retained earnings for the difference between the fair value and carrying value of benefits not currently measured at fair value (e.g., guaranteed minimum death benefits on variable annuities) and an impact from reclassifying the cumulative effect of changes in NPR from retained earnings to AOCI. The magnitude of such adjustments is currently being assessed.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)

Other ASU issued but not yet adopted as of ~~September~~June 30, ~~2018~~

2019



Standard	Description	Effective date and method of adoption	Effect on the financial statements or other significant matters
ASU 2016-13, Financial ~~Instruments-Credit~~Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments	This ASU provides a new current expected credit loss model to account for credit losses on certain financial assets and off-balance sheet exposures (e.g., loans held for investment, debt securities held to maturity, reinsurance receivables, net investments in leases and loan commitments). The model requires an entity to estimate lifetime credit losses related to such financial assets and exposures based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The standard also modifies the current other-than-temporary impairment standard for available-for-sale debt securities to require the use of an allowance rather than a direct write down of the investment, and replaces existing standard for purchased credit deteriorated loans and debt securities.	January 1, 2020 using the modified retrospective method which will include a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption. However, prospective application is required for purchased credit deteriorated assets previously accounted for under ASU 310-30 and for debt securities for which an other-than-temporary impairment was recognized prior to the date of adoption. Early adoption is permitted beginning January 1, 2019.	The Company is ~~currently assessing~~continuing to develop its expected credit loss models and related systems, processes and controls for assets held on the Statement of Financial Position at amortized cost, the most significant of which are the commercial mortgage and other loans. The allowance for credit losses will likely increase when the ASU is adopted to cover expected credit losses over the lifetime of the commercial mortgage and other loans, incorporating reasonable and supportable forecasts and expected changes in future economic conditions. The extent of the impact of ~~the~~adoption of this ASU on the Company’s ~~Consolidated~~ Financial Statements and Notes to the ~~Consolidated~~ Financial ~~Statements.~~
~~ASU 2017-08,~~ ~~Receivables -~~ ~~Nonrefundable Fees~~ Statements will depend on various factors including the economic environment and ~~Other Costs~~ ~~(Subtopic 310-20)~~ ~~Premium~~ ~~Amortization on~~ ~~Purchased Callable~~ ~~Debt Securities~~	~~This ASU requires certain premiums on callable debt securities to be amortized to~~ the ~~earliest call date.~~	~~January 1, 2019 using~~size and type of the ~~modified retrospective method (with early adoption permitted) which will include a cumulative-effect adjustment~~commercial mortgage and other loans held on the ~~balance sheet as~~date of ~~the beginning of the fiscal year of~~ adoption.	~~The Company does not expect the adoption of the ASU to have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.~~
~~ASU 2017-12,~~ ~~Derivatives and~~ ~~Hedging (Topic~~ ~~815): Targeted~~ ~~Improvements to~~ ~~Accounting for~~ ~~Hedging Activities~~	~~This ASU makes targeted changes to the existing hedge accounting model to better portray the economics of an entity’s risk management activities and to simplify the use of hedge accounting.~~	January 1, 2019 using the modified retrospective method (with early adoption permitted) which will include a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption.	~~The Company does not expect the adoption of the ASU to have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.~~

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Unaudited Interim Consolidated Financial Statements—(Continued)~~

3. INVESTMENTS

Fixed Maturity Securities

The following tables set forth ~~information relating to~~the composition of fixed maturity securities (excluding investments classified as trading), as of the dates indicated:


	September 30, 2018											June 30, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI(3)			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI(3)
	(in thousands)											(in thousands)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	4,718,446	$	38	$	510,300	$	4,208,184	$	0		$	6,541,657	$	336,709	$	69,324	$	6,809,042	$	0
Obligations of U.S. states and their political subdivisions	134,396		433		3,967		130,862		0			132,126		5,553		0		137,679		0
Foreign government bonds	223,312		4,706		3,653		224,365		0			203,223		14,688		16		217,895		0
Public utilities	548,257		10,863		16,122		542,998		0
Redeemable preferred stock	29,445		0		786		28,659		0
All other U.S. public corporate securities	1,391,160		26,213		35,125		1,382,248		0
All other U.S. private corporate securities	846,203		13,898		20,665		839,436		0
All other foreign public corporate securities	284,819		2,075		5,761		281,133		0
All other foreign private corporate securities	672,681		14,883		16,638		670,926		0
U.S. public corporate securities												1,582,606		90,724		3,539		1,669,791		0
U.S. private corporate securities												1,047,083		44,181		4,284		1,086,980		0
Foreign public corporate securities												305,453		13,421		519		318,355		0
Foreign private corporate securities												958,122		38,168		10,100		986,190		0
Asset-backed securities(1)	510,463		3,333		1,685		512,111		(16		)	479,696		4,733		2,299		482,130		(12		)
Commercial mortgage-backed securities	447,064		1,137		11,476		436,725		0			526,795		19,783		74		546,504		0
Residential mortgage-backed securities(2)	65,378		1,036		1,703		64,711		0			80,349		4,202		133		84,418		0
Total fixed maturities, available-for-sale	$	9,871,624	$	78,615	$	627,881	$	9,322,358	$	(16	)	$	11,857,110	$	572,162	$	90,288	$	12,338,984	$	(12	)


(1)	Includes credit-tranched securities collateralized by loan obligations, sub-prime mortgages, auto loans, ~~credit cards,~~equipment leases, education loans and other asset types.


(2)	Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.


(3)	Represents the amount of unrealized losses remaining in AOCI, from the impairment measurement date. Amount excludes ~~$(1.0)~~$9.8 million of net unrealized ~~losses~~gains on impaired available-for-sale securities relating to changes in the value of such securities subsequent to the impairment measurement date.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)


	December 31, 2017											December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI(3)			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI(3)
	(in thousands)											(in thousands)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	5,059,168	$	9,109	$	236,627	$	4,831,650	$	0		$	5,240,519	$	20,065	$	376,493	$	4,884,091	$	0
Obligations of U.S. states and their political subdivisions	102,709		2,089		158		104,640		0			133,670		621		3,127		131,164		0
Foreign government bonds	133,859		6,878		432		140,305		0			199,044		4,748		4,156		199,636		0
Public utilities	567,829		31,414		2,058		597,185		0
Redeemable preferred stock	29,504		615		59		30,060		0
All other U.S. public corporate securities	1,473,761		77,379		3,416		1,547,724		0
All other U.S. private corporate securities	938,144		35,327		3,795		969,676		0
All other foreign public corporate securities	194,201		5,663		918		198,946		0
All other foreign private corporate securities	638,785		38,030		3,231		673,584		0
U.S. public corporate securities												1,498,130		26,425		50,582		1,473,973		0
U.S. private corporate securities												1,070,400		15,430		22,877		1,062,953		0
Foreign public corporate securities												296,029		1,888		6,831		291,086		0
Foreign private corporate securities												829,588		10,415		27,771		812,232		0
Asset-backed securities(1)	341,277		4,438		128		345,587		(17		)	505,862		3,147		3,765		505,244		(16		)
Commercial mortgage-backed securities	502,695		7,334		4,345		505,684		0			364,601		2,770		5,491		361,880		0
Residential mortgage-backed securities(2)	163,334		2,950		539		165,745		(4		)	48,622		1,290		498		49,414		0
Total fixed maturities, available-for-sale	$	10,145,266	$	221,226	$	255,706	$	10,110,786	$	(21	)	$	10,186,465	$	86,799	$	501,591	$	9,771,673	$	(16	)


(1)	Includes credit-tranched securities collateralized by loan obligations, sub-prime mortgages, auto loans, ~~credit cards,~~equipment leases, education loans and other asset types.


(2)	Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.


(3)	Represents the amount of unrealized losses remaining in AOCI, from the impairment measurement date. Amount excludes ~~$12.3~~$3.3 million of net unrealized ~~gains~~losses on impaired available-for-sale securities relating to changes in the value of such securities subsequent to the impairment measurement date.

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Unaudited Interim Consolidated Financial Statements—(Continued)~~

The following tables set forth the fair value and gross unrealized losses aggregated by investment category and length of time that individual fixed maturity securities had been in a continuous unrealized loss position, as of the dates indicated:


	September 30, 2018												June 30, 2019
	Less than Twelve Months				Twelve Months or More				Total				Less Than Twelve Months				Twelve Months or More				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(in thousands)												(in thousands)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	998,734	$	28,769	$	3,194,749	$	481,531	$	4,193,483	$	510,300	$	0	$	0	$	1,340,698	$	69,324	$	1,340,698	$	69,324
Obligations of U.S. states and their political subdivisions	96,628		3,149		19,062		818		115,690		3,967		0		0		0		0		0		0
Foreign government bonds	138,696		2,510		23,115		1,143		161,811		3,653		0		0		131		16		131		16
Public utilities	284,042		12,460		61,961		3,662		346,003		16,122
Redeemable preferred stock	28,659		786		0		0		28,659		786
All other U.S. public corporate securities	755,392		29,258		134,461		5,867		889,853		35,125
All other U.S. private corporate securities	351,239		9,807		216,144		10,858		567,383		20,665
All other foreign public corporate securities	137,967		2,935		52,986		2,826		190,953		5,761
All other foreign private corporate securities	223,148		10,928		72,195		5,710		295,343		16,638
U.S. public corporate securities													13,122		711		92,531		2,828		105,653		3,539
U.S. private corporate securities													32,982		1,352		122,846		2,932		155,828		4,284
Foreign public corporate securities													11,590		325		19,845		194		31,435		519
Foreign private corporate securities													78,867		1,336		143,872		8,764		222,739		10,100
Asset-backed securities	268,933		1,539		5,052		146		273,985		1,685		123,334		518		185,263		1,781		308,597		2,299
Commercial mortgage-backed securities	137,333		2,773		181,463		8,703		318,796		11,476		0		0		40,513		74		40,513		74
Residential mortgage-backed securities	26,272		751		21,924		952		48,196		1,703		0		0		7,044		133		7,044		133
Total fixed maturities, available-for-sale	$	3,447,043	$	105,665	$	3,983,112	$	522,216	$	7,430,155	$	627,881	$	259,895	$	4,242	$	1,952,743	$	86,046	$	2,212,638	$	90,288

December 31, 2017
Less than Twelve Months Twelve Months or More Total
Fair Value
Gross
  Unrealized
Losses
Fair Value
Gross
  Unrealized
Losses
Fair Value
Gross
  Unrealized
Losses
(in thousands)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies $ 13,174
$ 23
$ 4,550,472
$ 236,604
$ 4,563,646
$ 236,627
Obligations of U.S. states and their political subdivisions 6,669
26
13,311
132
19,980
158
Foreign government bonds 37,466
428
143
4
37,609
432
Public utilities 84,260
1,357
22,420
701
106,680
2,058
Redeemable preferred stock 10,522
59
0
0
10,522
59
All other U.S. public corporate securities 206,988
1,034
118,002
2,382
324,990
3,416
All other U.S. private corporate securities 221,753
2,173
83,365
1,622
305,118
3,795
All other foreign public corporate securities 66,004
578
23,186
340
89,190
918
All other foreign private corporate securities 78,200
536
89,675
2,695
167,875
3,231
Asset-backed securities 30,234
128
0
0
30,234
128
Commercial mortgage-backed securities 113,423
1,225
129,458
3,120
242,881
4,345
Residential mortgage-backed securities 26,916
166
24,833
373
51,749
539
Total fixed maturities, available-for-sale $ 895,609
$ 7,733
$ 5,054,865
$ 247,973
$ 5,950,474
$ 255,706

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)



	December 31, 2018
	Less Than Twelve Months				Twelve Months or More				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	367,796	$	4,844	$	3,304,663	$	371,649	$	3,672,459	$	376,493
Obligations of U.S. states and their political subdivisions	25,764		322		83,950		2,805		109,714		3,127
Foreign government bonds	98,437		2,346		58,975		1,810		157,412		4,156
U.S. public corporate securities	627,589		28,474		386,599		22,108		1,014,188		50,582
U.S. private corporate securities	269,545		7,755		422,498		15,122		692,043		22,877
Foreign public corporate securities	97,367		2,521		107,286		4,310		204,653		6,831
Foreign private corporate securities	373,891		19,217		116,743		8,554		490,634		27,771
Asset-backed securities	358,668		3,501		24,529		264		383,197		3,765
Commercial mortgage-backed securities	45,432		355		159,638		5,136		205,070		5,491
Residential mortgage-backed securities	34		1		13,775		497		13,809		498
Total fixed maturities, available-for-sale	$	2,264,523	$	69,336	$	4,678,656	$	432,255	$	6,943,179	$	501,591

As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the gross unrealized losses on fixed maturity securities were composed of ~~$617.5~~$86.5 million and ~~$253.1~~$485.7 million, respectively, related to “1” highest quality or “2” high quality securities based on the National Association of Insurance Commissioners (“NAIC”) or equivalent rating and ~~$10.4~~$3.8 million and ~~$2.7~~$15.9 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. As of ~~September~~June 30, ~~2018,~~2019, the ~~$522.2~~$86.0 million of gross unrealized losses ~~on fixed maturities~~ of twelve months or more were concentrated in U.S. government bonds ~~commercial mortgage-backed securities~~ and in the Company’s corporate securities within the consumer non-cyclical ~~finance~~, utility and ~~utility~~capital goods sectors. As of December 31, ~~2017,~~2018, the ~~$248.0~~$432.3 million of gross unrealized losses ~~on fixed maturities~~ of twelve months or more were concentrated in U.S. government bonds ~~commercial mortgage-backed securities~~ and in the Company’s corporate securities within the finance, consumer non-cyclical and ~~finance~~capital goods sectors. In accordance with its policy described in Note 2 to the Financial Statements included in the ~~Company's~~Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, the Company concluded that an adjustment to earnings for OTTI for these fixed maturity securities was not warranted at either ~~September~~June 30, ~~2018~~2019 or December 31, ~~2017.~~2018. These conclusions were based on a detailed analysis of the underlying credit and cash flows on each security. Gross unrealized losses are primarily attributable to general credit spread widening, increases in interest rates and foreign currency exchange rate movements. As of ~~September~~June 30, ~~2018,~~2019, the Company did not intend to sell these securities, and it was not more likely than not that the Company would be required to sell these securities before the anticipated recovery of the remaining amortized cost basis.

The following table sets forth the amortized cost and fair value of fixed maturities by contractual maturities, as of the date indicated:



	June 30, 2019
	Amortized Cost		Fair Value
	(in thousands)
Fixed maturities, available-for-sale:
Due in one year or less	$	151,032	$	152,032
Due after one year through five years	1,188,945		1,217,111
Due after five years through ten years	1,542,382		1,628,079
Due after ten years	7,887,911		8,228,710
Asset-backed securities	479,696		482,130
Commercial mortgage-backed securities	526,795		546,504
Residential mortgage-backed securities	80,349		84,418
Total fixed maturities, available-for-sale	$	11,857,110	$	12,338,984

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

September 30, 2018
Amortized Cost Fair Value
(in thousands)
Fixed maturities, available-for-sale:
Due in one year or less $ 216,375
$ 217,322
Due after one year through five years 1,150,303
1,145,246
Due after five years through ten years 1,341,125
1,347,845
Due after ten years 6,140,916
5,598,398
Asset-backed securities 510,463
512,111
Commercial mortgage-backed securities 447,064
436,725
Residential mortgage-backed securities 65,378
64,711
Total fixed maturities, available-for-sale $ 9,871,624
$ 9,322,358

Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Asset-backed, commercial mortgage-backed and residential mortgage-backed securities are shown separately in the table above, as they do not have a single maturity date.

The following table sets forth the sources of fixed maturity proceeds and related investment gains (losses), as well as losses on impairments of fixed maturities, for the periods indicated:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
	(in thousands)												(in thousands)
Fixed maturities, available-for-sale
Proceeds from sales(1)	$	391,271		$	115,316		$	1,834,190		$	382,792		$	21,640		$	208,266		$	153,409		$	1,442,919
Proceeds from maturities/prepayments	67,980			156,822			308,339			480,794			109,974			124,502			254,417			240,359
Gross investment gains from sales and maturities	2,532			(1,299		)	20,109			2,461			(983		)	17,465			967			17,577
Gross investment losses from sales and maturities	(10,764		)	(1,406		)	(85,869		)	(2,081		)	(1,985		)	(1,480		)	(2,641		)	(75,105		)
OTTI recognized in earnings(2)	(2,523		)	41			(2,960		)	(4,787		)	0			(151		)	(2,025		)	(437		)


(1)	Includes ~~$(1.7)~~$3.6 million and ~~$8.7~~$(0.8) million of non-cash related proceeds due to the timing of trade settlements for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively.


(2)	Excludes the portion of OTTI ~~recorded~~amounts remaining in OCI, representing any difference between the fair value of the impaired debt security and the net present value of its projected future cash flows at the time of the impairment.

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Unaudited Interim Consolidated Financial Statements—(Continued)~~

The following table sets forth a rollforward of pre-tax amounts remaining in OCI related to fixed maturity securities with credit loss impairments recognized in earnings, for the periods indicated:



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in thousands)
Credit loss impairments:
Balance, beginning of period	$	1,134		$	791		$	(209	)	$	792
New credit loss impairments	0			0			1,343			0
Increases due to the passage of time on previously recorded credit losses	10			0			10			1
Reductions for securities which matured, paid down, prepaid or were sold during the period	(1		)	(38		)	(1		)	(40		)
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected	(1		)	0			(1		)	0
Balance, end of period	$	1,142		$	753		$	1,142		$	753

Three Months Ended September 30, 2018 Nine Months Ended September 30, 2018 Three Months Ended September 30, 2017 Nine Months Ended September 30, 2017
(in thousands)
Credit loss impairments:
Balance, beginning of period $ 753
$ 792
$ 200
$ 1,325
New credit loss impairments 0
0
(1 ) 365
Additional credit loss impairments on securities previously impaired 0
0
0
0
Increases due to the passage of time on previously recorded credit losses 1
2
1
9
Reductions for securities which matured, paid down, prepaid or were sold during the period 0
(40 ) (3 ) (18 )
Reductions for securities impaired to fair value during the period(1) 0
0
0
(1,481 )
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected (1 ) (1 ) (8 ) (11 )
Assets transferred to parent and affiliates 0
0
0
0
Balance, end of period $ 753
$ 753
$ 189
$ 189


~~(1)~~	Represents circumstances where the Company determined in the current period that it intends to sell the security or it is more likely than not that it will be required to sell the security before recovery of the security's amortized cost.

Equity Securities

The net change in unrealized gains (losses) from equity securities still held at period end, recorded within “Asset administration fees and other income,” was ~~$(0.3)~~$0.6 million and ~~$0.8~~$(0.4) million during the three months ended ~~September~~June 30, 2019 and 2018, respectively, and ~~2017, respectively.~~

~~The net change in unrealized gains (losses) from equity securities still held at period end, recorded within “Asset administration fees and other income,” was $0.1~~$1.5 million and ~~$1.7~~$0.4 million during the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018, ~~and 2017,~~ respectively.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)

Commercial Mortgage and Other Loans

The following table sets forth the composition of “Commercial mortgage and other loans,” as of the dates indicated:



	June 30, 2019					December 31, 2018
	Amount (in thousands)			% of Total		Amount (in thousands)			% of Total
Commercial mortgage and agricultural property loans by property type:
Apartments/Multi-Family	$	284,999		21.6	%	$	304,644		22.4	%
Hospitality	4,787			0.4		3,633			0.3
Industrial	390,931			29.6		355,758			26.2
Office	286,659			21.7		305,537			22.5
Other	138,177			10.5		137,781			10.2
Retail	160,506			12.2		194,646			14.4
Total commercial mortgage loans	1,266,059			96.0		1,301,999			96.0
Agricultural property loans	52,948			4.0		54,375			4.0
Total commercial mortgage and agricultural property loans by property type	1,319,007			100.0	%	1,356,374			100.0	%
Allowance for credit losses	(2,396		)			(2,896		)
Total commercial mortgage and other loans	$	1,316,611				$	1,353,478

September 30, 2018 December 31, 2017

Amount
(in thousands)

% of
Total

Amount
(in thousands)

% of
Total
Commercial mortgage and agricultural property loans by property type:
Apartments/Multi-Family $ 306,807
22.6 % $ 348,718
25.0 %
Hospitality 3,671
0.3
3,782
0.3
Industrial 358,883
26.5
327,987
23.6
Office 299,216
22.1
294,072
21.2
Other 135,790
10.0
139,362
10.0
Retail 195,520
14.4
216,544
15.6
Total commercial mortgage loans 1,299,887
95.9
1,330,465
95.7
Agricultural property loans 55,488
4.1
59,197
4.3
Total commercial mortgage and agricultural property loans by property type 1,355,375
100.0 % 1,389,662
100.0 %
Valuation allowance (2,972 ) (2,650 )
Total commercial mortgage and other loans $ 1,352,403
$ 1,387,012

As of ~~September~~June 30, ~~2018,~~2019, the commercial mortgage and agricultural property loans were secured by properties geographically dispersed throughout the United States (with the largest concentrations in California (27%), Texas (14%) and New York ~~(7%~~ (8%)) and included loans secured by properties in Europe (11%) and Australia (3%).

The following ~~tables set~~table sets forth the activity in the allowance for credit losses for commercial mortgage and other loans, as of the dates indicated:

September 30, 2018
Commercial Mortgage Loans Agricultural Property Loans Total
(in thousands)
Allowance for credit losses:
Balance, beginning of year $ 2,616
$ 34
$ 2,650
Addition to (release of) allowance for losses 323
(1 ) 322
Charge-offs, net of recoveries 0
0
0
Total ending balance $ 2,939
$ 33
$ 2,972



	Commercial Mortgage Loans			Agricultural Property Loans		Total
	(in thousands)
Balance at December 31, 2017	$	2,616		$	34	$	2,650
Addition to (release of) allowance for credit losses	245			1		246
Charge-offs, net of recoveries	0			0		0
Balance at December 31, 2018	2,861			35		2,896
Addition to (release of) allowance for credit losses	(507		)	7		(500		)
Charge-offs, net of recoveries	0			0		0
Balance at June 30, 2019	$	2,354		$	42	$	2,396

December 31, 2017
Commercial Mortgage Loans Agricultural Property Loans Total
(in thousands)
Allowance for credit losses:
Balance, beginning of year $ 2,267
$ 22
$ 2,289
Addition to (release of) allowance for losses 349
12
361
Charge-offs, net of recoveries 0
0
0
Total ending balance $ 2,616
$ 34
$ 2,650

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)

The following tables set forth the allowance for credit losses and the recorded investment in commercial mortgage and other loans, as of the dates indicated:


	September 30, 2018						June 30, 2019
	Commercial Mortgage Loans		Agricultural Property Loans		Total		Commercial Mortgage Loans		Agricultural Property Loans		Total
	(in thousands)						(in thousands)
Allowance for credit losses:
Individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	0
Collectively evaluated for impairment	2,939		33		2,972		2,354		42		2,396
Total ending balance(1)	$	2,939	$	33	$	2,972	$	2,354	$	42	$	2,396
Recorded investment(2):
Individually evaluated for impairment	$	0	$	4,333	$	4,333	$	0	$	0	$	0
Collectively evaluated for impairment	1,299,887		51,155		1,351,042		1,266,059		52,948		1,319,007
Total ending balance(1)	$	1,299,887	$	55,488	$	1,355,375	$	1,266,059	$	52,948	$	1,319,007


(1)	As of ~~September~~June 30, ~~2018,~~2019, there were no loans acquired with deteriorated credit quality.


(2)	Recorded investment reflects the carrying value gross of related allowance.


	December 31, 2017						December 31, 2018
	Commercial Mortgage Loans		Agricultural Property Loans		Total		Commercial Mortgage Loans		Agricultural Property Loans		Total
	(in thousands)						(in thousands)
Allowance for credit losses:
Individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	0
Collectively evaluated for impairment	2,616		34		2,650		2,861		35		2,896
Total ending balance(1)	$	2,616	$	34	$	2,650	$	2,861	$	35	$	2,896
Recorded investment(2):
Individually evaluated for impairment	$	1,571	$	4,865	$	6,436	$	0	$	3,439	$	3,439
Collectively evaluated for impairment	1,328,894		54,332		1,383,226		1,301,999		50,936		1,352,935
Total ending balance(1)	$	1,330,465	$	59,197	$	1,389,662	$	1,301,999	$	54,375	$	1,356,374


(1)	As of December 31, ~~2017,~~2018, there were no loans acquired with deteriorated credit quality.


