Prudential Annuities Life Assurance 10-Q 2013 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013

OR

– 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)

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

One Corporate Drive

Shelton, Connecticut 06484

(203) 926-1888

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

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes  x    No  ¨

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

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	x	Smaller reporting company	¨

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 August 13, 2013, 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. formerly known as American Skandia, 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

			Page
PART I	FINANCIAL INFORMATION
	Item 1.	Financial Statements:
		Unaudited Interim Statements of Financial Position As of June 30, 2013 and December 31, 2012		4
		Unaudited Interim Statements of Operations and Comprehensive Income Three and Six Months Ended June 30, 2013 and 2012		5
		Unaudited Interim Statements of Equity Six Months Ended June 30, 2013 and 2012		6
		Unaudited Interim Statements of Cash Flows Six Months Ended June 30, 2013 and 2012		7
		Notes to Unaudited Interim Financial Statements		8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		39
	Item 4.	Controls and Procedures		45
PART II	OTHER INFORMATION
	Item 1.	Legal Proceedings		46
	Item 1A.	Risk Factors		46
	Item 6.	Exhibits		46
SIGNATURES				47

2

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) general economic, market and political conditions, including the performance and fluctuations of fixed income, equity, real estate and other financial markets; (2) the availability and cost of additional debt or equity capital or external financing for our operations; (3) interest rate fluctuations or prolonged periods of low interest rates; (4) the degree to which we choose not to hedge risks, or the potential ineffectiveness or insufficiency of hedging or risk management strategies we do implement, with regard to variable annuity or other product guarantees; (5) any inability to access our credit facilities; (6) reestimates of our reserves for future policy benefits and claims; (7) differences between actual experience regarding mortality, morbidity, persistency, surrender experience, interest rates, or market returns and the assumptions we use in pricing our products, establishing liabilities and reserves or for other purposes; (8) changes in our assumptions related to deferred policy acquisition costs or value of business acquired; (9) changes in our financial strength or credit ratings; (10) investment losses, defaults and counterparty non-performance; (11) competition in our product lines and for personnel; (12) changes in tax law; (13) regulatory or legislative changes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act; (14) inability to protect our intellectual property rights or claims of infringement of the intellectual property rights of others; (15) adverse determinations in litigation or regulatory matters and our exposure to contingent liabilities; (16) domestic or international military actions, natural or man-made disasters including terrorist activities or pandemic disease, or other events resulting in catastrophic loss of life; (17) ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks; (18) interruption in telecommunication, information technology or other operational systems or failure to maintain the security, confidentiality or privacy of sensitive data on such systems; and (19) changes in statutory or U.S. GAAP accounting principles, practices or policies. 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” herein and in the Annual Report on Form 10-K for the year ended December 31, 2012 for discussion of certain risks relating to our businesses and investment in our securities.

3

PART I-FINANCIAL INFORMATION

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Financial Position

As of June 30, 2013 and December 31, 2012 (in thousands, except share amounts)

	June 30, 2013		December 31,     2012
ASSETS
Fixed maturities, available-for-sale, at fair value (amortized cost, 2013: $3,491,116; 2012: $3,827,496)	$	3,704,512	$	4,203,450
Trading account assets, at fair value		7,923		7,916
Equity securities, available-for-sale, at fair value (cost, 2013: $18; 2012: $18)		20		22
Commercial mortgage and other loans, net of valuation allowance		440,433		426,981
Policy loans		12,554		11,957
Short-term investments		247,063		103,761
Other long-term investments		75,916		175,661
Total investments		4,488,421		4,929,748
Cash and cash equivalents		253		266
Deferred policy acquisition costs		1,022,785		906,814
Accrued investment income		39,762		44,656
Reinsurance recoverables		655,240		1,732,969
Value of business acquired		41,614		43,090
Deferred sales inducements		624,650		556,830
Receivables from parent and affiliates		31,263		22,833
Other assets		35,553		16,527
Separate account assets		44,179,734		44,601,720
TOTAL ASSETS	$	51,119,275	$	52,855,453
LIABILITIES AND EQUITY
LIABILITIES
Policyholders’ account balances	$	3,771,878	$	4,112,318
Future policy benefits and other policyholder liabilities		1,066,160		2,164,754
Payables to parent and affiliates		63,430		119,504
Cash collateral for loaned securities		37,786		38,976
Income taxes		169,760		65,567
Long-term debt		400,000		400,000
Other liabilities		136,950		108,737
Separate account liabilities		44,179,734		44,601,720	��
Total Liabilities		49,825,698		51,611,576
Commitments and Contingent Liabilities (See Note 6)
EQUITY
Common stock, $100 par value; 25,000 shares, authorized, issued and outstanding		2,500		2,500
Additional paid-in capital		901,422		893,336
Retained earnings		307,812		200,754
Accumulated other comprehensive income (loss)		81,843		147,287
Total Equity		1,293,577		1,243,877
TOTAL LIABILITIES AND EQUITY	$	51,119,275	$	52,855,453

See Notes to Unaudited Interim Financial Statements

4

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Operations and Comprehensive Income

Three and Six Months Ended June 30, 2013 and 2012 (in thousands)

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
REVENUES
Premiums	$	8,615	$	5,301	$	15,108	$	11,067
Policy charges and fee income		201,497		199,806		400,361		401,430
Net investment income		58,934		69,177		117,474		143,070
Asset administration fees and other income		57,893		65,974		122,668		133,975
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities		-		(1,520)		-		(3,131)
Other-than-temporary impairments on fixed maturity securities transferred to other comprehensive income		-		1,437		-		2,979
Other realized investment gains (losses), net		(43,415)		35,243		(81,511)		(771)
Total realized investment gains (losses), net		(43,415)		35,160		(81,511)		(923)
Total revenues		283,524		375,418		574,100		688,619
BENEFITS AND EXPENSES
Policyholders’ benefits		27,685		41,459		46,303		32,202
Interest credited to policyholders’ account balances		5,313		227,250		14,776		139,795
Amortization of deferred policy acquisition costs		(36,580)		340,993		(71,614)		109,847
General, administrative and other expenses		100,302		106,917		200,445		216,777
Total benefits and expenses		96,720		716,619		189,910		498,621
INCOME FROM OPERATIONS BEFORE INCOME TAXES		186,804		(341,201)		384,190		189,998
Income tax expense (benefit)		43,134		(104,054)		93,132		54,798
NET INCOME (LOSS)		143,670		(237,147)		291,058		135,200
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments		-		(23)		(15)		(20)
Net unrealized investment gains (losses):
Unrealized investment gains (losses) for the period		(81,560)		8,946		(92,858)		(4,843)
Reclassification adjustment for (gains) losses included in net income		(5,096)		(6,789)		(7,809)		(13,857)
Net unrealized investment gains (losses)		(86,656)		2,157		(100,667)		(18,700)
Other comprehensive income (loss), before tax:		(86,656)		2,134		(100,682)		(18,720)
Less: Income tax expense (benefit) related to
Foreign currency translation adjustments		-		(8)		(5)		(7)
Net unrealized income (losses)		(30,329)		755		(35,233)		(6,538)
Total		(30,329)		747		(35,238)		(6,545)
Other comprehensive (loss), net of taxes		(56,327)		1,387		(65,444)		(12,175)
COMPREHENSIVE INCOME (LOSS)	$	87,343	$	(235,760)	$	225,614	$	123,025

See Notes to Unaudited Interim Financial Statements

5

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Equity

Six Months Ended June 30, 2013 and 2012 (in thousands)

	Common   stock		Additional   paid-in capital		Retained   earnings		Accumulated other   comprehensive   income (loss)		Total equity
Balance, December 31, 2012	$	2,500	$	893,336	$	200,754	$	147,287	$	1,243,877
Contributed capital (parent/child asset transfer)		-		8,086		-		-		8,086
Distribution to parent		-		-		(184,000)		-		(184,000)
Comprehensive income:
Net income		-		-		291,058		-		291,058
Other comprehensive (loss), net of taxes		-		-		-		(65,444)		(65,444)
Total comprehensive income										225,614
Balance, June 30, 2013	$	2,500	$	901,422	$	307,812	$	81,843	$	1,293,577
	Common   stock		Additional   paid-in capital		Retained earnings   (accumulated   deficit)		Accumulated other   comprehensive   income (loss)		Total equity
Balance, December 31, 2011	$	2,500	$	882,670	$	(25,305)	$	160,712	$	1,020,577
Contributed capital (parent/child asset transfer)		-		10,666		-		-		10,666
Distribution to parent		-		-		(248,000)		-		(248,000)
Comprehensive income:
Net income		-		-		135,200		-		135,200
Other comprehensive (loss), net of taxes		-		-		-		(12,175)		(12,175)
Total comprehensive income										123,025
Balance, June 30, 2012	$	2,500	$	893,336	$	(138,105)	$	148,537	$	906,268

See Notes to Unaudited Interim Financial Statements

6

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Cash Flows

Six Months Ended June 30, 2013 and 2012 (in thousands)

	2013		2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	291,058	$	135,200
Adjustments to reconcile net income to net cash provided by operating activities:
Policy charges and fee income		7,526		5,867
Realized investment losses, net		81,511		923
Depreciation and amortization		10,804		8,024
Interest credited to policyholders’ account balances		14,776		139,795
Change in:
Future policy benefit reserves		139,943		117,159
Accrued investment income		4,894		7,152
Net (payable) receivable to affiliates		(60,530)		(20,850)
Deferred sales inducements		(42,922)		(31,471)
Deferred policy acquisition costs		(74,037)		94,097
Income taxes		135,073		42,047
Reinsurance recoverables		(137,900)		(133,202)
Other, net		(20,991)		(21,369)
Cash flows from operating activities	$	349,205	$	343,372
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale	$	712,921	$	690,623
Commercial mortgage and other loans		8,767		12,182
Trading account assets		3,596		34,728
Policy loans		171		832
Other long-term investments		1,190		2,805
Short-term investments		1,466,651		1,903,348
Payments for the purchase/origination of:
Fixed maturities, available-for-sale		(347,147)		(286,467)
Commercial mortgage and other loans		(41,806)		(26,316)
Trading account assets		(3,163)		(3,506)
Policy loans		(448)		(83)
Other long-term investments		(4,790)		(21,984)
Short-term investments		(1,609,953)		(1,765,403)
Notes receivable from parent and affiliates, net		2,450		6,109
Other, net		24		68
Cash flows from investing activities	$	188,463	$	546,936
CASH FLOWS (USED IN) FINANCING ACTIVITIES:
Cash collateral for loaned securities		(1,190)		(83,012)
Net increase in short-term borrowing		-		46,115
Drafts outstanding		5,192		(10,904)
Distribution to parent		(184,000)		(248,000)
Contributed capital (parent/child asset transfer)		12,439		16,396
Policyholders’ account balances
Deposits		662,074		591,276
Withdrawals		(1,032,196)		(1,206,395)
Cash flows used in financing activities	$	(537,681)	$	(894,524)
NET (DECREASE) IN CASH AND CASH EQUIVALENTS		(13)		(4,216)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		266		8,861
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	253	$	4,645

See Notes to Unaudited Interim Financial Statements

7

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

1.    BUSINESS AND BASIS OF PRESENTATION

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

The Company developed long-term savings and retirement products, which were distributed through its affiliated broker/dealer company, Prudential Annuities Distributors, Incorporated (“PAD”). The Company issued variable deferred and immediate annuities for individuals and groups in the United States of America, District of Columbia and Puerto Rico.

Beginning in March 2010, the Company ceased offering its then existing 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 and Pruco Life Insurance Company of New Jersey (which are affiliates of the Company). In general, the new product line offers the same optional living benefits and optional death benefits as offered by the Company’s existing variable annuities. During 2012, the Company suspended additional customer deposits for variable annuities with certain optional living benefit riders. However, subject to applicable contractual provisions and administrative rules, the Company continues to accept certain subsequent purchase payments on inforce contracts under existing annuity products.

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.

Basis of Presentation

The Unaudited Interim 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. Interim results are not necessarily indicative of the results that may be expected for the full year. These unaudited interim financial statements should be read in conjunction with the Company’s Audited Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

The Company has extensive transactions and relationships with The Prudential Insurance Company of America (“Prudential Insurance”) and other affiliates, (as more fully described in Note 7). Due to these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among unrelated parties.

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 and related amortization; value of business acquired and its amortization; amortization of sales inducements; valuation of investments including derivatives and the recognition of other-than-temporary impairments (“OTTI”); future policy benefits including guarantees; provision for income taxes and valuation of deferred tax assets; and reserves for contingent liabilities, including reserves for losses in connection with unresolved legal matters.

Reclassifications

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

2.    SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS

Investments in Debt and Equity Securities and Commercial Mortgage and Other Loans

The Company’s investments in debt and equity securities include fixed maturities; equity securities; and short-term investments. The accounting policies related to these, as well as commercial mortgage and other loans, are as follows:

Fixed maturities are comprised of bonds, notes and redeemable preferred stock. Fixed maturities classified as “available-for-sale” are carried at fair value. See Note 4 for additional information regarding the determination of fair value. Fixed maturities that the Company has both the positive intent and ability to hold to maturity are carried at amortized cost and classified as “held-to-maturity.” The amortized cost of fixed maturities is adjusted for amortization of premiums and accretion of discounts to maturity. Interest income, as well as the related amortization of premium and accretion of discount is included in “Net investment income” under the effective yield method. For mortgage-backed and asset-backed securities, the effective

8

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

yield is based on estimated cash flows, including interest rate and prepayment assumptions based on data from widely accepted third-party data sources or internal estimates. In addition to interest rate and prepayment assumptions, cash flow estimates also vary based on other assumptions regarding the underlying collateral including default rates and changes in value. These assumptions can significantly impact income recognition and the amount of other-than-temporary impairments recognized in earnings and other comprehensive income. For high credit quality mortgage-backed and asset-backed securities (those rated AA or above), cash flows are provided quarterly, and the amortized cost and effective yield of the security are adjusted as necessary to reflect historical prepayment experience and changes in estimated future prepayments. The adjustments to amortized cost are recorded as a charge or credit to net investment income in accordance with the retrospective method. For mortgage-backed and asset-backed securities rated below AA or those for which an other than temporary impairment has been recorded, the effective yield is adjusted prospectively for any changes in estimated cash flows. See the discussion below on realized investment gains and losses for a description of the accounting for impairments. Unrealized gains and losses on fixed maturities classified as “available-for-sale,” net of tax, and the effect on deferred policy acquisition costs, value of business acquired, deferred sales inducements and future policy benefits that would result from the realization of unrealized gains and losses, are included in “Accumulated other comprehensive income (loss)” (“AOCI”).

Trading account assets, at fair value, represents equity securities held in support of a deferred compensation plan and other fixed maturity securities carried at fair value. Realized and unrealized gains and losses for these investments are reported in “Asset administration fees and other income.” Interest and dividend income from these investments is reported in “Net investment income.”

Equity securities, available-for-saleare comprised of mutual fund shares and are carried at fair value. The associated unrealized gains and losses, net of tax, and the effect on deferred policy acquisition costs, value of business acquired, deferred sales inducements, and future policy benefits that would result from the realization of unrealized gains and losses, are included in AOCI. The cost of equity securities is written down to fair value when a decline in value is considered to be other-than-temporary. See the discussion below on realized investment gains and losses for a description of the accounting for impairments. Dividends from these investments are recognized in “Net investment income” when earned.

Commercial mortgage and other loansconsist of commercial mortgage loans, agricultural loans and uncollateralized loans. Commercial mortgage and other loans held for investment are generally carried at unpaid principal balance, net of unamortized deferred loan origination fees and expenses and net of an allowance for losses. Commercial mortgage and other loans acquired, including those related to the acquisition of a business, are recorded at fair value when purchased, reflecting any premiums or discounts to unpaid principal balances.

Interest income, as well as prepayment fees and the amortization of the related premiums or discounts, related to commercial mortgage and other loans, are included in “Net investment income.”

Impaired loans include those loans for which it is probable that amounts due will not all be collected according to the contractual terms of the loan agreement. The Company defines “past due” as principal or interest not collected at least 30 days past the scheduled contractual due date. Interest received on loans that are past due, including impaired and non-impaired loans, as well as, loans that were previously modified in a troubled debt restructuring, is either applied against the principal or reported as net investment income based on the Company’s assessment as to the collectability of the principal. See Note 3 for additional information about the Company’s past due loans.

The Company discontinues accruing interest on loans after the loans become 90 days delinquent as to principal or interest payments, or earlier when the Company has doubts about collectability. When the Company discontinues accruing interest on a loan, any accrued but uncollectible interest on the loan and other loans backed by the same collateral, if any, is charged to interest income in the same period. Generally, a loan is restored to accrual status only after all delinquent interest and principal are brought current and, in the case of loans where the payment of interest has been interrupted for a substantial period, or the loan has been modified, a regular payment performance has been established.

