UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________ 

FORM 10-Q

______________________________ 

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

For the quarterly period ended September 30, 2017

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)

Arizona	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  ý    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  ý    No  ¨

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

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	x	(Do not check if a smaller reporting company)
		Smaller reporting company	¨
		Emerging growth company	¨

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

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

As of November 9, 2017, 25,000 shares of the registrant’s Common Stock (par value $100) consisting of 100 voting shares and 24,900 non-voting shares were outstanding. As of such date, Prudential Annuities, Inc., an indirect wholly-owned subsidiary of Prudential Financial, Inc., a New Jersey corporation, owned all of the Registrant’s Common Stock.

Prudential Annuities Life Assurance Corporation meets the conditions set

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

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

TABLE OF CONTENTS

			Page
PART I FINANCIAL INFORMATION
	Item 1.	Financial Statements:
		Unaudited Interim Statements of Financial Position as of September 30, 2017 and December 31, 2016	4
		Unaudited Interim Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2017 and 2016	5
		Unaudited Interim Statements of Equity for the Nine Months Ended September 30, 2017 and 2016	6
		Unaudited Interim Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016	7
		Notes to Unaudited Interim Financial Statements	9
		1.    Business and Basis of Presentation	9
		2.    Significant Accounting Policies and Pronouncements	13
		3.    Investments	17
		4.    Fair Value of Assets and Liabilities	28
		5.    Derivative Instruments	44
		6.    Commitments, Contingent Liabilities and Litigation and Regulatory Matters	49
		7.    Reinsurance	51
		8.    Equity	53
		9.    Related Party Transactions	55
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	59
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	69
	Item 4.	Controls and Procedures	70
PART II OTHER INFORMATION			71
	Item 1.	Legal Proceedings	71
	Item 1A.	Risk Factors	71
	Item 6.	Exhibits	72
SIGNATURES			73

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; (5) reestimates of our reserves for future policy benefits and claims; (6) differences between actual experience regarding mortality, morbidity, persistency, utilization, interest rates, or market returns and the assumptions we use in pricing our products, establishing liabilities and reserves or for other purposes; (7) changes in our assumptions related to deferred policy acquisition costs or value of business acquired; (8) changes in our financial strength or credit ratings; (9) investment losses, defaults and counterparty non-performance; (10) competition in our product lines and for personnel; (11) changes in tax law; (12) regulatory or legislative changes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the U.S. Department of Labor's fiduciary rules; (13) inability to protect our intellectual property rights or claims of infringement of the intellectual property rights of others; (14) adverse determinations in litigation or regulatory matters, and our exposure to contingent liabilities, including related to the remediation of certain securities lending activities administered by Prudential Financial, Inc.; (15) 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; (16) ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks; (17) interruption in telecommunication, information technology or other operational systems or failure to maintain the security, confidentiality or privacy of sensitive data on such systems; (18) changes in accounting principles, practices or policies; and (19) possible difficulties in executing, integrating and realizing projected results of acquisitions, divestitures and restructurings. Prudential Annuities Life Assurance Corporation does not intend, and is under no obligation, to update any particular forward-looking statement included in this document. See “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2016 for discussion of certain risks relating to our business and investment in our securities.

3

PART I - Financial Information

Item 1. Financial Statements

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Financial Position

September 30, 2017 and December 31, 2016 (in thousands, except share amounts)

	September 30, 2017			December 31, 2016
ASSETS
Fixed maturities, available-for-sale, at fair value (amortized cost, 2017: $10,118,639; 2016: $9,818,298)	$	9,968,944		$	9,362,763
Trading account assets, at fair value	178,647			149,871
Equity securities, available-for-sale, at fair value (cost, 2017: $14; 2016: $365)	18			18
Commercial mortgage and other loans	1,408,660			1,231,893
Policy loans	12,644			12,719
Short-term investments	393,813			947,150
Other long-term investments	190,020			551,931
Total investments	12,152,746			12,256,345
Cash and cash equivalents	2,774,478			1,848,039
Deferred policy acquisition costs	4,559,234			4,344,361
Accrued investment income	69,741			86,004
Reinsurance recoverables	534,694			588,608
Income tax receivable	1,876,761			1,978,607
Value of business acquired	35,187			30,287
Deferred sales inducements	1,027,819			978,823
Receivables from parent and affiliates	57,482			111,703
Other assets	121,330			169,649
Separate account assets	37,970,351			37,429,739
TOTAL ASSETS	$	61,179,823		$	59,822,165
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits	$	8,971,369		$	8,686,196
Policyholders’ account balances	4,744,406			4,736,889
Payables to parent and affiliates	51,270			91,432
Cash collateral for loaned securities	7,835			23,350
Short-term debt	0			28,101
Long-term debt	971,899			971,899
Reinsurance payables	234,859			275,822
Other liabilities	489,532			489,007
Separate account liabilities	37,970,351			37,429,739
Total Liabilities	53,441,521			52,732,435
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	7,795,436			8,095,436
Retained earnings/(accumulated deficit)	107,443			(693,258		)
Accumulated other comprehensive income (loss)	(167,077		)	(314,948		)
Total Equity	7,738,302			7,089,730
TOTAL LIABILITIES AND EQUITY	$	61,179,823		$	59,822,165

See Notes to Unaudited Interim Financial Statements

4

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Operations and Comprehensive Income (Loss)

Three and Nine Months Ended September 30, 2017 and 2016 (in thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
REVENUES
Premiums	$	12,505		$	(595	)	$	48,666		$	847,493
Policy charges and fee income	555,907			544,181			1,646,310			1,219,706
Net investment income	107,953			115,318			314,310			233,147
Asset administration fees and other income	102,713			96,805			307,384			225,832
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities	41			(40		)	(4,692		)	(3,796		)
Other-than-temporary impairments on fixed maturity securities transferred to other comprehensive income (loss)	0			(42		)	(95		)	1,776
Other realized investment gains (losses), net	1,170,036			(35,643		)	(322,725		)	(2,495,641		)
Total realized investment gains (losses), net	1,170,077			(35,725		)	(327,512		)	(2,497,661		)
Total revenues	1,949,155			719,984			1,989,158			28,517
BENEFITS AND EXPENSES
Policyholders’ benefits	14,056			(8,933		)	80,251			554,346
Interest credited to policyholders’ account balances	90,499			(85,615		)	567			101,184
Amortization of deferred policy acquisition costs	260,194			(267,829		)	(45,981		)	17,512
General, administrative and other expenses	232,493			213,129			784,104			822,360
Total benefits and expenses	597,242			(149,248		)	818,941			1,495,402
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES	1,351,913			869,232			1,170,217			(1,466,885		)
Income tax expense (benefit)(1)	412,987			299,586			369,516			(577,639		)
NET INCOME (LOSS)(1)	$	938,926		$	569,646		$	800,701		$	(889,246	)
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments	31			4			95			20
Net unrealized investment gains (losses):
Unrealized investment gains (losses) for the period	(10,626		)	(11,691		)	222,991			371,299
Reclassification adjustment for (gains) losses included in net income	2,664			(9,897		)	4,407			(94,834		)
Net unrealized investment gains (losses)	(7,962		)	(21,588		)	227,398			276,465
Other comprehensive income (loss), before tax:	(7,931		)	(21,584		)	227,493			276,485
Less: Income tax expense (benefit) related to:
Foreign currency translation adjustments	11			1			33			7
Net unrealized investment gains (losses)	(2,787		)	(7,556		)	79,589			96,762
Total	(2,776		)	(7,555		)	79,622			96,769
Other comprehensive income (loss), net of tax	(5,155		)	(14,029		)	147,871			179,716
COMPREHENSIVE INCOME (LOSS)(1)	$	933,771		$	555,617		$	948,572		$	(709,530	)