(2)	Recorded investment reflects the carrying value gross of related allowance.

The following tables set forth certain key credit quality indicators for commercial mortgage and agricultural property loans based upon the recorded investment gross of allowance for credit losses, as of the dates indicated:


	September 30, 2018								June 30, 2019
	Debt Service Coverage Ratio								Debt Service Coverage Ratio
	≥ 1.2X		1.0X to <1.2X		< 1.0X		Total		≥ 1.2X		1.0X to <1.2X		< 1.0X		Total
	(in thousands)								(in thousands)
Loan-to-Value Ratio:
0%-59.99%	$	658,709	$	15,079	$	0	$	673,788	$	688,758	$	12,017	$	3,621	$	704,396
60%-69.99%	478,402		23,469		0		501,871		431,303		21,536		0		452,839
70%-79.99%	169,409		7,281		0		176,690		153,620		7,143		0		160,763
80% or greater	2,000		1,026		0		3,026		0		0		1,009		1,009
Total commercial mortgage and agricultural property loans	$	1,308,520	$	46,855	$	0	$	1,355,375	$	1,273,681	$	40,696	$	4,630	$	1,319,007

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)



	December 31, 2018
	Debt Service Coverage Ratio
	≥ 1.2X		1.0X to <1.2X		< 1.0X		Total
	(in thousands)
Loan-to-Value Ratio:
0%-59.99%	$	709,342	$	14,814	$	345	$	724,501
60%-69.99%	442,308		23,260		0		465,568
70%-79.99%	156,049		7,236		0		163,285
80% or greater	2,000		1,020		0		3,020
Total commercial mortgage and agricultural property loans	$	1,309,699	$	46,330	$	345	$	1,356,374

December 31, 2017
Debt Service Coverage Ratio
≥ 1.2X 1.0X to <1.2X < 1.0X Total
(in thousands)
Loan-to-Value Ratio:
0%-59.99% $ 667,338
$ 14,426
$ 4,566
$ 686,330
60%-69.99% 503,922
1,329
0
505,251
70%-79.99% 182,368
13,281
0
195,649
80% or greater 1,387
0
1,045
2,432
Total commercial mortgage and agricultural property loans $ 1,355,015
$ 29,036
$ 5,611
$ 1,389,662

The following tables set forth an aging of past due commercial mortgage and other loans based upon the recorded investment gross of allowance for credit losses, as well as the amount of commercial mortgage and other loans on non-accrual status, as of the dates indicated:


	September 30, 2018												June 30, 2019
	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due(1)		Total Loans		Non-Accrual Status(2)		Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due(1)		Total Loans		Non-Accrual Status(2)
	(in thousands)												(in thousands)
Commercial mortgage loans	$	1,299,887	$	0	$	0	$	0	$	1,299,887	$	0	$	1,266,059	$	0	$	0	$	0	$	1,266,059	$	0
Agricultural property loans	55,488		0		0		0		55,488		0		52,948		0		0		0		52,948		0
Total	$	1,355,375	$	0	$	0	$	0	$	1,355,375	$	0	$	1,319,007	$	0	$	0	$	0	$	1,319,007	$	0


(1)	As of ~~September~~June 30, 2019, there were no loans in this category accruing interest.


(2)	For additional information regarding the Company's policies for accruing interest on loans, see Note 2 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.



	December 31, 2018
	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due(1)		Total Loans		Non-Accrual Status(2)
	(in thousands)
Commercial mortgage loans	$	1,301,999	$	0	$	0	$	0	$	1,301,999	$	0
Agricultural property loans	54,375		0		0		0		54,375		0
Total	$	1,356,374	$	0	$	0	$	0	$	1,356,374	$	0


(1)	As of December 31, 2018, there were no loans in this category accruing interest.


(2)	For additional information regarding the Company's policies for accruing interest on loans, see Note 2 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

December 31, 2017
Current 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due(1) Total Loans Non-Accrual Status(2)
(in thousands)
Commercial mortgage loans $ 1,330,465
$ 0
$ 0
$ 0
$ 1,330,465
$ 0
Agricultural property loans 59,197
0
0
0
59,197
0
Total $ 1,389,662
$ 0
$ 0
$ 0
$ 1,389,662
$ 0


~~(1)~~	~~As of December 31, 2017, there were no loans in this category accruing interest.~~


~~(2)~~	For additional information regarding the Company's policies for accruing interest on loans, see Note 2 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

For the three and ~~nine~~six months ended ~~September~~June 30, 2019, there were no commercial mortgage and other loans acquired, other than those through direct origination, and there were $0 million and $101 million, respectively, of commercial mortgage and other loans sold. For both the three and six months ended June 30, 2018, there were no commercial mortgage and other loans acquired, other than those through direct origination, and there were ~~$13 million and $96~~$83 million of commercial mortgage and other loans sold. For the three and nine months ended September 30, 2017, there were no commercial mortgage and other loans acquired, other than those through direct origination, and there were no commercial mortgage and other loans sold.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)

Other Invested Assets

The following table sets forth the composition of “Other invested assets,” as of the dates indicated:



	June 30, 2019		December 31, 2018
	(in thousands)
LPs/LLCs:
Equity method:
Private equity	$	24,043	$	23,844
Hedge funds	204,961		179,014
Real estate-related	135,035		94,738
Subtotal equity method	364,039		297,596
Fair value:
Private equity	3,854		4,142
Hedge funds	268		263
Real estate-related	5,619		3,562
Subtotal fair value	9,741		7,967
Total LPs/LLCs	373,780		305,563
Derivative instruments	2		42,978
Total other invested assets	$	373,782	$	348,541

September 30, 2018 December 31, 2017
(in thousands)
LPs/LLCs:
Equity method:
Private equity $ 26,480
$ 25,801
Hedge funds 154,928
106,474
Real estate-related 57,875
46,043
Subtotal equity method 239,283
178,318
Fair value:
Private equity 4,216
3,500
Hedge funds 267
302
Real estate-related 3,084
2,512
Subtotal fair value(1) 7,567
6,314
Total LPs/LLCs 246,850
184,632
Real estate held through direct ownership 7,200
0
Derivative instruments 0
151,179
Total other invested assets(2) $ 254,050
$ 335,811


~~(1)~~	~~As of December 31, 2017, $6.0 million was accounted for under the cost method.~~


~~(2)~~	~~Prior period amounts have been reclassified to conform to current period presentation. For additional information, see Note 2.~~

Net Investment Income

The following table sets forth “Net investment income” by investment type, for the periods indicated:



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in thousands)
Fixed maturities, available-for-sale	$	96,829		$	77,885		$	189,040		$	153,936
Fixed maturities, trading	2,553			484			4,918			1,085
Equity securities, at fair value	73			108			146			176
Commercial mortgage and other loans	13,168			12,758			24,900			26,251
Policy loans	218			236			277			371
Short-term investments and cash equivalents	16,766			7,358			30,506			13,885
Other invested assets	7,765			4,880			16,607			8,510
Gross investment income	137,372			103,709			266,394			204,214
Less: investment expenses	(5,400		)	(3,549		)	(9,353		)	(7,343		)
Net investment income	$	131,972		$	100,160		$	257,041		$	196,871

Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
(in thousands)
Fixed maturities, available-for-sale $ 81,551
$ 83,198
$ 235,487
$ 246,853
Fixed maturities, trading 2,006
1,109
3,091
3,213
Equity securities, at fair value 72
67
248
216
Commercial mortgage and other loans 12,567
12,777
38,818
36,313
Policy loans 175
114
546
810
Short-term investments and cash equivalents 5,103
9,700
18,988
22,618
Other invested assets 5,573
4,771
14,083
15,718
Gross investment income 107,047
111,736
311,261
325,741
Less: investment expenses (3,883 ) (3,783 ) (11,226 ) (11,431 )
Net investment income(1) $ 103,164
$ 107,953
$ 300,035
$ 314,310


~~(1)~~	~~Prior period amounts have been reclassified to conform to current period presentation.~~

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)

Realized Investment Gains (Losses), Net

The following table sets forth “Realized investment gains (losses), ~~net,”~~net” by investment type, for the periods indicated:



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in thousands)
Fixed maturities(1)	$	(2,968	)	$	15,834		$	(3,699	)	$	(57,965	)
Commercial mortgage and other loans	(461		)	472			(1,242		)	(148		)
Derivatives	(890,952		)	(6,465		)	(2,231,880		)	626,655
Short-term investments and cash equivalents	166			18			387			7
Realized investment gains (losses), net	$	(894,215	)	$	9,859		$	(2,236,434	)	$	568,549

Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
(in thousands)
Fixed maturities(1) $ (10,755 ) $ (2,664 ) $ (68,720 ) $ (4,407 )
Commercial mortgage and other loans 201
(430 ) 53
(660 )
LPs/LLCs 0
(3 ) 0
(37 )
Derivatives(2) 75,810
1,173,163
702,465
(322,456 )
Short-term investments and cash equivalents 17
11
24
48
Realized investment gains (losses), net $ 65,273
$ 1,170,077
$ 633,822
$ (327,512 )


(1)	Includes fixed maturity securities classified as available-for-sale and excludes fixed maturity securities classified as trading.


~~(2)~~	~~Includes the hedged items offset in qualifying fair value hedge accounting relationships.~~

Net Unrealized Gains (Losses) on Investments within AOCI

The following table sets forth net unrealized gains (losses) on investments, as of the dates indicated:


	September 30, 2018			December 31, 2017			June 30, 2019			December 31, 2018
	(in thousands)						(in thousands)
Fixed maturity securities, available-for-sale — with OTTI	$	(1,034	)	$	12,311		$	9,793		$	(3,334	)
Fixed maturity securities, available-for-sale — all other	(548,232		)	(46,791		)	472,081			(411,458		)
Equity securities, available-for-sale(1)	0			4
Derivatives designated as cash flow hedges(2)	(23,867		)	(25,851		)
Derivatives designated as cash flow hedges(1)							(302		)	(3,849		)
Affiliated notes	635			829			673			658
Other investments	1,075			86			1,074			1,074
Net unrealized gains (losses) on investments	$	(571,423	)	$	(59,412	)	$	483,319		$	(416,909	)


(1)	~~Effective January 1, 2018, unrealized gains (losses) on equity securities are recorded within “Asset administration fees and other income.”~~


~~(2)~~	For more information on cash flow hedges, see Note 4.

Repurchase Agreements and Securities Lending

In the normal course of business, the Company sells securities under agreements to repurchase and enters into securities lending transactions. As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company had no repurchase agreements.

The following table sets forth the composition of “Cash collateral for loaned securities,” which represents the liability to return cash collateral received for the following types of securities loaned, as of the dates indicated:


	September 30, 2018						December 31, 2017						June 30, 2019						December 31, 2018
	Remaining Contractual Maturities of the Agreements						Remaining Contractual Maturities of the Agreements						Remaining Contractual Maturities of the Agreements						Remaining Contractual Maturities of the Agreements
	Overnight & Continuous		Up to 30 Days		Total		Overnight & Continuous		Up to 30 Days		Total		Overnight & Continuous		Up to 30 Days		Total		Overnight & Continuous		Up to 30 Days		Total
	(in thousands)												(in thousands)
Foreign government bonds	$	0	$	0	$	0	$	10,505	$	0	$	10,505	$	0	$	0	$	0	$	0	$	0	$	0
U.S. public corporate securities	7,147		0		7,147		6,878		0		6,878		0		0		0		384		0		384
Total cash collateral for loaned securities(1)	$	7,147	$	0	$	7,147	$	17,383	$	0	$	17,383	$	0	$	0	$	0	$	384	$	0	$	384


(1)	The Company did not have any agreements with remaining contractual maturities of thirty days or greater, as of the dates indicated.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)

4. DERIVATIVE INSTRUMENTS

Types of Derivative Instruments and Derivative Strategies

The Company utilizes various derivative instruments and strategies to manage its risk. Commonly used derivative instruments include but are not necessarily limited to:

Interest rate contracts: futures, swaps, forwards, options, swaptions, caps and floors

•Equity contracts: futures, options and total return swaps

•Foreign exchange contracts: futures, options, forwards and swaps

•Credit contracts: single and index reference credit default swaps

•

Other ~~contracts: embedded~~types of financial contracts that the Company accounts for as derivatives include:

•Embedded derivatives

For detailed information on these contracts and the related strategies, see Note 114 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Primary Risks Managed by Derivatives

The table below provides a summary of the gross notional amount and the fair value of ~~derivatives~~derivative contracts by the primary underlying risks, excluding embedded derivatives and associated reinsurance recoverables. Many derivative instruments contain multiple underlying risks. The fair value amounts below represent the ~~gross fair~~ value of derivative contracts prior to taking into account the netting effects of master netting agreements, cash collateral and NPR.


	September 30, 2018							December 31, 2017							June 30, 2019							December 31, 2018
Primary Underlying Risk/Instrument Type			Gross Fair Value							Gross Fair Value					Gross Notional		Fair Value					Gross Notional			Fair Value
Primary Underlying Risk/Instrument Type	Notional		Assets		Liabilities			Notional		Assets		Liabilities			Gross Notional		Assets		Liabilities					Assets			Liabilities
	(in thousands)														(in thousands)
Derivatives Designated as Hedge Accounting Instruments:																						Gross Notional
Currency/Interest Rate
Foreign Currency Swaps	$	748,787	$	18,033	$	(38,666	)	$	677,257	$	13,348	$	(47,209	)	$	897,338	$	39,547	$	(20,748	)	$	768,075		$	33,348		$	(21,794	)
Total Qualifying Hedges	$	748,787	$	18,033	$	(38,666	)	$	677,257	$	13,348	$	(47,209	)
Total Derivatives Designated as Hedge Accounting Instruments															$	897,338	$	39,547	$	(20,748	)	$	768,075		$	33,348		$	(21,794	)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Futures	$	903,500	$	272	$	(2,508	)	$	1,964,000	$	8,296	$	0		$	4,094,800	$	0	$	(1,470	)	$	908,100		$	4,380		$	(664	)
Interest Rate Swaps	80,605,225		3,378,320		(2,578,179		)	87,939,425		4,374,658		(1,065,549		)	86,329,325		5,976,912		(1,782,753		)	82,172,825			3,344,033			(1,395,270		)
Interest Rate Options	19,050,000		157,095		(326,477		)	15,775,000		175,156		(160,181		)	17,905,000		315,214		(192,825		)	19,255,000			139,765			(245,523		)
Interest Rate Forwards	1,626,323		14		(32,402		)	975,929		19,870		(2		)	293,076		17,348		0			1,713,947			56,562			(1,976		)
Foreign Currency
Foreign Currency Forwards	15,281		104		0			12,455		1		(319		)	17,092		324		(62		)	19,467			287			(27		)
Currency/Interest Rate
Foreign Currency Swaps	157,819		7,414		(6,740		)	151,400		7,779		(7,488		)	210,641		14,595		(1,446		)	231,245			11,659			(2,850		)
Credit
Credit Default Swaps															100,000		3,850		(94		)	0			0			0
Equity
Equity Futures	253,208		78		0			672,055		2,442		0			1,191,402		276		(4,902		)	860,718			0			(6,629		)
Total Return Swaps	14,200,030		17,006		(270,367		)	13,841,333		8,517		(341,700		)	14,921,377		29,847		(271,467		)	14,456,836			986,130			(53,235		)
Equity Options	32,801,821		630,109		(569,941		)	31,702,334		460,597		(318,955		)	26,176,838		247,112		(413,442		)	26,861,807			271,630			(412,821		)
Total Non-Qualifying Hedges	$	149,613,207	$	4,190,412	$	(3,786,614	)	$	153,033,931	$	5,057,316	$	(1,894,194	)
Total Derivatives(1)	$	150,361,994	$	4,208,445	$	(3,825,280	)	$	153,711,188	$	5,070,664	$	(1,941,403	)
Total Derivatives Not Qualifying as Hedge Accounting Instruments															$	151,239,551	$	6,605,478	$	(2,668,461	)	$	146,479,945		$	4,814,446		$	(2,118,995	)
Total Derivatives(1)(2)															$	152,136,889	$	6,645,025	$	(2,689,209	)	$	147,248,020		$	4,847,794		$	(2,140,789	)


(1)	Excludes embedded derivatives and associated reinsurance recoverables which contain multiple underlying risks.


(2)	Recorded in “Other invested assets”, “Other liabilities”, and "Payables to parent and affiliates" on the Unaudited Interim Statements of Financial Position.

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Unaudited Interim Consolidated Financial Statements—(Continued)~~

The fair value of the embedded derivatives, included in "Future policy ~~benefits,"~~benefits", was a net liability of ~~$4,995~~$11,738 million and ~~$8,152~~$8,332 million as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. The fair value of the related reinsurance recoverables to Prudential Insurance was a net asset of ~~$156~~$300 million and ~~$232~~$234 million as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, included in "Reinsurance recoverables". See Note 76 for additional information on these reinsurance agreements.

The fair value of the embedded derivatives pertaining to the variable annuity products with a market value adjustment option assumed from Pruco Life, ~~as part of the Variable Annuities Recapture,~~ included in "Reinsurance recoverables" or "Reinsurance ~~payables,"~~payables", was a net asset of $3$40 million and ~~$12~~$6 million as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

The fair value of the embedded derivatives, included in "Policyholders' account ~~balances,"~~balances", was a net liability of ~~$34~~$121 million and $42 million as of ~~September~~June 30, 2019 and December 31, 2018, respectively, with no related reinsurance recoverables.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Offsetting Assets and Liabilities

The following table presents recognized derivative instruments (excluding embedded derivatives and associated reinsurance recoverables), and repurchase and reverse repurchase agreements that are offset in the Unaudited Interim ~~Consolidated~~ Statements of Financial Position, and/or are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in the Unaudited Interim ~~Consolidated~~ Statements of Financial Position.


	September 30, 2018												June 30, 2019
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Consolidated Statements of Financial Position			Net Amounts Presented in the Consolidated Statements of Financial Position		Financial Instruments/ Collateral(1)			Net Amount		Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statements of Financial Position			Net Amounts Presented in the Statements of Financial Position		Financial Instruments/ Collateral(1)			Net Amount
	(in thousands)												(in thousands)
Offsetting of Financial Assets:
Derivatives(1)	$	4,208,445	$	(4,208,445	)	$	0	$	0		$	0	$	6,645,025	$	(6,645,023	)	$	2	$	0		$	2
Securities purchased under agreements to resell	327,000		0			327,000		(327,000		)	0		835,000		0			835,000		(835,000		)	0
Total Assets	$	4,535,445	$	(4,208,445	)	$	327,000	$	(327,000	)	$	0	$	7,480,025	$	(6,645,023	)	$	835,002	$	(835,000	)	$	2
Offsetting of Financial Liabilities:
Derivatives(1)	$	3,825,280	$	(3,818,167	)	$	7,113	$	(3,781	)	$	3,332	$	2,689,209	$	(2,524,326	)	$	164,883	$	(624	)	$	164,259
Securities sold under agreements to repurchase	0		0			0		0			0		0		0			0		0			0
Total Liabilities	$	3,825,280	$	(3,818,167	)	$	7,113	$	(3,781	)	$	3,332	$	2,689,209	$	(2,524,326	)	$	164,883	$	(624	)	$	164,259


	December 31, 2017											December 31, 2018
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statements of Financial Position			Net Amounts Presented in the Statements of Financial Position		Financial Instruments/ Collateral(1)		Net Amount		Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statements of Financial Position			Net Amounts Presented in the Statements of Financial Position		Financial Instruments/ Collateral(1)			Net Amount
	(in thousands)											(in thousands)
Offsetting of Financial Assets:
Derivatives(1)	$	5,070,517	$	(4,919,486	)	$	151,031	$	0	$	151,031	$	4,847,794	$	(4,804,816	)	$	42,978	$	0		$	42,978
Securities purchased under agreements to resell	0		0			0		0		0		675,000		0			675,000		(675,000		)	0
Total Assets	$	5,070,517	$	(4,919,486	)	$	151,031	$	0	$	151,031	$	5,522,794	$	(4,804,816	)	$	717,978	$	(675,000	)	$	42,978
Offsetting of Financial Liabilities:
Derivatives(1)	$	1,941,403	$	(1,941,403	)	$	0	$	0	$	0	$	2,140,789	$	(2,134,160	)	$	6,629	$	(6,629	)	$	0
Securities sold under agreements to repurchase	0		0			0		0		0		0		0			0		0			0
Total Liabilities	$	1,941,403	$	(1,941,403	)	$	0	$	0	$	0	$	2,140,789	$	(2,134,160	)	$	6,629	$	(6,629	)	$	0


(1)	Amounts exclude the excess of collateral received/pledged from/to the counterparty.

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Unaudited Interim Consolidated Financial Statements—(Continued)~~

For information regarding the rights of offset associated with the derivative assets and liabilities in the table above see “Credit Risk” below and Note 9. For securities purchased under agreements to resell and securities sold under agreements to repurchase, the Company monitors the value of the securities and maintains collateral, as appropriate, to protect against credit exposure. Where the Company has entered into repurchase and resale agreements with the same counterparty, in the event of default, the Company would generally be permitted to exercise rights of offset. For additional information on the Company’s accounting policy for securities repurchase and resale agreements, see Note 2 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Cash Flow Hedges

The primary derivative instruments used by the Company in its cash flow hedge accounting relationships are currency swaps. These instruments are only designated for hedge accounting in instances where the appropriate criteria are met. The Company does not use futures, options, credit, equity or embedded derivatives in any of its cash flow hedge accounting relationships.

The following tables provide the financial statement classification and impact of derivatives used in qualifying and non-qualifying hedge relationships, excluding the offset of the hedged item in an effective hedge relationship.


	Three Months Ended September 30, 2018									Three Months Ended June 30, 2019
	Realized Investment Gains (Losses)			Net Investment Income		Other Income		AOCI(1)		Realized Investment Gains (Losses)			Net Investment Income		Other Income		AOCI(1)
	(in thousands)									(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	0		$	2,141	$	2,484	$	257	$	(399	)	$	2,977	$	1,956	$	1,882
Total cash flow hedges	0			2,141		2,484		257		(399		)	2,977		1,956		1,882
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	(772,889		)	0		0		0		1,764,300			0		0		0
Currency	213			0		0		0		435			0		0		0
Currency/Interest Rate	1,224			0		33		0		6,784			0		17		0
Credit										1,579			0		0		0
Equity	(640,413		)	0		0		0		(583,113		)	0		0		0
Embedded Derivatives	1,487,675			0		0		0		(2,080,538		)	0		0		0
Total non-qualifying hedges	75,810			0		33		0
Total Derivatives Not Qualifying as Hedge Accounting Instruments:										(890,553		)	0		17		0
Total	$	75,810		$	2,141	$	2,517	$	257	$	(890,952	)	$	2,977	$	1,973	$	1,882

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)


	Nine Months Ended September 30, 2018									Six Months Ended June 30, 2019
	Realized Investment Gains (Losses)			Net Investment Income		Other Income		AOCI(1)		Realized Investment Gains (Losses)			Net Investment Income		Other Income		AOCI(1)
	(in thousands)									(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	0		$	5,841	$	8,973	$	1,984	$	(720	)	$	5,710	$	398	$	3,505
Total cash flow hedges	0			5,841		8,973		1,984		(720		)	5,710		398		3,505
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	(2,360,922		)	0		0		0		2,756,745			0		0		0
Currency	537			0		0		0		248			0		0		0
Currency/Interest Rate	5,279			0		62		0		8,616			0		20		0
Credit										1,577			0		0		0
Equity	(879,866		)	0		0		0		(2,233,223		)	0		0		0
Embedded Derivatives	3,937,437			0		0		0		(2,765,123		)	0		0		0
Total non-qualifying hedges	702,465			0		62		0
Total Derivatives Not Qualifying as Hedge Accounting Instruments:										(2,231,160		)	0		20		0
Total	$	702,465		$	5,841	$	9,035	$	1,984	$	(2,231,880	)	$	5,710	$	418	$	3,505


	Three Months Ended September 30, 2017											Three Months Ended June 30, 2018(2)
	Realized Investment Gains (Losses)			Net Investment Income		Other Income			AOCI(1)			Realized Investment Gains (Losses)			Net Investment Income		Other Income		AOCI(1)
	(in thousands)											(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	0		$	1,678	$	(3,496	)	$	(12,020	)	$	160		$	2,085	$	10,483	$	14,699
Total cash flow hedges	0			1,678		(3,496		)	(12,020		)	160			2,085		10,483		14,699
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	52,535			0		0			0			(404,238		)	0		0		0
Currency	(230		)	0		0			0			794			0		0		0
Currency/Interest Rate	(11,358		)	0		(314		)	0			17,228			0		84		0
Credit												0			0		0		0
Equity	(453,516		)	0		0			0			(251,520		)	0		0		0
Embedded Derivatives	1,585,732			0		0			0			631,111			0		0		0
Total non-qualifying hedges	1,173,163			0		(314		)	0
Total Derivatives Not Qualifying as Hedge Accounting Instruments:												(6,625		)	0		84		0
Total	$	1,173,163		$	1,678	$	(3,810	)	$	(12,020	)	$	(6,465	)	$	2,085	$	10,567	$	14,699

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)


	Nine Months Ended September 30, 2017											Six Months Ended June 30, 2018(2)
	Realized Investment Gains (Losses)			Net Investment Income		Other Income			AOCI(1)			Realized Investment Gains (Losses)			Net Investment Income		Other Income		AOCI(1)
	(in thousands)											(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	0		$	4,523	$	(9,308	)	$	(27,143	)	$	(678	)	$	3,700	$	6,489	$	1,727
Total cash flow hedges	0			4,523		(9,308		)	(27,143		)	(678		)	3,700		6,489		1,727
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	618,534			0		0			0			(1,588,033		)	0		0		0
Currency	(307		)	0		0			0			324			0		0		0
Currency/Interest Rate	(22,712		)	0		(592		)	0			4,734			0		29		0
Credit												0			0		0		0
Equity	(1,468,601		)	0		0			0			(239,454		)	0		0		0
Embedded Derivatives	550,630			0		0			0			2,449,762			0		0		0
Total non-qualifying hedges	(322,456		)	0		(592		)	0
Total Derivatives Not Qualifying as Hedge Accounting Instruments:												627,333			0		29		0
Total	$	(322,456	)	$	4,523	$	(9,900	)	$	(27,143	)	$	626,655		$	3,700	$	6,518	$	1,727


(1)	~~Amounts deferred~~Net change in AOCI.