The Company reviews the performance and credit quality of the commercial mortgage and other loan portfolio on an on-going basis. Loans are placed on watch list status based on a predefined set of criteria and are assigned one of three categories. Loans are placed on “early warning” status in cases where, based on the Company’s analysis of the loan’s collateral, the financial situation of the borrower or tenants or other market factors, it is believed a loss of principal or interest could occur. Loans are classified as “closely monitored” when it is determined that there is a collateral deficiency or other credit events that may lead to a potential loss of principal or interest. Loans “not in good standing” are those loans where the Company has concluded that there is a high probability of loss of principal, such as when the loan is delinquent or in the process of foreclosure. As described below, in determining the allowance for losses, the Company evaluates each loan on the watch list to determine if it is probable that amounts due will not be collected according to the contractual terms of the loan agreement.

Loan-to-value and debt service coverage ratios are measures commonly used to assess the quality of commercial mortgage loans. The loan-to-value ratio compares the amount of the loan to the fair value of the underlying property collateralizing the loan, and is commonly expressed as a percentage. Loan-to-value ratios greater than 100% indicate that the loan amount exceeds the collateral value. A smaller loan-to-value ratio indicates a greater excess of collateral value over the loan amount. The debt service coverage ratio compares a property’s net operating income to its debt service payments. Debt service coverage ratios less than 1.0 times indicate that property operations do not generate enough income to cover the loan’s current debt payments. A larger debt service coverage ratio indicates a greater excess of net operating income over the debt service payments. The values utilized in calculating these ratios are developed as part of the Company’s periodic review of the commercial mortgage loan and agricultural loan portfolio, which includes an internal appraisal of the underlying collateral value. The Company’s periodic review also includes a quality re-rating process, whereby the internal quality rating originally assigned at underwriting is updated based on current loan, property and market information using a proprietary quality rating system. The loan-to-value ratio is the most significant of several inputs used to establish the internal credit rating of a loan which in turn drives the allowance for losses. Other key factors considered in determining the internal credit rating

9

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

include debt service coverage ratios, amortization, loan term, estimated market value growth rate and volatility for the property type and region. See Note 3 for additional information related to the loan-to-value ratios and debt service coverage ratios related to the Company’s commercial mortgage and agricultural loan portfolios.

The allowance for losses on commercial mortgage and other loans can increase or decrease from period to period based on the factors noted above. “Realized investment gains (losses), net” includes changes in the allowance for losses. “Realized investment gains (losses), net” also includes gains and losses on sales, certain restructurings, and foreclosures.

When a commercial mortgage or other loan is deemed to be uncollectible, any specific valuation allowance associated with the loan is reversed and a direct write down to the carrying amount of the loan is made. The carrying amount of the loan is not adjusted for subsequent recoveries in value.

In situations where a loan has been restructured in a troubled debt restructuring and the loan has subsequently defaulted, this factor is considered when evaluating the loan for a specific allowance for losses in accordance with the credit review process noted above.

See Note 3 for additional information about commercial mortgage and other loans that have been restructured in a troubled debt restructuring.

Short-term investments primarily consist of highly liquid debt instruments with a maturity of twelve months or less and greater than three months when purchased. These investments are generally carried at fair value and include certain money market investments, short-term debt securities issued by government sponsored entities and other highly liquid debt instruments.

Realized investment gains (losses) are computed using the specific identification method. Realized investment gains and losses are generated from numerous sources, including the sale of fixed maturity securities, equity securities, investments in joint ventures and limited partnerships and other types of investments, as well as adjustments to the cost basis of investments for net other-than-temporary impairments recognized in earnings. Realized investment gains and losses are also generated from prepayment premiums received on private fixed maturity securities, allowance for losses on commercial mortgage and other loans, and fair value changes on embedded derivatives and free-standing derivatives that do not qualify for hedge accounting treatment.

The Company’s available-for-sale securities with unrealized losses are reviewed quarterly to identify other-than-temporary impairments in value. In evaluating whether a decline in value is other-than-temporary, the Company considers several factors including, but not limited to the following: (1) the extent and the duration of the decline; (2) the reasons for the decline in value (credit event, currency or interest-rate related, including general credit spread widening); and (3) the financial condition of and near-term prospects of the issuer. With regard to available-for-sale equity securities, the Company also considers the ability and intent to hold the investment for a period of time to allow for a recovery of value. When it is determined that a decline in value of an equity security is other-than-temporary, the carrying value of the equity security is reduced to its fair value, with a corresponding charge to earnings.

An other-than-temporary impairment is recognized in earnings for a debt security in an unrealized loss position when the Company either (a) has the intent to sell the debt security or (b) more likely than not will be required to sell the debt security before its anticipated recovery. For all debt securities in unrealized loss positions that do not meet either of these two criteria, the Company analyzes its ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security prior to impairment. The Company may use the estimated fair value of collateral as a proxy for the net present value if it believes that the security is dependent on the liquidation of collateral for recovery of its investment. If the net present value is less than the amortized cost of the investment an other-than-temporary impairment is recognized.

When an other-than-temporary impairment of a debt security has occurred, the amount of the other-than-temporary impairment recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the debt security meets either of these two criteria, the other-than-temporary impairment recognized in earnings is equal to the entire difference between the security’s amortized cost basis and its fair value at the impairment measurement date. For other-than-temporary impairments of debt securities that do not meet these criteria, the net amount recognized in earnings is equal to the difference between the amortized cost of the debt security and its net present value calculated as described above. Any difference between the fair value and the net present value of the debt security at the impairment measurement date is recorded in “Other comprehensive income (loss)” (“OCI”). Unrealized gains or losses on securities for which an other-than-temporary impairment has been recognized in earnings is tracked as a separate component of AOCI.

For debt securities, the split between the amount of an other-than-temporary impairment recognized in other comprehensive income and the net amount recognized in earnings is driven principally by assumptions regarding the amount and timing of projected cash flows. For mortgage-backed and asset-backed securities, cash flow estimates consider the payment terms of the underlying assets backing a particular security, including interest rate and prepayment assumptions, based on data from widely accepted third-party data sources or internal estimates. In addition to interest rate and prepayment assumptions, cash flow estimates also include other assumptions regarding the underlying collateral including default rates and recoveries, which vary based on the asset type and geographic location, as well as the vintage year of the security. For structured securities, the payment priority within the tranche structure is also considered. For all other debt securities, cash flow estimates are driven by assumptions regarding probability of default and estimates regarding timing and amount of recoveries associated with a default. The Company has developed these estimates using information based on its historical experience as well as using market observable data, such as industry analyst reports and forecasts, sector credit ratings and other data relevant to the collectability of a security, such as the general payment terms of the security and the security’s position within the capital structure of the issuer.

10

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

The new cost basis of an impaired security is not adjusted for subsequent increases in estimated fair value. In periods subsequent to the recognition of an other-than-temporary impairment, the impaired security is accounted for as if it had been purchased on the measurement date of the impairment. For debt securities, the discount (or reduced premium) based on the new cost basis may be accreted into net investment income in future periods, including increases in cash flow on a prospective basis. In certain cases where there are decreased cash flow expectations, the security is reviewed for further cash flow impairments.

Derivative Financial Instruments

Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices, values of securities or commodities, credit spreads, market volatility, expected returns, and liquidity. Values can also be affected by changes in estimates and assumptions, including those related to counterparty behavior and non-performance risk used in valuation models. Derivative financial instruments generally used by the Company include swaps, futures, forwards and options and may be exchange-traded or contracted in the over-the-counter market. Derivative positions are carried at fair value, generally by obtaining quoted market prices or through the use of valuation models.

Derivatives are used in a non-broker-dealer capacity to manage the interest rate and currency characteristics of assets or liabilities. Additionally, derivatives may be used to seek to reduce exposure to interest rate, credit, foreign currency and equity risks associated with assets held or expected to be purchased or sold, and liabilities incurred or expected to be incurred. As discussed in detail below and in Note 5, all realized and unrealized changes in fair value of derivatives are recorded in current earnings, with the exception of the effective portion of cash flow hedges. Cash flows from derivatives are reported in the operating, investing, or financing activities sections in the Unaudited Interim Statements of Cash Flows based on the nature and purpose of the derivative.

Derivatives are recorded either as assets, within “Other trading account assets, at fair value” or “Other long-term investments,” or as liabilities, within “Other liabilities,” except for embedded derivatives which are recorded with the associated host contract. The Company nets the fair value of all derivative financial instruments with counterparties for which a master netting arrangement has been executed.

The Company designates derivatives as either (1) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge); or (2) a derivative that does not qualify for hedge accounting.

To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated risk of the hedged item. Effectiveness of the hedge is formally assessed at inception and throughout the life of the hedging relationship. Even if a derivative qualifies for hedge accounting treatment, there may be an element of ineffectiveness of the hedge. Under such circumstances, the ineffective portion is recorded in “Realized investment gains (losses), net.”

The Company formally documents at inception all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives designated as cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions.

When a derivative is designated as a cash flow hedge and is determined to be highly effective, changes in its fair value are recorded in AOCI until earnings are affected by the variability of cash flows being hedged (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings). At that time, the related portion of deferred gains or losses on the derivative instrument is reclassified and reported in the income statement line item associated with the hedged item.

If it is determined that a derivative no longer qualifies as an effective cash flow hedge or management removes the hedge designation, the derivative will continue to be carried on the balance sheet at its fair value, with changes in fair value recognized currently in “Realized investment gains (losses), net.” The component of AOCI related to discontinued cash flow hedges is reclassified to the income statement line associated with the hedged cash flows consistent with the earnings impact of the original hedged cash flows.

When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, or because it is probable that the forecasted transaction will not occur by the end of the specified time period, the derivative will continue to be carried on the balance sheet at its fair value, with changes in fair value recognized currently in “Realized investment gains (losses), net.” Any asset or liability that was recorded pursuant to recognition of the firm commitment is removed from the balance sheet and recognized currently in “Realized investment gains (losses), net.” Gains and losses that were in AOCI pursuant to the hedge of a forecasted transaction are recognized immediately in “Realized investment gains (losses), net.”

If a derivative does not qualify for hedge accounting, all changes in its fair value, including net receipts and payments, are included in “Realized investment gains (losses), net” without considering changes in the fair value of the economically associated assets or liabilities.

The Company is a party to financial instruments that contain derivative instruments that are “embedded” in the financial instruments. At inception, the Company assesses whether the economic characteristics of the embedded instrument are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the host contract) and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that (1) the embedded instrument possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and (2) a separate instrument with the same terms would qualify as a derivative instrument, the embedded instrument qualifies as an embedded derivative that is separated from the host contract, carried at fair value, and changes in its fair value are included in “Realized investment gains (losses), net.” For certain financial instruments that contain an embedded derivative that otherwise would need to be bifurcated and reported at fair value, the Company may elect to classify the entire instrument as a trading account asset and report it within “Trading account assets, at fair value.”

11

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

The Company sold variable annuity contracts that include optional living benefit features that may be treated from an accounting perspective as embedded derivatives. The Company has reinsurance agreements to transfer the risk related to certain of these benefit features to an affiliate, Pruco Reinsurance Ltd. (“Pruco Re”). The embedded derivatives related to the living benefit features and the related reinsurance agreements are carried at fair value and included in “Future policy benefits and other policyholder liabilities” and “Reinsurance recoverables,” respectively. Changes in the fair value are determined using valuation models as described in Note 4, and are recorded in “Realized investment gains (losses), net.”

Income taxes

The Company determines its interim tax provision using the annual effective tax rate methodology in accordance with the authoritative guidance. The increase in the income tax expense for the six months ended June 30, 2013 and change in effective tax rate was primarily driven by an increase in pre-tax income for the six months ended June 30, 2013 compared to the six months ended June 30, 2012.

Adoption of New Accounting Pronouncements

In December 2011 and January 2013, the Financial Accounting Standards Board (“FASB”) issued updated guidance regarding the disclosure of recognized derivative instruments (including bifurcated embedded derivatives), repurchase agreements and securities borrowing/lending transactions that are offset in the statement of financial position or are subject to an enforceable master netting arrangement or similar agreement (irrespective of whether they are offset in the statement of financial position). This new guidance requires an entity to disclose information on both a gross and net basis about instruments and transactions within the scope of this guidance. This new guidance is effective for interim or annual reporting periods beginning on or after January 1, 2013, and should be applied retrospectively for all comparative periods presented. The disclosures required by this guidance are included in Note 5.

In February 2013, the FASB issued updated guidance regarding the presentation of comprehensive income. Under the guidance, an entity is required to separately present information about significant items reclassified out of accumulated other comprehensive income by component as well as changes in accumulated other comprehensive income balances by component in either the financial statements or the notes to the financial statements. The guidance does not change the items that are reported in other comprehensive income, does not change when an item of other comprehensive income must be reclassified to net income, and does not amend any existing requirements for reporting net income or other comprehensive income. The guidance is effective for the first interim or annual reporting period beginning after December 15, 2012 and should be applied prospectively. The disclosures required by this guidance are included in Note 3.

3.    INVESTMENTS

Fixed Maturities and Equity Securities

The following tables provide information relating to fixed maturities and equity securities (excluding investments classified as trading) as of the dates indicated:

	June 30, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Other-than- temporary Impairments in AOCI (3)
	(in thousands)
Fixed maturities, available-for-sale
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	4,658	$	77	$	-	$	4,735	$	-
Obligations of U.S. states and their political subdivisions		96,150		4,675		1,253		99,572		-
Foreign government bonds		30,457		7,232		-		37,689		-
Public utilities		248,897		16,544		3,725		261,716		-
Redeemable preferred stock		-		-		-		-		-
Corporate securities		2,357,358		181,390		15,604		2,523,144		-
Asset-backed securities (1)		182,703		8,286		38		190,951		(1,352	)
Commercial mortgage-backed securities		371,503		15,374		5,302		381,575		-
Residential mortgage-backed securities (2)		199,390		6,376		636		205,130		(44	)
Total fixed maturities, available-for-sale	$	3,491,116	$	239,954	$	26,558	$	3,704,512	$	(1,396	)
Equity securities, available-for-sale
Common Stocks
Mutual Funds	$	18	$	2	$	-	$	20
Total equity securities, available-for-sale	$	18	$	2	$	-	$	20

(1) Includes credit-tranched securities collateralized by sub-prime mortgages, credit cards, education loans, and other asset types.

12

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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

(3) Represents the amount of other-than-temporary impairment losses in “AOCI,” which were not included in earnings. Amount excludes $1.7 million of net unrealized gains on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.

	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Other-than- temporary Impairments in AOCI (3)
	(in thousands)
Fixed maturities, available-for-sale
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	4,568	$	118	$	-	$	4,686	$	-
Obligations of U.S. states and their political subdivisions		95,107		7,359		350		102,116		-
Foreign government bonds		45,733		9,796		-		55,529		-
Public utilities		253,566		29,554		569		282,551		-
Redeemable preferred stock		2,565		697		-		3,262		-
Corporate securities		2,622,982		283,117		658		2,905,441		-
Asset-backed securities (1)		179,037		8,772		332		187,477		(3,514	)
Commercial mortgage-backed securities		369,187		25,725		10		394,902		-
Residential mortgage-backed securities (2)		254,751		12,735		-		267,486		(48	)
Total fixed maturities, available-for-sale	$	3,827,496	$	377,873	$	1,919	$	4,203,450	$	(3,562	)
Equity securities, available-for-sale
Common Stocks
Mutual Funds (4)	$	18	$	4	$	-	$	22
Total equity securities, available-for-sale	$	18	$	4	$	-	$	22

(1) Includes credit-tranched securities collateralized by sub-prime mortgages, credit cards, education loans, and other asset types.

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

(3) Represents the amount of other-than-temporary impairment losses in AOCI, which were not included in earnings. Amount excludes $4.1 million of net unrealized gains on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.

(4) Prior period has been reclassified to conform to the current period presentation.

The amortized cost and fair value of fixed maturities by contractual maturities at June 30, 2013, are as follows:

	Available-for-Sale
	Amortized Cost		Fair Value
	(in thousands)
Due in one year or less	$	890,150	$	913,772
Due after one year through five years		797,842		872,407
Due after five years through ten years		580,012		634,099
Due after ten years		469,516		506,578
Asset-backed securities		182,703		190,951
Commercial mortgage-backed securities		371,503		381,575
Residential mortgage-backed securities		199,390		205,130
Total	$	3,491,116	$	3,704,512

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 are not due at a single maturity date.

13

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

The following table depicts the sources of fixed maturity proceeds and related gross investment gains (losses), as well as losses on impairments of both fixed maturities and equity securities:

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(in thousands)
Fixed maturities, available-for-sale
Proceeds from sales	$	6,501		$	33,498		$	121,428		$	316,818
Proceeds from maturities/repayments		386,663			224,664			593,078			373,805
Gross investment gains from sales, prepayments, and maturities		4,093			6,894			6,885			14,032
Gross investment losses from sales and maturities		(17	)		(23	)		(97	)		(24	)
Equity securities, available-for-sale
Proceeds from sales	$	-		$	-		$	1		$	-
Proceeds from maturities/repayments		-			-			-			-
Gross investment gains from sales, prepayments, and maturities		(1	)		-			-			-
Gross investment losses from sales and maturities		-			-			-			-
Fixed maturity and equity security impairments
Net writedowns for other-than-temporary impairment losses on fixed maturities recognized in earnings (1)	$	-		$	(83	)	$	-		$	(152	)
Writedowns for impairments on equity securities		-			-			-			-

(1) Excludes the portion of other-than-temporary impairments recorded in “Other comprehensive income (loss),” 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 impairment.