(1) Prior period amounts for the three months ended September 30, 2016 have been revised to reflect a corrected tax expense amount.

See Notes to Unaudited Interim Financial Statements

5

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Equity

Nine Months EndedSeptember 30, 2017 and 2016 (in thousands)

	Common Stock		Additional Paid-in Capital			Retained Earnings / (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Equity
Balance, December 31, 2016	$	2,500	$	8,095,436		$	(693,258	)	$	(314,948	)	$	7,089,730
Contributed capital			0									0
Assets purchased/transferred from/to affiliates			0									0
Distribution to parent			(300,000		)							(300,000		)
Comprehensive income:
Net income (loss)						800,701						800,701
Other comprehensive income (loss), net of tax									147,871			147,871
Total comprehensive income (loss)												948,572
Balance, September 30, 2017	$	2,500	$	7,795,436		$	107,443		$	(167,077	)	$	7,738,302
	Common Stock		Additional Paid-in Capital			Retained Earnings / (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Equity
Balance, December 31, 2015	$	2,500	$	901,422		$	396,830		$	46,166		$	1,346,918
Contributed capital			8,421,955									8,421,955
Assets purchased/transferred from/to affiliates(1)			(71,770		)							(71,770		)
Distribution to parent			0									0
Impact of Pruco Re and PALAC merger(1)			(15,762		)							(15,762		)
Comprehensive income:
Net income (loss)						(889,246		)				(889,246		)
Other comprehensive income (loss), net of tax									179,716			179,716
Total comprehensive income (loss)												(709,530		)
Balance, September 30, 2016	$	2,500	$	9,235,845		$	(492,416	)	$	225,882		$	8,971,811

(1) Prior period amounts have been revised to reflect corrected amounts.

See Notes to Unaudited Interim Financial Statements

6

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Cash Flows

Nine Months EndedSeptember 30, 2017 and 2016 (in thousands)

	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	800,701		$	(889,246	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Policy charges and fee income	(761		)	117
Realized investment (gains) losses, net	327,512			2,497,661
Depreciation and amortization	(7,781		)	1,764
Interest credited to policyholders’ account balances	567			101,184
Change in:
Future policy benefits	728,762			530,380
Accrued investment income	16,263			(50,664		)
Net receivables from/payables to parent and affiliates	12,391			(55,000		)
Deferred sales inducements	(993		)	1,606
Deferred policy acquisition costs	(248,160		)	(175,636		)
Income taxes	22,224			(912,339		)
Reinsurance recoverables, net	(3,342		)	207,509
Derivatives, net	(615,583		)	8,687,903
Deferred (gain)/loss on reinsurance	5,448			284,501
Other, net	58,395			(140,897		)
Cash flows from (used in) operating activities	1,095,643			10,088,843
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale	854,872			3,530,194
Commercial mortgage and other loans	56,883			83,768
Trading account assets	3,999			3,509
Policy loans	956			1,375
Other long-term investments	71,152			5,531
Short-term investments	1,556,173			1,145,523
Payments for the purchase/origination of:
Fixed maturities, available-for-sale	(1,109,624		)	(5,119,769		)
Commercial mortgage and other loans	(228,825		)	(310,512		)
Trading account assets	(17,725		)	(6,338		)
Policy loans	(330		)	(317		)
Other long-term investments	(5,115		)	(135,367		)
Short-term investments	(1,003,242		)	(1,604,619		)
Notes receivable from parent and affiliates, net	521			(12,923		)
Derivatives, net	18,029			(43,283		)
Other, net	2,992			0
Cash flows from (used in) investing activities	200,716			(2,463,228		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash collateral for loaned securities	(15,515		)	10,516
Proceeds from the issuance of debt (maturities longer than 90 days)	0			125,000
Repayments of debt (maturities longer than 90 days)	0			(268,000		)
Net increase/(decrease) in short-term borrowing	(28,101		)	3,750

7

Drafts outstanding	6,790			(650		)
Distribution to parent	(300,000		)	0
Contributed capital	0			860,573
Policyholders’ account deposits	1,905,487			1,524,528
Ceded policyholders' account deposits	(6,818		)	(21,033		)
Policyholders' account withdrawals	(1,950,184		)	(1,691,367		)
Ceded policyholders' account withdrawals	18,421			25,198
Cash flows from (used in) financing activities	(369,920		)	568,515
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	926,439			8,194,130
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	1,848,039			536
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	2,774,478		$	8,194,666

Significant Non-Cash Transactions

Cash Flows from Investing and Financing Activities for the nine months ended September 30, 2016 excludes certain non-cash transactions related to the Variable Annuities Recapture. See Note 1 for additional information.

See Notes to Unaudited Interim Financial Statements

8

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

1.    BUSINESS AND BASIS OF PRESENTATION

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

The Company developed long-term savings and retirement products, which were distributed through its affiliated broker/dealer company, Prudential Annuities Distributors, Inc. (“PAD”). The Company issued variable and fixed deferred and immediate annuities for individuals and groups in the United States of America, District of Columbia and Puerto Rico. In addition, the Company has a relatively small in force block of variable life insurance policies. The Company no longer actively sells such products.

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

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.

On August 31, 2013, the Company redomesticated from Connecticut to Arizona. As a result of the redomestication, the Company is now an Arizona insurance company and its principal insurance regulatory authority is the Arizona Department of Insurance. The redomestication also resulted in the Company being domiciled in the same jurisdiction as the then primary reinsurer of the Company's living benefit guarantees, Pruco Reinsurance, Ltd. ("Pruco Re"), which enabled the Company to claim statutory reserve credit for business ceded to Pruco Re without the need for Pruco Re to collateralize its obligations under the reinsurance agreement. As of April 1, 2016, the Company no longer reinsures its living benefit guarantees to Pruco Re.