(2)	Prior period amounts have been updated to conform to current period presentation.

~~For~~Presented below is a rollforward of current period cash flow hedges in AOCI before taxes:



	(in thousands)
Balance, December 31, 2018	$	(3,849	)
Cumulative-effect adjustment from the adoption of ASU 2017-12(1)	42
Amount recorded in AOCI
Currency/Interest Rate	8,893
Total amount recorded in AOCI	8,893
Amount reclassified from AOCI to income
Currency/Interest Rate	(5,388		)
Total amount reclassified from AOCI to income	(5,388		)
Balance, June 30, 2019	$	(302	)

(1) See Note 2 for details.

The changes in fair value of cash flow hedges are deferred in AOCI and are included in "Net unrealized investment gains (losses)" in the ~~nine~~Unaudited Interim Statements of Operations and Comprehensive Income (Loss); these amounts are then reclassified to earnings when the hedged item affects earnings. Using June 30, 2019 values, it is estimated that a pre-tax gain of $12 million is expected to be reclassified from AOCI to earnings during the subsequent twelve months ~~ended September~~ending June 30, ~~2018 and 2017, the ineffective portion of derivatives accounted for using hedge accounting was de minimis~~2020, offset by amounts pertaining to the ~~Company’s results~~hedged items.

The exposures the Company is hedging with these qualifying cash flow hedges include the variability of ~~operations. Also, there~~the payment or receipt of interest or foreign currency amounts on existing financial instruments.

There were no material amounts reclassified from AOCI into earnings relating to instances in which the Company discontinued cash flow hedge accounting because the forecasted transaction did not occur by the anticipated date or within the additional time period permitted by the authoritative guidance for the accounting for derivatives and hedging.

Table of Contents

~~Presented below is a rollforward of current period cash flow hedges in AOCI before taxes:~~Prudential Annuities Life Assurance Corporation

(in thousands)
Balance, December 31, 2017 $ (25,851 )
Net deferred gains (losses) on cash flow hedges from January 1 to September 30, 2018 15,834
Amount reclassified into current period earnings (13,850 )
Balance, September 30, 2018 $ (23,867 )

~~The changes in fair value of cash flow hedges are deferred in AOCI and are included in "Net unrealized investment gains (losses)" in the~~Notes to Unaudited Interim Consolidated Statements of Operations and Comprehensive Income (Loss); these amounts are then reclassified to earnings when the hedged item affects earnings. Using September 30, 2018 values, it is estimated that a pre-tax gain of $9 million will be reclassified from AOCI to earnings during the subsequent twelve months ending September 30, 2019, offset by amounts pertaining to the hedged items.Financial Statements—(Continued)

~~The exposures the Company is hedging with these qualifying cash flow hedges include the variability of the payment or receipt of interest or foreign currency amounts on existing financial instruments.~~

Credit Derivatives

The Company has written credit protection on certain index references with notional amounts of $100 million and $0.0 million as of June 30, 2019 and December 31, 2018, respectively. These credit derivatives are reported at fair value as an asset of $4 million and $0.0 million as of June 30, 2019 and December 31, 2018. As of June 30, 2019, the notional amount of these credit derivatives had the following NAIC ratings: $50 million in NAIC 3 and $50 million in NAIC 6.

The Company has no exposure from credit derivative positions where it has ~~written or~~ purchased credit protection as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Unaudited Interim Consolidated Financial Statements—(Continued)~~

Credit Risk

The Company is exposed to credit-related losses in the event of non-performance by counterparty to financial derivative transactions with a positive fair value. The Company manages credit risk by entering into derivative transactions with its affiliate, Prudential Global Funding, LLC (“PGF”), related to its over-the-counter ("OTC") derivatives. PGF, in turn, manages its credit risk by: (i) entering into derivative transactions with highly rated major international financial institutions and other creditworthy counterparties governed by master netting agreement, as applicable; (ii) trading through central clearing and OTC parties; (iii) obtaining collateral, such as cash and securities, when appropriate; and (iv) setting limits on ~~single party~~single-party credit exposures which are subject to periodic management review.

Substantially all of the Company’s derivative agreements have zero thresholds which require daily full collateralization by the party in a liability position.

5. FAIR VALUE OF ASSETS AND LIABILITIES

Fair Value Measurement – Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative fair value guidance establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level 1 - Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities.

Level 2 - Fair value is based on significant inputs, other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets and liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities, and other market observable inputs.

Level 3 - Fair value is based on at least one significant unobservable input for the asset or liability. The assets and liabilities in this category may require significant judgment or estimation in determining the fair value.

For a discussion of the Company's valuation methodologies for assets and liabilities measured at fair value and the fair value hierarchy, see Note 105 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)

Assets and Liabilities by Hierarchy Level – The tables below present the balances of assets and liabilities reported at fair value on a recurring basis, as of the dates indicated.


	As of September 30, 2018											As of June 30, 2019
	Level 1		Level 2		Level 3		Netting(1)			Total		Level 1		Level 2		Level 3		Netting(1)			Total
	(in thousands)											(in thousands)
Fixed maturities, available-for-sale:
U.S Treasury securities and obligations of U.S. government authorities and agencies	$	0	$	4,201,271	$	6,913	$	0		$	4,208,184	$	0	$	6,799,662	$	9,380	$	0		$	6,809,042
Obligations of U.S. states and their political subdivisions	0		130,862		0		0			130,862		0		137,679		0		0			137,679
Foreign government bonds	0		224,365		0		0			224,365		0		217,895		0		0			217,895
U.S. corporate public securities	0		1,618,433		1,060		0			1,619,493		0		1,669,791		0		0			1,669,791
U.S. corporate private securities	0		998,383		54,457		0			1,052,840		0		1,047,099		39,881		0			1,086,980
Foreign corporate public securities	0		309,792		211		0			310,003		0		318,127		228		0			318,355
Foreign corporate private securities	0		733,928		29,136		0			763,064		0		955,228		30,962		0			986,190
Asset-backed securities(2)	0		502,704		9,407		0			512,111		0		462,405		19,725		0			482,130
Commercial mortgage-backed securities	0		436,180		545		0			436,725		0		546,504		0		0			546,504
Residential mortgage-backed securities	0		64,711		0		0			64,711		0		84,418		0		0			84,418
Subtotal	0		9,220,629		101,729		0			9,322,358		0		12,238,808		100,176		0			12,338,984
Fixed maturities, trading	0		261,226		0		0			261,226		0		368,031		4,044		0			372,075
Equity securities	5,473		12		7,679		0			13,164		5,031		26,326		5,363		0			36,720
Short-term investments	2,653		10,274		8		0			12,935		0		6,252		0		0			6,252
Cash equivalents	0		46,859		0		0			46,859		99,812		2,594,928		0		0			2,694,740
Other invested assets(3)	350		4,208,095		0		(4,208,445		)	0		276		6,644,749		0		(6,645,023		)	2
Reinsurance recoverables	0		0		159,206		0			159,206		0		0		339,744		0			339,744
Receivables from parent and affiliates	0		37,719		0		0			37,719		0		3,198		0		0			3,198
Subtotal excluding separate account assets	8,476		13,784,814		268,622		(4,208,445		)	9,853,467		105,119		21,882,292		449,327		(6,645,023		)	15,791,715
Separate account assets(4)	0		35,480,264		0		0			35,480,264		0		33,045,792		0		0			33,045,792
Total assets	$	8,476	$	49,265,078	$	268,622	$	(4,208,445	)	$	45,333,731	$	105,119	$	54,928,084	$	449,327	$	(6,645,023	)	$	48,837,507
Future policy benefits(5)	$	0	$	0	$	4,995,305	$	0		$	4,995,305	$	0	$	0	$	11,738,480	$	0		$	11,738,480
Policyholders' account balances	0		0		34,069		0			34,069		0		0		121,102		0			121,102
Payables to parent and affiliates	0		3,822,772		0		(3,817,815		)	4,957		0		2,682,837		0		(2,524,050		)	158,787
Other liabilities	2,508		0		0		(352		)	2,156		6,372		0		0		(276		)	6,096
Total liabilities	$	2,508	$	3,822,772	$	5,029,374	$	(3,818,167	)	$	5,036,487	$	6,372	$	2,682,837	$	11,859,582	$	(2,524,326	)	$	12,024,465

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)


	As of December 31, 2017											As of December 31, 2018
	Level 1		Level 2		Level 3		Netting(1)			Total		Level 1		Level 2		Level 3		Netting(1)			Total
	(in thousands)											(in thousands)
Fixed maturities, available-for-sale:
U.S Treasury securities and obligations of U.S. government authorities and agencies	$	0	$	4,826,413	$	5,237	$	0		$	4,831,650	$	0	$	4,875,959	$	8,132	$	0		$	4,884,091
Obligations of U.S. states and their political subdivisions	0		104,640		0		0			104,640		0		131,164		0		0			131,164
Foreign government bonds	0		140,305		0		0			140,305		0		199,636		0		0			199,636
U.S. corporate public securities	0		1,806,888		1,562		0			1,808,450		0		1,473,973		0		0			1,473,973
U.S. corporate private securities	0		1,148,536		59,408		0			1,207,944		0		1,008,632		54,321		0			1,062,953
Foreign corporate public securities	0		229,006		215		0			229,221		0		291,086		0		0			291,086
Foreign corporate private securities	0		737,539		34,021		0			771,560		0		781,101		31,131		0			812,232
Asset-backed securities(2)	0		160,229		185,358		0			345,587		0		495,908		9,336		0			505,244
Commercial mortgage-backed securities	0		505,684		0		0			505,684		0		361,880		0		0			361,880
Residential mortgage-backed securities	0		165,745		0		0			165,745		0		49,414		0		0			49,414
Subtotal	0		9,824,985		285,801		0			10,110,786		0		9,668,753		102,920		0			9,771,673
Fixed maturities, trading~~(6)~~	0		166,360		0		0			166,360		0		289,752		0		0			289,752
Equity securities~~(6)~~	5,599		18		9,758		0			15,375		4,896		12		5,705		0			10,613
Short-term investments	448,712		262,272		87		0			711,071		0		29,818		0		0			29,818
Cash equivalents	0		1,146,466		0		0			1,146,466		1,098,903		2,593,456		0		0			3,692,359
Other invested assets~~(6)~~(3)	10,738		5,059,779		147		(4,919,486		)	151,178		4,380		4,843,414		0		(4,804,816		)	42,978
Reinsurance recoverables	0		0		244,006		0			244,006		0		0		239,911		0			239,911
Receivables from parent and affiliates	0		38,145		0		0			38,145		0		37,193		0		0			37,193
Subtotal excluding separate account assets	465,049		16,498,025		539,799		(4,919,486		)	12,583,387		1,108,179		17,462,398		348,536		(4,804,816		)	14,114,297
Separate account assets(4)	0		37,990,547		0		0			37,990,547		0		31,210,346		0		0			31,210,346
Total assets	$	465,049	$	54,488,572	$	539,799	$	(4,919,486	)	$	50,573,934	$	1,108,179	$	48,672,744	$	348,536	$	(4,804,816	)	$	45,324,643
Future policy benefits(5)	$	0	$	0	$	8,151,902	$	0		$	8,151,902	$	0	$	0	$	8,332,474	$	0		$	8,332,474
Policyholders' account balances												0		0		42,350		0			42,350
Payables to parent and affiliates	0		1,941,403		0		(1,941,403		)	0		0		2,133,496		0		(2,133,496		)	0
Other liabilities	0		0		0		0			0		7,293		0		0		(664		)	6,629
Total liabilities	$	0	$	1,941,403	$	8,151,902	$	(1,941,403	)	$	8,151,902	$	7,293	$	2,133,496	$	8,374,824	$	(2,134,160	)	$	8,381,453


(1)	“Netting” amounts represent cash collateral of ~~$0.4~~$4,121 million and ~~$2,978~~$2,671 million as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, and the impact of offsetting asset and liability positions held with the same counterparty, subject to master netting arrangements.


(2)	Includes ~~credit tranched~~credit-tranched securities collateralized by syndicated bank loans, sub-prime mortgages, auto loans, credit cards, education loans and other asset types.

(3)

Other invested assets excluded from the fair value hierarchy include certain hedge funds, private equity funds and other funds for which fair value is measured at net asset value ("NAV") per share (or its equivalent) as a practical expedient. ~~At September~~As of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the fair values of such investments were ~~$7.6~~$9.7 million and ~~$0.3~~$8.0 million, respectively.

(4)

Separate account assets represent segregated funds that are invested for certain customers. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. Separate account liabilities are not included in the above table as they are reported at contract value and not fair value in the Company’s Unaudited Interim ~~Consolidated~~ Statements of Financial Position.

(5)

As of ~~September~~June 30, ~~2018,~~2019, the net embedded derivative liability position of ~~$4,995~~$11,738 million includes ~~$1,039~~$500 million of embedded derivatives in an asset position and ~~$6,034~~$12,238 million of embedded derivatives in a liability position. As of December 31, ~~2017,~~2018, the net embedded derivative liability position of ~~$8,152~~$8,332 million includes ~~$819~~$625 million of embedded derivatives in an asset position and ~~$8,971~~$8,957 million of embedded derivatives in a liability position.


~~(6)~~	~~Prior period amounts have been reclassified to conform to current period presentation. See Note 2 for details.~~

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)

~~Transfers between Levels 1 and 2 –~~ Transfers between levels are made to reflect changes in observability of inputs and market activity. Transfers into or out of any level are generally reported at the value as of the beginning of the quarter in which the transfers occur for any such assets still held at the end of the quarter. Periodically, there are transfers between Level 1 and Level 2 for assets held in the Company’s Separate account. The fair value of foreign common stock held in the Company's Separate account may reflect differences in market levels between the close of foreign trading markets and the close of U.S. trading markets for the respective day. Dependent on the existence of such a timing difference, the assets may move between Level 1 and Level 2. During both the three and nine months ended September 30, 2018 and 2017, there were no transfers between Level 1 and Level 2.

Quantitative Information Regarding Internally Priced Level 3 Assets and Liabilities – The tables below present quantitative information on significant internally-priced Level 3 assets and liabilities.


	As of September 30, 2018											As of June 30, 2019
	Fair Value		Valuation Techniques	Unobservable Inputs	Minimum		Maximum		Weighted Average		Impact of Increase in Input on Fair Value(1)	Fair Value		Valuation Techniques	Unobservable Inputs	Minimum		Maximum		Weighted Average		Impact of Increase in Input on Fair Value(1)
	(in thousands)											(in thousands)
Assets:
Corporate securities(2)	$	16,066	Discounted cash flow	Discount rate	7.00	%	20.00	%	11.15	%	Decrease	$	18,239	Discounted cash flow	Discount rate	8.34	%	20	%	11.03	%	Decrease
			Liquidation		6.00	%	54.00	%	50.00	%	Increase			Market Comparables	EBITDA multiples(3)	6.7X		6.7X		6.7X		Increase
														Liquidation	Liquidation value	3.98	%	3.98	%	3.98	%	Increase
Reinsurance recoverables	$	159,206	Fair values are determined in the same manner as future policy benefits									$	339,744	Fair values are determined using the same unobservable inputs as future policy benefits.
Liabilities:
Future policy benefits(3)	$	4,995,305	Discounted cash flow	Lapse rate(4)	1	%	13	%			Decrease
Future policy benefits(4)												$	11,738,480	Discounted cash flow	Lapse rate(6)	1	%	18	%			Decrease
				Spread over LIBOR(5)	0.16	%	1.21	%			Decrease				Spread over LIBOR(7)	0.16	%	1.24	%			Decrease
				Utilization rate(6)	50	%	97	%			Increase				Utilization rate(8)	43	%	97	%			Increase
				Withdrawal rate	See table footnote (7) below.										Withdrawal rate	See table footnote (9) below.
				Mortality rate(8)	0	%	15	%			Decrease				Mortality rate(10)	0	%	15	%			Decrease
				Equity volatility curve	14	%	22	%			Increase				Equity volatility curve	13	%	23	%			Increase
Policyholders' account balances(5)												$	121,102	Discounted cash flow	Lapse rate(6)	2	%	42	%			Decrease
															Spread over LIBOR(7)	0.16	%	1.24	%			Decrease
															Equity volatility curve	13	%	21	%			Increase


	As of December 31, 2017											As of December 31, 2018
	Fair Value		Valuation Techniques	Unobservable Inputs	Minimum		Maximum		Weighted Average		Impact of Increase in Input on Fair Value(1)	Fair Value		Valuation Techniques	Unobservable Inputs	Minimum		Maximum		Weighted Average		Impact of Increase in Input on Fair Value(1)
	(in thousands)											(in thousands)
Assets:
Corporate securities(2)	$	22,215	Discounted cash flow	Discount rate	5.06	%	22.23	%	8.57	%	Decrease	$	18,609	Discounted cash flow	Discount rate	7	%	20	%	11.30	%	Decrease
														Market Comparables	EBITDA multiples(3)	6.7	X	6.7	X	6.7	X	Increase
														Liquidation	Liquidation value	41	%	41	%	41	%	Increase
Reinsurance recoverables	$	244,006	Fair values are determined in the same manner as future policy benefits									$	239,911	Fair values are determined using the same unobservable inputs as future policy benefits.
Liabilities:
Future policy benefits(3)	$	8,151,902	Discounted cash flow	Lapse rate(4)	1	%	12	%			Decrease
Future policy benefits(4)												$	8,332,474	Discounted cash flow	Lapse rate(6)	1	%	13	%			Decrease
				Spread over LIBOR(5)	0.12	%	1.10	%			Decrease				Spread over LIBOR(7)	0.36	%	1.60	%			Decrease
				Utilization rate(6)	52	%	97	%			Increase				Utilization rate(8)	50	%	97	%			Increase
				Withdrawal rate	See table footnote (7) below.										Withdrawal rate	See table footnote (9) below.
				Mortality rate(8)	0	%	14	%			Decrease				Mortality rate(10)	0	%	15	%			Decrease
				Equity volatility curve	13	%	24	%			Increase				Equity volatility curve	18	%	22	%			Increase


(1)	Conversely, the impact of a decrease in input would have the opposite impact on fair value as that presented in the table.


(2)	Includes assets classified as fixed maturities, ~~available-for-sale.~~available-for-sale and fixed maturities trading.


(3)	Represents multiples of earnings before interest, taxes, depreciation and amortization ("EBITDA"), and are amounts used when the Company has determined that market participants would use such multiples when valuing the investments.

(4)

Future policy benefits primarily represent general account liabilities for the living benefit features of the Company’s variable annuity contracts which are accounted for as embedded derivatives. Since the valuation methodology for these liabilities uses a range of inputs that vary at the contract level over the cash flow projection period, presenting a range, rather than weighted average, is a more meaningful representation of the unobservable inputs used in the valuation.


~~(4)~~(5)	Policyholders’ account balances primarily represent general account liabilities for the index-linked interest credited on certain of the Company’s annuity products that are accounted for as embedded derivatives. Since the valuation methodology for these liabilities uses a range of inputs that vary at the contract

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

level over the cash flow projection period, presenting a range, rather than weighted average, is a more meaningful representation of the unobservable inputs used in the valuation.

(6)

Lapse rates for contracts with living benefit guarantees are adjusted at the contract level based on the in-the-moneyness of the living benefit and reflect other factors, such as the applicability of any surrender charges. Lapse rates are reduced when contracts are more in-the-money. Lapse rates for contracts with index-linked crediting guarantees may be adjusted at the contract level based on the applicability of any surrender charges, product type, and market related factors such as interest rates. Lapse rates are also generally assumed to be lower for the period where surrender charges apply. For any given contract, lapse rates vary throughout the period over which cash flows are projected for the purposes of valuing these embedded derivatives.

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Unaudited Interim Consolidated Financial Statements—(Continued)~~

~~(5)~~(7)

The spread over the London Inter-Bank Offered Rate ("LIBOR") swap curve represents the premium added to the proxy for the risk-free rate (LIBOR) to reflect ~~our~~the Company's estimates of rates that a market participant would use to value the living ~~benefit contracts~~benefits in both the accumulation and payout ~~phases.~~phases and index-linked interest crediting guarantees. This spread includes an estimate of NPR, which is the risk that the obligation will not be fulfilled by the Company. NPR is primarily estimated by utilizing the credit spreads associated with issuing funding agreements, adjusted for any illiquidity risk premium. In order to reflect the financial strength ratings of the Company, credit spreads associated with funding agreements, as opposed to credit spread associated with debt, are utilized in developing this estimate because ~~both~~ funding agreements, ~~and~~ living benefit ~~contracts~~guarantees, and index-linked interest crediting guarantees are insurance liabilities and are therefore senior to debt.

~~(6)~~(8)

The utilization rate assumption estimates the percentage of contracts that will utilize the benefit during the contract duration and begin lifetime withdrawals at various time intervals from contract inception. The remaining contractholders are assumed to either begin lifetime withdrawals immediately or never utilize the benefit. Utilization assumptions may vary by product type, tax status and age. The impact of changes in these assumptions is highly dependent on the product type, the age of the contractholder at the time of the sale, and the timing of the first lifetime income withdrawal. Range reflects the utilization rate for the vast majority of business with living benefits.

~~(7)~~(9)

The withdrawal rate assumption estimates the magnitude of annual contractholder withdrawals relative to the maximum allowable amount under the contract. These assumptions vary based on the age of the contractholder, the tax status of the contract and the duration since the contractholder began lifetime withdrawals. As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the minimum withdrawal rate assumption is 78% and the maximum withdrawal rate assumption may be greater than 100%. The fair value of the liability will generally increase the closer the withdrawal rate is to 100% and decrease as the withdrawal rate moves further away from 100%.

~~(8)~~(10)

~~Range~~The range reflects the mortality ~~rate~~rates for the vast majority of business with living benefits and other contracts, with policyholders ranging from 5045 to 90 years old. While the majority of living benefits have a minimum age requirement, certain ~~benefits~~other contracts do not have an age restriction. This results in contractholders ~~for certain benefits~~ with mortality rates approaching 0%~~. Based on historical experience, the Company applies a set of~~ for certain benefits. Mortality rates may vary by product, age, and ~~duration specific mortality rate adjustments compared to standard industry tables.~~duration. A mortality improvement assumption is also incorporated into the overall mortality table.