As discussed in Note 2, a portion of certain OTTI losses on fixed maturity securities are recognized in OCI. For these securities the net amount recognized in earnings (“credit loss impairments”) represents the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. Any remaining difference between the fair value and amortized cost is recognized in OCI.

The following table sets forth the amount of pre-tax credit loss impairments on fixed maturity securities held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized in OCI, and the corresponding changes in such amounts.

	Three Months Ended June 30,			Six Months Ended June 30,
	2013			2013
	(in thousands)
Balance, beginning of period	$	1,726		$	3,381
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period		(5	)		(1,619	)
Credit loss impairments previously recognized on securities impaired to fair value during the period		-			-
Credit loss impairment recognized in the current period on securities not previously impaired		-			-
Additional credit loss impairments recognized in the current period on securities previously impaired		-			-
Increases due to the passage of time on previously recorded credit losses		28			55
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected		-			(68	)
Balance, end of period	$	1,749		$	1,749
	Three Months Ended June 30,			Six Months Ended June 30,
	2012			2012
	(in thousands)
Balance, beginning of period	$	3,482		$	3,542
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period		(113	)		(131	)
Credit loss impairments previously recognized on securities impaired to fair value during the period		-			-
Credit loss impairment recognized in the current period on securities not previously impaired		-			-
Additional credit loss impairments recognized in the current period on securities previously impaired		83			152
Increases due to the passage of time on previously recorded credit losses		28			51
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected		(93	)		(227	)
Balance, end of period	$	3,387		$	3,387

14

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Trading Account Assets

The following table sets forth the composition of the Company’s “trading account assets” as of the dates indicated:

	June 30, 2013				December 31, 2012
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in thousands)
Fixed maturities	$	1,992	$	2,006	$	1,973	$	2,022
Equity securities		4,844		5,917		5,217		5,894
Total trading account assets	$	6,836	$	7,923	$	7,190	$	7,916

The net change in unrealized gains and losses from trading account assets still held at period end, recorded within “Asset administration fees and other income” was $0.1 million and $0.5 million of losses during the three months ended June 30, 2013 and 2012, respectively, and $0.4 million gain and $0.5 million loss during the six months ended June 30, 2013 and 2012, respectively.

Commercial Mortgage and Other Loans

The Company’s commercial mortgage and other loans are comprised as follows, as of the dates indicated:

	June 30, 2013					December 31, 2012
	Amount (in thousands)		% of Total			Amount (in thousands)		% of Total
Commercial mortgage and other loans by property type:
Office	$	41,505		9.4	%	$	59,074		13.8	%
Retail		73,113		16.6			71,546		16.7
Apartments/Multi-Family		141,170		32.1			120,066		28.0
Industrial		118,515		27.0			114,619		26.7
Hospitality		5,155		1.2			4,621		1.1
Other		10,687		2.4			9,206		2.0
Total commercial mortgage loans		390,145		88.8			379,132		88.3
Agricultural property loans		49,357		11.2			50,026		11.7
Total commercial and agricultural mortgage loans by property type		439,502		100.0	%		429,158		100.0	%
Valuation allowance		(1,809)					(2,177)
Total net commercial and agricultural mortgage loans by property type		437,693					426,981
Other Loans
Uncollateralized loans		2,740					-
Total other loans		2,740					-
Valuation Allowance		-					-
Total net other loans		2,740					-
Total commercial mortgage and other loans	$	440,433				$	426,981

The commercial mortgage and agricultural property loans are geographically dispersed throughout the United States, Canada and Asia with the largest concentrations in California (16%), New York (10%), and Ohio (11%) at June 30, 2013.

Activity in the allowance for losses for all commercial mortgage and other loans, as of the dates indicated, is as follows:

	June 30, 2013		December 31, 2012
	(in thousands)
Allowance for losses, beginning of year	$	2,177	$	1,501
Addition to / (release of) allowance for losses		(368)		676
Total ending balance (1)	$	1,809	$	2,177

(1) Agricultural loans represent $0.2 million of the ending allowance at both June 30, 2013 and December 31, 2012.

15

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim 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:

	June 30, 2013		December 31, 2012
	Total Loans
	(in thousands)
Allowance for Credit Losses:
Ending balance: individually evaluated for impairment (1)	$	-	$	-
Ending balance: collectively evaluated for impairment (2)		1,809		2,177
Total ending balance	$	1,809	$	2,177
Recorded Investment (3):
Ending balance gross of reserves: individually evaluated for impairment (1)	$	-	$	-
Ending balance gross of reserves: collectively evaluated for impairment (2)		442,242		429,158
Total ending balance, gross of reserves	$	442,242	$	429,158

(1) There were no agricultural or uncollateralized loans individually evaluated for impairments at June 30, 2013 and December 31, 2012.

(2) Agricultural loans collectively evaluated for impairment had a recorded investment of $49 million and $50 at June 30, 2013 and December 31, 2012, and a related allowance of $0.2 million for both periods. Uncollateralized loans collectively evaluated for impairment had a recorded investment of $3 million at June 30, 2013 and $0 million at December 31, 2012, respectively, and no related allowance for both periods.

(3) Recorded investment reflects the balance sheet carrying value gross of related allowance.

Impaired loans include those loans for which it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. As shown in the table above, there were no impaired commercial mortgage and other loans identified in management’s specific review of probable loan losses and related allowance at June 30, 2013 and December 31, 2012. The average recorded investment in impaired loans with an allowance recorded, before the allowance for losses, was $0 million at both June 30, 2013 and December 31, 2012.

There was no net investment income recognized on these loans for both the periods ended June 30, 2013 and December 31, 2012. See Note 2 for information regarding the Company’s accounting policies for non-performing loans.

Impaired commercial mortgage and other loans with no allowance for losses are loans in which the fair value of the collateral or the net present value of the loans’ expected future cash flows equals or exceeds the recorded investment. The Company had no such loans at June 30, 2013 and December 31, 2012. See Note 2 for information regarding the Company’s accounting policies for non-performing loans.

As described in Note 2, loan-to-value and debt service coverage ratios are measures commonly used to assess the quality of commercial mortgage and other loans. As of June 30, 2013 and December 31, 2012, 87% of the $440 million recorded investment and 85% of the $429 million recorded investment, respectively, had a loan-to-value ratio of less than 80%. As of June 30, 2013 and December 31, 2012, 95% and 96% of the recorded investment had a debt service coverage ratio of 1.0X or greater. As of June 30, 2013 and December 31, 2012, approximately 5% or $21 million and 4% or $17 million, respectively, of the recorded investment had a loan-to-value ratio greater than 100% or debt service coverage ratio less than 1.0X, reflecting loans where the mortgage amount exceeds the collateral value or where current debt payments are greater than income from property operations; none of which related to agricultural or uncollateralized loans. There were no nonaccrual loans as of June 30, 2013.

As of June 30, 2013 and December 31, 2012, all commercial mortgage and other loans were in current status. The Company defines current in its aging of past due commercial mortgage and agricultural loans as less than 30 days past due.

There were no commercial mortgage and other loans in nonaccrual status as of June 30, 2013 and December 31, 2012. Nonaccrual loans are those on which the accrual of interest has been suspended after the loans become 90 days delinquent as to principal or interest payments, or earlier when the Company has doubts about collectability and loans for which a loan specific reserve has been established. See Note 2 for further discussion regarding non-accrual status loans.

During 2012, the Company sold commercial mortgage loans to an affiliated company. See Note 7 for further discussion regarding related party transactions.

Commercial mortgage and other loans may occasionally be involved in a troubled debt restructuring. These restructurings generally include one or more of the following: full or partial payoffs outside of the original contract terms: changes to interest rates; extensions of maturity; or additions or modifications to covenants. Additionally, the Company may accept assets in full or partial satisfaction of the debt as part of a troubled debt restructuring. When restructurings occur, they are evaluated individually to determine whether the restructuring or modification constitutes a “troubled debt restructuring” as defined by authoritative accounting guidance. The Company does not hold any outstanding investments related to commercial mortgage and other loans that have been restructured in a troubled debt restructuring.

As of June 30, 2013, the Company has not committed to provide additional funds to borrowers that have been involved in a troubled debt restructuring.

16

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Net Investment Income

Net investment income for the three and six months ended June 30, 2013 and June 30, 2012 was from the following sources:

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
	(in thousands)
Fixed maturities, available-for-sale	$	49,240	$	63,357	$	102,534	$	130,979
Equity securities, available-for-sale		-		7		-		7
Trading account assets		29		370		61		814
Commercial mortgage and other loans		10,274		6,892		16,403		13,714
Policy loans		225		220		339		351
Short-term investments and cash equivalents		96		163		179		363
Other long-term investments		739		177		1,429		915
Gross investment income		60,603		71,186		120,945		147,143
Less investment expenses		(1,669)		(2,009)		(3,471)		(4,073)
Net investment income	$	58,934	$	69,177	$	117,474	$	143,070

Realized Investment Gains (Losses), Net 

Realized investment gains (losses), net, for the three and six months ended June 30, 2013 and June 30, 2012, were from the following sources:

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
	(in thousands)
Fixed maturities	$	5,096	$	6,790	$	7,808	$	13,857
Equity securities		-		-		1		-
Commercial mortgage and other loans		330		451		368		(105)
Derivatives		(48,839)		27,919		(89,665)		(14,675)
Other		(2)		-		(23)		-
Realized investment gains (losses), net	$	(43,415)	$	35,160	$	(81,511)	$	(923)

Accumulated Other Comprehensive Income (Loss)

The balance of and changes in each component of “Accumulated other comprehensive income (loss)” for the six months ended June 30, 2013 and 2012 are as follows:

	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, 2012	$	7	$	147,280	$	147,287
Change in other comprehensive income before reclassifications		(15)		(92,858)		(92,873)
Amounts reclassified from AOCI		-		(7,809)		(7,809)
Income tax benefit (expense)		5		35,233		35,238
Balance, June 30, 2013	$	(3)	$	81,846	$	81,843
	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, 2011	$	-	$	160,712	$	160,712
Change in component during period (2)		(13)		(12,162)		(12,175)
Balance, June 30, 2012	$	(13)	$	148,550	$	148,537

(1) Includes cash flow hedges of ($1) million and ($3) million as of June 30, 2013 and December 31, 2012, respectively, and $0 million and ($1) million as of June 30, 2012 and December 31, 2011, respectively.

(2) All amounts are shown net of taxes.

17

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Reclassifications out of Accumulated Other Comprehensive Income (Loss) (“AOCI”)

	Three Months Ended June 30, 2013		Six Months Ended June 30, 2013
	(in thousands)
Amounts reclassified from AOCI (1)(2):
Net unrealized investment gains (losses):
Cash flow hedges—Currency/Interest rate (3)	$	11	$	(18)
Net unrealized investment gains (losses) on available-for-sale securities		5,085		7,827
Total net unrealized investment gains (losses) (4)		5,096		7,809
Total reclassifications for the period	$	5,096	$	7,809

(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 5 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 and other costs, future policy benefits and policyholders�� dividends.

Net Unrealized Investment Gains (Losses)

Net unrealized investment gains and losses on securities classified as “available-for-sale” and certain other long-term investments and other assets are included in the Unaudited Interim Statements of Financial Position as a component of AOCI. Changes in these amounts include reclassification adjustments to exclude from OCI those items that are included as part of “Net income” for a period that had been part of 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 and losses, are as follows:

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

	Net Unrealized Gains (Losses) on Investments		Deferred Policy Acquisition Costs, Deferred Sales Inducements and Valuation of Business Acquired		Deferred Income Tax (Liability) Benefit		Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses)
	(in thousands)
Balance, December 31, 2012	$	545	$	(214)	$	(100)	$	231
Net investment (losses) gains on investments arising during the period		562		-		(197)		365
Reclassification adjustment for gains (losses) included in net income		(762)		-		267		(495)
Impact of net unrealized investment (losses) gains on deferred policy acquisition costs, deferred sales inducements and valuation of business acquired		-		86		(30)		56
Balance, June 30, 2013	$	345	$	(128)	$	(60)	$	157

All Other Net Unrealized Investment Gains and Losses in AOCI

	Net Unrealized Gains/(Losses) on Investments (1)		Deferred Policy Acquisition Costs, Deferred Sales Inducements and Valuation of Business Acquired		Future Policy Benefits		Deferred Income Tax (Liability) Benefit		Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses)
	(in thousands)
Balance, December 31, 2012	$	376,777	$	(147,089)	$	(2,164)	$	(80,468)	$	147,056
Net investment gains (losses) on investments arising during the period		(154,012)		-		-		53,905		(100,107)
Reclassification adjustment for (losses) gains included in net income		(7,047)		-		-		2,467		(4,580)
Impact of net unrealized investment (losses) gains on deferred policy acquisition costs, deferred sales inducements and valuation of business acquired		-		68,555		-		(23,993)		44,562
Impact of net unrealized investment (gains) losses on future policy benefits		-		-		(8,049)		2,804		(5,245)
Balance, June 30, 2013	$	215,718	$	(78,534)	$	(10,213)	$	(45,285)	$	81,686

(1) Includes cash flow hedges. See Note 5 for additional discussion of our cash flow hedges.

18

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

The table below presents net unrealized gains (losses) on investments by asset class as of the dates indicated:

	June 30,     2013		December 31, 2012
	(in thousands)
Fixed maturity securities on which an OTTI loss has been recognized	$	345	$	545
Fixed maturity securities, available-for-sale—all other		213,051		375,409
Equity securities, available-for-sale		2		4
Affiliated notes		3,460		4,386
Derivatives designated as cash flow hedges (1)		(725)		(3,068)
Other investments		(70)		46
Unrealized gains (losses) on investments and derivatives	$	216,063	$	377,322

(1) See Note 5 for more information on cash flow hedges.

Duration of Gross Unrealized Loss Positions for Fixed Maturities and Equity Securities

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

	June 30, 2013
	Less than twelve months				Twelve months or more				Total
	Fair Value		Unrealized   Losses		Fair Value		Unrealized   Losses		Fair Value		Unrealized   Losses
	(in thousands)
Fixed maturities, available-for-sale
Obligations of U.S. States and their political subdivisions	$	12,180	$	1,253	$	-	$	-	$	12,180	$	1,253
Corporate securities		426,185		18,493		5,560		836		431,745		19,329
Commercial mortgage-backed securities		61,307		5,302		118		-		61,425		5,302
Asset-backed securities		15,054		38		-		-		15,054		38
Residential mortgage-backed securities		43,304		636		-		-		43,304		636
Total	$	558,030	$	25,722	$	5,678	$	836	$	563,708	$	26,558
Equity securities, available-for-sale	$	-	$	-	$	-	$	-	$	-	$	-
	December 31, 2012
	Less than twelve months				Twelve months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in thousands)
Fixed maturities, available-for-sale
Obligations of U.S. States and their political subdivisions	$	7,090	$	350	$	-	$	-	$	7,090	$	350
Corporate securities		35,248		897		14,867		330		50,115		1,227
Commercial mortgage-backed securities		3,326		10		-		-		3,326		10
Asset-backed securities		13,817		42		2,994		290		16,811		332
Residential mortgage-backed securities		-		-		-		-		-		-
Total	$	59,481	$	1,299	$	17,861	$	620	$	77,342	$	1,919
Equity securities, available-for-sale	$	-	$	-	$	-	$	-	$	-	$	-

The gross unrealized losses, related to fixed maturities at June 30, 2013 and December 31, 2012, are composed of $24.6 million and $1.6 million, respectively, related to high or highest quality securities based on National Association of Insurance Commissioners (“NAIC”) or equivalent rating and $1.9 million and $0.3 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. At June 30, 2013, none of the gross unrealized losses represented declines in value of greater than 20%, which is consistent with that at December 31, 2012, that represented declines in value of greater than 20%. At June 30, 2013 and December 31, 2012, respectively, the $0.8 million and $0.6 million of gross unrealized losses of twelve months or more were concentrated in asset backed securities and the service and manufacturing sectors of the Company’s corporate securities.

In accordance with its policy described in Note 2, the Company concluded that an adjustment to earnings for other-than-temporary impairments for these securities was not warranted at June 30, 2013 or December 31, 2012. These conclusions are based on a detailed analysis of the underlying credit and cash flows on each security. The gross unrealized losses are primarily attributable to credit spread widening and increased liquidity discounts. At June 30, 2013, the Company does not intend to sell the securities and it is not more likely than not that the Company will be required to sell the securities before the anticipated recovery of its remaining amortized cost basis.

19

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

At June 30, 2013 and December 31, 2012, there were no gross unrealized losses, related to equity securities.

4.    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. The Company’s Level 1 assets and liabilities primarily include certain cash equivalents, short term investments, and equity securities that trade on an active exchange market.

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. The Company’s Level 2 assets and liabilities include: fixed maturities (corporate public and private bonds, most government securities, certain asset-backed and mortgage-backed securities, etc.), certain equity securities (mutual funds, which do not actively trade and are priced based on a net asset value), certain short term investments and certain cash equivalents (primarily commercial paper), and certain over-the-counter derivatives.