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

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

9

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

The financial statement impacts of these transactions were as follows:

Affected Financial Statement Lines Only

Interim Statement of Financial Position

	Balance as of March 31, 2016		Impacts of Recapture			Impacts of Reinsurance			Total
	(in millions)
ASSETS
Total investments(1)	$	3,343	$	3,084		$	10,624		$	17,051
Cash and cash equivalents	106		11			1,024			1,141
Deferred policy acquisition costs	537		0			3,134			3,671
Reinsurance recoverables	3,776		(3,401		)	320			695
Deferred sales inducements	327		0			500			827
Income tax receivable(2)	0		115			2,441			2,556
TOTAL ASSETS	46,694		(191		)	18,043			64,546
LIABILITIES AND EQUITY
LIABILITIES
Policyholders' account balances	$	2,422	$	0		$	2,387		$	4,809
Future policy benefits	4,295		0			6,972			11,267
Short-term and long-term debt(3)	0		0			1,268			1,268
Other liabilities	114		0			630			744
TOTAL LIABILITIES	45,472		0			11,257			56,729
EQUITY
Additional paid-in capital(4)	901		0			8,422			9,323
Retained earnings	254		(191		)	(1,600		)	(1,537		)
Accumulated other comprehensive income	64		0			(36		)	28
TOTAL EQUITY	1,222		(191		)	6,786			7,817
TOTAL LIABILITIES AND EQUITY	46,694		(191		)	18,043			64,546

Significant Non-Cash Transactions

(1) The increase in total investments includes non-cash activities of $3.1 billion for assets received related to the recapture transaction with Pruco Re, $7.1 billion for assets received related to the reinsurance transaction with Pruco Life and $3.6 billion related to non-cash capital contributions from PAI.

(2) Prudential Financial contributed current tax receivables through PAI of $1.5 billion to the Company as part of the Variable Annuities Recapture.

(3) The Company incurred ceding commissions of $3.6 billion, of which $1.1 billion was in the form of reassignment of debt from Pruco Life.

(4) The increase in additional paid-in capital ("APIC") includes non-cash capital contributions from PAI of $3.6 billion in invested assets, $1.5 billion of current tax receivables and $2.5 billion funding for the ceding commission for the reinsurance transaction with Pruco Life.

10

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Statement of Operations and Comprehensive Income (Loss)

Day 1 Impact of the Variable Annuities Recapture	Impacts of Recapture			Impacts of Reinsurance			Total Impacts
	(in millions)
REVENUES
Premiums	$	0		$	832		$	832
Realized investment gains (losses), net	(305		)	(2,561		)	(2,866		)
TOTAL REVENUES	(305		)	(1,729		)	(2,034		)
BENEFITS AND EXPENSES
Policyholders' benefits	0			522			522
General, administrative and other expenses	0			310			310
TOTAL BENEFITS AND EXPENSES	0			832			832
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES	(305		)	(2,561		)	(2,866		)
Income tax expense (benefit)	(114		)	(961		)	(1,075		)
NET INCOME (LOSS)	$	(191	)	$	(1,600	)	$	(1,791	)

As part of the Variable Annuities Recapture, the Company received invested assets of $3.1 billion as consideration from Pruco Re, which is equivalent to the amount of statutory reserve credit taken as of March 31, 2016, and unwound the associated reinsurance recoverable of $3.4 billion. As a result of the recapture transaction, the Company recognized a loss of $0.3 billion immediately.

For the Variable Annuities Recapture, the Company received invested assets of $7.1 billion as consideration from Pruco Life and established reserves of $9.4 billion. In addition, the Company incurred ceding commissions of $3.6 billion, of which $1.1 billion was in the form of reassignment of debt from Pruco Life. Also, the Company established deferred policy acquisition costs ("DAC") and deferred sales inducements ("DSI") balances, which were equivalent to the ceding commission incurred by the Company. For the reinsurance of the variable annuity base contracts, the Company recognized a benefit of $0.3 billion, which was deferred and will subsequently be amortized through General, administrative and other expenses. For the reinsurance of the living benefit guarantees, the Company recognized a loss of $2.6 billion immediately since the reinsurance contract is accounted for as a free-standing derivative.

The Company also received a capital contribution of $8.4 billion from PAI.

As a result of the Variable Annuities Recapture, Pruco Re no longer had any material active reinsurance with affiliates. On September 30, 2016, Pruco Re was merged with and into the Company.

11

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

The following table summarizes the asset transfers related to the Variable Annuities Recapture between the Company and its affiliates.

Affiliate	Period	Transaction	Security Type	Fair Value		Book Value		APIC Increase/ (Decrease)		Realized Investment Gain/(Loss), Net
				(in millions)
Pruco Re	Apr - June 2016	Purchase	Derivatives	$	3,084	$	3,084	$	0	$	0
Pruco Life	Apr - June 2016	Purchase	Fixed Maturities, Trading Account Assets, Commercial Mortgages, Derivatives, JV/LP Investments and Short-Term Investments	$	6,994	$	6,994	$	0	$	0
PAI	Apr - June 2016	Contributed Capital	Fixed Maturities, Trading Account Assets and Derivatives	$	3,517	$	3,517	$	3,517	$	0

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. All such adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Company’s Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

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 DAC and related amortization; value of business acquired ("VOBA") and its amortization; amortization of DSI; 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 accruals for contingent liabilities, including estimates for losses in connection with unresolved legal matters.

Revision to Prior Period Financial Statements

In 2016, the Company identified errors in the presentation of certain activity related to affiliated reinsurance transactions that impacted several line items within our previously issued Statement of Cash Flows for the interim period ended September 30, 2016. Management assessed the materiality of the misstatements on prior period financial statements in accordance with SEC Staff Accounting Bulletin No. 99, Materiality, codified in Accounting Standards Codification ("ASC") 250-10, Accounting Changes and Error Corrections ("ASC 250"), and concluded that these misstatements were not material to any prior interim periods. Accordingly, the Statement of Cash Flows for the nine months ended September 30, 2016, which is presented herein, has been revised, as presented below:

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	(UNAUDITED)
	Nine Months Ended September 30, 2016
	As Previously Reported			Revision			As Revised
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Policy charges and fee income	$	(803	)	$	920		$	117
Future policy benefits	(5,224		)	535,604			530,380
Net receivables from/payables to parent and affiliates	171,317			(226,317		)	(55,000		)
Reinsurance recoverables, net	(213,844		)	421,353			207,509
Other, net	650,903			(791,800		)	(140,897		)
Cash flows from (used in) operating activities	10,149,084			(60,241		)	10,088,843
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributed capital	781,125			79,448			860,573
Policyholders’ account deposits	2,203,234			(678,706		)	1,524,528
Ceded policyholders’ account deposits	0			(21,033		)	(21,033		)
Policyholders’ account withdrawals	(2,346,701		)	655,334			(1,691,367		)
Ceded policyholders’ account withdrawals	0			25,198			25,198
Cash flows from (used in) financing activities	508,274			60,241			568,515

Reclassifications

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

2.    SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS

Recent Accounting Pronouncements

Changes to U.S. GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of accounting standards updates ("ASU") to the FASB Accounting Standards Codification.