Interrelationships Between Unobservable Inputs– In addition to the sensitivities of fair value measurements to changes in each unobservable input in isolation, as reflected in the table above, interrelationships between these inputs may also exist, such that a change in one unobservable input may give rise to a change in another, or multiple, inputs. For the discussion of the relationships between unobservable inputs as well as market factors that may affect the range of inputs used in the valuation of Level 3 assets and liabilities, see Note 105 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

Changes in Level 3 Assets and Liabilities – The following tables describe changes in fair values of Level 3 assets and liabilities as of the dates indicated, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at the end of their respective periods. When a determination is made to classify assets and liabilities within Level 3, the determination is based on significance of the unobservable inputs in the overall fair value measurement. All transfers are based on changes in the observability of the valuation inputs, including the availability of pricing service information that the Company can validate. All transfers are generally reported at the value as of the beginning of the quarter in which transfers occur for any such assets still held at the end of the quarter. During the second quarter of 2018, $213 million of investments in collateralized loan obligations (“CLOs”) reported as “Asset-backed securities” were transferred from Level 3 to Level 2 as market activity, liquidity and overall observability of valuation inputs of CLOs have increased. For further information on valuation processes, see Note 10 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)

Three Months Ended September 30, 2018
Fixed Maturities, Available-For-Sale
U.S. Government Corporate Securities(1) Structured Securities(2)
(in thousands)
Fair Value, beginning of period assets/(liabilities) $ 6,658
$ 96,849
$ 59,178
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net 0
(2,424 ) (441 )
Asset administration fees and other income 0
0
0
Included in other comprehensive income (loss) 0
(4,437 ) 284
Net investment income 0
45
2
Purchases 255
1,323
0
Sales 0
0
(13,850 )
Issuances 0
0
0
Settlements 0
(6,495 ) (14,052 )
Transfers into Level 3(4) 0
0
(194 )
Transfers out of Level 3(4) 0
0
(20,975 )
Other(5) 0
3
0
Fair Value, end of period assets/(liabilities) $ 6,913
$ 84,864
$ 9,952
Unrealized gains (losses) for assets/liabilities still held(6):
Included in earnings:
Realized investment gains (losses), net $ 0
$ (2,771 ) $ 0
Asset administration fees and other income $ 0
$ 0
$ 0



	Three Months Ended June 30, 2019
	Fair Value, beginning of period			Total realized and unrealized gains (losses)(1)			Purchases		Sales			Issuances			Settlements			Other(2)			Transfers into Level 3		Transfers out of Level 3			Fair Value, end of period			Unrealized gains (losses) for assets still held(3)
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Government	$	8,779		$	0		$	601	$	0		$	0		$	0		$	0		$	0	$	0		$	9,380		$	0
Corporate Securities(4)	84,800			13			4,087		0			0			(16,626		)	0			815		(2,018		)	71,071			0
Structured Securities(5)	50,258			384			0		0			0			(339		)	0			0		(30,578		)	19,725			0
Other assets:
Fixed maturities, trading	0			(977		)	0		0			0			0			0			5,021		0			4,044			(972		)
Equity securities	5,616			481			0		(734		)	0			0			0			0		0			5,363			480
Reinsurance recoverables	283,991			51,236			4,518		0			0			0			(1		)	0		0			339,744			53,335
Liabilities:
Future policy benefits	(9,316,905		)	(2,157,110		)	0		0			(264,465		)	0			0			0		0			(11,738,480		)	(2,240,816		)
Policyholders' account balances(6)	(80,579		)	(5,095		)	0		0			(35,428		)	0			0			0		0			(121,102		)	(3,299		)



	Three Months Ended June 30, 2019
	Total realized and unrealized gains (losses)											Unrealized gains (losses) for assets still held(3)
	Realized investment gains (losses), net(1)			Asset administration fees and other income			Included in other comprehensive income (losses)		Net investment income			Realized investment gains (losses), net			Asset administration fees and other income
	(in thousands)
Fixed maturities, available-for-sale	$	(1,175	)	$	0		$	1,473	$	99		$	0		$	0
Other assets:
Fixed maturities, trading	0			(972		)	0		(5		)	0			(972		)
Equity securities	0			481			0		0			0			480
Reinsurance recoverables	51,236			0			0		0			53,335			0
Liabilities:
Future policy benefits	(2,157,110		)	0			0		0			(2,240,816		)	0
Policyholders' account balances	(5,095		)	0			0		0			(3,299		)	0

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)

Three Months Ended September 30, 2018
Equity Securities Short-Term Investments Other
Invested Assets
(in thousands)
Fair Value, beginning of period assets/(liabilities) $ 9,309
$ 0
$ 0
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net 0
0
0
Asset administration fees and other income (46 ) 0
0
Included in other comprehensive income (loss) 0
0
0
Net investment income 0
0
0
Purchases 0
0
0
Sales (1,584 ) 0
0
Issuances 0
0
0
Settlements 0
31
0
Transfers into Level 3(4) 0
0
0
Transfers out of Level 3(4) 0
0
0
Other(5) 0
(23 ) 0
Fair Value, end of period assets/(liabilities) $ 7,679
$ 8
$ 0
Unrealized gains (losses) for assets/liabilities still held(6):
Included in earnings:
Realized investment gains (losses), net $ 0
$ 0
$ 0
Asset administration fees and other income $ (375 ) $ 0
$ 0



	Six Months Ended June 30, 2019
	Fair Value, beginning of period			Total realized and unrealized gains (losses)(1)			Purchases		Sales			Issuances			Settlements			Other(2)		Transfers into Level 3		Transfers out of Level 3			Fair Value, end of period			Unrealized gains (losses) for assets still held(3)
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Government	$	8,132		$	0		$	1,248	$	0		$	0		$	0		$	0	$	0	$	0		$	9,380		$	0
Corporate Securities(4)	85,452			623			7,313		0			0			(22,089		)	0		1,790		(2,018		)	71,071			(1,996		)
Structured Securities(5)	9,336			529			44,273		0			0			(4,386		)	0		551		(30,578		)	19,725			(2		)
Other assets:
Fixed maturities, trading	0			(977		)	0		0			0			0			0		5,021		0			4,044			(972		)
Equity securities	5,705			587			0		(929		)	0			0			0		0		0			5,363			598
Reinsurance recoverables	239,911			68,861			9,077		0			0			0			21,895		0		0			339,744			72,829
Liabilities:
Future policy benefits	(8,332,474		)	(2,884,200		)	0		0			(521,806		)	0			0		0		0			(11,738,480		)	(3,025,994		)
Policyholders' account balances(6)	(42,350		)	(13,078		)	0		0			(65,674		)	0			0		0		0			(121,102		)	(11,282		)



	Six Months Ended June 30, 2019
	Total realized and unrealized gains (losses)											Unrealized gains (losses) for assets still held(3)
	Realized investment gains (losses), net(1)			Asset administration fees and other income			Included in other comprehensive income (losses)		Net investment income			Realized investment gains (losses), net			Asset administration fees and other income
	(in thousands)
Fixed maturities, available-for-sale	$	(1,900	)	$	0		$	2,914	$	138		$	(1,998	)	$	0
Other assets:
Fixed maturities, trading	0			(972		)	0		(5		)	0			(972		)
Equity securities	0			587			0		0			0			598
Reinsurance recoverables	68,861			0			0		0			72,829			0
Liabilities:
Future policy benefits	(2,884,200		)	0			0		0			(3,025,994		)	0
Policyholders' account balances	(13,078		)	0			0		0			(11,282		)	0

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)

Three Months Ended September 30, 2018
Reinsurance
Recoverables Receivables from
Parent and Affiliates Future Policy
Benefits Policyholders' account balances
(in thousands)
Fair Value, beginning of period assets/(liabilities) $ 185,258
$ 0
$ (6,222,612 ) $ (13,835 )
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net(7) (33,467 ) 0
1,485,428
(1,093 )
Asset administration fees and other income 0
0
0
0
Included in other comprehensive income (loss) 0
0
0
0
Net investment income 0
0
0
0
Purchases 4,930
0
0
0
Sales 0
0
0
0
Issuances 0
0
(258,121 ) (19,141 )
Settlements 0
0
0
0
Transfers into Level 3(4) 0
0
0
0
Transfers out of Level 3(4) 0
0
0
0
Other(5) 2,485
0
0
0
Fair Value, end of period assets/(liabilities) $ 159,206
$ 0
$ (4,995,305 ) $ (34,069 )
Unrealized gains (losses) for assets/liabilities still held(6):
Included in earnings:
Realized investment gains (losses), net $ (47,218 ) $ 0
$ 1,428,629
$ (1,093 )
Asset administration fees and other income $ 0
$ 0
$ 0
$ 0



	Three Months Ended June 30, 2018(7)
	Fair Value, beginning of period			Total realized and unrealized gains (losses)(1)			Purchases		Sales			Issuances			Settlements			Other (2)		Transfers into Level 3		Transfers out of Level 3			Fair Value, end of period			Unrealized gains (losses) for assets still held(3)
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Government	$	5,882		$	0		$	776	$	0		$	0		$	0		$	0	$	0	$	0		$	6,658		$	0
Corporate Securities(4)	90,273			(2,665		)	4,874		(205		)	0			(2,369		)	0		6,941		0			96,849			(144		)
Structured Securities(5)	256,244			(404		)	21,000		(193		)	0			(14,714		)	0		10,025		(212,780		)	59,178			0
Other assets:
Equity securities	10,617			(300		)	0		(1,008		)	0			0			0		0		0			9,309			(462		)
Other invested assets	0			0			0		0			0			0			0		0		0			0			0
Short-term investments	11			(2		)	0		0			0			(9		)	0		0		0			0			(2		)
Reinsurance recoverables	195,497			(15,696		)	4,662		0			0			0			795		0		0			185,258			(14,217		)
Receivables from parent and affiliates	34,163			0			0		0			0			0			0		0		(34,163		)	0			0
Liabilities:
Future policy benefits	(6,578,210		)	611,827			0		0			(256,229		)	0			0		0		0			(6,222,612		)	537,900
Policyholders' account balances(6)	0			(45		)	0		0			(13,790		)	0			0		0		0			(13,835		)	(45		)
Reinsurance payable	(129		)	0			0		0			0			0			129		0		0			0			0



	Three Months Ended June 30, 2018(7)
	Total realized and unrealized gains (losses)											Unrealized gains (losses) for assets still held(3)
	Realized investment gains (losses), net(1)			Asset administration fees and other income			Included in other comprehensive income (losses)			Net investment income		Realized investment gains (losses), net			Asset administration fees and other income
	(in thousands)
Fixed maturities, available-for-sale	$	(119	)	$	0		$	(3,002	)	$	52	$	(144	)	$	0
Other assets:
Equity securities	0			(300		)	0			0		0			(462		)
Other invested assets	0			0			0			0		0			0
Short-term investments	(2		)	0			0			0		(2		)	0
Reinsurance recoverables	(15,696		)	0			0			0		(14,217		)	0
Receivables from parent and affiliates	0			0			0			0		0			0
Liabilities:
Future policy benefits	611,827			0			0			0		537,900			0
Policyholders' account balances	(45		)	0			0			0		(45		)	0
Reinsurance payable	0			0			0			0		0			0

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)

Nine Months Ended September 30, 2018
Fixed Maturities, Available-For-Sale
U.S. Government Corporate Securities(1) Structured Securities(2)
(in thousands)
Fair Value, beginning of period assets/(liabilities) $ 5,237
$ 95,206
$ 185,358
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net 0
(2,656 ) (394 )
Asset administration fees and other income 0
0
0
Included in other comprehensive income (loss) 0
(5,805 ) (300 )
Net investment income 0
159
35
Purchases 1,676
6,348
84,810
Sales 0
(241 ) (14,043 )
Issuances 0
0
0
Settlements 0
(14,899 ) (37,665 )
Transfers into Level 3(4) 0
6,941
51,785
Transfers out of Level 3(4) 0
(215 ) (259,634 )
Other(5) 0
26
0
Fair Value, end of period assets/(liabilities) $ 6,913
$ 84,864
$ 9,952
Unrealized gains (losses) for assets/liabilities still held(6):
Included in earnings:
Realized investment gains (losses), net $ 0
$ (2,992 ) $ 0
Asset administration fees and other income $ 0
$ 0
$ 0



	Six Months Ended June 30, 2018(7)
	Fair Value, beginning of period			Total realized and unrealized gains (losses)(1)			Purchases		Sales			Issuances			Settlements			Other (2)			Transfers into Level 3		Transfers out of Level 3			Fair Value, end of period			Unrealized gains (losses) for assets still held(3)
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Government	$	5,237		$	0		$	1,421	$	0		$	0		$	0		$	0		$	0	$	0		$	6,658		$	0
Corporate Securities(4)	95,206			(1,486		)	5,025		(241		)	0			(8,404		)	23			6,941		(215		)	96,849			(221		)
Structured Securities(5)	185,358			(504		)	84,810		(193		)	0			(23,613		)	0			51,979		(238,659		)	59,178			0
Other assets:
Equity securities	9,758			412			0		(1,008		)	0			0			147			0		0			9,309			250
Other invested assets	147			0			0		0			0			0			(147		)	0		0			0			0
Short-term investments	87			(55		)	0		0			0			(31		)	(1		)	0		0			0			(55		)
Reinsurance recoverables	244,006			(56,738		)	9,513		0			0			0			(11,523		)	0		0			185,258			(52,511		)
Receivables from parent and affiliates	0			(106		)	0		0			0			0			0			34,269		(34,163		)	0			0
Liabilities:
Future policy benefits	(8,151,902		)	2,440,439			0		0			(511,149		)	0			0			0		0			(6,222,612		)	2,272,290
Policyholders' account balances(6)	0			(45		)	0		0			(13,790		)	0			0			0		0			(13,835		)	(45		)

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Unaudited Interim Consolidated Financial Statements—(Continued)~~

Nine Months Ended September 30, 2018
Equity Securities Short-Term Investments Other
Invested Assets
(in thousands)
Fair Value, beginning of period assets/(liabilities) $ 9,758
$ 87
$ 147
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net 0
(55 ) 0
Asset administration fees and other income 366
0
0
Included in other comprehensive income (loss) 0
0
0
Net investment income 0
0
0
Purchases 0
0
0
Sales (2,592 ) 0
0
Issuances 0
0
0
Settlements 0
0
0
Transfers into Level 3(4) 0
0
0
Transfers out of Level 3(4) 0
0
0
Other(5) 147
(24 ) (147 )
Fair Value, end of period assets/(liabilities) $ 7,679
$ 8
$ 0
Unrealized gains (losses) for assets/liabilities still held(6):
Included in earnings:
Realized investment gains (losses), net $ 0
$ (55 ) $ 0
Asset administration fees and other income $ (125 ) $ 0
$ 0



	Six Months Ended June 30, 2018(7)
	Total realized and unrealized gains (losses)										Unrealized gains (losses) for assets still held(3)
	Realized investment gains (losses), net(1)			Asset administration fees and other income		Included in other comprehensive income (losses)			Net investment income		Realized investment gains (losses), net			Asset administration fees and other income
	(in thousands)
Fixed maturities, available-for-sale	$	(185	)	$	0	$	(1,952	)	$	147	$	(221	)	$	0
Other assets:
Equity securities	0			412		0			0		0			250
Other invested assets	0			0		0			0		0			0
Short-term investments	(55		)	0		0			0		(55		)	0
Reinsurance recoverables	(56,738		)	0		0			0		(52,511		)	0
Receivables from parent and affiliates	0			0		(106		)	0		0			0
Liabilities:
Future policy benefits	2,440,439			0		0			0		2,272,290			0
Policyholders' account balances	(45		)	0		0			0		(45		)	0
Reinsurance payable	0			0		0			0		0			0

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Unaudited Interim Consolidated Financial Statements—(Continued)~~

Nine Months Ended September 30, 2018
Reinsurance
Recoverables Receivables from
Parent and Affiliates Future Policy
Benefits Policyholders' account balances
(in thousands)
Fair Value, beginning of period assets/(liabilities) $ 244,006
$ 0
$ (8,151,902 ) $ 0
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net(7) (90,205 ) 0
3,925,867
(1,138 )
Asset administration fees and other income 0
0
0
0
Included in other comprehensive income (loss) 0
(106 ) 0
0
Net investment income 0
0
0
0
Purchases 14,444
0
0
0
Sales 0
0
0
0
Issuances 0
0
(769,270 ) (32,931 )
Settlements 0
0
0
0
Transfers into Level 3(4) 0
34,269
0
0
Transfers out of Level 3(4) 0
(34,163 ) 0
0
Other(5) (9,039 ) 0
0
0
Fair Value, end of period assets/(liabilities) $ 159,206
$ 0
$ (4,995,305 ) $ (34,069 )
Unrealized gains (losses) for assets/liabilities still held(6):
Included in earnings:
Realized investment gains (losses), net $ (95,836 ) $ 0
$ 3,677,070
$ (1,138 )
Asset administration fees and other income $ 0
$ 0
$ 0
$ 0

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Unaudited Interim Consolidated Financial Statements—(Continued)~~

Three Months Ended September 30, 2017
Fixed Maturities Available-For-Sale
U.S. Government Foreign Government Corporate Securities(1) Structured Securities(2)
(in thousands)
Fair Value, beginning of period assets/(liabilities) $ 3,151
$ 0
$ 133,567
$ 215,503
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net 0
0
(945 ) 527
Asset administration fees and other income 0
0
0
0
Included in other comprehensive income (loss) 0
0
(2,270 ) (306 )
Net investment income 0
0
1,526
111
Purchases 917
0
334
78,112
Sales 0
0
0
0
Issuances 0
0
0
0
Settlements 0
0
(1,670 ) (6,720 )
Transfers into Level 3(4) 0
0
8,290
2,513
Transfers out of Level 3(4) 0
0
(1,056 ) (12,502 )
Other(5) (2 ) 0
(3,028 ) 0
Fair Value, end of period assets/(liabilities) $ 4,066
$ 0
$ 134,748
$ 277,238
Unrealized gains (losses) for assets/(liabilities) still held(6):
Included in earnings:
Realized investment gains (losses), net $ 0
$ 0
$ 0
$ 0
Asset administration fees and other income $ 0
$ 0
$ 0
$ 0

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Unaudited Interim Consolidated Financial Statements—(Continued)~~

Three Months Ended September 30, 2017
Equity Securities(3) Short-Term Investments Cash Equivalents
(in thousands)
Fair Value, beginning of period assets/(liabilities) $ 5,854
$ 450
$ 375
Total gains (losses) (realized/unrealized):

Included in earnings:

Realized investment gains (losses), net 0
0
0
Asset administration fees and other income 630
0
0
Included in other comprehensive income (loss) 0
0
0
Net investment income 0
0
0
Purchases 0
75
0
Sales 0
0
0
Issuances 0
0
0
Settlements 0
0
0
Transfers into Level 3(4) 0
0
0
Transfers out of Level 3(4) 0
0
0
Other 3,853
(450 ) (375 )
Fair Value, end of period assets/(liabilities) $ 10,337
$ 75
$ 0
Unrealized gains (losses) for assets/(liabilities) still held(6):
Included in earnings:
Realized investment gains (losses), net $ 0
$ 0
$ 0
Asset administration fees and other income $ 630
$ 0
$ 0

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Unaudited Interim Consolidated Financial Statements—(Continued)~~

Three Months Ended September 30, 2017
Reinsurance
Recoverables Receivables from
Parent and Affiliates Future Policy
Benefits
(in thousands)
Fair Value, beginning of period assets/(liabilities) $ 268,337
$ 0
$ (9,331,040 )
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net(7) (33,779 ) 0
1,584,013
Asset administration fees and other income 0
0
0
Included in other comprehensive income (loss) 0
0
0
Net investment income 0
0
0
Purchases 4,875
0
0
Sales 0
0
0
Issuances 0
0
(252,024 )
Settlements 0
0
0
Transfers into Level 3(4) 0
0
0
Transfers out of Level 3(4) 0
0
0
Other(5) 2,948
0
0
Fair Value, end of period assets/(liabilities) $ 242,381
$ 0
$ (7,999,051 )
Unrealized gains (losses) for assets/(liabilities) still held(6):
Included in earnings:
Realized investment gains (losses), net $ (31,836 ) $ 0
$ 1,503,393
Asset administration fees and other income $ 0
$ 0
$ 0

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Unaudited Interim Consolidated Financial Statements—(Continued)~~

Nine Months Ended September 30, 2017
Fixed Maturities Available-For-Sale
U.S. Government Foreign Government Corporate Securities(1) Structured Securities(2)
(in thousands)
Fair Value, beginning of period assets/(liabilities) $ 0
$ 87
$ 151,989
$ 31,735
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net 0
0
(3,060 ) 535
Asset administration fees and other income 0
0
0
0
Included in other comprehensive income (loss) 0
0
(1,619 ) (35 )
Net investment income 0
0
6,383
163
Purchases 3,093
0
1,428
228,719
Sales 0
0
(14,367 ) (1,595 )
Issuances 0
0
0
0
Settlements 0
0
(7,963 ) (49,272 )
Transfers into Level 3(4) 0
0
10,640
94,979
Transfers out of Level 3(4) 0
(87 ) (4,681 ) (27,991 )
Other(5) 973
0
(4,002 ) 0
Fair Value, end of period assets/(liabilities) $ 4,066
$ 0
$ 134,748
$ 277,238
Unrealized gains (losses) for assets/(liabilities) still held(6):
Included in earnings:
Realized investment gains (losses), net $ 0
$ 0
$ (2,277 ) $ (1 )
Asset administration fees and other income $ 0
$ 0
$ 0
$ 0

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Unaudited Interim Consolidated Financial Statements—(Continued)~~

Nine Months Ended September 30, 2017
Equity Securities(3) Short-Term Investments Cash Equivalents
(in thousands)
Fair Value, beginning of period assets/(liabilities) $ 4,864
$ 450
$ 375
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net 0
0
0
Asset administration fees and other income 1,268
0
0
Included in other comprehensive income (loss) 351
0
0
Net investment income 0
0
0
Purchases 0
75
0
Sales 0
0
0
Issuances 0
0
0
Settlements 0
0
0
Transfers into Level 3(4) 0
0
0
Transfers out of Level 3(4) 0
0
0
Other 3,854
(450 ) (375 )
Fair Value, end of period assets/(liabilities) $ 10,337
$ 75
$ 0
Unrealized gains (losses) for assets/(liabilities) still held(6):
Included in earnings:
Realized investment gains (losses), net $ 0
$ 0
$ 0
Asset administration fees and other income $ 917
$ 0
$ 0

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Unaudited Interim Consolidated Financial Statements—(Continued)~~

Nine Months Ended September 30, 2017
Reinsurance
Recoverables Receivables from
Parent and Affiliates Future Policy
Benefits
(in thousands)
Fair Value, beginning of period assets/(liabilities) $ 240,091
$ 33,962
$ (7,707,333 )
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net(7) (12,834 ) 0
455,564
Asset administration fees and other income 0
0
0
Included in other comprehensive income (loss) 0
0
0
Net investment income 0
0
0
Purchases 14,659
0
0
Sales 0
0
0
Issuances 0
0
(747,282 )
Settlements 0
0
0
Transfers into Level 3(4) 0
0
0
Transfers out of Level 3(4) 0
(33,962 ) 0
Other(5) 465
0
0
Fair Value, end of period assets/(liabilities) $ 242,381
$ 0
$ (7,999,051 )
Unrealized gains (losses) for assets/(liabilities) still held(6):
Included in earnings:
Realized investment gains (losses), net $ (7,021 ) $ 0
$ 274,784
Asset administration fees and other income $ 0
$ 0
$ 0


(1)	Includes U.S. corporate public, U.S. corporate private, foreign corporate public and foreign corporate private securities. Prior period amounts were aggregated to conform to current period presentation.


~~(2)~~	~~Includes asset-backed, commercial mortgage-backed and residential mortgage-backed securities. Prior period amounts were aggregated to conform to current period presentation.~~


~~(3)~~	~~Prior period amounts have been reclassified to conform to current period presentation. See Note 2 for details.~~


~~(4)~~	~~Transfers into or out of any level are generally reported at the value as of the beginning of the quarter in which the transfers occur for any such assets still held at the end of the quarter.~~


~~(5)~~	~~Other, primarily represents reclassifications of certain assets and liabilities between reporting categories.~~


~~(6)~~	~~Unrealized gains or losses related to assets still held at the end of the period do not include amortization or accretion of premiums and discounts.~~


~~(7)~~	Realized investment gains (losses) on future policy benefits and reinsurance recoverables primarily represent the change in the fair value of the Company's living benefit guarantees on certain of its variable annuity contracts.