Level 3- Fair value is based on at least one or more significant unobservable inputs for the asset or liability. The assets and liabilities in this category may require significant judgment or estimation in determining the fair value. The Company’s Level 3 assets and liabilities primarily include: certain private fixed maturities and equity securities, certain manually priced public equity securities and fixed maturities, certain highly structured over-the-counter derivative contracts, and embedded derivatives resulting from certain products with guaranteed benefits.

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

	As of June 30, 2013
	Level 1		Level 2		Level 3		Netting (2)			Total
	(in thousands)
Fixed maturities, available-for-sale:
U.S Treasury securities and obligations of U.S. government authorities and agencies	$	-	$	4,735	$	-	$	-		$	4,735
Obligations of U.S. states and their political subdivisions		-		99,572		-		-			99,572
Foreign government bonds		-		37,689		-		-			37,689
Corporate securities		-		2,688,668		96,192		-			2,784,860
Asset-backed securities		-		104,865		86,086		-			190,951
Commercial mortgage-backed securities		-		381,575		-		-			381,575
Residential mortgage-backed securities		-		205,130		-		-			205,130
Sub-total		-		3,522,234		182,278		-			3,704,512
Trading account assets:
Asset-backed securities		-		2,006		-		-			2,006
Equity securities		5,638		-		279		-			5,917
Sub-total		5,638		2,006		279		-			7,923
Equity securities, available-for-sale		-		20		-		-			20
Short-term investments		245,804		1,259		-		-			247,063
Cash equivalents		1		-		-		-			1
Other long-term investments		-		105,439		407		(75,568	)		30,278
Reinsurance recoverables		-		-		654,058		-			654,058
Receivables from parent and affiliates		-		19,706		5,250		-			24,956
Sub-total excluding separate account assets		251,443		3,650,664		842,272		(75,568	)		4,668,811
Separate account assets (1)		124,735		44,054,999		-		-			44,179,734
Total assets	$	376,178	$	47,705,663	$	842,272	$	(75,568	)	$	48,848,545
Future policy benefits	$	-	$	-	$	669,989	$	-		$	669,989
Other liabilities		-		75,568		-		(75,568	)		-
Total liabilities	$	-	$	75,568	$	669,989	$	(75,568	)	$	669,989

20

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	As of December 31, 2012
	Level 1		Level 2		Level 3		Netting (2)		Total
	(in thousands)
Fixed maturities, available-for-sale:
U.S Treasury securities and obligations of U.S. government authorities and agencies	$	-	$	4,686	$	-	$	-	$	4,686
Obligations of U.S. states and their political subdivisions		-		102,116		-		-		102,116
Foreign government securities		-		55,529		-		-		55,529
Corporate securities		-		3,095,699		95,555		-		3,191,254
Asset-backed securities		-		118,179		69,298		-		187,477
Commercial mortgage-backed securities		-		394,902		-		-		394,902
Residential mortgage-backed securities		-		267,486		-		-		267,486
Sub-total		-		4,038,597		164,853		-		4,203,450
Trading account assets:
Asset-backed securities		-		2,022		-		-		2,022
Equity securities		5,687		-		207		-		5,894
Sub-total		5,687		2,022		207		-		7,916
Equity securities, available-for-sale		-		22		-		-		22
Short-term investments		103,761		-		-		-		103,761
Cash equivalents		-		-		-		-		-
Other long-term investments		-		173,348		1,054		(42,351)		132,051
Reinsurance recoverables		-		-		1,732,094		-		1,732,094
Receivables from parent and affiliates		-		20,632		1,995		-		22,627
Sub-total excluding separate account assets		109,448		4,234,621		1,900,203		(42,351)		6,201,921
Separate account assets (1)		122,142		44,479,578		-		-		44,601,720
Total assets	$	231,590	$	48,714,199	$	1,900,203	$	(42,351)	$	50,803,641
Future policy benefits	$	-	$	-	$	1,793,137	$	-	$	1,793,137
Other liabilities		-		42,351		-		(42,351)		-
Total liabilities	$	-	$	42,351	$	1,793,137	$	(42,351)	$	1,793,137

(1) 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 Statements of Financial Position.

(2) “Netting” amounts represent the impact of offsetting asset and liability positions held with the same counterparty.

The methods and assumptions the Company uses to estimate the fair value of assets and liabilities measured at fair value on a recurring basis are summarized below.

Fixed Maturity Securities – The fair values of the Company’s public fixed maturity securities are generally based on prices obtained from independent pricing services. Prices for each security are generally sourced from multiple pricing vendors, and a vendor hierarchy is maintained by asset type based on historical pricing experience and vendor expertise. The Company ultimately uses the price from the pricing service highest in the vendor hierarchy based on the respective asset type. Consistent with the fair value hierarchy described above, securities with validated quotes from pricing services are generally reflected within Level 2, as they are primarily based on observable pricing for similar assets and/or other market observable inputs. If the pricing information received from third party pricing services is not reflective of market activity or other inputs observable in the market, the Company may challenge the price through a formal process with the pricing service. If the pricing service updates the price to be more consistent with the presented market observations, the security remains within Level 2.

Internally-developed valuations or indicative broker quotes are also used to determine fair value in circumstances where vendor pricing is not available, or where the Company ultimately concludes that pricing information received from the independent pricing service is not reflective of market activity. If the Company concludes the values from both pricing services and brokers are not reflective of market activity, it may over-ride the information with an internally developed valuation. As of June 30, 2013 and December 31, 2012 over-rides on a net basis were not material. Pricing service over-rides, internally developed valuations and indicative broker quotes are generally included in Level 3 in the fair value hierarchy.

The fair value of private fixed maturities, which are comprised of investments in private placement securities, originated by internal private asset managers, are primarily determined using a discounted cash flow model. If the fair value is determined using pricing inputs that are observable in the market, the securities have been reflected within Level 2; otherwise a Level 3 classification is used.

21

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Private fixed maturities also include debt investments in funds that pay a stated coupon and a return based upon the results of the underlying portfolios. The fair values of these securities are determined by reference to the funds’ net asset value (“NAV”). Since the NAV at which the funds trade can be observed by redemption and subscription transactions between third parties, the fair values of these investments have been reflected within Level 2 in the fair value hierarchy.

Trading Account Assets – Trading account assets consist primarily of asset-backed, equity securities, and perpetual preferred stocks whose fair values are determined consistent with similar instruments described above under “Fixed Maturity Securities” and below under “Equity Securities.”

Equity Securities – Equity securities consist principally of investments in mutual fund shares. The fair values of most publicly traded equity securities are based on quoted market prices in active markets for identical assets and are classified within Level 1 in the fair value hierarchy. Estimated fair values for most privately traded equity securities are determined using discounted cash flow, earnings multiple and other valuation models that require a substantial level of judgment around inputs and therefore are classified within Level 3. The fair values of mutual fund shares that transact regularly (but do not trade in active markets because they are not publicly available) are based on transaction prices of identical fund shares and are classified within Level 2 in the fair value hierarchy. The fair values of perpetual preferred stock are based on inputs obtained from independent pricing services that are primarily based on indicative broker quotes. As a result, the fair values of perpetual preferred stock are classified as Level 3.

Derivative Instruments – Derivatives are recorded at fair value either as assets, within “Other long-term investments,” or as liabilities, within “Other liabilities,” except for embedded derivatives which are recorded with the associated host contract. The fair values of derivative contracts can be affected by changes in interest rates, foreign exchange rates, credit spreads, market volatility, expected returns, non-performance risk (“NPR”), liquidity and other factors. Liquidity valuation adjustments are made to reflect the cost of exiting significant risk positions, and consider the bid-ask, spread, maturity, complexity, and other specific attributes of the underlying derivative position.

The majority of the Company’s derivative positions are traded in the over-the-counter (“OTC”) derivative market and are classified within Level 2 in the fair value hierarchy. OTC derivatives classified within Level 2 are valued using models that utilize actively quoted or observable market input values from external market data providers, third-party pricing vendors and/or recent trading activity. The Company’s policy is to use mid-market pricing in determining its best estimate of fair value. The fair values of most OTC derivatives, including interest rate and cross currency swaps and single name credit default swaps are determined using discounted cash flow models. The fair values of European style option contracts are determined using Black-Scholes option pricing models. These models’ key inputs include the contractual terms of the respective contract, along with significant observable inputs, including interest rates, currency rates, credit spreads, equity prices, index dividend yields, non-performance risk, volatility, and other factors.

The Company’s cleared interest rate swaps and credit derivatives linked to an index are valued using models that utilize actively quoted or observable market inputs obtained from external market data providers, third-party pricing vendors, and/or recent trading activity. These derivatives are classified as Level 2 in the fair value hierarchy.

To reflect the market’s perception of its own and the counterparty’s non-performance risk, the Company incorporates additional spreads over London Interbank Offered Rate (“LIBOR”) into the discount rate used in determining the fair value of OTC derivative assets and liabilities that are not otherwise collateralized.

Derivatives classified as Level 3 include structured products. These derivatives are valued based upon models (such as Monte Carlo simulation models and other techniques) with some significant unobservable market inputs or inputs (e.g. interest rates, equity indices, dividend yields, etc.) from less actively traded markets (e.g. model-specific input values, including volatility parameters, etc.). Level 3 methodologies are validated through periodic comparison of the Company’s fair values to broker-dealer values. As of June 30, 2013 and December 31, 2012, there were derivatives with the fair value of $19 thousand and $739 thousand, respectively, classified within Level 3, and all other derivatives were classified within Level 2. See Note 5 for more details on the fair value of derivative instruments by primary underlying.

Cash Equivalents and Short-Term Investments – Cash equivalents and short-term investments include money market instruments and other highly liquid debt instruments. Certain money market instruments are valued using unadjusted quoted prices in active markets that are accessible for identical assets and are primarily classified as Level 1. The remaining instruments in this category are generally fair valued based on market observable inputs, and these investments have primarily been classified within Level 2.

Separate Account Assets – Separate Account Assets include fixed maturity securities, treasuries, and equity securities for which values are determined consistent with similar instruments described above under “Fixed Maturity Securities” and “Equity Securities.”

Receivables from Parent and Affiliates – Receivables from Parent and Affiliates carried at fair value include affiliated bonds within our legal entity whose fair value are determined consistent with similar securities described above under “Fixed Maturity Securities” managed by affiliated asset managers.

Reinsurance Recoverables – Reinsurance recoverables carried at fair value include the reinsurance of our living benefit guarantees on certain of our variable annuities. These guarantees are accounted for as embedded derivatives and are described below in “Future Policy Benefits.” The reinsurance agreements covering these guarantees are derivatives with fair value determined in the same manner as the living benefit guarantees.

Future Policy Benefits – The liability for future policy benefits primarily includes general account liabilities for the optional living benefit features of the Company’s variable annuity contracts, including guaranteed minimum accumulation benefits (“GMAB”), guaranteed minimum withdrawal benefits (“GMWB”) and guaranteed minimum income and withdrawal benefits (“GMIWB”), accounted for as embedded derivatives. The fair values

22

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

of the GMAB, GMWB, and GMIWB liabilities are calculated as the present value of future expected benefit payments to contractholders less the present value of assessed rider fees attributable to the optional living benefit feature. This methodology could result in either a liability or contra-liability balance, given changing capital market conditions and various contractholder behavior assumptions. Since there is no observable active market for the transfer of these obligations, the valuations are calculated using internally developed models with option pricing techniques. The models are based on a risk neutral valuation framework and incorporate premiums for risks inherent in valuation techniques, inputs, and the general uncertainty around the timing and amount of future cash flows. The determination of these risk premiums requires the use of management judgment.

The significant inputs to the valuation models for these embedded derivatives include capital market assumptions, such as interest rate and implied volatility assumptions, the Company’s market-perceived risk of its own non-performance, as well as actuarially determined assumptions, including contractholder behavior, such as lapse rates, benefit utilization rates, withdrawal rates, and mortality rates. Since many of these assumptions are unobservable and are considered to be significant inputs to the liability valuation, the liability included in future policy benefits has been reflected within Level 3 in the fair value hierarchy.

Capital market inputs and actual contractholders’ account values are updated each quarter based on capital market conditions as of the end of the quarter, including interest rates, equity markets, and implied volatility. In the risk neutral valuation, interest rates are used to both grow the contractholders’ account values and discount all projected future cash flows. The Company’s discount rate assumption is based on the LIBOR swap curve, adjusted for an additional spread over LIBOR to reflect NPR.

Actuarial assumptions, including contractholder behavior and mortality, are reviewed at least annually, and updated based upon historical experience giving consideration to any observable market data, including available industry studies or market transactions such as acquisitions and reinsurance transactions. These assumptions are generally updated in the third quarter of each year unless a material change that the Company feels is indicative of a long term trend is observed in an interim period.

Transfers between Levels 1 and 2 – There were no transfers between Levels 1 and 2 for the three and six months ended June 30, 2013. During the three and six months ended June 30, 2012, $3.2 million of equity securities, available for sale, transferred from Level 1 to Level 2. The assets that transferred were mutual funds that were priced on a net asset value. This transfer was the result of an ongoing monitoring assessment of pricing inputs to ensure appropriateness of the level classification in the fair value hierarchy. Transfers between levels are generally reported at the values as of the beginning of the period in which the transfers occur.

Level 3 Assets and Liabilities by Price Source – The tables below present the balances of Level 3 assets and liabilities measured at fair value with their corresponding pricing sources.

	As of June 30, 2013
	Internal (1)		External (2)		Total
	(in thousands)
Corporate securities	$	89,564	$	6,628	$	96,192
Asset-backed securities		-		86,086		86,086
Commercial mortgage-backed securities		-		-		-
Equity securities		-		279		279
Other long-term Investments		19		388		407
Reinsurance recoverables		654,058		-		654,058
Receivables from parent and affiliates		-		5,250		5,250
Total assets	$	743,641	$	98,631	$	842,272
Future policy benefits		669,989		-		669,989
Total liabilities	$	669,989	$	-	$	669,989
	As of December 31, 2012
	Internal (1)		External (2)		Total
	(in thousands)
Corporate securities	$	92,263	$	3,292	$	95,555
Asset-backed securities		-		69,298		69,298
Equity securities		-		207		207
Other long-term Investments		739		315		1,054
Reinsurance recoverables		1,732,094		-		1,732,094
Receivables from parent and affiliates		-		1,995		1,995
Total assets	$	1,825,096	$	75,107	$	1,900,203
Future policy benefits		1,793,137		-		1,793,137
Total liabilities	$	1,793,137	$	-	$	1,793,137

(1) Represents valuations which could incorporate internally-derived and market inputs. See below for additional information related to internally-developed valuation for significant items in the above table.

(2) Represents unadjusted prices from independent pricing services and independent non-binding broker quotes where pricing inputs are not readily available.

23

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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 June 30, 2013
	Fair     Value		Primary Valuation     Techniques	Unobservable      Inputs	Minimum			Maximum			Weighted     Average			Impact of Increase in     Input on Fair     Value (1)
	(in thousands)
Assets:
Corporate securities	$	89,564	Discounted cash flow	Discount rate		3.97	%		15.00	%		4.32	%	Decrease
Reinsurance recoverables	$	654,058	Fair values are determined in the same manner as future policy benefits
Liabilities:
Future policy benefits (2)	$	669,989	Discounted cash flow	Lapse rate (3)		0	%		14	%				Decrease
				NPR spread (4)		0.11	%		1.59	%				Decrease
				Utilization rate (5)		70	%		94	%				Increase
				Withdrawal rate (6)		85	%		100	%				Increase
				Mortality rate (7)		0	%		13	%				Decrease
				Equity Volatility curve		18	%		33	%				Increase
	As of December 31, 2012
	Fair     Value		Primary Valuation     Techniques	Unobservable     Inputs	Minimum			Maximum			Weighted     Average			Impact of Increase in     Input on Fair     Value  (1)
	(in thousands)
Assets:
Corporate securities	$	92,263	Discounted cash flow	Discount rate		3.27	%		17.50	%		3.74	%	Decrease
			Cap at call price	Call price		100.00	%		100.00	%				Increase
Reinsurance recoverables	$	1,732,094	Fair values are determined in the same manner as future policy benefits
Liabilities:
Future policy benefits (2)	$	1,793,137	Discounted cash flow	Lapse rate (3)		0	%		14	%				Decrease
				NPR spread (4)		0.20	%		1.60	%				Decrease
				Utilization rate (5)		70	%		94	%				Increase
				Withdrawal rate (6)		85	%		100	%				Increase
				Mortality rate (7)		0	%		13	%				Decrease
				Equity Volatility curve		19	%		34	%				Increase

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

(2) Future policy benefits primarily represent general account liabilities for the optional 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.

(3) Base lapse rates are adjusted at the contract level based on a comparison of the actuarially calculated guaranteed amount and the current contractholder account value as well as other factors, such as the applicability of any surrender charges. A dynamic lapse adjustment reduces the base lapse rate when the guaranteed amount is greater than the account value, as in-the-money contracts are less likely to lapse. Lapse rates are also generally assumed to be lower for the period where surrender charges apply.

(4) To reflect NPR, the Company incorporates an additional spread over LIBOR into the discount rate used in the valuation of individual living benefit contracts in a liability position and generally not to those in a contra-liability position. In determining the NPR spread, the Company reflects the financial strength ratings of the Company as these are insurance liabilities and senior to debt. The additional spread over LIBOR is determined by utilizing the credit spreads associated with issuing funding agreements adjusted for any illiquidity risk premium.