The Company considers the applicability and impact of all ASU. ASU listed below include those that have been adopted during the current fiscal year and/or those that have been issued but not yet adopted as of the date of this filing. ASU not listed below were assessed and determined to be either not applicable or not material.

There have been no ASU adopted during the nine months ended September 30, 2017.

ASU issued but not yet adopted as of the nine months ended September 30, 2017

13

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Standard	Description	Effective date and method of adoption	Effect on the financial statements or other significant matters
ASU 2014-09, Revenue from Contracts with Customers (Topic 606)	The ASU is based on the core principle that revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The standard also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, and assets recognized from the costs to obtain or fulfill a contract with a customer. Revenue recognition for insurance contracts and financial instruments is explicitly scoped out of the standard.	January 1, 2018 using the modified retrospective method.	Based on the assessment completed to date, the Company does not expect the adoption of the ASU to have a significant impact on the Company’s Financial Statements and Notes to the Financial Statements.
ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities	The ASU revises an entity’s accounting related to the recognition and measurement of certain equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU requires equity investments, except for those accounted for using the equity method, to be measured at fair value with changes in fair value recognized in net income. The standard also amends certain disclosure requirements associated with the fair value of financial instruments.	January 1, 2018 using the modified retrospective method which will include a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption. The amendments are to be applied prospectively as they relate to equity investments without readily determinable fair value that exist as of the date of adoption.	The transition impact to the Company’s Statement of Financial Position will depend on the net unrealized gain or loss on equity securities and the embedded unrealized gain or loss on equity investments currently accounted for under the cost method as of the effective date. As of September 30, 2017 the net unrealized gain on equity investments is $0.0 million. The cumulative-effect adjustment ultimately recorded on January 1, 2018 will differ from that amount after taking into account portfolio activity and market movements that occur during the fourth quarter of 2017.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Standard	Description	Effective date and method of adoption	Effect on the financial statements or other significant matters
ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments	This ASU provides a new current expected credit loss model to account for credit losses on certain financial assets and off-balance sheet exposures (e.g., loans held for investment, debt securities held to maturity, reinsurance receivables, net investments in leases and loan commitments). The model requires an entity to estimate lifetime credit losses related to such financial assets and exposures based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The standard also modifies the current other-than-temporary impairment standard for available-for-sale debt securities to require the use of an allowance rather than a direct write down of the investment, and replaces existing standard for purchased credit deteriorated loans and debt securities.	January 1, 2020 using the modified retrospective method, however prospective application is required for purchased credit deteriorated assets previously accounted for under ASU 310-30 and for debt securities for which an other-than-temporary-impairment was recognized prior to the date of adoption. Early adoption is permitted beginning January 1, 2019.	The Company is currently assessing the impact of the ASU on the Company’s Financial Statements and Notes to the Financial Statements.
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a Consensus of the Emerging Issues Task Force)	This ASU addresses diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard provides clarity on the treatment of eight specifically defined types of cash inflows and outflows.	January 1, 2018 using the retrospective method (with early adoption permitted provided that all amendments are adopted in the same period).	Based on the assessment completed to date, the Company does not expect the adoption of the ASU to have a significant impact on the Company’s Financial Statements and Notes to the Financial Statements.
Update 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash	In November 2016, the FASB issued this ASU to address diversity in practice from entities classifying and presenting transfers between cash and restricted cash as operating, investing, or financing activities, or as a combination of those activities in the Statement of Cash Flows. The ASU requires entities to show the changes in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents in the Statement of Cash Flows. As a result, transfers between such categories will no longer be presented in the Statement of Cash Flows.	January 1, 2018 using the retrospective method (with early adoption permitted).	Based on the assessment completed to date, the Company does not expect the adoption of the ASU to have a significant impact on the Company’s Financial Statements and Notes to the Financial Statements

15

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Standard	Description	Effective date and method of adoption	Effect on the financial statements or other significant matters
ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities	This ASU requires certain premiums on callable debt securities to be amortized to the earliest call date.	January 1, 2019 using the modified retrospective method (with early adoption permitted).	The Company is currently assessing the impact of the ASU on the Company’s Financial Statements and Notes to the Financial Statements.
ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities	This ASU makes targeted changes to the existing hedge accounting model to better portray the economics of an entity’s risk management activities and to simplify the use of hedge accounting.	January 1, 2019 using the modified retrospective method (with early adoption permitted).	The Company is currently assessing the impact of the ASU on the Company’s Financial Statements and Notes to the Financial Statements.

16

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

3.    INVESTMENTS

Fixed Maturities and Equity Securities

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

	September 30, 2017
	Amortized Cost or Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI(3)
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	5,028,572	$	5,978	$	340,444	$	4,694,106	$	0
Obligations of U.S. states and their political subdivisions	101,051		1,243		751		101,543		0
Foreign government bonds	117,975		7,240		80		125,135		0
Public utilities	548,161		25,021		2,964		570,218		0
Redeemable preferred stock	29,524		867		0		30,391		0
All other U.S. public corporate securities	1,408,362		82,644		2,447		1,488,559		0
All other U.S. private corporate securities	1,039,396		37,163		5,695		1,070,864		0
All other foreign public corporate securities	183,645		6,313		452		189,506		0
All other foreign private corporate securities	622,040		29,557		4,668		646,929		0
Asset-backed securities(1)	366,108		3,546		53		369,601		(19		)
Commercial mortgage-backed securities	503,210		8,423		3,720		507,913		0
Residential mortgage-backed securities(2)	170,595		3,868		284		174,179		(4		)
Total fixed maturities, available-for-sale	$	10,118,639	$	211,863	$	361,558	$	9,968,944	$	(23	)
Equity securities, available-for-sale:
Common stocks:
Industrial, miscellaneous & other	$	0	$	0	$	0	$	0
Mutual funds	14		4		0		18
Total equity securities, available-for-sale	$	14	$	4	$	0	$	18