(2)	Other includes reclassifications of certain assets and liabilities between reporting categories.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)


(3)	Unrealized gains or losses related to assets still held at the end of the period do not include amortization or accretion of premiums and discounts.


(4)	Includes U.S. corporate public, U.S. corporate private, foreign corporate public and foreign corporate private securities.


(5)	Includes asset-backed, commercial mortgage-backed and residential mortgage-backed securities.


(6)	Issuances and settlements for Policyholders' account balances are presented net in the rollforward.


(7)	Prior period amounts have been updated to conform to current period presentation.

Fair Value of Financial Instruments

The table below presents the carrying amount and fair value by fair value hierarchy level of certain financial instruments that are not reported at fair value. The financial instruments presented below are reported at carrying value on the Company’s Unaudited Interim ~~Consolidated~~ Statements of Financial Position. In some cases, as described below, the carrying amount equals or approximates fair value.


	September 30, 2018(1)										June 30, 2019
	Fair Value								Carrying Amount(2)		Fair Value								Carrying Amount(1)
	Level 1		Level 2		Level 3		Total		Total		Level 1		Level 2		Level 3		Total		Total
	(in thousands)										(in thousands)
Assets:
Commercial mortgage and other loans	$	0	$	0	$	1,324,292	$	1,324,292	$	1,352,403	$	0	$	0	$	1,358,041	$	1,358,041	$	1,316,611
Policy loans	0		0		12,656		12,656		12,656		0		0		12,239		12,239		12,239
Short-term investments	7,750		0		0		7,750		7,750		0		0		0		0		0
Cash and cash equivalents	20,403		327,000		0		347,403		347,403		468,660		835,000		0		1,303,660		1,303,660
Accrued investment income	0		76,228		0		76,228		76,228		0		98,149		0		98,149		98,149
Reinsurance recoverables	0		0		56,348		56,348		56,348		0		0		53,251		53,251		53,251
Receivables from parent and affiliates	0		18,649		0		18,649		18,649		0		11,974		0		11,974		11,974
Other assets	0		15,047		0		15,047		15,047		0		5,633		0		5,633		5,633
Total assets	$	28,153	$	436,924	$	1,393,296	$	1,858,373	$	1,886,484	$	468,660	$	950,756	$	1,423,531	$	2,842,947	$	2,801,517
Liabilities:
Policyholders’ account balances - investment contracts	$	0	$	0	$	431,293	$	431,293	$	438,448	$	0	$	0	$	1,003,487	$	1,003,487	$	997,938
Cash collateral for loaned securities	0		7,147		0		7,147		7,147		0		0		0		0		0
Short-term debt	0		183,673		0		183,673		184,303		0		0		0		0		0
Long-term debt	0		789,881		0		789,881		787,596		0		682,141		0		682,141		653,596
Reinsurance payables	0		0		56,348		56,348		56,348		0		0		53,251		53,251		53,251
Payables to parent and affiliates	0		46,010		0		46,010		46,010		0		35,557		0		35,557		35,557
Other liabilities	0		138,859		0		138,859		138,859		0		155,474		0		155,474		155,474
Separate account liabilities - investment contracts	0		86		0		86		86		0		65		0		65		65
Total liabilities	$	0	$	1,165,656	$	487,641	$	1,653,297	$	1,658,797	$	0	$	873,237	$	1,056,738	$	1,929,975	$	1,895,881

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)


	December 31, 2017(1)										December 31, 2018
	Fair Value								Carrying Amount(2)		Fair Value								Carrying Amount(1)
	Level 1		Level 2		Level 3		Total		Total		Level 1		Level 2		Level 3		Total		Total
	(in thousands)										(in thousands)
Assets:
Commercial mortgage and other loans	$	0	$	0	$	1,396,167	$	1,396,167	$	1,387,012	$	0	$	0	$	1,339,707	$	1,339,707	$	1,353,478
Policy loans	0		0		12,558		12,558		12,558		0		0		12,805		12,805		12,805
Short-term investments											7,750		0		0		7,750		7,750
Cash and cash equivalents	493,473		0		0		493,473		493,473		136,175		675,000		0		811,175		811,175
Accrued investment income	0		88,331		0		88,331		88,331		0		90,895		0		90,895		90,895
Reinsurance recoverables	0		0		59,588		59,588		59,588		0		0		55,236		55,236		55,236
Receivables from parent and affiliates	0		11,206		0		11,206		11,206		0		9,188		0		9,188		9,188
Other assets	0		13,802		0		13,802		13,802		0		3,735		0		3,735		3,735
Total assets	$	493,473	$	113,339	$	1,468,313	$	2,075,125	$	2,065,970	$	143,925	$	778,818	$	1,407,748	$	2,330,491	$	2,344,262
Liabilities:
Policyholders’ account balances - investment contracts	$	0	$	0	$	281,582	$	281,582	$	281,051	$	0	$	0	$	560,548	$	560,548	$	565,903
Cash collateral for loaned securities	0		17,383		0		17,383		17,383		0		384		0		384		384
Short-term debt	0		43,734		0		43,734		43,734		0		139,843		0		139,843		140,569
Long-term debt	0		1,003,251		0		1,003,251		928,165		0		791,670		0		791,670		787,596
Reinsurance payables	0		0		59,588		59,588		59,588		0		0		55,236		55,236		55,236
Payables to parent and affiliates	0		36,026		0		36,026		36,026		0		30,846		0		30,846		30,846
Other liabilities	0		135,556		0		135,556		135,556		0		554,162		0		554,162		554,162
Separate account liabilities - investment contracts	0		102		0		102		102		0		71		0		71		71
Total liabilities	$	0	$	1,236,052	$	341,170	$	1,577,222	$	1,501,605	$	0	$	1,516,976	$	615,784	$	2,132,760	$	2,134,767

(1)

The information presented as of December 31, 2017, excludes certain hedge funds, private equity funds and other funds that were accounted for using the cost method and for which the fair value was measured at NAV per share (or its equivalent) as a practical expedient. The fair value and the carrying value of these cost method investments were $6.4 million and $6.0 million, respectively. Due to the adoption of ASU 2016-01 effective January 1, 2018, these assets are carried at fair value at each reporting date with changes in fair value reported in “Asset administration fees and other income.” Therefore, as of September 30, 2018, these assets are excluded from this table but are reported in the fair value recurring measurement table.


~~(2)~~	Carrying values presented herein differ from those in the Company’s Unaudited Interim ~~Consolidated~~ Statements of Financial Position because certain items within the respective financial statement captions are not considered financial instruments or are out of scope under authoritative guidance relating to disclosures of the fair value of financial instruments.

6. ~~INCOME TAXES~~

The Company uses a full year projected effective tax rate approach to calculate year-to-date taxes. In addition, certain items impacting total income tax expense are recorded in the periods in which they occur. The projected effective tax rate is the ratio of projected “Total income tax expense” divided by projected “Income from operations before income taxes”. The interim period tax expense (or benefit) is the difference between the year-to-date income tax provision and the amounts reported for the previous interim periods of the fiscal year.

The Company's income tax provision, on a consolidated basis, amounted to an income tax expense of $57 million, or 4.4% of income from operations before income taxes in the first nine months of 2018, compared to $370 million, or 31.6%, in the first nine months of 2017. The Company’s 2018 effective tax rates differed from the U.S. statutory rate of 21% primarily due to non-taxable investment income, tax credits and unique items described below that were recorded in the periods in which they occurred. The Company's 2017 effective tax rates differed from the U.S. statutory rate of 35% primarily due to non-taxable investment income and tax credits. The Tax Cuts and Jobs Act of 2017 ("Tax Act of 2017") modified the methodology for determining the dividend received deduction and will likely reduce the tax benefit of non-taxable investment income in periods starting after December 31, 2017.

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Unaudited Interim Consolidated Financial Statements—(Continued)~~

~~2018 Industry Issue Resolution (IIR)~~ - In August 2018, the Internal Revenue Service ("IRS") released an IIR to provide guidance on the tax reserving for guaranteed benefits within variable annuity contracts and principle-based reserves on certain life insurance contracts. Adopting the IIR methodology resulted in an accelerated deduction for the Company’s 2017 tax return that would have otherwise been deductible in future years. Prior to the adoption of this IIR, the Company accounted for these future deductions as deferred tax assets measured using the current 21% corporate income tax rate. Upon adoption of the IIR, the tax benefits were revalued using the 35% tax rate applicable for the 2017 tax year in which they will now be recognized resulting in a reduction in income tax expense of $193 million for the first nine months of 2018.

~~U.S. Tax Cuts and Jobs Act of 2017 -~~ On December 22, 2017, the Tax Act of 2017 was enacted into U.S. law. As a result, the Company recognized a $882 million tax expense in “Total income tax expense (benefit)” in the Company’s Consolidated Statements of Operations for the year ended December 31, 2017. In accordance with SEC Staff Accounting Bulletin 118, the Company recorded the effects of the Tax Act of 2017 using reasonable estimates due to the need for further analysis of the provisions within the Tax Act of 2017 and collection, preparation and analysis of relevant data necessary to complete the accounting. The Company has not fully completed its accounting for the tax effects of the Tax Act of 2017. As the Company completes the collection, preparation and analysis of data relevant to the Tax Act of 2017, and interprets any additional guidance issued by the IRS, U.S. Department of the Treasury, or other standard-setting organizations, the Company may make adjustments to these provisional amounts. These adjustments may materially impact the Company’s provision for income taxes in the period in which the adjustments are made. During the first nine months of 2018, the Company recognized a $0.5 million increase in income tax expense primarily related to refinements of our provisional estimates.

7. REINSURANCE

The Company uses reinsurance as part of its risk management and capital management strategies for certain of its living benefit guarantees 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 the Company previously executed its living benefit hedging program. Effective April, 1, 2016, the Company recaptured the risks related to its variable annuity living benefit guarantees that were previously reinsured to ~~Pruco Re and Prudential Insurance, as discussed further in Note 1.~~affiliates. In addition, the Company reinsured variable annuity base contracts, along with the living benefit guarantees, 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.

~~In the fourth quarter of~~Effective December 31, 2015, the Company surrendered its New York ~~license. The Company recaptured the New York living benefits previously ceded to Pruco Re,~~license and reinsured the majority of its New York business, both the living benefit guarantees and base contracts, to Prudential Insurance. See Note 1 for additional information. 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.

Realized investment gains and losses include the impact of reinsurance agreements, particularly reinsurance agreements involving living benefit guarantees. 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". ~~For~~See Note 4 for additional information related to the accounting for embedded ~~derivatives, see Note 11 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.~~

derivatives.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)

Reinsurance amounts included in the Company's Unaudited Interim ~~Consolidated~~ Statements of Financial Position as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 were as follows:



	June 30, 2019			December 31, 2018
	(in thousands)
Reinsurance recoverables(1)	$	646,139		$	572,102
Deferred policy acquisition costs	3,778,155			3,703,166
Deferred sales inducements	473,085			476,608
Value of business acquired	(2,399		)	(2,431		)
Other assets	90,297			79,992
Policyholders’ account balances	3,185,754			3,098,537
Future policy benefits	8,247,032			5,680,939
Reinsurance payables(2)	251,804			232,937
Other liabilities	291,469			290,330

September 30, 2018 December 31, 2017
(in thousands)
Reinsurance recoverables(1) $ 487,748
$ 563,428
Deferred policy acquisition costs 3,684,641
3,766,066
Deferred sales inducements 484,204
540,389
Value of business acquired (2,561 ) (2,702 )
Other assets 100,053
105,167
Policyholders’ account balances 3,029,531
2,825,030
Future policy benefits 3,269,692
5,511,496
Reinsurance payables(2) 214,420
262,588
Other liabilities 296,686
329,019


(1)	"Reinsurance recoverables" includes ~~$0.0~~$0.1 million and ~~$0.3~~$0 million of unaffiliated activity as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.


(2)	"Reinsurance payables" includes $0.1 million of unaffiliated activity as of both ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

The reinsurance recoverables by counterparty are broken out below:



	June 30, 2019		December 31, 2018
	(in thousands)
Prudential Insurance	$	390,634	$	335,349
Pruco Life	255,366		236,716
Unaffiliated	139		37
Total reinsurance recoverables	$	646,139	$	572,102

September 30, 2018 December 31, 2017
(in thousands)
Prudential Insurance $ 246,217
$ 310,758
Pruco Life 241,494
252,383
Unaffiliated 37
287
Total reinsurance recoverables $ 487,748
$ 563,428

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in thousands)
Premiums:
Direct	$	8,381		$	7,824		$	16,435		$	19,937
Assumed	10,398			5,965			19,493			16,146
Ceded	(308		)	(494		)	(192		)	(1,754		)
Net premiums	18,471			13,295			35,736			34,329
Policy charges and fee income:
Direct	122,420			139,738			244,031			285,451
Assumed	411,058			417,636			806,146			837,662
Ceded(1)	(8,690		)	(10,031		)	(17,455		)	(20,480		)
Net policy charges and fee income	524,788			547,343			1,032,722			1,102,633
Asset administration fees and other income:
Direct	41,226			25,660			79,971			51,693
Assumed	76,079			75,255			148,774			151,147
Ceded	(2,100		)	(2,312		)	(4,152		)	(4,700		)
Net asset administration fees and other income	115,205			98,603			224,593			198,140
Realized investment gains (losses), net:
Direct	593,738			(457,927		)	(240,470		)	(1,206,252		)
Assumed	(1,530,524		)	483,344			(2,046,233		)	1,832,448
Ceded	42,571			(15,558		)	50,269			(57,647		)
Realized investment gains (losses), net	(894,215		)	9,859			(2,236,434		)	568,549
Policyholders' benefits (including change in reserves):
Direct	17,616			12,353			24,719			30,517
Assumed	31,619			16,766			33,976			34,658
Ceded(2)	(1,345		)	(452		)	(2,855		)	(1,482		)
Net policyholders' benefits (including change in reserves)	47,890			28,667			55,840			63,693
Interest credited to policyholders’ account balances:
Direct	15,335			35,185			21,345			71,573
Assumed	19,283			29,757			24,094			65,548
Ceded	(1,263		)	(2,922		)	(1,657		)	(5,531		)
Net interest credited to policyholders’ account balances	33,355			62,020			43,782			131,590
Reinsurance expense allowances and general and administrative expenses, net of capitalization and amortization	240,225			295,556			439,480			591,753

Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
(in thousands)
Premiums:
Direct $ 7,582
$ 8,028
$ 27,519
$ 26,216
Assumed 6,568
5,849
22,714
25,402
Ceded (471 ) (1,372 ) (2,225 ) (2,952 )
Net premiums 13,679
12,505
48,008
48,666
Policy charges and fee income:
Direct 137,719
153,835
423,170
469,128
Assumed 422,888
413,400
1,260,550
1,210,789
Ceded(1) (10,015 ) (11,328 ) (30,495 ) (33,607 )
Net policy charges and fee income 550,592
555,907
1,653,225
1,646,310
Asset administration fees and other income:
Direct 18,360
30,573
70,053
97,972
Assumed 77,276
74,586
228,423
216,697
Ceded (2,316 ) (2,446 ) (7,016 ) (7,285 )
Net asset administration fees and other income 93,320
102,713
291,460
307,384
Realized investment gains (losses), net:
Direct (1,033,002 ) (32,663 ) (2,239,254 ) (779,499 )
Assumed 1,133,110
1,237,967
2,965,558
470,545
Ceded (34,835 ) (35,227 ) (92,482 ) (18,558 )
Realized investment gains (losses), net 65,273
1,170,077
633,822
(327,512 )
Policyholders' benefits (including change in reserves):
Direct 20,847
10,061
51,364
36,627
Assumed 29,743
6,114
64,401
28,505
Ceded(2) (659 ) (2,119 ) (2,141 ) 15,119
Net policyholders' benefits (including change in reserves) 49,931
14,056
113,624
80,251
Interest credited to policyholders’ account balances:
Direct 41,949
42,401
113,522
(5,421 )
Assumed 43,662
52,559
109,210
9,108
Ceded (3,298 ) (4,461 ) (8,829 ) (3,120 )
Net interest credited to policyholders’ account balances 82,313
90,499
213,903
567
Reinsurance expense allowances and general and administrative expenses, net of capitalization and amortization 283,512
352,114
875,265
524,961


(1)	"Policy charges and fee income ceded" includes ~~$(0.4)~~$(1) million and ~~$(0.6)~~$(0.4) million of unaffiliated activity for the three months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and $(1) million and ~~$(2)~~$(0.6) million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively.


(2)	"Policyholders' benefits (including change in reserves) ceded" includes ~~$0.0~~$(0.1) million and $0 million of unaffiliated activity for ~~both~~ the three months ended ~~September~~June 30, 2019 and 2018, respectively, and ~~2017,~~$(0.1) million and $(0.2) million ~~and $0.0 million~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)

7. INCOME TAXES

The Company uses a full year projected effective tax rate approach to calculate year-to-date taxes. In addition, certain items impacting total income tax expense are recorded in the periods in which they occur. The projected effective tax rate is the ratio of projected “Income tax expense (benefit)” divided by projected “Income (loss) from operations before income taxes”. The interim period tax expense (or benefit) is the difference between the year-to-date income tax provision and the amounts reported for the previous interim periods of the fiscal year.

The Company's income tax provision amounted to an income tax benefit of $(318) million, or 22.96% of income (loss) from operations before income taxes in the first six months of 2019, compared to an income tax expense of $205 million, or 19.68%, in the first six months of 2018. The Company’s current and prior effective tax rates differed from the U.S. statutory tax rate of 21% primarily due to non-taxable investment income and tax credits.

8. EQUITY

Accumulated Other Comprehensive Income (Loss)

AOCI represents the cumulative OCI items that are reported separate from net income and detailed on the Statements of Comprehensive Income. The balance of and changes in each component of ~~“Accumulated other comprehensive income (loss)”~~AOCI as of and for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 are as follows:

Accumulated Other Comprehensive Income (Loss)
Foreign Currency Translation Adjustments
Net Unrealized
Investment Gains
(Losses)(1)
Total Accumulated Other Comprehensive Income (Loss)
(in thousands)
Balance, December 31, 2017 $ (7 ) $ (90,117 ) $ (90,124 )
Change in OCI before reclassifications (1,192 ) (438,304 ) (439,496 )
Amounts reclassified from AOCI 0
54,870
54,870
Income tax benefit (expense) 251
80,522
80,773
Cumulative effect of adoption of ASU 2016-01 0
(3 ) (3 )
Cumulative effect of adoption of ASU 2018-02 (2 ) (36,712 ) (36,714 )
Balance, September 30, 2018 $ (950 ) $ (429,744 ) $ (430,694 )



	Accumulated Other Comprehensive Income (Loss)
	Foreign Currency Translation Adjustment			Net Unrealized Investment Gains (Losses)(1)			Total Accumulated Other Comprehensive Income (Loss)
	(in thousands)
Balance, December 31, 2018	$	(1,078	)	$	(323,295	)	$	(324,373	)
Change in OCI before reclassifications	(16		)	698,743			698,727
Amounts reclassified from AOCI	0			9,087			9,087
Income tax benefit (expense)	3			(148,645		)	(148,642		)
Balance, June 30, 2019	$	(1,091	)	$	235,890		$	234,799


	Accumulated Other Comprehensive Income (Loss)									Accumulated Other Comprehensive Income (Loss)
	Foreign Currency Translation Adjustments			Net Unrealized Investment Gains (Losses)(1)			Total Accumulated Other Comprehensive Income (Loss)			Foreign Currency Translation Adjustment			Net Unrealized Investment Gains (Losses)(1)			Total Accumulated Other Comprehensive Income (Loss)
	(in thousands)									(in thousands)
Balance, December 31, 2016	$	(78	)	$	(314,870	)	$	(314,948	)
Balance, December 31, 2017										$	(7	)	$	(90,117	)	$	(90,124	)
Change in OCI before reclassifications	95			222,991			223,086			(1,128		)	(282,772		)	(283,900		)
Amounts reclassified from AOCI	0			4,407			4,407			0			48,454			48,454
Income tax benefit (expense)	(33		)	(79,589		)	(79,622		)	237			49,208			49,445
Balance, September 30, 2017	$	(16	)	$	(167,061	)	$	(167,077	)
Cumulative effect of adoption of ASU 2016-01										0			(3		)	(3		)
Cumulative effect of adoption of ASU 2018-02										(2		)	(36,712		)	(36,714		)
Balance, June 30, 2018										$	(900	)	$	(311,942	)	$	(312,842	)


(1)	Includes cash flow hedges of ~~$(24)~~$0 million and ~~$(26)~~$(4) million as of ~~September~~June 30, 2019 and December 31, 2018, respectively, and $(24) millionand$(26) million as of June 30, 2018 and December 31, 2017, respectively ~~and $(15) millionand$12 million as of September 30, 2017 and December 31, 2016, respectively~~.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Reclassifications out of Accumulated Other Comprehensive Income (Loss)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,					Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018		2019			2018
	(in thousands)												(in thousands)
Amounts reclassified from AOCI(1)(2):
Net unrealized investment gains (losses):
Cash flow hedges—Currency/ Interest rate(3)	$	4,339		$	(1,484	)	$	13,850		$	(1,861	)	$	(4,535	)	$	12,729	$	(5,388	)	$	9,511
Net unrealized investment gains (losses) on available-for-sale securities	(10,755		)	(1,180		)	(68,720		)	(2,546		)	(2,968		)	15,834		(3,699		)	(57,965		)
Total net unrealized investment gains (losses)(4)	(6,416		)	(2,664		)	(54,870		)	(4,407		)	(7,503		)	28,563		(9,087		)	(48,454		)
Total reclassifications for the period	$	(6,416	)	$	(2,664	)	$	(54,870	)	$	(4,407	)	$	(7,503	)	$	28,563	$	(9,087	)	$	(48,454	)


(1)	All amounts are shown before tax.


(2)	Positive amounts indicate gains/benefits reclassified out of AOCI. Negative amounts indicate losses/costs reclassified out of AOCI.


(3)	See Note 4 for additional information on cash flow hedges.


(4)	See table below for additional information on unrealized investment gains (losses), including the impact on deferred policy acquisition ~~costs,~~and other costs and future policy benefits and other liabilities.

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Unaudited Interim Consolidated Financial Statements—(Continued)~~

Net Unrealized Investment Gains (Losses)

Net unrealized investment gains (losses) on securities classified as available-for-sale and certain other invested assets and other assets are included in the Company’s Unaudited Interim ~~Consolidated~~ Statements of Financial Position as a component of AOCI. Changes in these amounts include reclassification adjustments to exclude from ~~“Other comprehensive income (loss)”~~OCI those items that are included as part of “Net income” for a period that had been part of ~~“Other comprehensive income (loss)”~~OCI in earlier periods. The amounts for the periods indicated below, split between amounts related to fixed maturity securities on which an OTTI loss has been recognized, and all other net unrealized investment gains (losses), are as follows:

Net Unrealized Investment Gains (Losses) on Fixed Maturity Securities on which an OTTI loss has been recognized


	Net Unrealized Gains (Losses) on Investments			Deferred Policy Acquisition Costs and Other Costs			Future Policy Benefits and Other Liabilities			Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related to Net Unrealized Investment Gains (Losses)			Net Unrealized Gains (Losses) on Investments			Deferred Policy Acquisition Costs and Other Costs(2)			Future Policy Benefits and Other Liabilities(3)			Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses)
	(in thousands)															(in thousands)
Balance, December 31, 2017	$	12,311		$	(1,008	)	$	(157	)	$	(3,263	)	$	7,883
Balance, December 31, 2018																$	(3,334	)	$	(1,119	)	$	(68	)	$	27		$	(4,494	)
Net investment gains (losses) on investments arising during the period	(12,928		)	0			0			2,715			(10,213		)	13,215			0			0			(2,775		)	10,440
Reclassification adjustment for (gains) losses included in net income	(192		)	0			0			40			(152		)	4			0			0			(1		)	3
Reclassification adjustment for OTTI (gains) losses excluded from net income(1)	(225		)	0			0			47			(178		)	(92		)	0			0			19			(73		)
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs	0			2,841			0			(597		)	2,244			0			120			0			(25		)	95
Impact of net unrealized investment (gains) losses on future policy benefits and other liabilities	0			0			518			(109		)	409			0			0			(52		)	11			(41		)
Balance, September 30, 2018	$	(1,034	)	$	1,833		$	361		$	(1,167	)	$	(7	)
Balance, June 30, 2019																$	9,793		$	(999	)	$	(120	)	$	(2,744	)	$	5,930


(1)	Represents "transfers in" related to the portion of OTTI losses recognized during the period that were not recognized in earnings for securities with no prior OTTI loss.