(5) 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. These assumptions vary based on the product type, the age of the contractholder, and the age of the contract. The impact of changes in these assumptions is highly dependent on the contract type and age of the contractholder at the time of the sale and the timing of the first lifetime income withdrawal.

(6) The withdrawal rate assumption estimates the magnitude of annual contractholder withdrawals relative to the maximum allowable amount under the contract. The fair value of the liability will generally increase the closer the withdrawal rate is to 100%.

(7) Range reflects the mortality rate for the vast majority of business with living benefits, with contractholders ranging from 35 to 90 years old. While the majority of living benefits have a minimum age requirement, certain benefits 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 age and duration specific mortality rate adjustments compared to standard industry tables. A mortality improvement assumption is also incorporated into the overall mortality table.

24

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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. Examples of such interrelationships for significant internally-priced Level 3 assets and liabilities are as follows:

Corporate Securities – The rate used to discount future cash flows reflects current risk-free rates plus credit and liquidity spread requirements that market participants would use to value an asset. The discount rate may be influenced by many factors, including market cycles, expectations of default, collateral, term, and asset complexity. Each of these factors can influence discount rates, either in isolation, or in response to other factors.

Future Policy Benefits – The unobservable contractholder behavior inputs related to the liability for the optional living benefit features of the Company’s variable annuity contracts included in future policy benefits are generally based on a long-term view of historical experience. While experience for these products is still emerging, the Company expects efficient benefit utilization and withdrawal rates to generally be correlated with lapse rates. However, contractholder behavior is generally highly dependent on the facts and circumstances surrounding the individual contractholder, such as their liquidity needs or tax situation, which could drive lapse behavior independent of other contractholder behavior assumptions. The dynamic lapse adjustment assumes lower lapses when the guaranteed amount is greater than the account value, as in-the-money contracts are less likely to lapse. Therefore, to the extent more efficient contractholder behavior results in greater in-the-moneyness at the contract level, the dynamic lapse function will reduce lapse rates for those contracts. Similarly, to the extent that increases in equity volatility are correlated with overall declines in the capital markets, the dynamic lapse function will lower overall lapse rates as contracts become more in-the-money.

Valuation Process for Fair Value Measurements Categorized within Level 3 – The Company has established an internal control infrastructure over the valuation of financial instruments that requires ongoing oversight by its various Business Groups. These management control functions are segregated from the trading and investing functions. For invested assets, the Company has established oversight teams, often in the form of Pricing Committees within each asset management group. The teams, which typically include representation from investment, accounting, operations, legal and other disciplines are responsible for overseeing and monitoring the pricing of the Company’s investments and performing periodic due diligence reviews of independent pricing services. An actuarial valuation team oversees the valuation of optional living benefit features of the Company’s variable annuity contracts.

The Company has also established policies and guidelines that require the establishment of valuation methodologies and consistent application of such methodologies. These policies and guidelines govern the use of inputs and price source hierarchies and provide controls around the valuation processes. These controls include appropriate review and analysis of investment prices against market activity or indicators of reasonableness, approval of price source changes, price overrides, methodology changes and classification of fair value hierarchy levels. For optional living benefit features of the Company’s variable annuity products, the actuarial valuation unit periodically performs baseline testing of contract input data and actuarial assumptions are reviewed at least annually, and updated based upon historical experience giving consideration to any observable market data, including available industry studies. The valuation policies and guidelines are reviewed and updated as appropriate.

Within the trading and investing functions, the Company has established policies and procedures that relate to the approval of all new transaction types, transaction pricing sources and fair value hierarchy coding within the financial reporting system. For variable annuity product changes or new launches of optional living benefit features, the actuarial valuation unit validates input logic and new product features and agrees new input data directly to source documents.

25

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Changes in Level 3 assets and liabilities – The following tables provide summaries of the 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.

	Three Months Ended June 30, 2013
	Fixed Maturities Available-For-Sale
	Corporate Securities		Asset- Backed Securities		Commercial Mortgage- Backed		Trading Account Assets - Equity Securities		Other Long Term Investments
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	95,575	$	72,740	$	9,106	$	267	$	463
Included in earnings:
Realized investment gains (losses), net		45		-		1		-		(97)
Asset management fees and other income		-		-		-		12		4
Included in other comprehensive income (loss)		(3,789)		(151)		-		-		-
Net investment income		1,176		181		-		-		-
Purchases		643		18,922		-		-		37
Sales		-		-		-		-		-
Issuances		-		-		-		-		-
Settlements		(2,434)		(5,606)		-		-		-
Transfers into Level 3 (1)		4,976		-		-		-		-
Transfers out of Level 3 (1)		-		-		(9,107)		-		-
Fair Value, end of period assets/(liabilities)	$	96,192	$	86,086	$	-	$	279	$	407
Unrealized gains (losses) for the period relating to those
Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	-	$	-	$	-	$	-	$	(97)
Asset management fees and other income	$	-	$	-	$	-	$	11	$	4
	Three Months Ended June 30, 2013
	Reinsurance Recoverables		Receivables from parent and affiliates		Future Policy Benefits
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	1,191,409	$	2,000	$	(1,230,323)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		(596,967)		-		622,798
Asset management fees and other income		-		-		-
Included in other comprehensive income (loss)		-		(4)		-
Net investment income		-		-		-
Purchases		59,616		3,254		-
Sales		-		-		-
Issuances		-		-		(62,464)
Settlements		-		-		-
Transfers into Level 3 (1)		-		-		-
Transfers out of Level 3 (1)		-		-		-
Fair Value, end of period assets/(liabilities)	$	654,058	$	5,250	$	(669,989)
Unrealized gains (losses) for the period relating to those
Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	(588,372)	$	-	$	614,035
Asset management fees and other income	$	-	$	-	$	-

26

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	Six Months Ended June 30, 2013
	Fixed Maturities Available-For-Sale
	Corporate Securities		Asset- Backed Securities		Commercial Mortgage- Backed		Trading Account Assets - Equity Securities		Other Long Term Investments
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	95,555	$	69,298	$	-	$	207	$	1,054
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		49		-		-		-		(721)
Asset management fees and other income		-		-		-		72		37
Included in other comprehensive income (loss)		(4,060)		11		17		-		-
Net investment income		2,330		316		-		-		-
Purchases		1,243		25,980		9,090		-		37
Sales		-		-		-		-		-
Issuances		-		-		-		-		-
Settlements		(3,901)		(9,519)		-		-		-
Transfers into Level 3 (1)		4,976		-		-		-		-
Transfers out of Level 3 (1)		-		-		(9,107)		-		-
Fair Value, end of period assets/(liabilities)	$	96,192	$	86,086	$	-	$	279	$	407
Unrealized gains (losses) for the period relating to those
Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	-	$	-	$	-	$	-	$	(721)
Asset management fees and other income	$	-	$	-	$	-	$	72	$	37
	Six Months Ended June 30, 2013
	Reinsurance Recoverables		Receivables from parent and affiliates		Future Policy Benefits
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	1,732,094	$	1,995	$	(1,793,136)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		(1,195,788)		-		1,246,584
Asset management fees and other income		-		-		-
Included in other comprehensive income (loss)		-		1		-
Net investment income		-		-		-
Purchases		117,752		3,254		-
Sales		-		-		-
Issuances		-		-		(123,437)
Settlements		-		-		-
Transfers into Level 3 (1)		-		-		-
Transfers out of Level 3 (1)		-		-		-
Fair Value, end of period assets/(liabilities)	$	654,058	$	5,250	$	(669,989)
Unrealized gains (losses) for the period relating to those
Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	(1,173,117)	$	-	$	1,223,615
Asset management fees and other income	$	-	$	-	$	-

27

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	Three Months Ended June 30, 2012
	Fixed Maturities Available-For- Sale - Corporate Securities		Fixed Maturities Available-For- Sale - Asset Backed Securities		Other Trading Securities - Equity Unaffiliated		Other Long-Term Investments		Reinsurance Recoverables
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	103,130	$	46,700	$	201	$	256	$	1,205,262
Total gains or (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		2		-		-		-		500,397
Asset management fees and other income		-		-		(4)		(11)		-
Included in other comprehensive income (loss)		1,596		91		-		-		-
Net investment income		1,149		193		-		-		-
Purchases		2,775		7,500		-		60		55,615
Sales		(29)		-		-		-		-
Issuances		(2,775)		-		-		-		-
Settlements		(1,697)		(2,718)		-		-		-
Transfers into Level 3 (1)		1		-		-		-		-
Transfers out of Level 3 (1)		(11,691)		-		-		-		-
Fair Value, end of period assets/(liabilities)	$	92,461	$	51,766	$	197	$	305	$	1,761,274
Unrealized gains (losses) for the period relating to those Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	-	$	-	$	-	$	874	$	513,151
Asset management fees and other income	$	-	$	-	$	(5)	$	(11)	$	-
	Three Months Ended June 30, 2012
	Future Policy Benefits
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	(1,220,550)
Total gains or (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		(516,861)
Asset management fees and other income		-
Included in other comprehensive income (loss)		-
Net investment income		-
Purchases		-
Sales		-
Issuances		(58,304)
Settlements		-
Transfers into Level 3 (1)		-
Transfers out of Level 3 (1)		-
Fair Value, end of period assets/(liabilities)	$	(1,795,715)
Unrealized gains (losses) for the period relating to those
Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	(529,720)

28

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	Six Months Ended June 30, 2012
	Fixed  Maturities Available-For-Sale - Corporate Securities		Fixed Maturities Available-For- Sale - Asset Backed Securities		Trading Account Assets - Equity Securities		Other Long- Term Investments		Reinsurance Recoverable
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	89,658	$	48,563	$	203	$	1,213	$	1,747,757
Total gains or (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		9		-		-		(977)		(97,855)
Asset management fees and other income		-		-		(6)		2		-
Included in other comprehensive income (loss)		740		953		-		-		-
Net investment income		2,377		351		-		-		-
Purchases		5,400		7,500		-		60		111,372
Sales		(29)		-		-		-		-
Issuances		-		-		-		-		-
Settlements		(5,995)		(5,601)		-		7		-
Transfers into Level 3 (1)		11,992		-		-		-		-
Transfers out of Level 3 (1)		(11,691)		-		-		-		-
Fair Value, end of period assets/(liabilities)	$	92,461	$	51,766	$	197	$	305	$	1,761,274
Unrealized gains (losses) for the period relating to those Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	-	$	-	$	-	$	-	$	(71,947)
Asset management fees and other income	$	-	$	-	$	(6)	$	2	$	-
	Six Months Ended June 30, 2012
	Future Policy Benefits
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	(1,783,595)
Total gains or (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		104,631
Asset management fees and other income		-
Included in other comprehensive income (loss)		-
Net investment income		-
Purchases		-
Sales		-
Issuances		(116,751)
Settlements		-
Transfers into Level 3 (1)		-
Transfers out of Level 3 (1)		-
Fair Value, end of period assets/(liabilities)	$	(1,795,715)
Unrealized gains (losses) for the period relating to Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	78,346

(1) Transfers into or out of Level 3 are generally reported as the value as of the beginning of the quarter in which the transfer occurs.

(2) 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.

Transfers – Transfers into Level 3 are generally the result of unobservable inputs utilized within valuation methodologies and the use of indicative broker quotes for assets that were previously valued using observable inputs. Transfers out of Level 3 are generally due to the use of observable inputs in valuation methodologies as well as the utilization of pricing service information for certain assets that the Company is able to validate.

29

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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. However, in some cases, as described below, the carrying amount equals or approximates fair value.

	June 30, 2013										December 31, 2012
	Fair Value								Carrying Amount (1)		Fair Value		Carrying Amount
	Level 1		Level 2		Level 3		Total		Total		Total		Total
	(in thousands)
Assets:
Commercial mortgage and other loans	$	-	$	2,676	$	468,216	$	470,892	$	440,433	$	473,964	$	426,981
Policy loans		-		-		12,554		12,554		12,554		11,957		11,957
Cash		252		-		-		252		252		266		266
Accrued investment income		-		39,762		-		39,762		39,762		44,656		44,656
Receivables from parent and affiliates		-		6,308		-		6,308		6,308		199		199
Other assets		-		29,346		-		29,346		29,346		12,410		12,410
Total assets	$	252	$	78,092	$	480,770	$	559,114	$	528,655	$	543,452	$	496,469
Liabilities:
Policyholders’ Account Balances - Investment contracts	$	-	$	-	$	80,566	$	80,566	$	80,658	$	78,159	$	75,242
Cash collateral for loaned securities		-		37,786		-		37,786		37,786		38,976		38,976
Long-term debt		-		425,061		-		425,061		400,000		426,827		400,000
Payables to parent and affiliates		-		40,525		-		40,525		40,525		94,953		94,953
Other liabilities		-		124,787		-		124,787		124,787		99,094		99,094
Separate account liabilities - investment contracts		-		867		-		867		867		964		964
Total liabilities	$	-	$	629,026	$	80,566	$	709,592	$	684,623	$	738,973	$	709,229

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

The fair values presented above have been determined by using available market information and by applying market valuation methodologies, as described in more detail below.

Commercial Mortgage and Other Loans

The fair value of most commercial mortgage loans is based upon the present value of the expected future cash flows discounted at the appropriate U.S. Treasury rate plus an appropriate credit spread for similar quality loans. The quality ratings for these loans, a primary determinant of the credit spreads and a significant component of the pricing process, are based on an internally-developed methodology.

Policy Loans

Policy Loans carrying value approximates fair value.

Cash, Accrued Investment Income, Receivables from Parent and Affiliates, and Other Assets

The Company believes that due to the short-term nature of certain assets, the carrying value approximates fair value. These assets include: cash, accrued investment income, and other assets that meet the definition of financial instruments, including receivables such as unsettled trades, accounts receivable.

Policyholders’ Account Balances - Investment Contracts

Only the portion of policyholders’ account balances related to products that are investment contracts (those without significant mortality or morbidity risk) are reflected in the table above. For payout annuities and other similar contracts without life contingencies, fair values are derived using discounted projected cash flows based on interest rates that are representative of the Company’s financial strength ratings, and hence reflect the Company’s own non-performance risk. For those balances that can be withdrawn by the customer at any time without prior notice or penalty, the fair value is the amount estimated to be payable to the customer as of the reporting date, which is generally the carrying value.

30

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Cash Collateral for Loaned Securities

This represents the collateral received or paid in connection with loaning or borrowing securities. For these transactions, the carrying value of the related asset/liability approximates fair value as they equal the amount of cash collateral received/paid.

Long-Term Debt

The fair value of long-term debt is generally determined by either prices obtained from independent pricing services, which are validated by the Company, or discounted cash flow models. These fair values consider the Company’s own non-performance risk. Discounted cash flow models predominately use market observable inputs such as the borrowing rates currently available to the Company for debt and financial instruments with similar terms and remaining maturities.

Other Liabilities and Payables to Parent and Affiliates

Other liabilities and Payables to Parent and Affiliates are primarily payables, such as unsettled trades, drafts, escrow deposits and accrued expense payables. Due to the short term until settlement of most of these liabilities, the Company believes that carrying value approximates fair value.

Separate Account Liabilities - Investment Contracts

Only the portion of separate account liabilities related to products that are investments contracts are reflected in the table above. Separate account liabilities are recorded at the amount credited to the contractholder, which reflects the change in fair value of the corresponding separate account assets including contractholder deposits less withdrawals and fees. Therefore, carrying value approximates fair value.

5.    DERIVATIVE INSTRUMENTS

Types of Derivative Instruments and Derivative Strategies

Interest Rate Contracts

Interest rate swaps are used by the Company to reduce risks from changes in interest rates, manage interest rate exposures arising from mismatches between assets and liabilities (including duration mismatches) and to hedge against changes in the value of assets it owns or anticipates acquiring or selling. Swaps may be attributed to specific assets or liabilities or may be used on a portfolio basis. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed upon notional principal amount. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty at each due date.

Equity Contracts

Equity index options are contracts which will settle in cash based on differentials in the underlying indices at the time of exercise and the strike price. The Company uses combinations of purchases and sales of equity index options to hedge the effects of adverse changes in equity indices within a predetermined range. These hedges do not qualify for hedge accounting.

Foreign Exchange Contracts

Currency derivatives, including currency swaps, are used by the Company to reduce risks from changes in currency exchange rates with respect to investments denominated in foreign currencies that the Company either holds or intends to acquire or sell.

Under currency swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between one currency and another at an exchange rate and calculated by reference to an agreed principal amount. Generally, the principal amount of each currency is exchanged at the beginning and termination of the currency swap by each party. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty for payments made in the same currency at each due date.

Credit Contracts

Credit derivatives are used by the Company to enhance the return on the Company’s investment portfolio by creating credit exposure similar to an investment in public fixed maturity cash instruments. With credit derivatives the Company sells credit protection on an identified name, and in return receives a quarterly premium. With credit default derivatives, this premium or credit spread generally corresponds to the difference between the yield on the referenced name’s public fixed maturity cash instruments and swap rates, at the time the agreement is executed. If there is an event of default by the referenced name, as defined by the agreement, then the Company is obligated to pay the counterparty the referenced amount of the contract and receive in return the referenced defaulted security or similar security or pay the referenced amount less the auction recovery rate. See credit

31

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

derivatives written section for discussion of guarantees related to credit derivatives written. In addition to selling credit protection, the Company has purchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio.