(1) Includes credit-tranched securities collateralized by loan obligations, sub-prime mortgages, auto loans, 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 OTTI losses in "Accumulated other comprehensive income (loss)" ("AOCI"), which were not included in earnings. Amount excludes $9.0 million of net unrealized gains on impaired available-for-sale securities relating to changes in the value of such securities subsequent to the impairment measurement date.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	December 31, 2016
	Amortized Cost or Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI(3)
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	4,998,652	$	2,487	$	536,114	$	4,465,025	$	0
Obligations of U.S. states and their political subdivisions	92,107		566		2,699		89,974		0
Foreign government bonds	64,352		5,404		370		69,386		0
Public utilities	448,349		13,155		10,348		451,156		0
Redeemable preferred stock	29,581		288		633		29,236		0
All other U.S. public corporate securities	1,619,814		73,819		10,153		1,683,480		(771		)
All other U.S. private corporate securities	951,324		27,234		13,810		964,748		(694		)
All other foreign public corporate securities	183,253		5,410		1,022		187,641		0
All other foreign private corporate securities	501,140		5,349		20,450		486,039		0
Asset-backed securities(1)	248,547		3,227		465		251,309		0
Commercial mortgage-backed securities	484,673		6,793		6,753		484,713		0
Residential mortgage-backed securities(2)	196,506		4,063		513		200,056		(5		)
Total fixed maturities, available-for-sale	$	9,818,298	$	147,795	$	603,330	$	9,362,763	$	(1,470	)
Equity securities, available-for-sale:
Common stocks:
Industrial, miscellaneous & other	$	351	$	0	$	351	$	0
Mutual funds	14		4		0		18
Total equity securities, available-for-sale	$	365	$	4	$	351	$	18

(1) Includes credit-tranched securities collateralized by loan obligations, sub-prime mortgages, auto loans, 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 OTTI losses in AOCI, which were not included in earnings. Amount excludes $0.2 million of net unrealized gains on impaired available-for-sale securities relating to changes in the value of such securities subsequent to the impairment measurement date.

18

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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

	September 30, 2017
	Less Than Twelve Months				Twelve Months or More				Total
	Fair Value		Gross   Unrealized   Losses		Fair Value		Gross   Unrealized   Losses		Fair Value		Gross   Unrealized   Losses
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	1,410,256	$	69,022	$	3,045,887	$	271,422	$	4,456,143	$	340,444
Obligations of U.S. states and their political subdivisions	58,449		641		3,980		110		62,429		751
Foreign government bonds	15,564		77		145		3		15,709		80
Public utilities	106,170		1,592		23,175		1,372		129,345		2,964
Redeemable preferred stock	0		0		0		0		0		0
All other U.S. public corporate securities	182,387		940		83,448		1,507		265,835		2,447
All other U.S. private corporate securities	268,926		4,384		41,675		1,311		310,601		5,695
All other foreign public corporate securities	64,229		452		0		0		64,229		452
All other foreign private corporate securities	57,066		654		78,062		4,014		135,128		4,668
Asset-backed securities	36,356		50		177		3		36,533		53
Commercial mortgage-backed securities	181,908		2,131		62,060		1,589		243,968		3,720
Residential mortgage-backed securities	37,156		274		278		10		37,434		284
Total fixed maturities, available-for-sale	$	2,418,467	$	80,217	$	3,338,887	$	281,341	$	5,757,354	$	361,558
Equity securities, available-for-sale	$	0	$	0	$	0	$	0	$	0	$	0

19

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	December 31, 2016
	Less Than Twelve Months				Twelve Months or More				Total
	Fair Value		Gross   Unrealized   Losses		Fair Value		Gross   Unrealized   Losses		Fair Value		Gross   Unrealized   Losses
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	4,254,477	$	536,114	$	0	$	0	$	4,254,477	$	536,114
Obligations of U.S. states and their political subdivisions	73,885		2,699		0		0		73,885		2,699
Foreign government bonds	32,107		370		0		0		32,107		370
Public utilities	240,041		8,019		17,097		2,329		257,138		10,348
Redeemable preferred stock	12,948		633		0		0		12,948		633
All other U.S. public corporate securities	530,904		8,798		12,981		1,355		543,885		10,153
All other U.S. private corporate securities	453,976		13,632		12,304		178		466,280		13,810
All other foreign public corporate securities	89,962		1,016		9,994		6		99,956		1,022
All other foreign private corporate securities	247,111		11,661		58,214		8,789		305,325		20,450
Asset-backed securities	67,246		439		16,489		26		83,735		465
Commercial mortgage-backed securities	293,651		6,753		0		0		293,651		6,753
Residential mortgage-backed securities	68,283		513		0		0		68,283		513
Total fixed maturities, available-for-sale	$	6,364,591	$	590,647	$	127,079	$	12,683	$	6,491,670	$	603,330
Equity securities, available-for-sale	$	0	$	351	$	0	$	0	$	0	$	351

As of September 30, 2017 and December 31, 2016, the gross unrealized losses on fixed maturity securities were composed of $356.6 million and $594.9 million, respectively, related to "1" highest quality or "2" high quality securities based on the National Association of Insurance Commissioners (“NAIC”) or equivalent rating and $4.9 million and $8.4 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. As of September 30, 2017, the $281.3 million of gross unrealized losses on fixed maturity securities of twelve months or more were concentrated in U.S. government bonds, the consumer non-cyclical sector of the Company’s corporate securities and in commercial mortgage-backed securities. As of December 31, 2016, the $12.7 million of gross unrealized losses on fixed maturity securities of twelve months or more were concentrated in the consumer non-cyclical, finance and utility sectors of the Company’s corporate securities. In accordance with its policy described in Note 2 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, the Company concluded that an adjustment to earnings for OTTI for these fixed maturity securities was not warranted at either September 30, 2017 or December 31, 2016. These conclusions were based on a detailed analysis of the underlying credit and cash flows on each security. Gross unrealized losses are primarily attributable to general credit spread widening, increases in interest rates and foreign currency exchange rate movements. As of September 30, 2017, the Company did not intend to sell these securities, and it was not more likely than not that the Company would be required to sell these securities before the anticipated recovery of the remaining amortized cost basis.

As of September 30, 2017, there were no gross unrealized losses on equity securities. As of December 31, 2016, all of the gross unrealized losses on equity securities represented declines in value of greater than 20%, all of which had been in that position for less than six months. In accordance with its policy described in Note 2 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, the Company concluded that an adjustment to earnings for OTTI for these equity securities was not warranted.