(2)	"Other costs" primarily includes reinsurance recoverables, DSI and value of business acquired ("VOBA").


(3)	"Other liabilities" primarily includes reinsurance payables and deferred reinsurance gains.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)

All Other Net Unrealized Investment Gains (Losses) in AOCI


	Net Unrealized Gains (Losses) on Investments(1)			Deferred Policy Acquisition Costs and Other Costs			Future Policy Benefits and Other Liabilities			Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related to Net Unrealized Investment Gains (Losses)			Net Unrealized Gains (Losses) on Investments(1)			Deferred Policy Acquisition Costs and Other Costs(3)			Future Policy Benefits and Other Liabilities(4)			Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses)
	(in thousands)															(in thousands)
Balance, December 31, 2017	$	(71,723	)	$	(82,212	)	$	(16,997	)	$	72,932		$	(98,000	)
Balance, December 31, 2018																$	(413,575	)	$	8,505		$	1,113		$	85,156		$	(318,801	)
Net investment gains (losses) on investments arising during the period	(553,949		)	0			0			116,330			(437,619		)	877,926			0			0			(184,366		)	693,560
Reclassification adjustment for (gains) losses included in net income	55,062			0			0			(11,562		)	43,500			9,083			0			0			(1,907		)	7,176
Reclassification adjustment for OTTI (gains) losses excluded from net income(2)	225			0			0			(47		)	178			92			0			0			(19		)	73
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs	0			105,676			0			(22,192		)	83,484			0			(172,664		)	0			36,259			(136,405		)
Impact of net unrealized investment (gains) losses on future policy benefits and other liabilities	0			0			19,538			(4,103		)	15,435			0			0			(19,802		)	4,159			(15,643		)
Cumulative effect of adoption of ASU 2016-01	(4		)	0			0			1			(3		)
Cumulative effect of adoption of ASU 2018-02	0			0			0			(36,712		)	(36,712		)
Balance, September 30, 2018	$	(570,389	)	$	23,464		$	2,541		$	114,647		$	(429,737	)
Balance, June 30, 2019																$	473,526		$	(164,159	)	$	(18,689	)	$	(60,718	)	$	229,960


(1)	Includes cash flow hedges. See Note 4 for information on cash flow hedges.


(2)	Represents "transfers out" related to the portion of OTTI losses recognized during the period that were not recognized in earnings for securities with no prior OTTI loss.


(3)	"Other costs" primarily includes reinsurance recoverables, DSI and VOBA.


(4)	"Other liabilities" primarily includes reinsurance payables and deferred reinsurance gains.

9. 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 ~~$0.0 million for both the three months ended September 30, 2018 and 2017, and~~ $0.1 million and $0.0 million for the ~~nine~~three months ended ~~September~~June 30, 2019 and 2018, respectively, and ~~2017, respectively.~~$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 ~~both~~ the three months ended ~~September~~June 30, 2019 and 2018, ~~and 2017,~~respectively, and $0.5 million and ~~$0.6~~$0.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)

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 ~~$0.4~~$0.6 million and ~~$0.3~~$0.5 million for the three months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and $1$1.1 million and $0.9 million for ~~both~~ the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018, ~~and 2017.~~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 ~~and $0.4 million~~ for both the three months ended ~~September~~June 30, 2019 and 2018 and ~~2017, respectively, and $2 million and $1~~$1.1 million for both the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017, respectively.~~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 ~~$0.2~~$0.3 million and ~~$0.1~~$0.2 million for the three months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and $0.5 million and $0.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~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 ~~were $32~~was $25 million and ~~$27~~$29 million for the three months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$91~~$49 million and ~~$81~~$59 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~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 ~~and $(2) million~~ for both the three months ended ~~September~~June 30, 2019 and 2018, and ~~2017, respectively, and $12~~$8 million ~~and $10 million for the nine months ended September 30, 2018 and 2017, respectively.~~

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. The Company 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. There was no allocated lease expense for both the ~~three and nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017. There was no sub-lease rental income, recorded as a reduction to lease expense, for both the three and nine months ended September 30, 2018 and 2017.~~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 ~~both~~ the three months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and $9$8 million and $6 million for ~~both~~ the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. These expenses are recorded as “Net investment income” in the Company's Unaudited Interim~~Consolidated~~ 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 ~~$160~~$294 million and ~~$111~~$228 million as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. "Net investment income" related to these ventures includes ~~a gain of $2~~$4 million and $2 million for the three months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and $4$9 million and $7$2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)

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~~The Prudential Series Fund. Income received from ASTISI and PGIM Investments related to this agreement was ~~$26~~$24 million and ~~$28~~$27 million for the three months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$80~~$48 million and ~~$83~~$54 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. These revenues are recorded as “Asset administration fees and other income” in the Company's Unaudited Interim ~~Consolidated~~ Statements of Operations and Comprehensive Income (Loss).

Affiliated Notes Receivable

Affiliated notes receivable included in "Receivables from parent and affiliates" at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 were as follows:


	Maturity Dates	Interest Rates				September 30, 2018		December 31, 2017		Maturity Dates	Interest Rates				June 30, 2019		December 31, 2018
						(in thousands)									(in thousands)
U.S. dollar floating rate notes	2028	3.74%	-	3.83	%	$	34,037	$	34,268	2028	3.74%	-	4.03	%	$	0	$	34,008
U.S. dollar fixed rate notes	2027	8.15%	-	14.85	%	3,682		3,877		2027	8.15%	-	14.85	%	3,198		3,184
Total long-term notes receivable - affiliated(1)						$	37,719	$	38,145
Total notes receivable - affiliated(1)															$	3,198	$	37,192


(1)	All ~~long-term~~ 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 ~~$0.5~~$0.1 million and ~~$0.2~~$0.3 million at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~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 ~~three~~six months ended ~~September~~June 30, ~~2018~~2019, and ~~2017, respectively, and $0.3 million and $0.5~~a gain of $0.2 million for the ~~nine~~six months ended ~~September~~June 30, 2018, ~~and 2017, respectively,~~ and are included in “Asset administration fees and other income”.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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 ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and for the year ended December 31, ~~2017.~~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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)

Affiliate Date Transaction Security Type Fair Value Book Value APIC, Net of Tax Increase/(Decrease)
Realized
Investment
Gain (Loss), Net of Tax
(in thousands)
Pruco Life January 2017 Sale Fixed Maturities $ 29
$ 29
$ 0
$ 0
Prudential Insurance October 2017 Sale Commercial Mortgages $ 131,953
$ 128,529
$ 0
$ 2,226
Gibraltar Universal Life Reinsurance Company October 2017 Purchase Fixed Maturities $ 113,686
$ 96,583
$ 0
$ (11,117 )
Prudential Insurance December 2017 Purchase Other Invested Assets - Derivatives $ 171,363
$ 171,363
$ 0
$ 0
Prudential Insurance December 2017 Sale Fixed Maturities $ 13,793
$ 7,113
$ 0
$ 4,342
Prudential Insurance February 2018 Purchase Fixed Maturities $ 136,963
$ 136,963
$ 0
$ 0
Pruco Life Insurance Company of Arizona April 2018 Sale Fixed Maturity $ 64,313
$ 64,514
$ 0
$ (159 )
Prudential Insurance April 2018 Sale Fixed Maturity $ 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 Maturity $ 11,160
$ 9,277
$ 0
$ 1,488
Prudential Insurance August 2018 Sale Commercial Mortgages $ 13,414
$ 13,165
$ 0
$ 196

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~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Unaudited Interim Consolidated Financial Statements—(Continued)~~

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 ~~debt issued during the second quarter of 2016 in the table below was assigned from affiliates as part of the Variable Annuities Recapture, as described further in Note 1. The~~ following table provides the breakout of the Company's short and ~~long term~~long-term debt to affiliates as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017.~~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

Affiliate
Date
Issued
Amount of Notes - September 30, 2018 Amount of Notes - December 31, 2017 Interest Rate Date of Maturity
(in thousands)
Prudential Insurance 4/20/2016 $ 18,734
$ 18,734
2.60 % 12/15/2018
Prudential Insurance 4/20/2016 25,000
25,000
2.60 % 12/15/2018
Prudential Insurance 4/20/2016 46,835
46,835
2.80 % 6/20/2019
Prudential Insurance 4/20/2016 18,734
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 93,671
93,671
3.64 % 12/15/2020
Prudential Insurance 4/20/2016 103,039
103,039
3.64 % 12/15/2020
Prudential Insurance 4/20/2016 93,671
93,671
3.47 % 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 37,468
37,468
3.95 % 6/20/2024
Prudential Insurance 4/20/2016 93,671
93,671
3.95 % 6/20/2024
Prudential Insurance 4/20/2016 46,835
46,835
3.95 % 6/20/2024
Prudential Insurance 6/28/2016 30,000
30,000
2.08 % 6/28/2019
Prudential Insurance 6/28/2016 50,000
50,000
3.87 % 6/28/2026
Prudential Insurance 6/28/2016 25,000
25,000
3.49 % 6/28/2026
Prudential Insurance 6/28/2016 26,000
26,000
2.59 % 6/28/2021
Prudential Insurance 6/28/2016 25,000
25,000
2.08 % 6/28/2019
Prudential Insurance 6/28/2016 20,000
20,000
2.08 % 6/28/2019
Prudential Insurance 6/28/2016 25,000
25,000
3.49 % 6/28/2026
Prudential Retirement Insurance & Annuity Company 6/28/2016 34,000
34,000
3.09 % 6/28/2023
Total Loans Payable to Affiliates $ 971,899
$ 971,899

The total interest expense to the Company related to loans and other payables to affiliates was ~~$14~~$24 million and ~~$19~~$15 million for the three months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$44~~$40 million and ~~$48~~$30 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

Contributed Capital and Dividends

Through ~~September 30, 2018~~June 2019 and December 31, ~~2017,~~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, ~~and~~ $250 million ~~return of capital, respectively, to PAI. In June, September~~ and ~~December 2017, there was a $100 million, $200 million and $650~~$225 million return of capital, respectively, to PAI.

Reinsurance with Affiliates

As discussed in Note 7,6, the Company participates in reinsurance transactions with certain affiliates.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)

10. COMMITMENTS AND CONTINGENT LIABILITIES

Commitments

The Company has made commitments to fund $2$88 million and ~~$37~~$4 million of commercial mortgage loans as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. The Company also made commitments to purchase or fund investments, mostly private fixed maturities, of ~~$138~~$230 million and ~~$134~~$271 million as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

Contingent Liabilities

On an ongoing basis, the ~~Company’s internal supervisory~~Company and ~~control functions~~its regulators review ~~the quality of~~its operations including, but not limited to, sales ~~marketing~~ and other customer interface procedures and practices, and procedures for meeting obligations to our customers and other parties. These reviews may ~~recommend modifications or enhancements. From time to time, this review process results~~result in the ~~discovery~~modification or enhancement of ~~product administration, servicing~~processes or the imposition of other ~~errors,~~action plans, including ~~errors relating to~~concerning management oversight, sales and other customer interface procedures and practices, and the timing or ~~amount~~computation of payments ~~or contract values due~~ to ~~customers.~~customers and other parties. In certain cases, if appropriate, the Company may offer customers or other parties remediation and may incur charges, including the cost of such remediation, administrative costs and regulatory fines.

The Company is subject to the laws and regulations of states and other jurisdictions concerning the identification, reporting and escheatment of unclaimed or abandoned funds, and is subject to audit and examination for compliance with these requirements. ~~For additional discussion of these matters, see “Litigation and Regulatory Matters” below.~~

It is possible that the results of operations or the cash flows of the Company in a particular quarterly or annual period could be materially affected as a result of payments in connection with the matters discussed above or other matters depending, in part, upon the results of operations or cash flows for such period. Management believes, however, that ultimate payments in connection with these matters, after consideration of applicable reserves and rights to indemnification, should not have a material adverse effect on the Company’s financial position.

Litigation and Regulatory Matters

The Company is subject to legal and regulatory actions in the ordinary course of its business. Pending legal and regulatory actions include proceedings specific to the Company and proceedings generally applicable to business practices in the industry in which it operates. The Company is subject to class action lawsuits and other litigation involving a variety of issues and allegations involving sales practices, claims payments and procedures, premium charges, policy servicing and breach of fiduciary duty to customers. The Company is also subject to litigation arising out of its general business activities, such as its investments, contracts, leases and labor and employment relationships, including claims of discrimination and harassment, and could be exposed to claims or litigation concerning certain business or process patents. In addition, the Company, along with other participants in the businesses in which it engages, may be subject from time to time to investigations, examinations and inquiries, in some cases industry-wide, concerning issues or matters upon which such regulators have determined to focus. In some of the Company’s pending legal and regulatory actions, parties are seeking large and/or indeterminate amounts, including punitive or exemplary damages. The outcome of litigation or a regulatory matter, and the amount or range of potential loss at any particular time, is often inherently uncertain.

The Company establishes accruals for litigation and regulatory matters when it is probable that a loss has been incurred and the amount of that loss can be reasonably estimated. For litigation and regulatory matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but the matter, if material, is disclosed. The Company estimates that as of ~~September~~June 30, ~~2018,~~2019, the aggregate range of reasonably possible losses in excess of accruals established for those litigation and regulatory matters for which such an estimate currently can be made is less than $150 million. This estimate is not an indication of expected loss, if any, or the Company’s maximum possible loss exposure on such matters. The Company reviews relevant information with respect to its litigation and regulatory matters on a quarterly and annual basis and updates its accruals, disclosures and estimates of reasonably possible loss based on such reviews.

~~For a~~The following discussion of ~~the Company's~~ litigation and regulatory matters ~~see~~provides an update of those matters discussed in Note 1215 to the Company's Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018, and should be read in conjunction with the complete descriptions provided in the Form 10-K.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim ~~Consolidated~~ Financial Statements—(Continued)

Securities Lending and Foreign Tax Reclaim Matter

In 2016, Prudential Financial self-reported to the SEC and the U.S. Department of Labor ("DOL"), and notified other regulators, that in some cases it failed to maximize securities lending income for the benefit of certain separate account investments due to a long-standing restriction benefiting Prudential Financial that limited the availability of loanable securities. Prudential Financial has removed the restriction and implemented a remediation plan for the benefit of customers. As part of Prudential Financial’s review of this matter, in 2018 it further self-reported to the SEC, and notified other regulators, that in some cases it failed to timely process foreign tax reclaims for the separate account investments. Prudential Financial has corrected the foreign tax reclaim process and ~~is implementing~~has implemented a remediation plan for the benefit of customers.

The DOL’s review of the securities lending matter is closed. Prudential Financial is cooperating with the SEC in its review of the securities lending and foreign tax reclaim matters (which includes a review of the remediation plans) and has entered into discussions with the SEC staff regarding a possible settlement of ~~the securities lending matter~~both matters that would potentially involve charges under the Investment Advisers Act and financial remedies. Prudential Financial cannot predict the outcome of the discussions with the SEC regarding ~~the foreign tax reclaim matter or the possible settlement of the securities lending matter.~~these matters.

Summary

The Company’s litigation and regulatory matters are subject to many uncertainties, and given their complexity and scope, their outcome cannot be predicted. It is possible that the Company’s results of operations or cash flows in a particular quarterly or annual period could be materially affected by an ultimate unfavorable resolution of pending litigation and regulatory matters depending, in part, upon the results of operations or cash flows for such period. In light of the unpredictability of the Company’s litigation and regulatory matters, it is also possible that in certain cases an ultimate unfavorable resolution of one or more pending litigation or regulatory matters could have a material adverse effect on the Company’s financial position. Management believes, however, that, based on information currently known to it, the ultimate outcome of all pending litigation and regulatory matters, after consideration of applicable reserves and rights to indemnification, is not likely to have a material adverse effect on the Company’s financial position.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) addresses the financial condition of Prudential Annuities Life Assurance Corporation (“PALAC” or the “Company”) as of ~~September~~June 30, ~~2018,~~2019, compared with December 31, ~~2017,~~2018, and its results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~2018. You should read the following analysis of our financial condition and results of operations in conjunction with the MD&A, the “Risk Factors” section, and the audited Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, as well as the statements under “Forward-Looking Statements” and the Unaudited Interim ~~Consolidated~~ Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Overview

The Company was established in 1969 and has been a provider of annuity contracts for the individual market in the United States. The Company’s products have been sold primarily to individuals to provide for long-term savings and retirement needs and to address the economic impact of premature death, estate planning concerns and supplemental retirement income.

The Company has sold a wide array of annuities, including deferred and immediate variable annuities with (1) fixed interest rate allocation options, subject to a market value adjustment, that are registered with the United States Securities and Exchange Commission (the “SEC”), and (2) fixed-rate allocation options not subject to a market value adjustment and not registered with the SEC. In addition, the Company has a relatively small in force block of variable life insurance policies. The Company stopped

selling such products in March 2010.

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Beginning in March 2010, the Company ceased offering its variable and fixed annuity products (and where offered, the companion market value adjustment option) to new investors upon the launch of a new product line by each of Pruco Life Insurance Company ("Pruco Life") and Pruco Life Insurance Company of New Jersey ("PLNJ") (which are affiliates of the Company). These initiatives were implemented to create operational and administrative efficiencies by offering a single product line of annuity products from a more limited group of legal entities. During 2012, the Company suspended additional customer deposits for variable annuities with certain living benefit guarantees. However, the Company continues to accept additional customer deposits on certain in force contracts, subject to applicable contract provisions and administrative rules.

~~The~~In 2018, the Company ~~has~~ resumed offering annuity products to new investors (except in New York). It launched a new fixed ~~index~~indexed annuity in January 2018 and a new deferred income annuity in March 2018.

As disclosed in Note 1 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015, the Company surrendered its New York license effective as of December 31, 2015, and reinsured the majority of its New York business to an affiliate, The Prudential Insurance Company of America (“Prudential Insurance”). In addition, effective April 1, 2016, the Company recaptured the risks related to its variable annuity living benefit guarantees that were previously reinsured to ~~Pruco Re~~affiliates and ~~Prudential Insurance. Further, the Company~~ reinsured the variable annuity base contracts, along with the living benefit guarantees, from Pruco Life, excluding the PLNJ business which was reinsured to Prudential Insurance, in each case under a coinsurance and modified coinsurance agreement. This reinsurance agreement covers new and in force business and excludes business reinsured externally. Additionally, the living benefit hedging program related to the living benefit guarantees as well as the product risks for retained and reinsured businesses are being managed within the Company and Prudential Insurance, as applicable.

Regulatory Developments

SEC Best Interest Regulation ~~as a Designated Financial Company~~

In October 2018, the Financial Stability Oversight Council rescinded the designation of Prudential Financial as a non-bank financial company (a “Designated Financial Company”) subject to supervision by the Board of Governors of the Federal Reserve System (“FRB”) under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). As a result, Prudential Financial is no longer subject to supervision and examination by the FRB or to the prudential standards applicable to Designated Financial Companies under Dodd-Frank. Prudential Financial remains subject to comprehensive regulation and supervision as described under “Business—Regulation” in our Annual Report on Form 10-K for the year ended December 31, 2017, and the New Jersey Department of Banking and Insurance will continue to act as its group-wide supervisor.

~~Fiduciary Rules and other Standards of Care~~

~~In March 2018, the Fifth Circuit Court of Appeals vacated the fiduciary rules adopted by the U.S. Department of Labor (“DOL”) in April 2016. The decision became effective in~~ June ~~2018.~~

~~In April 2018,~~2019, the SEC ~~proposed~~adopted a package of rulemakings and interpretative guidance that, ~~would,~~ among other things, ~~require~~requires broker-dealers to act in the best interest of retail customers when recommending securities transactions or investment strategies to them. The ~~proposals would~~guidance also ~~clarify~~clarifies the SEC’s views of the fiduciary duty that investment advisers owe to their clients. ~~If enacted in their current form, we believe~~The new best interest standards will become effective on June 30, 2020. We are evaluating the ~~primary~~ impact of the ~~proposals would be~~new standards and believe that they will apply to ~~sales of~~recommendations to purchase certain of our products, and towill result in increased compliance costs, in particular in our ~~affiliated~~ Prudential Advisors distribution system.

SECURE Act

In ~~July 2018,~~May 2019, the ~~New York Department~~U.S. House of ~~Financial Services issued an amendment~~Representatives passed the Setting Every Community up for Retirement Enhancement (“SECURE”) Act. If enacted into law in its current form, the SECURE Act would help promote retirement plan coverage by expanding access to ~~its suitability regulations which~~and use of Multiple Employer Plans; facilitate access to lifetime income disclosures for plan participants to better understand how their retirement savings translate into monthly lifetime income in retirement; improve upon the current annuity selection safe harbor; and provide lifetime income portability. We cannot predict whether the SECURE Act will impose a best-interest standard on the sale of annuity and life insurance products in New York. In addition, in October 2018 the New Jersey Bureau of Securities issued proposed regulations that would impose a fiduciary standard on all New Jersey investment professionals, and other state regulators and legislatures haveultimately be adopted, or ~~are considering adopting best interest standards.~~

~~Given the uncertainty as to the standards that will ultimately apply to our businesses, we cannot predict the~~its impact ~~of these new laws and proposals.~~

~~State Insurance Exam~~

In June 2018, the Arizona Department of Insurance and the New Jersey Department of Banking and Insurance, along with the insurance regulators of Connecticut and Indiana, completed their first global consolidated group-wide examination of Prudential Financial and its subsidiaries for the five-year period ended December 31, 2016 and had no reportable findings.

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~~Risk-Based Capital~~

In June 2018, the Capital Adequacy Task Force of the National Association of Insurance Commissioners (“NAIC”) approved revisions to the NAIC’s risk-based capital (“RBC”) framework in respect of the Tax Cuts and Jobs Act of 2017 (“Tax Act of 2017”). The revisions will apply to our RBC ratio as of December 31, 2018. For a discussion of the impact of the Tax Act of 2017 and these changes on our ~~RBC ratio, see "Liquidity and Capital Resources—Capital".~~business.

For additional information on the potential impacts of regulation on the Company see “Business—Regulation” and “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

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Impact of a Low Interest Rate Environment

As a financial services company, market interest rates are a key driver of our results of operations and financial condition. Changes in interest rates can affect our results of operations and/or our financial condition in several ways, including favorable or adverse impacts to:

• investment-related activity, including: investment income returns, net interest margins, net investment spread results,

new money rates, mortgage loan prepayments and bond redemptions;

• insurance reserve levels, market experience true-ups and amortization of both deferred policy acquisition costs

(“DAC”) and value of business acquired (“VOBA”); deferred sales inducements ("DSI");

• customer account values, including their impact on fee income;

• fair value of, and possible impairments, on intangible assets;

• product offerings, design features, crediting rates and sales mix; and

• policyholder behavior, including surrender or withdrawal activity.

Interest rates in the U.S. have experienced a period of historically low levels in large part due to Federal Reserve efforts to assist

with the economic recovery subsequent to the financial crisis of 2008. ~~However, more recently market interest rates have begun to climb in conjunction with a series of Federal Reserve decisions to raise interest rates in response to a strengthening economy.~~ While market conditions and events make uncertain the timing, amount and impact of any ~~further~~ monetary policy decisions by the Federal Reserve, a trend of rising interest rates may enhance our reinvestment yields, primarily for our investments in fixed maturity securities and commercial mortgage loans. As interest rates rise, our reinvestment yield may approach or exceed the overall portfolio yield. Conversely, if interest rates were to decline, our reinvestment yield may fall below our overall portfolio yield, resulting in an unfavorable impact to earnings.

For more information on interest rate risks, see “Risk Factors—Market Risk” included in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

Revenues and Expenses

The Company earns revenues principally from contract charges, ~~fee income,~~mortality and expense fees, asset administration fees from annuity and investment products and from net investment income on the investment of general account and other funds. The Company earns contract fees, mortality and expense fees and asset administration fees primarily from the sale and servicing of annuity products. The Company’s operating expenses principally consist of annuity benefit guarantees provided and reserves established for anticipated future annuity benefit guarantees and costs of managing risk related to these products, interest credited to contractholders' account balances, general business expenses, reinsurance premiums, commissions and other costs of selling and servicing the various products it sold.

Profitability

The Company’s profitability depends principally on its ability to manage risk on insurance and annuity products. Profitability also depends on, among other items, our actuarial and contractholder behavior experience on insurance and annuity products, our ability to retain customer assets, generate and maintain favorable investment results, and to manage expenses.