Embedded Derivatives

The Company sells variable annuity products, which may include guaranteed benefit features that are accounted for as embedded derivatives. The Company has reinsurance agreements to transfer the risk related to certain of these benefit features to affiliates, Pruco Re and Prudential Insurance. The embedded derivatives related to the living benefit features and the related reinsurance agreements are carried at fair value. These embedded derivatives are marked to market through “Realized investment gains (losses), net” based on the change in value of the underlying contractual guarantees, which are determined using valuation models, as described in Note 4.

The fair value of the living benefit feature embedded derivatives included in “Future policy benefits” was a liability of $670 million and $1,793 million as of June 30, 2013 and December 31, 2012, respectively. The fair value of the embedded derivatives related to the reinsurance of certain of these benefits to Pruco Re and Prudential Insurance included in “Reinsurance recoverables” was an asset of $655 million and $1,733 million as of June 30, 2013 and December 31, 2012, respectively.

The table below provides a summary of the gross notional amount and fair value of derivatives contracts used in a non-dealer or broker capacity, excluding embedded derivatives which are recorded with the associated host, by the primary underlying. Many derivative instruments contain multiple underlyings.

	June 30, 2013						December 31, 2012
	Notional		Gross Fair Value				Notional		Gross Fair Value
	Amount		Assets		Liabilities		Amount		Assets		Liabilities
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Currency/Interest Rate	$	72,247	$	1,146	$	(1,881)	$	65,612	$	192	$	(3,309)
Total Qualifying Hedges	$	72,247	$	1,146	$	(1,881)	$	65,612	$	192	$	(3,309)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Swaps	$	2,332,950	$	85,230	$	(66,573)	$	2,332,950	$	139,258	$	(24,075)
Interest Rate Options		70,000		9,837		-		100,000		15,330		-
Currency/Interest Rate
Foreign Currency Swaps		55,919		1,731		(894)		61,126		1,715		(2,894)
Credit
Credit Default Swaps		21,050		-		(909)		345,050		411		(1,413)
Equity
Total Return Swaps		191,197		1,907		(3,283)		253,766		193		(3,741)
Equity Options		4,314,657		5,607		(2,028)		7,800,982		16,988		(6,920)
Total Non-Qualifying Hedges	$	6,985,773	$	104,312	$	(73,687)	$	10,893,874	$	173,895	$	(39,043)
Total Derivatives (1)	$	7,058,020	$	105,458	$	(75,568)	$	10,959,486	$	174,087	$	(42,352)

(1) Excludes embedded derivatives which contain multiple underlyings. The fair value of these embedded derivatives was a liability of $670 million and $1,793 million as of June 30, 2013 and December 31, 2012, respectively, included in “Future policy benefits.”

Offsetting Assets and Liabilities

The following table presents recognized derivative instruments (including bifurcated embedded derivatives) that are offset in the balance sheet, and/or are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in the balance sheet.

	June 30, 2013
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statement of Financial Position		Net Amounts Presented in the Statement of Financial Position		Financial Instruments/ Collateral		Net Amount
	(in thousands)
Offsetting of Financial Assets:
Derivatives	$	105,458	$	(75,568)	$	29,890	$	-	$	29,890
Offsetting of Financial Liabilities:
Derivatives	$	75,568	$	(75,568)	$	-	$	-	$	-

32

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	December 31, 2012
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statement of Financial Position		Net Amounts Presented in the Statement of Financial Position		Financial Instruments/ Collateral		Net Amount
	(in thousands)
Offsetting of Financial Assets:
Derivatives	$	174,087	$	(42,352)	$	131,735	$	-	$	131,735
Offsetting of Financial Liabilities:
Derivatives	$	42,352	$	(42,352)	$	-	$	-	$	-

For information regarding the rights of offset associated with the derivative assets and liabilities in the table above see “Credit Risk” below.

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 June 30, 2013
	Realized Investment Gains/(Losses)			Net Investment Income			Other Income		Accumulated Other Comprehensive Income (1)
	(in thousands)
Derivatives Designated as Hedging Instruments:
Cash flow hedges
Currency/Interest Rate	$	-			$            (16	)	$	27	$	598
Total cash flow hedges		-			(16	)		27		598
Derivatives Not Qualifying as Hedging Instruments:
Interest Rate		(56,393	)		-			-		-
Currency		-			-			-		-
Currency/Interest Rate		474			-			46		-
Credit		(22	)		-			-		-
Equity		(10,976	)		-			-		-
Embedded Derivatives		18,078			-			-		-
Total non-qualifying hedges		(48,839	)		-			46		-
Total	$	(48,839	)	$	(16	)	$	73	$	598

	Six Months Ended June 30, 2013
	Realized Investment Gains/(Losses)			Net Investment Income			Other Income		Accumulated Other Comprehensive Income (1)
	(in thousands)
Derivatives Designated as Hedging Instruments:
Cash flow hedges
Currency/Interest Rate	$	-		$	(50	)	$	32	$	2,343
Total cash flow hedges		-			(50	)		32		2,343
Derivatives Not Qualifying as Hedging Instruments:
Interest Rate		(82,230	)		-			-		-
Currency		-			-			-		-
Currency/Interest Rate		1,784			-			41		-
Credit		(59	)		-			-		-
Equity		(41,427	)		-			-		-
Embedded Derivatives		32,267			-			-		-
Total non-qualifying hedges		(89,665	)		-			41		-
Total	$	(89,665	)	$	(50	)	$	74	$	2,343

33

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	Three Months Ended June 30, 2012
	Realized Investment Gains/(Losses)			Net Investment Income			Other Income		Accumulated Other Comprehensive Income (1)
	(in thousands)
Derivatives Designated as Hedging Instruments:
Cash flow hedges
Currency/Interest Rate	$	-		$	(33	)	$	32	$	2,263
Total cash flow hedges		-			(33	)		32		2,263
Derivatives Not Qualifying as Hedging Instruments:
Interest Rate		47,230			-			-		-
Currency		-			-			-		-
Currency/Interest Rate		2,306			-			39		-
Credit		94			-			-		-
Equity		5,644			-			-		-
Embedded Derivatives		(27,354	)		-			-		-
Total non-qualifying hedges		27,920			-			39		-
Total	$	27,920		$	(33	)	$	71	$	2,263

	Six Months Ended June 30, 2012
	Realized Investment Gains/(Losses)			Net Investment Income			Other Income		Accumulated Other Comprehensive Income (1)
	(in thousands)
Derivatives Designated as Hedging Instruments:
Cash flow hedges
Currency/Interest Rate	$	-		$	(74	)	$	34	$	1,062
Total cash flow hedges		-			(74	)		34		1,062
Derivatives Not Qualifying as Hedging Instruments:
Interest Rate		25,854			-			-		-
Currency		-			-			-		-
Currency/Interest Rate		1,150			-			27		-
Credit		193			-			-		-
Equity		(27,193	)		-			-		-
Embedded Derivatives		(14,680	)		-			-		-
Total non-qualifying hedges		(14,676	)		-			27		-
Total	$	(14,676	)	$	(74	)	$	61	$	1,062

(1) Amounts deferred in “Accumulated other comprehensive income (loss).”

For the three and six months ended June 30, 2013 the ineffective portion of derivatives accounted for using hedge accounting was not material to the Company’s results of operations and there were no material amounts reclassified 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.

Presented below is a rollforward of current period cash flow hedges in “Accumulated other comprehensive income (loss)” before taxes:

	(in thousands)
Balance, December 31, 2012	$	(3,068	)
Net deferred gains (losses) on cash flow hedges from January 1 to June 30, 2013		2,325
Amount reclassified into current period earnings		18
Balance, June 30, 2013	$	(725	)

As of June 30, 2013 and 2012, the Company did not have any qualifying cash flow hedges of forecasted transactions other than those related to the variability of the payment or receipt of interest or foreign currency amounts on existing financial instruments. The maximum length of time for which these variable cash flows are hedged is 20 years. Income amounts deferred in “Accumulated other comprehensive income (loss)” as a result of cash flow hedges are included in “Net unrealized investment gains (losses)” in the Unaudited Interim Statements of Equity.

34

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Credit Derivatives Written

The Company writes credit derivatives under which the Company is obligated to pay a related party counterparty the referenced amount of the contract and receive in return the defaulted security or similar security. The Company’s maximum amount at risk under these credit derivatives, assuming the value of the underlying referenced securities become worthless, is $0 million and $315 million notional of credit default swap (“CDS”) selling protection with an associated fair value of $0 million and less than $1 million, at June 30, 2013 and December 31, 2012, respectively. These credit derivatives have matured as of June 30, 2013. At December 31, 2012, the underlying credits had NAIC designation ratings of 1 and 2.

The following table sets forth the composition of the Company’s credit derivatives where it has written credit protection by industry category as of the dates indicated. The table excludes embedded derivatives contained in externally-managed investments in European markets.

	June 30, 2013				December 31, 2012
Industry	Notional		Fair Value		Notional		Fair Value
	(in thousands)
Corporate Securities:
Consumer Non-cyclical	$	-	$	-	$	120,000	$	146
Capital Goods		-		-		90,000		109
Basic Industry		-		-		40,000		68
Transportation		-		-		25,000		30
Consumer Cyclical		-		-		20,000		29
Energy		-		-		20,000		29
Total Credit Derivatives	$	-	$	-	$	315,000	$	411

In addition to writing credit protection, the Company has purchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio. As of June 30, 2013 and December 31, 2012, the Company had $21 million and $30 million of outstanding notional amounts, reported at fair value as a liability of $1 million for both periods.

Credit Risk

The Company is exposed to credit-related losses in the event of non-performance by our counterparty to financial derivative transactions.

The Company has credit risk exposure to an affiliate, Prudential Global Funding, LLC (“PGF”), related to its OTC derivative transactions. PGF manages credit risk with external counterparties by entering into derivative transactions with highly rated major international financial institutions and other creditworthy counterparties, and by obtaining collateral where appropriate, see Note 7. Additionally, limits are set on single party credit exposures which are subject to periodic management review.

Under fair value measurements, the Company incorporates the market’s perception of its own and the counterparty’s non-performance risk in determining the fair value of the portion of its OTC derivative assets and liabilities that are uncollateralized. Credit spreads are applied to the derivative fair values on a net basis by counterparty. To reflect the Company’s own credit spread a proxy based on relevant debt spreads is applied to OTC derivative net liability positions. Similarly, the Company’s counterparty’s credit spread is applied to OTC derivative net asset positions.

6.    COMMITMENTS, CONTINGENT LIABILITIES AND LITIGATION AND REGULATORY MATTERS

Commitments

The Company had made commitments to fund $25 million of commercial loans as of June 30, 2013. The Company also made commitments to purchase or fund investments, mostly private fixed maturities, of $19 million as of June 30, 2013.

Contingent Liabilities

On an ongoing basis, the Company’s internal supervisory and control functions review the quality of sales, marketing and other customer interface procedures and practices and may recommend modifications or enhancements. From time to time, this review process results in the discovery of product administration, servicing or other errors, including errors relating to the timing or amount of payments or contract values due to customers. In certain cases, if appropriate, the Company may offer customers 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 flow 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 flow 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.

35

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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 some of the pending legal and regulatory actions, plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary damages. 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 following is a summary of certain pending proceedings.

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, including matters discussed below. The Company estimates that as of June 30, 2013, 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 $0 to approximately $5 million. The 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.

In January 2013, a qui tam action on behalf of the State of Florida,Total Asset Recovery Services v. Met Life Inc., et al., Manulife Financial Corporation, et. al., Prudential Financial, Inc., The Prudential Insurance Company of America, and Prudential Insurance Agency, LLC., filed in the Circuit Court of Leon County, Florida, was served on Prudential Insurance. The complaint alleges that Prudential Insurance failed to escheat life insurance proceeds to the State of Florida in violation of the Florida False Claims Act and seeks injunctive relief, compensatory damages, civil penalties, treble damages, prejudgment interest, attorneys’ fees and costs. In March 2013, the Company filed a motion to dismiss the complaint.

In January 2012, a Global Resolution Agreement entered into by the Company and a third party auditor became effective upon its acceptance by the unclaimed property departments of 20 states and jurisdictions. Under the terms of the Global Resolution Agreement, the third party auditor acting on behalf of the signatory states will compare expanded matching criteria to the Social Security Master Death File (“SSMDF”) to identify deceased insureds and contract holders where a valid claim has not been made. In February 2012, a Regulatory Settlement Agreement entered into by the Company to resolve a multi-state market conduct examination regarding its adherence to state claim settlement practices became effective upon its acceptance by the insurance departments of 20 states and jurisdictions. The Regulatory Settlement Agreement applies prospectively and requires the Company to adopt and implement additional procedures comparing its records to the SSMDF to identify unclaimed death benefits and prescribes procedures for identifying and locating beneficiaries once deaths are identified. Other jurisdictions that are not signatories to the Regulatory Settlement Agreement are considering proposals that would apply prospectively and require life insurance companies to take additional steps to identify unreported deceased policy and contract holders. These prospective changes and any escheatable property identified as a result of the audits and inquiries could result in: (1) additional payments of previously unclaimed death benefits; (2) the payment of abandoned funds to U.S. jurisdictions; and (3) changes in the Company’s practices and procedures for the identification of escheatable funds and beneficiaries, which would impact claim payments and reserves, among other consequences.

The Company is one of several companies subpoenaed by the New York Attorney General regarding its unclaimed property procedures. Additionally, the New York State Department of Financial Services (“NYDFS”) has requested that 172 life insurers (including the Company) provide data to the NYDFS regarding use of the SSMDF. The New York Office of Unclaimed Funds is conducting an audit of the Company’s compliance with New York’s unclaimed property laws. In February 2012, the Massachusetts Office of the Attorney General requested information regarding the Company’s unclaimed property procedures. In May 2013, the Company entered into a settlement agreement with the Minnesota Department of Commerce, Insurance Division, which requires the Company to take additional steps to identify deceased insureds and contract holders where a valid claim has not been made.

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 flow 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 flow 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.

36

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

7.    RELATED PARTY TRANSACTIONS

The Company has extensive transactions and relationships with Prudential Insurance and other affiliates. Although we seek to ensure that these transactions and relationships are fair and reasonable, it is possible that the terms of these transactions are not the same as those that would result from transactions among unrelated parties.

Expense Charges and Allocations

Many of the Company’s expenses are allocations or charges from Prudential Insurance or other affiliates.

The Company’s general and administrative expenses are charged to the Company using allocation methodologies based on business production processes. Management believes that the methodology is reasonable and reflects costs incurred by Prudential Insurance to process transactions on behalf of the Company. The Company operates under service and lease agreements whereby services of officers and employees, supplies, use of equipment and office space are provided by Prudential Insurance. The Company reviews its allocation methodology periodically which it may adjust accordingly. General and administrative expenses also include allocations of stock compensation expenses related to a stock option program and a deferred compensation program issued by Prudential Financial. The expense charged to the Company for the stock option program and deferred compensation program was $365 thousand and $477 thousand for the three months ended June 30, 2013 and 2012, respectively, and $0.8 million and $1.3 million for the six months ended June 30, 2013 and 2012, respectively.

The Company is charged for its share of employee benefits expenses. These expenses include costs for funded and non-funded contributory and non-contributory defined benefit pension plans. Some of these benefits are based on earnings and length of service. Other benefits are based on an account balance, which takes into consideration age, service and earnings during career. The Company’s share of net expense for the pension plans was $1 million for the three months ended June 30, 2013 and 2012, and $2 million for the six months ended June 30, 2013 and 2012.

Prudential Insurance sponsors voluntary savings plans for the Company’s employees (“401(k) plans”). The 401(k) plans provide for salary reduction contributions by employees and matching contributions by the Company of up to 4% of annual salary. The expense charged to the Company for the matching contribution to the 401(k) plans was $249 thousand and $342 thousand for the three months ended June 30, 2013 and 2012, respectively, and $517 thousand and $679 thousand for the six months ended June 30, 2013 and 2012, respectively.

Affiliated Asset Administration Fee Income

In accordance with an agreement with AST Investment Services, Inc., the Company receives fee income calculated on contractholder separate account balances invested in the Advanced Series Trust, formerly known as American Skandia Trust. Income received from AST Investment Services, Inc. related to this agreement was $57 million and $56 million for the three months ended June 30, 2013 and 2012, respectively, and $114 million and $113 million for the six months ended June 30, 2013 and 2012, respectively. These revenues are recorded as “Asset administration fees and other income” in the Unaudited Interim Statements of Operations and Comprehensive Income.

Affiliated Investment Management Expenses

In accordance with an agreement with Prudential Investment Management, Inc. (“PIMI”), the Company pays investment management expenses to PIMI who acts as investment manager to certain Company general account and separate account assets. Investment management expenses paid to PIMI related to this agreement was $2 million for the three months ended June 30, 2013 and 2012, and $3 million and $4 million for the six months ended June 30, 2013 and 2012, respectively. These expenses are recorded as “Net investment income” in the Unaudited Interim Statements of Operations and Comprehensive Income.