20

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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

	September 30, 2017
	Amortized Cost		Fair Value
	(in thousands)
Fixed maturities, available-for-sale:
Due in one year or less	$	409,701	$	411,603
Due after one year through five years	1,160,347		1,188,688
Due after five years through ten years	1,516,165		1,592,338
Due after ten years	5,992,513		5,724,622
Asset-backed securities	366,108		369,601
Commercial mortgage-backed securities	503,210		507,913
Residential mortgage-backed securities	170,595		174,179
Total fixed maturities, available-for-sale	$	10,118,639	$	9,968,944

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

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(in thousands)
Fixed maturities, available-for-sale:
Proceeds from sales(1)	$	115,316		$	80,589		$	382,792		$	3,280,497
Proceeds from maturities/prepayments	156,822			100,931			480,794			295,769
Gross investment gains from sales and maturities	(1,299		)	10,238			2,461			98,157
Gross investment losses from sales and maturities	(1,406		)	(257		)	(2,081		)	(1,303		)
OTTI recognized in earnings(2)	41			(82		)	(4,787		)	(2,020		)
Equity securities, available-for-sale:
Proceeds from sales	$	0		$	0		$	0		$	0
Gross investment gains from sales	0			0			0			0
Gross investment losses from sales	0			0			0			0
OTTI recognized in earnings	0			0			0			0

(1) Includes $8.7 million and $46.1 million of non-cash related proceeds for the nine months ended September 30, 2017 and 2016, respectively.

(2) Excludes the portion of OTTI recorded in “Other comprehensive income (loss)” ("OCI"), representing any difference between the fair value of the impaired debt security and the net present value of its projected future cash flows at the time of the impairment.

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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	Three Months Ended September 30, 2017			Nine Months Ended September 30, 2017			Three Months Ended September 30, 2016			Nine Months Ended September 30, 2016
	(in thousands)
Credit loss impairments:
Balance, beginning of period	$	200		$	1,325		$	43		$	86
New credit loss impairments	(1		)	365			0			0
Increases due to the passage of time on previously recorded credit losses	1			9			18			24
Reductions for securities which matured, paid down, prepaid or were sold during the period	(3		)	(18		)	(128		)	(1,972		)
Reductions for securities impaired to fair value during the period(1)	0			(1,481		)	82			1,271
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected	(8		)	(11		)	(6		)	(7		)
Assets transferred to parent and affiliates	0			0			0			607
Balance, end of period	$	189		$	189		$	9		$	9

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

Trading Account Assets

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

	September 30, 2017				December 31, 2016
	Amortized Cost or Cost		Fair Value		Amortized Cost or Cost		Fair Value
	(in thousands)
Fixed maturities	$	161,385	$	162,811	$	147,057	$	139,513
Equity securities	11,320		15,836		7,551		10,358
Total trading account assets	$	172,705	$	178,647	$	154,608	$	149,871

The net change in unrealized gains (losses) from trading account assets still held at period end, recorded within “Asset administration fees and other income,” was $2.3 million and $(0.1) million for the three months ended September 30, 2017 and 2016, respectively, and $10.7 million and $15.5 million for the nine months ended September 30, 2017 and 2016, respectively.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Commercial Mortgage and Other Loans

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

	September 30, 2017					December 31, 2016
	Amount (in thousands)			% of Total		Amount (in thousands)			% of Total
Commercial mortgage and agricultural property loans by property type:
Apartments/Multi-Family	$	327,526		23.2	%	$	277,296		22.5	%
Industrial	296,149			21.0		263,705			21.4
Hospitality	3,818			0.3		3,925			0.3
Office	309,119			21.9		294,304			23.8
Other	124,660			8.8		87,465			7.1
Retail	266,482			18.9		223,252			18.1
Total commercial mortgage loans	1,327,754			94.1		1,149,947			93.2
Agricultural property loans	83,725			5.9		84,235			6.8
Total commercial mortgage and agricultural property loans by property type	1,411,479			100.0	%	1,234,182			100.0	%
Valuation allowance	(2,819		)			(2,289		)
Total commercial mortgage and other loans	$	1,408,660				$	1,231,893

As of September 30, 2017, the commercial mortgage and agricultural property loans were geographically dispersed throughout the United States (with the largest concentrations in California (28%), Texas (12%) and New Jersey (6%)) and included loans secured by properties in Europe and Australia.

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

	September 30, 2017
	Commercial Mortgage Loans		Agricultural Property Loans		Total
	(in thousands)
Allowance for credit losses:
Balance, beginning of year	$	2,267	$	22	$	2,289
Addition to (release of) allowance for losses	504		26		530
Charge-offs, net of recoveries	0		0		0
Total ending balance	$	2,771	$	48	$	2,819

	December 31, 2016
	Commercial Mortgage Loans		Agricultural Property Loans		Total
	(in thousands)
Allowance for credit losses:
Balance, beginning of year	$	622	$	21	$	643
Addition to (release of) allowance for losses	1,645		1		1,646
Charge-offs, net of recoveries	0		0		0
Total ending balance	$	2,267	$	22	$	2,289

23

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:

	September 30, 2017
	Commercial Mortgage Loans		Agricultural Property Loans		Total
	(in thousands)
Allowance for credit losses:
Individually evaluated for impairment	$	0	$	0	$	0
Collectively evaluated for impairment	2,771		48		2,819
Total ending balance(1)	$	2,771	$	48	$	2,819
Recorded investment(2):
Individually evaluated for impairment	$	1,608	$	5,509	$	7,117
Collectively evaluated for impairment	1,326,146		78,216		1,404,362
Total ending balance(1)	$	1,327,754	$	83,725	$	1,411,479

(1) As of September 30, 2017, there were no loans acquired with deteriorated credit quality.

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

	December 31, 2016
	Commercial Mortgage Loans		Agricultural Property Loans		Total
	(in thousands)
Allowance for credit losses:
Individually evaluated for impairment	$	0	$	0	$	0
Collectively evaluated for impairment	2,267		22		2,289
Total ending balance(1)	$	2,267	$	22	$	2,289
Recorded investment(2):
Individually evaluated for impairment	$	1,715	$	0	$	1,715
Collectively evaluated for impairment	1,148,232		84,235		1,232,467
Total ending balance(1)	$	1,149,947	$	84,235	$	1,234,182

(1) As of December 31, 2016, there were no loans acquired with deteriorated credit quality.

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

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

	September 30, 2017
	Debt Service Coverage Ratio
	≥ 1.2X		1.0X to <1.2X		< 1.0X		Total
	(in thousands)
Loan-to-Value Ratio:
0%-59.99%	$	742,332	$	19,212	$	1,786	$	763,330
60%-69.99%	531,006		1,341		0		532,347
70%-79.99%	98,239		15,126		0		113,365
80% or greater	1,387		0		1,050		2,437
Total loans	$	1,372,964	$	35,679	$	2,836	$	1,411,479

24

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	December 31, 2016
	Debt Service Coverage Ratio
	≥ 1.2X		1.0X to <1.2X		< 1.0X		Total
	(in thousands)
Loan-to-Value Ratio:
0%-59.99%	$	667,051	$	16,921	$	4,610	$	688,582
60%-69.99%	406,728		0		3,817		410,545
70%-79.99%	108,770		15,493		0		124,263
80% or greater	9,725		0		1,067		10,792
Total loans	$	1,192,274	$	32,414	$	9,494	$	1,234,182

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

	September 30, 2017
	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due(1)		Total Loans		Non-Accrual Status(2)
	(in thousands)
Commercial mortgage loans	$	1,327,754	$	0	$	0	$	0	$	1,327,754	$	0
Agricultural property loans	83,725		0		0		0		83,725		0
Total	$	1,411,479	$	0	$	0	$	0	$	1,411,479	$	0

(1) As of September 30, 2017, there were no loans in this category accruing interest.