See “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018 for a discussion of risks that have materially affected and may affect in the future the Company’s business, results of operations or financial condition, or cause the Company’s actual results to differ materially from those expected or those expressed in any forward-looking statements made by or on behalf of the Company.

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~~Products~~

The Company has sold a wide array of annuities, including deferred and immediate variable annuities with (1) fixed interest rate allocation options, subject to a market value adjustment, that are registered with the SEC, and (2) fixed-rate allocation options not subject to a market value adjustment and not registered with the SEC. In addition, the Company has a relatively small in force block of variable life insurance policies. The Company stopped selling such products in March 2010.

Beginning in March 2010, the Company ceased offering its variable and fixed annuity products (and where offered, the companion market value adjustment option) to new investors upon the launch of a new product line by each of Pruco Life and PLNJ (which are affiliates of the Company). These initiatives were implemented to create operational and administrative efficiencies by offering a single product line of annuity products from a more limited group of legal entities. During 2012, the Company suspended additional customer deposits for variable annuities with certain living benefit guarantees. However, subject to applicable contract provisions and administrative rules, the Company continues to accept additional customer deposits on certain in force contracts. Starting in January 2018 the Company began selling a new fixed indexed annuity and launched a new deferred income annuity in March 2018.

~~In January 2018, the Company launched PruSecure~~^SM, a single premium fixed index annuity, which allows the contractholder to allocate all or a portion of their account balance into an index-based strategy, such as the S&P® 500. The index-based strategy provides interest or an interest component linked to, but not an investment in, the selected index, and its performance over the elected term (i.e., 1, 3 or 5 years), subject to certain contractual minimums and maximums. In March 2018, the Company also launched Guaranteed Income For Tomorrow ("GIFT")®, a deferred income annuity, which is distributed through direct response solicitation through Prudential Insurance's Group Insurance business and online.

The Company’s in force variable annuities provide its contractholders with tax-deferred asset accumulation together with a base death benefit and a suite of optional guaranteed living benefits (including versions with enhanced guaranteed minimum death benefits), and annuitization options. Certain optional living benefit guarantees include, among other features, the ability to make withdrawals based on the highest daily contract value plus a specified return, credited for a period of time. This contract value is a notional amount that forms the basis for determining periodic withdrawals for the life of the contractholder, and cannot be accessed as a lump-sum surrender value. Our results are impacted by the fee rates we assess on our products. Some of our in force products have fee tiers that decline throughout the life of the contract while our newer products generally have lower fee rates.

Our variable annuities generally provide our contractholders with the opportunity to allocate purchase payments to sub-accounts that invest in underlying proprietary and/or non-proprietary mutual funds, frequently under asset allocation programs. Certain products also allow fixed-rate accounts that are invested in the general account and are credited with interest at rates we determine, subject to certain minimums. We also offered fixed annuities that provide a guarantee of principal and interest credited at rates we determine, subject to certain contractual minimums. Certain allocations made in the fixed-rate accounts of our variable annuities and certain fixed annuities impose a market value adjustment if the invested amount is not held to maturity.

In addition, most contracts also guarantee the contractholder’s beneficiary a return of total purchase payments made to the contract, adjusted for any partial withdrawals, upon death. Certain in force contracts include guaranteed benefits which are not currently offered, such as annuitization benefits based on a guaranteed notional amount and benefits payable at specified dates after the accumulation period.

The Company's in force business includes both variable and fixed annuities that may include optional living benefit guarantees (e.g., guaranteed minimum income benefits (“GMIB”), guaranteed minimum accumulation benefits (“GMAB”), guaranteed minimum withdrawal benefits (“GMWB”), and guaranteed minimum income and withdrawal benefits (“GMIWB”)), and/or guaranteed minimum death benefits (“GMDB”). We also offered fixed annuities that provide a guarantee of principal and interest credited at rates we determine, subject to certain contractual minimums.

The reserves for GMDB and GMIB are calculated based on best estimates applying our actuarial and capital markets return assumptions in accordance with an insurance fulfillment accounting framework whereby a liability is established over time representing the portion of fees collected that is expected to be used to satisfy the obligation to pay benefits in future periods. In contrast, certain of our living benefit guarantees (e.g., GMAB, GMWB and GMIWB) are accounted for in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) as embedded derivatives and reported using a fair value accounting framework. These benefit features are carried at fair value based on estimates of assumptions a market participant would use in valuing these embedded derivatives and the change in fair value during each reporting period is recorded within “Realized investment gains (losses), net”.

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Accounting Policies & Pronouncements

Application of Critical Accounting Estimates

The preparation of financial statements in conformity with U.S. GAAP requires the application of accounting policies that often involve a significant degree of judgment. Management reviews estimates and assumptions used in the preparation of financial statements on an ongoing basis. If management determines that modifications in assumptions and estimates are appropriate given current facts and circumstances, the Company’s results of operations and financial position as reported in the Unaudited Interim ~~Consolidated~~ Financial Statements could change significantly.

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Management believes the accounting policies relating to the following areas are most dependent on the application of estimates and assumptions and require management’s most difficult, subjective, or complex judgments:

DAC, DSI and VOBA;

Policyholder liabilities;

Valuation of investments, including derivatives, and the recognition of other-than-temporary impairments ("OTTI");

Reinsurance recoverables;

Taxes on income; and

Reserves for contingencies, including reserves for losses in connection with unresolved legal matters.

Market Performance - Equity and Interest Assumptions

DAC, DSI and VOBA associated with the variable and fixed annuity contracts are generally amortized over the expected lives of these policies in proportion to total gross profits. Total gross profits include both actual gross profits and estimates of gross profits for future periods. The quarterly adjustments for market performance reflect the impact of changes to our estimate of total gross profits to reflect actual fund performance and market conditions. A significant portion of gross profits for our variable annuity contracts are dependent upon the total rate of return on assets held in separate account investment options. This rate of return influences the fees we earn, costs we incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts, as well as other sources of profit. Returns that are higher than our expectations for a given period produce higher than expected account balances, which increase the future fees we expect to earn and decrease the future costs we expect to incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts. The opposite occurs when returns are lower than our expectations. The changes in future expected gross profits are used to recognize a cumulative adjustment to all prior periods’ amortization.

Furthermore, the calculation of the estimated liability for future policy benefits related to certain insurance products includes an estimate of associated revenues and expenses that are dependent on both historical market performance as well as estimates of market performance in the future. Similar to DAC, DSI and VOBA described above, these liabilities are subject to quarterly adjustments for experience including market performance, in addition to annual adjustments resulting from our annual reviews of assumptions.

The weighted average rate of return assumptions used in developing estimated market returns consider many factors, including asset durations, asset allocations and other factors. With regard to equity market assumptions, the near-term future rate of return assumption used in evaluating DAC, DSI, VOBA and liabilities for future policy benefits for certain of our products, primarily domestic variable annuity products, is generally updated each quarter and is derived using a reversion to the mean approach, a common industry practice. Under this approach, we consider historical equity returns and adjust projected equity returns over an initial future period of five years (the “near-term”) so that equity returns converge to the long-term expected rate of return. If the near-term projected future rate of return is greater than our near-term maximum future rate of return of 15.0%, we use our maximum future rate of return. As of ~~September~~June 30, ~~2018,~~2019, we assume an 8.0% long-term equity expected rate of return and a ~~2.9%~~4.3% near-term mean reversion equity expected rate of return.

With regard to interest rate assumptions, we generally update the future interest rates used to project fixed income returns ~~annually and in any quarter when interest rates vary significantly from these assumptions.~~annually. As a result of our ~~2018~~2019 annual reviews and update of assumptions and other refinements, we kept our long-term expectation of the 10-year U.S. Treasury rate unchanged ~~from last year~~ and continue to grade to a rate of 3.75% over ten years. ~~This~~As part of our market ~~performance related adjustment~~experience updates, in the second quarter of 2019, we updated our near-term projections of interest rates to ~~our estimate of total gross profits results~~reflect a decrease in ~~a cumulative adjustment to prior amortization, reflecting the application of the new required rate of amortization to all prior periods’ gross profits.~~current rates.

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Adoption of New Accounting Pronouncements

~~On August 15, 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-12,~~ ~~Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts~~, which is expected to have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements. The ASU is effective January 1, 2021 (with early adoption permitted), and will impact, at least to some extent, the accounting and disclosure requirements for all long-duration insurance and investment contracts issued by the Company. See Note 2 to our Unaudited Interim ~~Consolidated~~ Financial Statements for a ~~more detailed~~ discussion of ~~ASU 2018-12, as well as other~~newly adopted accounting pronouncements and accounting pronouncements issued but not yet ~~adopted and newly adopted accounting pronouncements.~~adopted.

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Changes in Financial Position

~~September~~June 30, ~~2018~~2019 versus December 31, ~~2017~~2018

Total assets ~~decreased $5.4~~increased $4.1 billion from ~~$60.0~~$54.7 billion at December 31, ~~2017~~2018 to ~~$54.6~~$58.8 billion at ~~September~~June 30, ~~2018.~~2019. Significant components were:

Total investments and ~~cash~~Cash and cash equivalents ~~decreased $2.7~~increased $2.2 billion primarily driven by ~~liquidity needs to meet~~derivative collateral ~~requirements, unrealized losses on investments due to an increase in rates and a return of capital to PAI partially offset by~~postings, an increase in cash flows from insurance ~~operations;~~

~~Separate account assets decreased $2.5 billion primarily driven by net outflows and policy charges partially offset by favorable market performance; and~~

~~DAC and DSI decreased $0.3 billion primarily driven by base amortization and impacts from gains in our living benefit results partially offset by capitalization of new business~~operations and unrealized gains ason investments due to a ~~result of rising interest rates.~~

~~Total liabilities decreased $5.5 billion, from $53.7 billion at December 31, 2017 to $48.2 billion at September 30, 2018. Significant components were:~~

~~Separate account liabilities decreased $2.5 billion, corresponding to the~~ decrease in ~~separate account assets described above; and~~

~~Future policy benefits decreased $3.1 billion primarily driven by rising interest~~ rates, ~~favorable equity markets and credit spread widening.~~

Total equity increased $0.1 billion from $6.3 billion at December 31, 2017 to $6.4 billion at September 30, 2018, primarily driven by after-tax net income of $1.3 billion for the nine months ended September 30, 2018 partially offset by a return of capital, settlement timing of ~~$0.8~~investment payable on open trades and debt repayment;

Separate account assets increased $1.8 billion primarily driven by favorable market performance, partially offset by net outflows and policy charges;

Total liabilities increased $5.2 billion, from $47.9 billion at December 31, 2018 to $53.1 billion at June 30, 2019. Significant components were:

Future policy benefits increased $3.4 billion primarily driven by declining rates and non-performance risk ("NPR") spread tightening, partially offset by favorable equity markets;

Separate account liabilities increased $1.8 billion, corresponding to the increase in separate account assets described above;

Policyholders' account balances increased $0.4 billion primarily driven by general account product sales;

Payables to parent and affiliates increased $0.2 billion primarily driven by an increase in derivatives payable.

Partially offsetting these increases to total liabilities were the following:

Other liabilities decreased $0.4 billion primarily driven by a decrease in investment payable on open trades as a result of settlement timing; and

Short-term and Long-term debt decreased $0.3 billion driven by maturities and debt repayments.

Total equity decreased $1 billion from $6.7 billion at December 31, 2018 to $5.7 billion at June 30, 2019, primarily driven by after-tax loss of $1.1 billion for the six months ended June 30, 2019 and a return of capital of $0.5 billion, partially offset by unrealized ~~losses~~gains on investments of ~~$0.4~~$0.6 billion, as discussed above.

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Results of Operations

Income (loss) from Operations before Income Taxes

~~2018~~2019 to ~~2017~~2018 Three Months Comparison

Income (loss) from operations before income taxes decreased ~~$1.1~~$0.8 billion from income of ~~$1.4~~$0.3 billion for the three months ended June 30, 2018 to a loss of $0.5 billion for the three months ended June 30, 2019, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results from this annual review included a net charge of $11 million and a net charge of $160 million in the ~~third~~second quarter of ~~2017 to~~2019 and 2018, respectively. Excluding this item, income ~~of $0.3~~(loss) from operations before income taxes decreased $0.9 billion, ~~in the third quarter of 2018,~~ primarily driven by ~~less favorable~~an unfavorable impact from living benefit results in the current year quarter as a result of ~~widening credit spreads in the third quarter of 2017 and higher realized losses~~declining interest rates in the current quarter compared to rising interest rates in the prior year quarter. Also contributing to the decrease was an unfavorable comparative impact of Realized gains (losses) related to our capital hedge program, primarily driven by ~~$245 million~~more favorable equity markets in ~~capital~~the second quarter of 2019. Capital hedge ~~losses.~~impacts are excluded from the table below.

2019 to 2018 ~~to 2017 Nine~~Six Months Comparison

Income (loss) from operations before income taxes ~~increased $0.1~~decreased $2.4 billion from income of ~~$1.2~~$1.0 billion for the ~~first nine~~six months ended June 30, 2018 to a loss of ~~2017 to income of $1.3~~$1.4 billion for the ~~first nine~~six months ended June 30, 2019, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results from this annual review included a net charge of $11 million and a net charge of $160 million in the second quarter of 2019 and 2018, respectively. Excluding this item, income (loss) from operations before income taxes decreased $2.5 billion primarily driven by an unfavorable impact from living benefit results in the ~~prior~~current year as a result of ~~significant NPR losses due to~~declining interest rates and spread tightening ~~and~~in comparison to a favorable impact from rising interest rates ~~favorable equity markets~~ and spread widening in the ~~current~~prior year. Also contributing to the decrease was an unfavorable comparative impact of realized gains (losses) related to our capital hedge program, primarily driven by more favorable equity markets in 2019. Capital hedge impacts are excluded from the table below.

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The following table illustrates the net impact on our results of operations from changes in the U.S. GAAP embedded derivative liability and hedge positions, ~~under the ALM strategy,~~ and the related amortization of DAC and other costs, for the periods indicated:


	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017			June 30, 2019			June 30, 2018			June 30, 2019			June 30, 2018
	(in millions)(1)						(in millions)(1)						(in millions)(1)						(in millions)(1)
Excluding impact of assumption updates and other refinements:
Net hedging impact(2)	$	(42	)	$	79		$	(154	)	$	433		$	(54	)	$	9		$	(137	)	$	(112	)
Change in portions of U.S. GAAP liability, before NPR(3)	562			1,832			1,011			2,109			(737		)	120			(431		)	449
Change in the NPR adjustment	(258		)	(814		)	(144		)	(2,872		)	207			(51		)	(756		)	114
Net impact from changes in the U.S. GAAP embedded derivative and hedge positions	262			1,097			713			(330		)	(584		)	78			(1,324		)	451
Related benefit (charge) to amortization of DAC and other costs	(60		)	(251		)	(215		)	64			80			(55		)	231			(155		)
Net impact of assumption updates and other refinements	0			0			(159		)	(75		)	13			(159		)	13			(159		)
Net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs.	$	202		$	846		$	339		$	(341	)	$	(491	)	$	(136	)	$	(1,080	)	$	137


(1)	Positive amount represents income; negative amount represents a loss.


(2)	Net hedging impact represents the difference between the change in fair value of the risk we seek to hedge using derivatives and the change in fair value of the derivatives utilized with respect to that risk.


(3)	Represents risk margins and valuation methodology differences between the economic liability managed by the Asset Liability Management ("ALM") Strategy and the U.S. GAAP ~~liability, as well as the portion of the economic liability managed with fixed income instruments.~~liability.

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For the three months ended ~~September~~June 30, 2019, the net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs, was a charge of $491 million, which primarily reflects the impact of a net charge of $584 million due to changes in the U.S. GAAP embedded derivative and hedge positions as a result of declining interest rates used in measuring our living benefit contracts, partially offset by $80 million of a related benefit to amortization of DAC and other costs as well as the impact of a $13 million net benefit from our annual reviews and update of assumptions and other refinements.

For the six months ended June 30, 2019, the net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs, was a charge of $1,080 million, which primarily reflects the impact of a net charge of $1,324 million due to changes in the U.S. GAAP embedded derivative and hedge positions as a result of declining interest rates and spread tightening used in measuring our living benefit contracts, partially offset by $231 million of a related benefit to amortization of DAC and other costs as well as the impact of a $13 million net benefit from our annual reviews and update of assumptions and other refinements.

For the three months ended June 30, 2018, the net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of ~~non-performance risk ("NPR"),~~NPR, DAC and other costs, was a ~~benefit~~charge of ~~$202~~$136 million, which primarily reflects the impact of $159 million net charge from our annual reviews and update of assumptions and other refinements, including updates to expected withdrawal rates as well as economic assumptions. The impact also includes $55 million of related charges to amortization of DAC and other costs. These charges were partially offset by a net benefit of ~~$262~~$78 million due to changes in the U.S. GAAP embedded derivative and hedge positions as a result of rising interest rates used in measuring our living benefit ~~contracts partially offset by $60 million of related charges to amortization of DAC and other costs.~~contracts.

For the ~~nine~~six months ended ~~September~~June 30, 2018, the net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs, was a benefit of ~~$339~~$137 million which primarily reflected a ~~$713~~$451 million net impact from changes in the U.S. GAAP embedded derivative and hedge positions as a result of ~~rising interest rates, favorable equity markets and~~ widening credit spreads used in measuring our living benefit contracts. Partial offsets include ~~$215~~$155 million of related charges to amortization of DAC and other costs and the net impact from assumption updates and other refinements, as discussed above.

Revenues, Benefits and Expenses

2019 to 2018 Three Months Comparison

Revenues decreased $0.9 billion, from $0.8 billion for the three months ended June 30, 2018 to a ~~$159 million~~loss of $0.1 billion for the three months ended June 30, 2019. Excluding a $0.2 billion net ~~charge from~~increase related to our impacts of our annual reviews and update of assumptions and other refinements, ~~including updates to expected withdrawal~~as discussed above, revenues decreased $1.1 billion primarily driven by a decrease of $1.1 billion in Realized investment gains (losses) as a result of unfavorable living benefit results and the impact from declining interest rates, as ~~well as economic assumptions.~~discussed above.

~~For~~Benefits and expenses decreased $0.1 billion, from $0.5 billion for the three months ended ~~September~~June 30, ~~2017,~~2018 to $0.4 billion for the net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs, was a benefit of $846 million which primarily reflected the impact of a net benefit of $1,097 million due to changes in the U.S. GAAP embedded derivative and hedge positions as a result of spread widening used in measuring our living benefit contracts partially offset by $251 million of related charges to amortization of DAC and other costs.

~~For the nine~~three months ended ~~September~~June 30, ~~2017, the~~2019. Excluding a $0.1 billion net ~~impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact~~increase related to our impacts of NPR, DAC and other costs, was a charge of $341 million which primarily reflected the impact from changes in the NPR adjustment as a result of tightening credit spreads and a $75 million net charge from our annual reviews and update of assumptions and other refinements, ~~including updates to expected withdrawal rates~~ as ~~well as economic assumptions. Partial offsets are included in the $64 million related benefits to amortization of DAC and other costs.~~

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~~Revenues, Benefits and Expenses~~

~~2018 to 2017 Three Months Comparison~~

~~Revenues~~discussed above, expenses decreased ~~$1.1~~$0.2 billion ~~from $1.9 billion for the three months ended September 30, 2017 to $0.8 billion for the three months ended September 30, 2018,~~ primarily driven by a decrease of ~~$1.1~~$0.1 billion ~~in realized investment gains (losses), as discussed above.~~

~~Benefits and expenses remained flat from prior year quarter, from $0.6 billion for the three months ended September 30, 2017 to $0.6 billion for the three months ended September 30, 2018.~~

~~2018 to 2017 Nine Months Comparison~~

Revenues increased $0.9 billion, from $2.0 billion for the nine months ended September 30, 2017 to $2.9 billion for the nine months ended September 30, 2018, primarily driven by an increase of $1.0 billion in realized investment gains (losses), as discussed above.

Benefits and expenses increased $0.8 billion, from $0.8 billion for the nine months ended September 30, 2017 to $1.6 billion for the nine months ended September 30, 2018, primarily driven by an increase of $0.6 billion primarily related to the amortization of DAC and other costs due to changes in the living benefit reserves as a result of ~~credit spread tightening~~declining interest rates in the ~~prior~~current year quarter and a favorable impact from ~~rising rates, favorable equity markets and~~ spread widening in the ~~current~~prior year quarter, as discussed above.

2019 to 2018 Six Months Comparison

Revenues decreased $2.8 billion, from $2.1 billion for the six months ended June 30, 2018 to a loss of $0.7 billion for the six months ended June 30, 2019. Excluding the impacts of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $3.0 billion primarily driven by a decrease of $3.0 billion in Realized investment gains (losses) as a result of unfavorable living benefit results and the impact from declining interest rates, as discussed above.

Benefits and expenses decreased $0.4 billion, from $1.1 billion for the six months ended June 30, 2018 to $0.7 billion for the six months ended June 30, 2019. Excluding the impacts of our annual reviews and update of assumptions and other refinements, as discussed above, expenses decreased $0.5 billion primarily driven by a decrease of $0.4 billion related to the amortization of DAC and other costs due to changes in the living benefit reserves, as discussed above.

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Variable Annuity Risks and Risk Mitigants

The following is a summary of: (i) certain risks associated with individual annuity ~~products;~~products and (ii) certain strategies in mitigating those risks, including any updates to those strategies since the previous year ~~end; and (iii) the related financial results.~~end. For a more detailed description of these items and their related accounting treatment, refer to the complete descriptions provided in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

The primary risk exposures of our variable annuity contracts relate to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including capital market assumptions such as equity market returns, interest rates and market volatility, along with actuarial assumptions such as contractholder mortality, the timing and amount of annuitization and withdrawals, and contract lapses. For these risk exposures, achievement of our expected returns ~~and profitability~~ is subject to the risk that actual experience will differ from the assumptions used in the original pricing of these products. We currently manage our exposure to certain risks driven by fluctuations in capital markets primarily through a combination of product design features, an ALM Strategy and a ~~capital hedge program.~~Capital Hedge Program.

Product Design Features

A portion of the variable annuity contracts that we have offered include an asset transfer feature. This feature is implemented at the contract level, and transfers assets between certain variable investment sub-accounts selected by the annuity contractholder and, depending on the benefit feature, a fixed-rate account in the general account or a bond fund sub-account within the separate account. The objective of the asset transfer feature is to reduce our exposure to equity market risk and market volatility. The asset transfer feature associated with living benefit products formerly sold by PALAC and highest daily benefit products currently sold by Pruco Life and PLNJ use a designated bond fund sub-account within the separate accounts. The transfers are based on a static mathematical formula used with the particular benefit which considers a number of factors, including, but not limited to, the impact of investment performance on the contractholder’s total account value. Other product design features we utilize include, among others, asset allocation restrictions, minimum issuance age requirements and certain limitations on the amount of contractholder deposits. In addition, there is diversity in our fee arrangements, as certain fees are primarily based on the benefit guarantee amount, the contractholder account value and/or premiums, which helps preserve certain revenue streams when market fluctuations cause account values to decline.

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Asset Liability Management Strategy (including fixed income instruments and derivatives)

Our current ALM strategy utilizes a combination of both traditional fixed income instruments and derivatives to defray potential claims associated with ~~our~~the variable annuity living benefit guarantees. ~~The economic liability we manage with~~Under this ~~ALM~~ strategy, ~~consists of~~ expected living benefit claims under less severe market conditions ~~which~~ are managed using a traditional ALM strategy through the accumulation of fixed income and derivative instruments and potential living benefit claims resulting from more severe market conditions ~~which~~ are hedged using derivative instruments. For the portion of our ALM strategy executed with derivatives, we enter into a range of exchange-traded, cleared, and over-the-counter ~~(“OTC”~~("OTC") equity and interest rate derivatives, including, but not limited to: equity and treasury futures; total return and interest rate swaps; and options including equity options, swaptions, and floors and caps.