Cost Allocation Agreements with Affiliates

Certain operating costs (including rental of office space, furniture, and equipment) have been charged to the Company at cost by Prudential Annuities Information Services and Technology Corporation (“PAIST”), an affiliated company. PALAC signed a written service agreement with PAIST for these services executed and approved by the Connecticut Insurance Department in 1995. This agreement automatically continues in effect from year to year and may be terminated by either party upon 30 days written notice.

Allocated lease expense was $1 million for the three months ended June 30, 2013 and 2012, and $2 million for the six months ended June 30, 2013 and 2012. Allocated sub-lease rental income, recorded as a reduction to lease expense was $1 million for the three months ended June 30, 2013 and 2012, and $1 million and $2 million for the six months ended June 30, 2013 and 2012, 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 sold and service the Company’s products. Commissions and fees paid by the Company to PAD were $43 million and $45 million for the three months ended June 30, 2013 and 2012, respectively, and $85 million and $95 million for the six months ended June 30, 2013 and 2012, respectively.

37

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Debt Agreements

Short-term and Long-term Debt

The Company is authorized to borrow funds up to $2 billion from Prudential Financial and its affiliates to meet its capital and other funding needs. The Company paid off a $28 million short-term debt from Prudential Funding, LLC on December 12, 2012. Total interest expense on short-term affiliated debt to the Company was less than $1 million for the three months ended June 30, 2013 and 2012, respectively, and less than $1 million the six months ended June 30, 2013 and 2012, respectively.

The Company had long-term debt of $400 million outstanding with Prudential Financial as of June 30, 2013 and December 31, 2012. This loan has a fixed interest rate of 4.49% and matures on December 29, 2014. In December 2012, a $200 million partial pay down was made on this outstanding debt. Total interest expense on affiliated long-term debt was $5 million and $7 million for the three months ended June 30, 2013 and 2012, respectively and $9 million and $13 million for the six months ended June 30, 2013 and 2012, respectively.

Reinsurance Agreements

The Company uses reinsurance as part of its risk management and capital management strategies for certain of its optional living benefit features. Fees ceded under these agreements are included in “Realized investment gains (losses), net” on the Unaudited Interim Statement of Operations and Comprehensive Income. The Company ceded fees of $67 million and $66 million to Pruco Re for the three months ended June 30, 2013 and 2012, respectively and $136 million and $132 million for the six months ended June 30, 2013 and 2012, respectively. The Company ceded fees of less than $1 million to Prudential Insurance for the three months ended June 30, 2013 and 2012, and less than $1 million for the six months ended June 30, 2013 and 2012.

The Company’s reinsurance recoverables related to the above product reinsurance agreements were $655 million and $1,733 million as of June 30, 2013 and December 31, 2012, respectively. The assets are reflected in “Reinsurance recoverables” in the Company’s Unaudited Interim Statements of Financial Position. Realized gains (losses) were ($605) million and $490 million for the three months ended June 30, 2013 and 2012, respectively and ($1,214) million and ($119) million for the six months ended June 30, 2013 and 2012, respectively. Changes in realized gains (losses) for the 2013 and 2012 periods were primarily due to changes in market conditions in each respective period.

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.

Purchase/sale of fixed maturities and commercial mortgage loans from/to an affiliate

During the first quarter of 2012, the Company sold fixed maturity securities to Prudential Financial. These securities had an amortized cost of $123 million and a fair value of $141 million. The net difference between historic amortized cost and the fair value was accounted for as an increase of $11 million to additional paid-in capital, net of taxes.

The Company also sold fixed maturity securities to an affiliated company during December 2012. These securities had an amortized cost of $27 million and a fair value of $28 million. The net difference between historic amortized cost and the fair value was $1 million and was recorded as a realized investment gain on the Company’s Unaudited Interim Statement of Operations and Comprehensive Income. The Company also sold commercial mortgage loans to an affiliated company during December 2012. These loans had an amortized cost of $27 million and a fair value of $28 million. The net difference between historic amortized cost and the fair value was $1 million and was recorded as a realized investment gain on the Company’s Unaudited Interim Statement of Operations and Comprehensive Income.

During the first quarter of 2013, the Company sold fixed maturity securities to Prudential Financial. These securities had an amortized cost of $90 million and a fair value of $103 million. The net difference between historic amortized cost and the fair value was accounted for as an increase of $8 million to additional paid-in capital, net of taxes.

38

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

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 with the reduced disclosure format.

This 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 June 30, 2013 compared with December 31, 2012, and its results of operations for the three and six months ended June 30, 2013 and 2012. You should read the following analysis of our financial condition and results of operations in conjunction with the audited Financial Statements, and the “Risk Factors” section included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, the statements under “Forward Looking Statements,” “Risk Factors” and the Unaudited Interim Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Overview

The Company was established in 1988 and has been a provider of variable 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 (1) deferred and immediate variable annuities that are registered with the United States Securities and Exchange Commission (the “SEC”), including fixed interest rate allocation options, subject to a market value adjustment, 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 inforce block of variable life insurance policies, but it no longer actively sells such policies.

Beginning in March 2010, the Company ceased offering its existing 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 and Pruco Life Insurance Company of New Jersey (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 optional living benefit riders.

Revenues and Expenses

The Company earns revenues from policy charges, fee income, asset administration fees calculated on the average separate account fund balances and from net investment income on the investment of general account and other funds. The Company’s operating expenses principally consist of insurance benefits provided and reserves established for anticipated future insurance benefits, general business expenses, commissions and other costs of selling and servicing the various products it sold.

Effective February 25, 2013, the Advanced Series Trust (“AST”) adopted a Rule 12b-1 Plan under the Investment Company Act of 1940 with respect to most of the AST portfolios that are primarily offered through the Company’s variable annuity investment options. Under the Rule 12b-1 Plan, AST pays an affiliate of the Company for distribution and administrative services. Prior to the adoption of the 12b-1 Plan, the Company received an administrative service fee from AST and incurred expenses associated with administration services provided. While we expect the level of revenue and expenses of the Company in 2013 to decline relative to 2012 due to the elimination of the administrative services fee and related expenses, we do not expect a material impact to net income related to AST’s adoption of the Rule 12b-1 Plan.

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 policyholder 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” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 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.

Products

The Company’s inforce variable annuities provide its customers with tax-deferred asset accumulation together with a base death benefit and a suite of optional guaranteed death and living benefits. The benefit features contractually guarantee the contractholder a return of no less than (1) total deposits made to the contract less any partial withdrawals (“return of net deposits”), (2) total deposits made to the contract less any partial withdrawals plus a minimum return (“minimum return”), and/or (3) the highest contract value on a specified date minus any withdrawals (“contract value”). These guarantees may include benefits that are payable in the event of death, annuitization or at specified dates during the accumulation period and withdrawal and income living benefits payable during specified periods. Certain optional living benefit guarantees include, among other features, the ability to make withdrawals based on the highest daily contract value plus a minimum return, credited for a period of time. This guaranteed contract value is a notional amount that forms the basis for determination of periodic withdrawals for the life of the contractholder, and cannot be accessed as a lump-sum surrender value.

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Our variable annuities provide our customers with the opportunity to allocate purchase payments to sub-accounts that invest in underlying proprietary and non-proprietary mutual funds, frequently under asset allocation programs, and fixed-rate accounts. The fixed-rate accounts 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 investments 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.

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 equity market returns, interest rates, market volatility, contractholder longevity/mortality, timing and amount of annuitization and withdrawals, withdrawal efficiency and contract lapses. The return we realize from our variable annuity contracts will vary based on the extent of the differences between our actual experience and the assumptions used in the original pricing of these products. Our returns can also vary due to the impact of affiliated reinsurance, the impact and effectiveness of our hedging programs for any capital markets movements that we may hedge, the impact of that portion of our variable annuity contracts with an asset transfer feature, the impact of risks we have retained and the impact of risks that are not able to be hedged.

Our risk management strategy helps to limit our exposure to certain of these risks primarily through a combination of product design elements, our living benefits hedging program and affiliated reinsurance arrangements. The product design elements we utilize for certain products include, among others, asset allocation restrictions, minimum issuance age requirements, certain limitations on the amount of subsequent contractholder deposits and an asset transfer feature. The objective of the asset transfer feature is to help mitigate our exposure to equity market risk and market volatility by transferring assets between certain variable investment sub-accounts selected by the annuity contractholder and investments that are expected to be more stable (e.g., a bond fund sub-account within the separate account or a fixed-rate account within the general account). The transfers are based on the static mathematical formula used with the particular optional benefit which considers a number of factors, including, but not limited to, the impact of investment performance on the contractholder’s total account value. This occurs at the contractholder level, rather than at the fund level, which we believe enhances our risk mitigation. As of June 30, 2013 approximately $39.2 billion or 83% of total variable annuity account values contain a living benefit feature, compared to approximately $40.0 billion or 82% as of December 31, 2012. As of June 30, 2013 approximately $31.0 billion or 79% of variable annuity account values with living benefit features included an asset transfer feature in the product design, compared to approximately $32.0 billion or 80% as of December 31, 2012.

As mentioned above, in addition to our asset transfer feature, we also manage certain risks associated with our variable annuity products through our living benefits hedging programs and affiliated reinsurance agreements. We reinsure the majority of our variable annuity living benefit guarantees to an affiliated reinsurance company, Pruco Reinsurance, Ltd. (“Pruco Re”). The living benefits hedging program is primarily executed within Pruco Re to manage capital markets risk associated with the reinsured optional living benefit guarantees. The program is also executed within the Company related to certain non-reinsured optional living benefit guarantees. This program represents a balance among three objectives that seek to: 1) provide severe scenario protection, 2) minimize net income volatility associated with an internally-defined hedge target, and 3) maintain capital efficiency. Through the hedge program, derivatives are entered into that seek to replicate the net change in an internally-defined hedge target. In addition to mitigating capital markets risk and income statement volatility, the hedging program is also focused on a long-term goal of accumulating assets that could be used to pay claims under these benefits irrespective of market path, recognizing that, under the terms of the contracts, we do not expect to begin substantial payment of such claims until at least five years in the future.

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, on an ongoing basis, reviews estimates and assumptions used in the preparation of financial statements. If management determines that modifications in assumptions and estimates are appropriate given current facts and circumstances, results of operations and financial position as reported in the Unaudited Interim Financial Statements could change significantly.

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:

— Deferred policy acquisition costs (“DAC”) and other costs, including value of business acquired;

— Valuation of investments, including derivatives, and the recognition of other-than-temporary impairments;

— Policyholder liabilities;

— Taxes on income; and

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

The near-term future equity rate of return assumption used in evaluating DAC and deferred sales inducements (“DSI”) is derived using a reversion to the mean approach, a common industry practice. Under this approach, we consider historical equity returns over a period of time and initially adjust future projected equity returns over the next four years (the “near-term”) so that the assets are projected to grow at the long-term expected rate of return for the entire period. If the near-term projected future rate of return is greater than our near-term maximum future rate of return of 13%, we use our maximum future rate of return.

The weighted average rate of return assumptions consider many factors including asset durations, asset allocations and other factors. We update the near term equity rate of return and our estimate of total gross profits each quarter to reflect the result of the reversion to the mean approach, which assumes a convergence to the long-term equity expected rate of return. These market performance related adjustments to our estimate of total gross profits result in cumulative adjustments to prior amortization, reflecting the application of the new required rate of amortization to all prior periods’ gross profits. The new required rate of amortization is also applied prospectively to future gross profits in calculating amortization in future periods. As of June 30, 2013, our variable annuities business assumes an 8.0% long-term equity expected rate of return and a near-term mean reversion equity rate of return of 6.7%.

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Additional information on our policies for our critical accounting estimates listed above may also be found in our Annual Report on Form 10-K for the year ended December 31, 2012, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Application of Critical Accounting Estimates.”

Adoption of New Accounting Pronouncements

See Note 2 to our Unaudited Interim Financial Statements for a discussion of newly adopted accounting pronouncements.

Changes in Financial Position

June 30, 2013 versus December 31, 2012

Total assets decreased by $1.7 billion, from $52.8 billion at December 31, 2012 to $51.1 billion at June 30, 2013. Reinsurance recoverables decreased $1.1 billion related to the reinsured liability for living benefit embedded derivatives primarily resulting from a decrease in the present value of future expected benefit payments driven by increases in interest rates. Total investments decreased $441 million primarily due to asset sales associated with contractholder surrenders, the impact of the asset transfer feature which moved customer account values from the general account to the separate account due to favorable markets in the first six months of 2013 and a decrease in unrealized gains on fixed maturity securities due to rising interest rates. Separate account assets decreased $422 million primarily driven by net outflows on the runoff block and policy charges, partially offset by market appreciation and the impact of the asset transfer feature which moved customer account values from the general account to the separate account due to favorable markets in the first six months of 2013. Partially offsetting the above decreases was a $184 million increase in DAC and DSI primarily resulting from the impact of the mark-to-market of the reinsured liability for living benefit embedded derivatives and related hedge positions.

Total liabilities decreased by $1.8 billion, from $51.6 billion at December 31, 2012 to $49.8 billion at June 30, 2013. Future policy benefits and other policyholder liabilities decreased $1.1 billion primarily driven by a decrease in the liability for living benefit embedded derivatives, as discussed above. Separate account liabilities decreased by $422 million offsetting the decrease in separate accounts assets above. Policyholder’s account balance decreased by $340 million driven by account value runoff due to contractholder surrenders and the impact of the asset transfer feature which moved customer account values from the general account to the separate account, as discussed above.

Total equity increased by $0.1 billion from $1.2 billion at December 31, 2012 to $1.3 billion at June 30, 2013, primarily driven by net income partially offset by a dividend paid to our ultimate parent, Prudential Financial of $184 million and a decrease driven by unrealized gains on fixed maturity securities due to rising interest rates.

Results of Operations

2013 versus 2012 Three Month Comparison

Income (Loss) from Operations before Income Taxes

Income from operations before income taxes increased $528 million from a loss of $341 million for the second quarter of 2012 to income of $187 million for the second quarter of 2013. The increase was primarily driven by the impact on the amortization of DAC and other costs, and on the reserves for the guaranteed minimum death benefit (“GMDB”) and guaranteed minimum income benefit (“GMIB”) features, of the mark-to-market of the liability for living benefit embedded derivatives and related hedge positions and of changes in the estimated profitability of the business, as discussed in more detail below. Partially offsetting the benefit from these items was an unfavorable variance related to the mark-to-market of our non-reinsured living benefit features and related hedge positions, primarily due to larger non-performance risk (“NPR”) losses in 2013 primarily driven by a decline in the base embedded liability due to rising interest rates, as well as larger net hedging losses mainly driven by fund performance.

The following table reflects the impact on the amortization of DAC and other costs and on the GMDB/GMIB reserves of the mark-to-market of the liability for living benefit embedded derivatives and related hedge positions, and of changes in the estimated profitability of the business.

	Three Months Ended June 30,
	2013		2012
	($ in millions)
	(1)
Impact of the mark-to-market of the liability for living benefit embedded derivatives and related hedge positions	$	141	$	(414)
Impacts of changes in the estimated profitability of the business		(3)		(58)
Total	$	138		(472)

(1) Amounts reflect (charges) or benefits for (increases) or decreases, respectively, in the amortization of DAC and other costs and for GMDB/GMIB reserve (increases) or decreases, respectively.

We amortize DAC and other costs over the expected lives of the contracts based on the level and timing of gross profits on the underlying product. In calculating gross profits, we consider mortality, persistency, and other elements as well as rates of return on investments associated with these contracts and include profits and losses related to these contracts that are reported in affiliated legal entities other than the Company as a result of, for example, reinsurance agreements with those affiliated entities. The Company is an indirect subsidiary of Prudential Financial (an SEC registrant) and has extensive transactions and relationships with other subsidiaries of Prudential Financial, including reinsurance agreements, as discussed in Note 7

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to the Unaudited Interim Financial Statements. Incorporating all product-related profits and losses in gross profits, including those that are reported in affiliated legal entities, produces an amortization pattern representative of the economics of the products.

The impact of the mark-to-market of the liability for living benefit embedded derivatives and related hedge positions, primarily relates to changes in the valuation of the reinsured living benefit liabilities related to NPR which we and the reinsurance affiliate believe to be noneconomic, and choose not to hedge. The favorable variance was driven by NPR losses in the reinsurance affiliate in 2013 compared to NPR gains in 2012, which resulted in an amortization benefit in 2013 compared to an amortization expense in 2012. NPR losses in the reinsurance affiliate in 2013 were primarily driven by a decline in the base embedded liability due to higher interest rates, while NPR gains in the reinsurance affiliate in 2012 were primarily driven by an increase in the base embedded liability due to lower interest rates and unfavorable equity market conditions.