(2) For additional information regarding the Company's policies for accruing interest on loans, see Note 2 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

	December 31, 2016
	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due(1)		Total Loans		Non-Accrual Status(2)
	(in thousands)
Commercial mortgage loans	$	1,149,947	$	0	$	0	$	0	$	1,149,947	$	0
Agricultural property loans	84,235		0		0		0		84,235		0
Total	$	1,234,182	$	0	$	0	$	0	$	1,234,182	$	0

(1) As of December 31, 2016, there were no loans in this category accruing interest.

(2) For additional information regarding the Company's policies for accruing interest on loans, see Note 2 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

25

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

For the three and nine months ended September 30, 2017 and 2016, there were no commercial mortgage and other loans acquired, other than those through direct origination, and there were no commercial mortgage and other loans sold. For both the three and nine months ended September 30, 2017, the Company received no commercial mortgage and other loans from related parties. For the three months ended September 30, 2016, there were no transfers of commercial mortgage and other loans from related parties. For the nine months ended September 30, 2016, the Company received $580 million of commercial mortgage and other loans from related parties.

The Company’s commercial mortgage and other loans may occasionally be involved in a troubled debt restructuring. For the three and nine months ended September 30, 2017 and 2016, there were no new troubled debt restructurings related to commercial mortgage and other loans and no payment defaults on commercial mortgage and other loans that were modified as a troubled debt restructuring within the twelve months preceding. As of both September 30, 2017 and December 31, 2016, the Company had no significant commitments to provide additional funds to borrowers that had been involved in a troubled debt restructuring. For additional information relating to the accounting for troubled debt restructurings, see Note 2 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

Other Long-Term Investments

The following table sets forth the composition of “Other long-term investments,” as of the dates indicated:

	September 30, 2017		December 31, 2016
	(in thousands)
Joint ventures and limited partnerships:
Private equity	$	30,178	$	30,513
Hedge funds	104,849		98,554
Real estate-related	47,009		109,043
Total joint ventures and limited partnerships	182,036		238,110
Derivatives	7,984		313,821
Total other long-term investments	$	190,020	$	551,931

Net Investment Income

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(in thousands)
Fixed maturities, available-for-sale	$	83,198		$	75,271		$	246,853		$	168,655
Trading account assets	1,176			1,128			3,429			2,193
Commercial mortgage and other loans	12,777			11,730			36,313			28,106
Policy loans	114			185			810			517
Short-term investments and cash equivalents	9,700			10,615			22,618			18,312
Other long-term investments	4,771			20,176			15,718			23,162
Gross investment income	111,736			119,105			325,741			240,945
Less: investment expenses	(3,783		)	(3,787		)	(11,431		)	(7,798		)
Net investment income	$	107,953		$	115,318		$	314,310		$	233,147

26

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Realized Investment Gains (Losses), Net

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(in thousands)
Fixed maturities	$	(2,664	)	$	9,899		$	(4,407	)	$	94,834
Commercial mortgage and other loans	(430		)	(422		)	(660		)	(1,823		)
Joint ventures and limited partnerships	(3		)	(167		)	(37		)	(649		)
Derivatives(1)	1,173,163			(45,139		)	(322,456		)	(2,590,550		)
Short-term investments and cash equivalents	11			104			48			527
Realized investment gains (losses), net	$	1,170,077		$	(35,725	)	$	(327,512	)	$	(2,497,661	)

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

Net Unrealized Gains (Losses) on Investments

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

	September 30, 2017			December 31, 2016
	(in thousands)
Fixed maturity securities, available-for-sale — with OTTI	$	8,985		$	(1,261	)
Fixed maturity securities, available-for-sale — all other	(158,680		)	(454,274		)
Equity securities, available-for-sale	4			(347		)
Affiliated notes	937			1,181
Derivatives designated as cash flow hedges(1)	(15,398		)	11,745
Other investments	(97		)	(619		)
Net unrealized gains (losses) on investments	$	(164,249	)	$	(443,575	)

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

Securities Lending and Repurchase Agreements

In the normal course of business, the Company sells securities under agreements to repurchase and enters into securities lending transactions. The following table sets forth the composition of "Cash collateral for loaned securities," which represents the liability to return cash collateral received for the following types of securities loaned, as of the dates indicated:

	September 30, 2017						December 31, 2016
	Remaining Contractual Maturities of the Agreements						Remaining Contractual Maturities of the Agreements
	Overnight & Continuous		Up to 30 Days		Total		Overnight & Continuous		Up to 30 Days		Total
	(in thousands)						(in thousands)
Foreign government bonds	$	83	$	0	$	83	$	10,712	$	0	$	10,712
U.S. public corporate securities	7,752		0		7,752		12,638		0		12,638
Foreign public corporate securities	0		0		0		0		0		0
Total cash collateral for loaned securities(1)	$	7,835	$	0	$	7,835	$	23,350	$	0	$	23,350

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

As of September 30, 2017 and December 31, 2016, the Company had no "Securities sold under agreements to repurchase."

27

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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.

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

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

For discussion of the Company's valuation methodologies for assets and liabilities measured at fair value and the fair value hierarchy, see Note 10 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

28

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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