The valuation of the economic liability we seek to defray excludes certain items that are included within the U.S. GAAP liability, such as NPR (in order to maximize protection irrespective of the possibility of our own default), as well as risk margins (required by U.S. GAAP but different from our best estimate) and valuation methodology differences. The following table provides a reconciliation between the liability reported under U.S. GAAP and the economic liability the Company intends to manage through our ALM ~~strategy.~~strategy as of the dates indicated:


	As of September 30, 2018			As of December 31, 2017			As of June 30, 2019			As of December 31, 2018
	(in millions)			(in millions)			(in millions)			(in millions)
U.S. GAAP liability (including non-performance risk)	$	4,995		$	8,152		$	11,738		$	8,332
Non-performance risk adjustment	2,777			2,998			3,462			4,275
Subtotal	7,772			11,150			15,200			12,608
Adjustments including risk margins and valuation methodology differences	(1,860		)	(2,603		)	(4,347		)	(3,831		)
Economic liability managed by ALM strategy	$	5,912		$	8,546		$	10,853		$	8,777

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As of ~~September~~June 30, ~~2018,~~2019, we have sufficient assets to cover our ~~fixed income instruments and derivative assets exceed the~~ economic ~~liability in which the risks reside.~~liability.

For information regarding the Capital Protection Framework we use to evaluate and support the risks of the ALM strategy, see “—Liquidity and Capital Resources—Capital” ~~below.~~.

Capital Hedge Program

~~During 2017, we commenced~~We employ a capital hedge program within PALAC to further hedge equity market impacts. The program is intended to protect a portion of the overall capital position of the variable annuities business against its exposure to the equity markets. The capital hedge program is conducted using equity derivatives which include equity call and put options, total return swaps and futures contracts.

~~Product Specific Risks and Risk Mitigants~~

For certain living benefit guarantees, claims will primarily represent the funding of contractholder lifetime withdrawals after the cumulative withdrawals have first exhausted the contractholder account value. Due to the age of the in force block, limited claim payments have occurred to date, and they are not expected to increase significantly within the next five years, based upon current assumptions. The timing and amount of future claims will depend on actual returns on contractholder account value and actual contractholder behavior relative to our assumptions. The majority of our current living benefit guarantees provide for guaranteed lifetime contractholder withdrawal payments inclusive of a “highest daily” contract value guarantee.

The majority of our variable annuity contracts with living benefit guarantees, include risk mitigants in the form of an asset transfer feature and/or inclusion in the ALM strategy. The risks associated with the guaranteed benefits of certain legacy products that were sold prior to our development of the asset transfer feature are also managed through our ALM strategy. Certain legacy GMAB products include the asset transfer feature, but are not included in the ALM strategy. The contracts with the GMIB feature have neither risk mitigant.

For our GMDBs, we provide a benefit payable in the event of death. Our base GMDB is generally equal to a return of cumulative purchase payments adjusted for any partial withdrawals. Certain products include an optional enhanced GMDB based on the greater of a minimum return on the contract value or an enhanced value. We have retained the risk that the total amount of death benefit payable may be greater than the contractholder account value. However, a substantial portion of the account values associated with GMDBs are subject to an asset transfer feature because the contractholder also selected a living benefit guarantee which includes an asset transfer feature. All of the variable annuity account values with living benefit guarantees also contain GMDBs. The living and death benefit features for these contracts cover the same insured life and, consequently, we have insured both the longevity and mortality risk on these contracts.

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Income Taxes

For information regarding income taxes, see Note 67 to the Unaudited Interim ~~Consolidated~~ Financial Statements.

Liquidity and Capital Resources

This section supplements and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” included in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

Overview

Liquidity refers to the ability to generate sufficient cash resources to meet the payment obligations of the Company. Capital refers to the long-term financial resources available to support the operations of our business, fund business growth, and provide a cushion to withstand adverse circumstances. Our ability to generate and maintain sufficient liquidity and capital depends on the profitability of our business, general economic conditions, our ability to borrow from affiliates and our access to the capital markets through affiliates as described herein.

Effective and prudent liquidity and capital management is a priority across the organization. Management monitors the liquidity of Prudential Financial, Prudential Insurance and the Company on a daily basis and projects borrowing and capital needs over a multi-year time horizon through our periodic planning process. We believe that cash flows from the sources of funds available to us are sufficient to satisfy the current liquidity requirements of Prudential Insurance, Prudential Financial and the Company, including under reasonably foreseeable stress scenarios. Prudential Financial has a capital management framework in place that governs the allocation of capital and approval of capital uses.

Our businesses are subject to comprehensive regulation and supervision by domestic and international regulators. These regulations currently include, or may include in the future requirements and limitations (many of which are the subject of ongoing rule-making) relating to capital, leverage, liquidity, stress-testing, overall risk management, credit exposure reporting and credit concentration. For information on these regulatory initiatives and their potential impact on us, see ~~“Regulatory Developments” above and~~ “Business—~~Regulation”~~Regulation" and “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, ~~2017 and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Regulatory Developments" within this Form 10-Q.~~2018.

Through March 31, 2016, the Company reinsured the majority of its variable annuity living benefit guarantees to its affiliated companies, Pruco Re and Prudential Insurance, in order to facilitate the capital markets hedging program for these living benefit guarantees. Effective April 1, 2016, the Company recaptured the risks related to its variable annuity living benefit guarantees that were previously reinsured to Pruco Re and Prudential Insurance. In addition, the Company reinsured variable annuity base contracts, along with the living benefit guarantees, from Pruco Life. The reinsurance agreement covers new and in force business and excludes business reinsured externally by Pruco Life. The product risks related to the reinsured business are being managed in the Company. In addition, the hedging portion of our risk management strategy related to the reinsured living benefit guarantees is being managed within the Company.

Capital

Our capital management framework is primarily based on statutory ~~RBC~~Risk-Based Capital ("RBC") measures. The RBC ratio is a primary measure of the capital adequacy of the Company. RBC is calculated based on statutory financial statements and risk formulas consistent with the practices of the ~~NAIC.~~National Association of Insurance Commissioners ("NAIC"). RBC considers, among other things, risks related to the type and quality of the invested assets, insurance-related risks associated with an insurer’s products and liabilities, interest rate risks and general business risks. RBC ratio calculations are intended to assist insurance regulators in measuring an insurer’s solvency and ability to pay future claims. The reporting of RBC measures is not intended for the purpose of ranking any insurance company or for use in connection with any marketing, advertising or promotional activities, but is available to the public. The ~~RBC ratio is an annual calculation; however, as of September 30, 2018 we estimate that the~~ Company’s ~~RBC ratio exceeds~~capital levels substantially exceed the minimum level required by applicable insurance regulations.

~~In June 2018,~~ Our regulatory capital levels may be affected in the ~~Capital Adequacy Task Force of the NAIC approved revisions~~future by changes to the ~~NAIC RBC framework as a result of the adoption of the Tax Act of 2017~~applicable regulations, proposals for which are currently under consideration by both domestic and the corresponding reduction of the corporate tax rate from 35% to 21%. The revisions will apply to the calculation of our RBC ratios as of December 31, 2018. The reduction of the corporate tax rate under the Tax Act of 2017 has the effect of increasing certain RBC factors, resulting in an overall decrease in insurers’ RBC ratios. The Company expects to have the necessary resources to maintain its “AA” ratings targets under this proposed RBC framework.international insurance regulators.

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The regulatory capital level of the Company can be materially impacted by interest rate and equity market fluctuations, changes in the values of derivatives, the level of impairments recorded, and credit quality migration of the investment portfolio, among other items. In addition, the recapture of business subject to reinsurance arrangements due to defaults by, or credit quality migration affecting, the reinsurers or for other reasons could negatively impact regulatory capital levels. The Company’s regulatory capital level is also affected by statutory accounting rules, which are subject to change by each applicable insurance regulator.

In ~~September 2018,~~June 2019, the Company returned capital of ~~$250~~$247 million to its parent, ~~Prudential Annuities Inc. ("PAI"). In June 2018, the Company returned capital of $250 million to~~ PAI. In March 2018, June 2018, September 2018 December 2018, and March 2019, the Company returned capital of $300 million, ~~to PAI. On June 7, 2017, September 6, 2017 and December 21, 2017, the Company returned capital of $100~~$250 million, ~~$200~~$250 million, $225 million and ~~$650~~$245 million, respectively, to PAI. ~~On December 21, 2016, the Company returned capital of $1,140 million to PAI.~~

Capital Protection Framework

Prudential Financial ~~and the Company employ~~employs a ~~“Capital~~Capital Protection ~~Framework”~~Framework (the ~~“Framework”~~"Framework”) to ensure that sufficient capital resources are available to maintain adequate capitalization and competitive RBC ~~ratios~~ratio and solvency margins under various stress scenarios. The Framework incorporates the potential impacts from market related stresses, including equity markets, real estate, interest rates, and credit ~~losses.~~losses and foreign currency exchange rates.

The Framework accommodates periodic volatility within ranges that ~~are deemed~~we deem acceptable, while also providing for additional potential sources of capital, including on-balance sheet capital ~~derivatives,~~capacity and contingent sources of capital. We believe we currently have access to sufficient resources, either directly, or indirectly through Prudential Financial, to maintain adequate capitalization under a range of potential stress scenarios.

Liquidity

Our liquidity is managed to ensure stable, reliable and cost-effective sources of cash flows to meet all of our obligations. Liquidity is provided by a variety of sources, as described more fully below, including portfolios of liquid assets. Our investment portfolios are integral to the overall liquidity of the Company. We use a projection process for cash flows from operations to ensure sufficient liquidity to meet projected cash outflows, including claims. The impact of Prudential Funding, LLC’s ("Prudential Funding"), a wholly-owned subsidiary of Prudential Insurance, financing capacity on liquidity (as described below) is considered in the internal liquidity measures of the Company.

Liquidity is measured against internally-developed benchmarks that take into account the characteristics of both the asset portfolio and the liabilities that they support. We consider attributes of the various categories of liquid assets (for example, type of asset and credit quality) in calculating internal liquidity measures to evaluate our liquidity under various stress scenarios, including company-specific and market-wide events. We continue to believe that cash generated by ongoing operations and the liquidity profile of our assets provide sufficient liquidity under reasonably foreseeable stress scenarios.

Cash Flow

The principal sources of the Company’s liquidity are premiums and certain annuity considerations, investment and fee income, investment maturities, sales of investments and internal borrowings. The principal uses of that liquidity include benefits, claims, and payments to policyholders and contractholders in connection with surrenders, withdrawals and net policy loan activity. Other uses of liquidity include commissions, general and administrative expenses, purchases of investments, the payment of dividends and return of capital to the parent company, hedging and reinsurance activity and payments in connection with financing activities.

In ~~March 2010,~~managing liquidity, we consider the ~~Company ceased offering its existing variable annuity products~~risk of policyholder and contractholder withdrawals of funds earlier than our assumptions when selecting assets to ~~new investors upon~~support these contractual obligations. We use surrender charges and other contract provisions to mitigate the ~~launch~~extent, timing and profitability impact of ~~a new product line~~withdrawals of funds by ~~certain affiliates, but has launched a new fixed indexed annuity in January 2018 and a new deferred income annuity in March 2018.~~customers.

Liquid Assets

Liquid assets include cash and cash equivalents, short-term investments, U.S. Treasury fixed maturities and fixed maturities that are not designated as held-to-maturity, and public equity securities. As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company had liquid assets of ~~$10.0~~$16.8 billion and ~~$12.6~~$14.6 billion, respectively. The portion of liquid assets comprised of cash and cash equivalents and short-term investments was ~~$0.4~~$4.0 billion and ~~$2.4~~$4.5 billion as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. As of ~~September~~June 30, ~~2018, $8.9~~2019, $11.9 billion, or ~~95%~~97%, of the fixed maturity investments in ~~Company~~company general account portfolios, were rated ~~"1"~~high or highest ~~quality or "2" high~~ quality based on NAIC or equivalent rating.

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Hedging activities

~~For the portion of our ALM strategy executed through hedging, as well as~~Prudential Funding, LLC

Prudential Financial and Prudential Funding borrow funds in the capital ~~hedge program, we enter into a range~~markets primarily through the direct issuance of ~~exchange-traded, cleared and other OTC equity and interest rate derivatives in order to hedge certain capital market risks related to more severe market conditions. This portion~~commercial paper. The borrowings serve as an additional source of ~~our ALM strategy and capital hedge program requires access to liquidity~~financing to meet ~~payment obligations relating~~our working capital needs. Prudential Funding operates under a support agreement with Prudential Insurance whereby Prudential Insurance has agreed to these derivatives, such as payments for periodic settlements, purchases, maturities and terminations. These liquidity needs can vary materially due to, among other items, changes in interest rates, equity markets, mortality and policyholder behavior.maintain Prudential Funding’s positive tangible net worth at all times.

The hedging portion of our ALM strategy and capital hedge program may also result in derivative related collateral postings to (when we are in a net pay position) or from (when we are in a net receive position) counterparties. The net collateral position depends on changes in interest rates and equity markets related to the amount of the exposures hedged. Depending on market conditions, the collateral posting requirements can result in material liquidity needs when we are in a net pay position. As of September 30, 2018, the derivatives comprising the hedging portion of our ALM strategy and capital hedge program were in a net receive position of $0.4 billion compared to a net receive position of $3.0~~billion as of December 31, 2017. The change in collateral position was primarily driven by an increase in interest rates.~~Hedging activities associated with living benefit guarantees

~~As noted above, effective April 1, 2016, the~~The hedging portion of our risk management strategy associated with ~~the~~our living benefit guarantees, ~~recaptured from Pruco Re and Prudential Insurance, as well as the living benefit guarantees reinsured~~including those assumed from Pruco Life, is being managed within the Company. For the portion of the risk management strategy executed through hedging, we enter into a range of exchange-traded, cleared and other OTC equity and interest rate derivatives in order to hedge certain living benefit guarantees accounted for as embedded derivatives against changes in certain capital market risks above a designated threshold. The portion of the risk management strategy comprising the hedging portion requires access to liquidity to meet the Company's payment obligations relating to these derivatives, such as payments for periodic settlements, purchases, maturities and terminations. These liquidity needs can vary materially due to, among other items, changes in interest rates, equity markets, mortality and policyholder behavior.

The hedging portion of the risk management strategy may also result in collateral postings on derivatives to (when we are in a net pay position) or from (when we are in a net receive position) counterparties. The net collateral position depends on changes in interest rates and equity markets related to the amount of the exposures hedged. Depending on market conditions, the collateral posting requirements can result in material liquidity needs when we are in a net pay position.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of fluctuations in the value of financial instruments as a result of absolute or relative changes in interest rates, foreign currency exchange rates, equity prices or commodity prices. To varying degrees, our products and services, and the investment activities supporting them, generate exposure to market risk. The market risk incurred, and our strategies for managing this risk, vary by product. As of ~~September~~June 30, ~~2018,~~2019, there have been no material changes in our economic exposure to market risk from December 31, ~~2017,~~2018, a description of which may be found in our Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” filed with the SEC. See Item 1A, “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, for a discussion of how difficult conditions in the financial markets and the economy generally may materially adversely affect our business and results of our operations.

Item 4. Controls and Procedures

In order to ensure that the information we must disclose in our filings with the SEC is recorded, processed, summarized and reported on a timely basis, the Company’s management, including our Chief Executive Officer and Chief Financial Officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Securities Exchange Act of 1934, as amended (“Exchange Act”) Rule 13a-15(e), as of ~~September~~June 30, ~~2018.~~2019. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of ~~September~~June 30, ~~2018,~~2019, our disclosure controls and procedures were effective. No change in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), occurred during the quarter ended ~~September~~June 30, ~~2018~~2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

See Note 10 to the Unaudited Interim ~~Consolidated~~ Financial Statements under “—Litigation and Regulatory Matters” for a description of certain pending litigation and regulatory matters affecting us, and certain risks to our business presented by such matters, which is incorporated herein by reference.

Item 1A. Risk Factors

You should carefully consider the risks described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. These risks could materially affect our business, results of operations or financial condition, or cause our actual results to differ materially from those expected or those expressed in any forward-looking statements made by or on behalf of the Company. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” above and the risks of our business described elsewhere in this Quarterly Report on Form 10-Q.

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Item 6. Exhibits

EXHIBIT INDEX

31.1 Section 302 Certification of the Chief Executive Officer

31.2 Section 302 Certification of the Chief Financial Officer

32.1 Section 906 Certification of the Chief Executive Officer

32.2 Section 906 Certification of the Chief Financial Officer

101.INS - XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH - XBRL Taxonomy Extension Schema Document.

101.CAL - XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB - XBRL Taxonomy Extension Label Linkbase Document

101.PRE - XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF - XBRL Taxonomy Extension Definition Linkbase Document

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



PRUDENTIAL ANNUITIES LIFE ASSURANCE CORPORATION

By:		/s/ John Chieffo
Name		John Chieffo
		Executive Vice President and Chief Financial Officer
		(Authorized Signatory and Principal Financial Officer)

Date: ~~November~~August 13, ~~2018~~2019

7760



	Common Stock		Additional Paid-in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Equity
Balance, December 31, 2017	$	2,500	$	7,145,436		$	(776,762	)	$	(90,124	)	$	6,281,050
Cumulative effect of adoption of ASU 2016-01						337			(3		)	334
Cumulative effect of adoption of ASU 2018-02						36,714			(36,714		)	0
Return of capital			(800,000		)							(800,000		)
Comprehensive income:
Net income (loss)						1,250,461						1,250,461
Other comprehensive income (loss), net of tax									(303,853		)	(303,853		)
Total comprehensive income (loss)												946,608
Balance, September 30, 2018	$	2,500	$	6,345,436		$	510,750		$	(430,694	)	$	6,427,992

	Common Stock		Additional Paid-in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Equity
Balance, December 31, 2016	$	2,500	$	8,095,436		$	(693,258	)	$	(314,948	)	$	7,089,730
Return of capital			(300,000		)							(300,000		)
Comprehensive income:
Net income (loss)						800,701						800,701
Other comprehensive income (loss), net of tax									147,871			147,871
Total comprehensive income (loss)												948,572
Balance, September 30, 2017	$	2,500	$	7,795,436		$	107,443		$	(167,077	)	$	7,738,302



	December 31, 2017
	As previously reported		Reclassifications									As currently reported
Statement of Financial Position Line Items			(1)			(2)			(3)
	(in thousands)
Fixed maturities, available-for-sale, at fair value	$	10,110,786										$	10,110,786
*Fixed maturities, trading, at fair value	0					166,360						166,360
Trading account assets, at fair value	181,717					(181,717		)				0
Equity securities, available-for-sale, at fair value	18		(18		)							0
*Equity securities, at fair value	0		18			15,357						15,375
Commercial mortgage and other loans	1,387,012											1,387,012
Policy loans	12,558											12,558
Short-term investments	711,071											711,071
Other long-term investments	335,811								(335,811		)	0
*Other invested assets	0								335,811			335,811
Total investments	$	12,738,973	$	0		$	0		$	0		$	12,738,973



Summary of ASU 2016-01 Transition Impacts on the Consolidated Statement
of Financial Position upon Adoption on January 1, 2018
(in thousands)
	Increase / (Decrease)
Other invested assets	$	423
Total assets	$	423
Income taxes	$	89
Total liabilities	89
Accumulated other comprehensive income (loss)	(3		)
Retained earnings	337
Total equity	334
Total liabilities and equity	$	423



	Three Months Ended September 30, 2018
	Reinsurance Recoverables			Receivables from Parent and Affiliates		Future Policy Benefits			Policyholders' account balances
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	185,258		$	0	$	(6,222,612	)	$	(13,835	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net(7)	(33,467		)	0		1,485,428			(1,093		)
Asset administration fees and other income	0			0		0			0
Included in other comprehensive income (loss)	0			0		0			0
Net investment income	0			0		0			0
Purchases	4,930			0		0			0
Sales	0			0		0			0
Issuances	0			0		(258,121		)	(19,141		)
Settlements	0			0		0			0
Transfers into Level 3(4)	0			0		0			0
Transfers out of Level 3(4)	0			0		0			0
Other(5)	2,485			0		0			0
Fair Value, end of period assets/(liabilities)	$	159,206		$	0	$	(4,995,305	)	$	(34,069	)
Unrealized gains (losses) for assets/liabilities still held(6):
Included in earnings:
Realized investment gains (losses), net	$	(47,218	)	$	0	$	1,428,629		$	(1,093	)
Asset administration fees and other income	$	0		$	0	$	0		$	0



	Three Months Ended September 30, 2017
	Fixed Maturities Available-For-Sale
	U.S. Government			Foreign Government		Corporate Securities(1)			Structured Securities(2)
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	3,151		$	0	$	133,567		$	215,503
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			0		(945		)	527
Asset administration fees and other income	0			0		0			0
Included in other comprehensive income (loss)	0			0		(2,270		)	(306		)
Net investment income	0			0		1,526			111
Purchases	917			0		334			78,112
Sales	0			0		0			0
Issuances	0			0		0			0
Settlements	0			0		(1,670		)	(6,720		)
Transfers into Level 3(4)	0			0		8,290			2,513
Transfers out of Level 3(4)	0			0		(1,056		)	(12,502		)
Other(5)	(2		)	0		(3,028		)	0
Fair Value, end of period assets/(liabilities)	$	4,066		$	0	$	134,748		$	277,238
Unrealized gains (losses) for assets/(liabilities) still held(6):
Included in earnings:
Realized investment gains (losses), net	$	0		$	0	$	0		$	0
Asset administration fees and other income	$	0		$	0	$	0		$	0



	Three Months Ended September 30, 2017
	Equity Securities(3)		Short-Term Investments			Cash Equivalents
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	5,854	$	450		$	375
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0		0			0
Asset administration fees and other income	630		0			0
Included in other comprehensive income (loss)	0		0			0
Net investment income	0		0			0
Purchases	0		75			0
Sales	0		0			0
Issuances	0		0			0
Settlements	0		0			0
Transfers into Level 3(4)	0		0			0
Transfers out of Level 3(4)	0		0			0
Other	3,853		(450		)	(375		)
Fair Value, end of period assets/(liabilities)	$	10,337	$	75		$	0
Unrealized gains (losses) for assets/(liabilities) still held(6):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0		$	0
Asset administration fees and other income	$	630	$	0		$	0



Affiliate	Date Issued	Amount of Notes - September 30, 2018		Amount of Notes - December 31, 2017		Interest Rate			Date of Maturity
		(in thousands)
Prudential Insurance	4/20/2016	$	18,734	$	18,734		2.60	%		12/15/2018
Prudential Insurance	4/20/2016	25,000		25,000			2.60	%		12/15/2018
Prudential Insurance	4/20/2016	46,835		46,835			2.80	%		6/20/2019
Prudential Insurance	4/20/2016	18,734		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	93,671		93,671			3.64	%		12/15/2020
Prudential Insurance	4/20/2016	103,039		103,039			3.64	%		12/15/2020
Prudential Insurance	4/20/2016	93,671		93,671			3.47	%		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	37,468		37,468			3.95	%		6/20/2024
Prudential Insurance	4/20/2016	93,671		93,671			3.95	%		6/20/2024
Prudential Insurance	4/20/2016	46,835		46,835			3.95	%		6/20/2024
Prudential Insurance	6/28/2016	30,000		30,000			2.08	%		6/28/2019
Prudential Insurance	6/28/2016	50,000		50,000			3.87	%		6/28/2026
Prudential Insurance	6/28/2016	25,000		25,000			3.49	%		6/28/2026
Prudential Insurance	6/28/2016	26,000		26,000			2.59	%		6/28/2021
Prudential Insurance	6/28/2016	25,000		25,000			2.08	%		6/28/2019
Prudential Insurance	6/28/2016	20,000		20,000			2.08	%		6/28/2019
Prudential Insurance	6/28/2016	25,000		25,000			3.49	%		6/28/2026
Prudential Retirement Insurance & Annuity Company	6/28/2016	34,000		34,000			3.09	%		6/28/2023
Total Loans Payable to Affiliates		$	971,899	$	971,899

Description

Effective date and method of adoption

Effect on the financial statements or other significant matters

ASU ~~2014-09~~,
~~Revenue from Contracts with Customers (Topic 606)~~2017-08,
Receivables -
Nonrefundable Fees
and Other Costs
(Subtopic 310-20)
Premium
Amortization on
Purchased Callable
Debt Securities

~~The~~
This ASU ~~is based~~requires certain premiums on ~~the core principle that revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects~~callable debt securities to be ~~entitled in exchange for those goods and services. The standard also requires additional disclosures about~~amortized to the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, and assets recognized from the costs to obtain or fulfill a contract with a customer. Revenue recognition for insurance contracts and financial instruments is explicitly scoped out of the standard.earliest call date.

January 1, ~~2018~~2019 using the modified retrospective method which included a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption.

~~Adoption of the ASU did not have an impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.~~