The impacts of changes in the estimated profitability of the business include adjustments to the amortization of DAC and other costs and to GMDB and GMIB reserves for the impacts of market performance and current period experience. The $3 million net charge in the second quarter of 2013 was primarily driven by the negative experience related to the change of the fair value of the hedge target liability and the change in the fair value of the hedge assets primarily in the reinsurance affiliate due to differences in market conditions relative to our assumptions, partially offset by the impact of higher interest rates, which increased future expected fixed income returns on contractholder accounts and lowered future expected claims relative to our assumptions. For weighted average rate of return assumptions as of June 30, 2013 see “Application of Critical Accounting Estimates” above. The $58 million net charge in the second quarter of 2012 primarily reflects negative equity market performance on contractholder accounts relative to assumptions and negative experience related to the change of the fair value of the hedge target liability and the change in the fair value of the hedge assets primarily in the reinsurance affiliate due to differences in market conditions relative to our assumptions.

Revenues, Benefits and Expenses

Revenues decreased $92 million, primarily driven by a $79 million decrease in realized investment gains/losses, net, primarily due to an unfavorable variance related to our non-reinsured living benefit features, as discussed above. Net investment income decreased $10 million as a result of lower average annuity account values in the general account, primarily resulting from contractholder surrenders and net transfers from the fixed-rate option in the general account to the separate accounts relating to favorable markets and the asset transfer feature.

Benefits and expenses decreased $620 million, primarily driven by a benefit in DAC amortization of $37 million in the second quarter of 2013 compared to a charge in DAC amortization of $341 million in the second quarter of 2012. In addition, interest credited to policyholders’ account balances, which includes DSI amortization decreased $222 million. Changes in DAC and DSI amortization were related to the impact of the mark-to-market of the reinsured liability for living benefit embedded derivatives and related hedge positions and the impact of changes in the estimated profitability of the business, as discussed above.

2013 versus 2012 Six Month Comparison

Income (Loss) from Operations before Income Taxes

Income from operations before income taxes increased $194 million from $190 million for 2012 to $384 million for 2013. The increase was primarily driven by the impact on the amortization of DAC and other costs, and on the reserves for the GMDB and GMIB features, of the mark-to-market of the liability for living benefit embedded derivatives and related hedge positions and of changes in the estimated profitability of the business, as discussed in more detail below. Partially offsetting the benefit from these items was an unfavorable variance related to the mark-to-market of our non-reinsured living benefit features and related hedge positions, primarily due to larger NPR losses in 2013 primarily driven by a decline in the base embedded liability due to rising interest rates, as well as larger net hedging losses mainly driven by fund performance.

The following table reflects the impact on the amortization of DAC and other costs and on the GMDB/GMIB reserves of the mark-to-market of the liability for living benefit embedded derivatives and related hedge positions, and of changes in the estimated profitability of the business.

	Six Months Ended June 30,
	2013		2012
	($ in millions)
	(1)
Impact of the mark-to-market of the liability for living benefit embedded derivatives and related hedge positions	$	284	$	(32)
Impacts of changes in the estimated profitability of the business		(15)		34
Total	$	269	$	2

(1) Amounts reflect (charges) or benefits for (increases) or decreases, respectively, in the amortization of DAC and other costs and for GMDB/GMIB reserve (increases) or decreases, respectively.

The impact of the mark-to-market of the liability for living benefit embedded derivatives and related hedge positions, primarily relates to changes in the valuation of the reinsured living benefit liabilities related to NPR which we and the reinsurance affiliate believe to be noneconomic, and choose not to hedge. The favorable variance was driven by larger NPR losses in the reinsurance affiliate in 2013, which resulted in a larger amortization benefit in 2013. Larger NPR losses in the reinsurance affiliate in 2013 were primarily driven by lower base embedded derivative liability due to higher interest rates during the second quarter of 2013.

The impacts of changes in the estimated profitability of the business include adjustments to the amortization of DAC and other costs and to GMDB and GMIB reserves for the impacts of market performance and current period experience. The $15 million net charge in the first six months of 2013

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was primarily driven by the negative experience related to the change of the fair value of the hedge target liability and the change in the fair value of the hedge assets primarily in the reinsurance affiliate due to differences in market conditions relative to our assumptions, partially offset by the impact of higher interest rates, which increased future expected fixed income returns on contractholder accounts and lowered future expected claims relative to our assumptions as well as the impact of positive market performance on contractholder accounts relative to our assumptions. For weighted average rate of return assumptions as of June 30, 2013 see “Application of Critical Accounting Estimates” above. The $34 million net benefit in the second quarter of 2012 was primarily driven by the impact of positive market performance on contractholder accounts relative to our assumptions and positive experience related to the change of the fair value of the hedge target liability and the change in the fair value of the hedge assets primarily in the reinsurance affiliate due to differences in market conditions relative to our assumptions

Revenues, Benefits and Expenses

Revenues decreased $115 million, primarily driven by a $81 million decrease in realized investment gains/losses, net, primarily due to an unfavorable variance related to our non-reinsured living benefit features, as discussed above. Net investment income decreased $25 million as a result of lower average annuity account values in the general account, primarily resulting from contractholder surrenders and net transfers from the fixed-rate option in the general account to the separate accounts relating to favorable markets and the asset transfer feature.

Benefits and expenses decreased $309 million, primarily driven by a benefit in DAC amortization of $72 million in 2013 compared to a charge in DAC amortization of $109 million in 2012. In addition, interest credited to policyholders’ account balances, which includes DSI amortization decreased $125 million. Changes in DAC and DSI amortization were related to the impact of the mark-to-market of the reinsured liability for living benefit embedded derivatives and related hedge positions and the impact of changes in the estimated profitability of the business, as discussed above.

Income Taxes

The income tax provision amounted to an expense of $43 million and a benefit of $104 million for the three months ended June 30, 2013 and 2012, respectively. The income tax provision amounted to an expense of $93 million and $55 million for the six months ended June 30, 2013 and 2012, respectively. The increases in income tax expense were primarily driven by the increases in pre-tax income.

The Company’s liability for income taxes includes the liability for unrecognized tax benefits and interest that relate to tax years still subject to review by the Internal Revenue Service (“IRS”) or other taxing authorities. The completion of review or the expiration of the Federal statute of limitations for a given audit period could result in an adjustment to the liability for income taxes. The statute of limitations for the 2009 tax year will expire in December 2014, unless extended. Tax years 2010 through 2012 are still open for IRS examination.

The Company does not anticipate any significant changes within the next 12 months to its total unrecognized tax benefits related to tax years for which the statute of limitations has not expired.

The dividends received deduction (“DRD”) reduces the amount of dividend income subject to U.S. tax and is a significant component of the difference between the Company’s effective tax rate and the federal statutory tax rate of 35%. The DRD for the current period was estimated using information from 2012, current year results, and was adjusted to take into account the current year’s equity market performance. The actual current year DRD can vary from the estimate based on factors such as, but not limited to, changes in the amount of dividends received that are eligible for the DRD, changes in the amount of distributions received from mutual fund investments, changes in the account balances of variable life and annuity contracts, and the Company’s taxable income before the DRD.

In August 2007, the IRS released Revenue Ruling 2007-54, which included, among other items, guidance on the methodology to be followed in calculating the DRD related to variable life insurance and annuity contracts. In September 2007, the IRS released Revenue Ruling 2007-61. Revenue Ruling 2007-61 suspended Revenue Ruling 2007-54 and informed taxpayers that the U.S. Treasury Department and the IRS intend to address through new guidance the issues considered in Revenue Ruling 2007-54, including the methodology to be followed in determining the DRD related to variable life insurance and annuity contracts. In May 2010, the IRS issued an Industry Director Directive (“IDD”) confirming that the methodology for calculating the DRD set forth in Revenue Ruling 2007-54 should not be followed. The IDD also confirmed that the IRS guidance issued before Revenue Ruling 2007-54, which guidance the Company relied upon in calculating its DRD, should be used to determine the DRD. For the last several years, the revenue proposals included in the Obama Administration’s budgets included a proposal that would change the method used to determine the amount of the DRD. A change in the DRD, including the possible retroactive or prospective elimination of this deduction through guidance or legislation, could increase actual tax expense and reduce the Company’s consolidated net income. These activities had no impact on the Company’s results for 2012 or for the six months ended June 30, 2013.

In 2009, the Company joined in filing the consolidated federal tax return with its parent, Prudential Financial. For tax years 2009 through 2012, the Company is participating in the IRS’s Compliance Assurance Program (“CAP”). Under CAP, the IRS assigns an examination team to review completed transactions contemporaneously during these tax years in order to reach agreement with the Company on how they should be reported in the tax returns. If disagreements arise, accelerated resolutions programs are available to resolve the disagreements in a timely manner before the tax returns are filed. It is management’s expectation this program will shorten the time period between the filing of the Company’s federal income tax returns and the IRS’s completion of its examination of the returns.

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, 2012.

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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. The ability to generate and maintain sufficient liquidity and capital depends on the profitability of our business, general economic conditions and our access to the capital markets through affiliates as described herein.

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 quarterly 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 Financial and the Company, including reasonably foreseeable stress scenarios. We have a capital management framework in place that facilitates the allocation of capital and approval of capital uses, and we forecast capital sources and uses on a quarterly basis. Furthermore, we employ a “Capital Protection Framework” to ensure the availability of sufficient capital resources to maintain adequate capitalization and competitive risk-based capital ratios under reasonably foreseeable stress scenarios.

The Financial Stability Oversight Council has made a proposed determination that Prudential Financial should be subject to stricter prudential regulatory standards and supervision by the Board of Governors of the Federal Reserve System under the Dodd-Frank Act. This stricter prudential regulation may include new capital and liquidity standards, including requirements regarding risk-based capital, leverage, liquidity, stress-testing and other matters. For information on recent actions and the potential impact of the Dodd-Frank Act, see “Business—Regulation” and “Risk Factors” included in our 2012 Annual Report on Form 10-K for the year ended December 31, 2012 and updated “Risk Factors” included in this Quarterly Report on Form 10-Q.

The Financial Stability Oversight Council has made a proposed determination that Prudential Financial should be subject to stricter prudential regulatory standards and supervision by the Board of Governors of the Federal Reserve System under the Dodd-Frank Act. This stricter prudential regulation may include new capital and liquidity standards, including requirements regarding risk-based capital, leverage, liquidity, stress-testing and other matters. In addition, the Financial Stability Board, consisting of representatives of national financial authorities of the G20 nations, identified Prudential Financial as a global systemically important insurer. For information on these recent actions and their potential impact on us, see “Business—Regulation” and “Risk Factors” included in our 2012 Annual Report on Form 10-K.

On June 26, 2013, December 11, 2012 and June 29, 2012 the Company paid extraordinary dividends of $184 million, $160 million and $248 million, respectively, to its ultimate parent, Prudential Financial.

Capital

The Risk Based Capital, or RBC, ratio is a primary measure of the capital adequacy of the Company. RBC is determined by statutory guidelines and formulas that consider 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 is calculated based on statutory financial statements and risk formulas consistent with NAIC practices. The RBC ratio calculations are intended to assist insurance regulators in measuring the 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 June 30, 2013 we estimate that the Company’s RBC ratio exceeds the minimum level required by applicable insurance regulations.

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. Further, the recapture of business subject to reinsurance arrangements due to defaults by, or credit quality migration affecting, the reinsurers could result in higher required statutory capital levels. The regulatory capital level of the Company is also affected by statutory accounting rules which are subject to change by insurance regulators.

We employ a “Capital Protection Framework” to ensure sufficient capital resources are available to maintain adequate capitalization and a competitive risk based capital ratio, under reasonably foreseeable stress scenarios. The Capital Protection Framework incorporates the potential impacts from market related stresses, including equity markets, interest rates, and credit losses. Potential sources of capital include on-balance sheet capital, derivatives, reinsurance and contingent sources of capital. Although we continue to enhance our approach, we believe we currently have sufficient resources to maintain adequate capitalization and a competitive RBC ratio under reasonably foreseeable stress scenarios.

Prudential Financial and the Company use captive reinsurance companies to more effectively manage its capital on an economic basis and to enable the aggregation and transfer of risks. To support the risks they assume, the captives are capitalized to a level consistent with our “AA” financial strength ratings. In the normal course of business, Prudential Financial provides support to these captives through net worth maintenance agreements and/or guarantees of certain of the captives’ obligations. Recently, the NAIC and the New York State Department of Financial Services have examined life insurers’ use of captive reinsurance companies. We cannot predict what, if any, changes may result from these reviews. If applicable insurance laws are changed in a way that impairs the use of captive reinsurance companies, our ability to manage certain products risks could be adversely affected, which could adversely affect our capital and financial position and results of operations.

We manage certain risks associated with our variable annuity products through arrangements with an affiliated captive reinsurance company. We reinsure variable annuity living benefit guarantees to an affiliated captive reinsurance company, Pruco Re. This enables Prudential Financial to execute its living benefit hedging program within one legal entity, Pruco Re. In order for the Company to claim statutory reserve credit for business ceded to Pruco Re, Pruco Re must collateralize its obligation under the reinsurance agreement. This requirement is satisfied by Pruco Re depositing assets into statutory reserve credit trusts. Reinsurance reserve credit requirements can move materially in either direction due to changes in equity markets and interest rates, actuarial assumptions and other factors. Higher statutory reinsurance credit reserve requirements would require Pruco Re

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to deposit additional assets in the statutory reserve credit trusts, while lower statutory reinsurance credit reserve requirements would allow assets to be removed from the statutory reserve credit trusts. As of June 30, 2013, the statutory reserve credit trusts required collateral of $1.4 billion, a decrease of $0.7 billion from December 31, 2012. Pruco Re has deposited assets into statutory reserve credit trusts to satisfy this requirement. The decrease was primarily driven by favorable equity markets, partially offset by a decline in the long term interest rate assumptions we are required to use to calculate the associated reserve requirements.

Liquidity

There have been no material changes to the liquidity position of the Company since December 31, 2012. 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 for the Company.

The principal sources of the Company’s cash are certain annuity considerations, investment and fee income, investment maturities as well as 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, and payments in connection with financing activities. As discussed above, in March 2010, the Company ceased offering its existing variable annuity products to new investors upon the launch of a new product line by certain affiliates. Therefore, the Company expects to continue to see the overall level of cash flows decrease going forward as the book of business runs off. We use a projection process for cash flows from operations to ensure sufficient liquidity is available to meet projected cash outflows, including claims.

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 segment our investment portfolios and employ an asset/liability management approach specific to the requirements of each of our product lines. This enhances the discipline applied in managing the liquidity, as well as the interest rate and credit risk profiles, of each portfolio in a manner consistent with the unique characteristics of the product liabilities.

Liquid assets include cash and cash equivalents, short-term investments and fixed maturities that are not designated as held-to-maturity and public equity securities. As of June 30, 2013 and December 31, 2012, the Company had liquid assets of $4.0 billion and $4.3 billion, respectively. The portion of liquid assets comprised of cash and cash equivalents and short-term investments was $0.2 billion and $0.1 billion as of June 30, 2013 and December 31, 2012, respectively. As of June 30, 2013, $3.5 billion, or 94%, of the fixed maturity investments in company general account portfolios were rated high or highest quality based on NAIC or equivalent rating. The remaining $0.2 billion, or 6%, of these fixed maturity investments were rated other than high or highest quality.

Prudential Financial and Prudential Funding, LLC, or Prudential Funding, a wholly-owned subsidiary of Prudential Insurance, borrow funds in the capital markets primarily through the direct issuance of commercial paper. The borrowings serve as an additional source of financing to meet our working capital needs. Prudential Funding operates under a support agreement with Prudential Insurance whereby Prudential Insurance has agreed to maintain Prudential Funding positive tangible net worth at all times.

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 Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the “Exchange Act”, as amended, as of June 30, 2013. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2013, our disclosure controls and procedures were effective. No change in our internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), occurred during the quarter ended June 30, 2013 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 6 to the Unaudited Interim Financial Statements under “—Litigation and Regulatory Matters” for a description of material pending litigation and regulatory matters affecting us, and certain risks to our businesses 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, 2012. 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 businesses described elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2012.

The risk factor contained in our 2012 Form 10-K titled “The Dodd-Frank Wall Street Reform and Consumer Protection Act has and will subject us to substantial additional federal regulation and we cannot predict the effect on our business, results of operations, cash flows or financial condition” is hereby updated to note that on June 3, 2013, Prudential Financial received notice of a proposed determination by the Financial Stability Oversight Council (the “Council”) that it should be subject to stricter prudential regulatory standards and supervision by the Board of Governors of the Federal Reserve System (as a “Covered Company”) pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. On July 2, 2013, Prudential Financial provided notice to the Council requesting a nonpublic written and oral evidentiary hearing before the Council to contest the Council’s proposed determination. The written and oral evidentiary hearing was held and completed as of July 30, 2013. According to the regulations, the Council will make a final determination on Prudential Financial’s status as a Covered Company within 60 days after the hearing.

On July 18, 2013, the Financial Stability Board, consisting of representatives of national financial authorities of the G20 nations, identified Prudential Financial as a global systemically important insurer (“G-SII”).

For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Item 6. Exhibits

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.
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.

In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to the Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or Exchange Act, except as shall be expressly set forth by specific reference in such filing.

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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/ Yanela C. Frias
	Yanela C. Frias
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

Date: August 13, 2013

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Exhibit Index

Exhibit Number and Description

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.
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.

In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to the Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or Exchange Act, except as shall be expressly set forth by specific reference in such filing.

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