	As of September 30, 2017
	Level 1		Level 2		Level 3		Netting(1)			Total
	(in thousands)
Fixed maturities, available-for-sale:
U.S Treasury securities and obligations of U.S. government authorities and agencies	$	0	$	4,690,040	$	4,066	$	0		$	4,694,106
Obligations of U.S. states and their political subdivisions	0		101,543		0		0			101,543
Foreign government bonds	0		125,135		0		0			125,135
U.S. corporate public securities	0		1,733,082		559		0			1,733,641
U.S. corporate private securities	0		1,178,845		122,776		0			1,301,621
Foreign corporate public securities	0		220,063		688		0			220,751
Foreign corporate private securities	0		729,729		10,725		0			740,454
Asset-backed securities(4)	0		92,363		277,238		0			369,601
Commercial mortgage-backed securities	0		507,913		0		0			507,913
Residential mortgage-backed securities	0		174,179		0		0			174,179
Subtotal	0		9,552,892		416,052		0			9,968,944
Trading account assets:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	0		121,254		0		0			121,254
Corporate securities	0		41,557		0		0			41,557
Foreign government securities	0		0		0		0			0
Asset-backed securities(4)	0		0		0		0			0
Equity securities	5,499		0		10,337		0			15,836
Subtotal	5,499		162,811		10,337		0			178,647
Equity securities, available-for-sale	0		18		0		0			18
Short-term investments	0		393,738		75		0			393,813
Cash equivalents	30,622		2,403,246		0		0			2,433,868
Other long-term investments(5)	7,982		4,971,348		0		(4,970,040		)	9,290
Reinsurance recoverables	0		0		242,381		0			242,381
Receivables from parent and affiliates	0		41,013		0		0			41,013
Subtotal excluding separate account assets	44,103		17,525,066		668,845		(4,970,040		)	13,267,974
Separate account assets(2)	0		37,970,351		0		0			37,970,351
Total assets	$	44,103	$	55,495,417	$	668,845	$	(4,970,040	)	$	51,238,325
Future policy benefits(3)	$	0	$	0	$	7,999,051	$	0		$	7,999,051
Payables to parent and affiliates	0		1,660,701		0		(1,660,701		)	0
Other liabilities	0		0		0		0			0
Total liabilities	$	0	$	1,660,701	$	7,999,051	$	(1,660,701	)	$	7,999,051

29

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	As of December 31, 2016
	Level 1		Level 2		Level 3		Netting(1)			Total
	(in thousands)
Fixed maturities, available-for-sale:
U.S Treasury securities and obligations of U.S. government authorities and agencies	$	0	$	4,465,025	$	0	$	0		$	4,465,025
Obligations of U.S. states and their political subdivisions	0		89,974		0		0			89,974
Foreign government bonds	0		69,299		87		0			69,386
U.S. corporate public securities	0		1,909,440		15,598		0			1,925,038
U.S. corporate private securities	0		997,004		124,864		0			1,121,868
Foreign corporate public securities	0		217,363		0		0			217,363
Foreign corporate private securities	0		526,504		11,527		0			538,031
Asset-backed securities(4)	0		219,574		31,735		0			251,309
Commercial mortgage-backed securities	0		484,713		0		0			484,713
Residential mortgage-backed securities	0		200,056		0		0			200,056
Subtotal	0		9,178,952		183,811		0			9,362,763
Trading account assets:
U.S Treasury securities and obligations of U.S. government authorities and agencies	0		116,184		0		0			116,184
Corporate securities	0		21,632		0		0			21,632
Asset-backed securities(4)	0		1,697		0		0			1,697
Equity securities	5,494		0		4,864		0			10,358
Subtotal	5,494		139,513		4,864		0			149,871
Equity securities, available-for-sale	0		18		0		0			18
Short-term investments	519,000		392,700		450		0			912,150
Cash equivalents	738,449		847,329		375		0			1,586,153
Other long-term investments(5)	23,967		4,872,392		0		(4,582,540		)	313,819
Reinsurance recoverables	0		0		240,091		0			240,091
Receivables from parent and affiliates	0		6,962		33,962		0			40,924
Subtotal excluding separate account assets	1,286,910		15,437,866		463,553		(4,582,540		)	12,605,789
Separate account assets(2)	0		37,429,739		0		0			37,429,739
Total assets	$	1,286,910	$	52,867,605	$	463,553	$	(4,582,540	)	$	50,035,528
Future policy benefits(3)	$	0	$	0	$	7,707,333	$	0		$	7,707,333
Payable to parent and affiliates	0		1,654,360		0		(1,654,360		)	0
Other liabilities	5,051		0		0		0			5,051
Total liabilities	$	5,051	$	1,654,360	$	7,707,333	$	(1,654,360	)	$	7,712,384

(1) “Netting” amounts represent cash collateral of $3,309 million and $2,928 million as of September 30, 2017 and December 31, 2016, respectively, and the impact of offsetting asset and liability positions held with the same counterparty, subject to master netting arrangements.

(2) 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.

(3) As of September 30, 2017, the net embedded derivative liability position of $7,999 million includes $828 million of embedded derivatives in an asset position and $8,827 million of embedded derivatives in a liability position. As of December 31, 2016, the net embedded derivative liability position of $7,707 million includes $1,060 million of embedded derivatives in an asset position and $8,767 million of embedded derivatives in a liability position.

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

30

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

(5) Other long-term investments excluded from the fair value hierarchy include certain hedge funds, private funds and other funds for which fair value is measured at net asset value ("NAV") per share (or its equivalent) as a practical expedient. At September 30, 2017 and December 31, 2016, the fair values of such investments were $0.3 million and $0.4 million, respectively.

Transfers between Levels 1 and 2 – Transfers between levels are made to reflect changes in observability of inputs and market activity. Transfers into or out of any level are generally reported at the value as of the beginning of the quarter in which the transfers occur for any such assets still held at the end of the quarter. Periodically there are transfers between Level 1 and Level 2 for assets held in the Company’s Separate Account. During both the three and nine months ended September 30, 2017 and 2016, there were no transfers between Level 1 and Level 2.

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

	As of September 30, 2017
	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	$	128,030	Discounted cash flow	Discount rate	1.38	%	14.85	%	3.84	%	Decrease
Reinsurance recoverables	$	242,381	Fair values are determined in the same manner as future policy benefits
Liabilities:
Future policy benefits(2)	$	7,999,051	Discounted cash flow	Lapse rate(3)	1	%	12	%			Decrease
				Spread over LIBOR(4)	0.13	%	1.27	%			Decrease
				Utilization rate(5)	52	%	97	%			Increase
				Withdrawal rate	See table footnote (6) below.
				Mortality rate(7)	0	%	14	%			Decrease
				Equity volatility curve	13	%	24	%			Increase

	As of December 31, 2016
	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	$	136,391	Discounted cash flow	Discount rate	3.24	%	17.12	%	4.71	%	Decrease
			Liquidation	Liquidation value	98.21	%	98.68	%	98.64	%	Increase
Reinsurance recoverables	$	240,091	Fair values are determined in the same manner as future policy benefits
Liabilities:
Future policy benefits(2)	$	7,707,333	Discounted cash flow	Lapse rate(3)	0	%	13	%			Decrease
				Spread over LIBOR(4)	0.25	%	1.50	%			Decrease
				Utilization rate(5)	52	%	96	%			Increase
				Withdrawal rate	See table footnote (6) below.
				Mortality rate(7)	0	%	14	%			Decrease
				Equity volatility curve	16	%	25	%			Increase

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

(2) Future policy benefits primarily represent general account liabilities for the living benefit guarantees 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) Lapse rates are adjusted at the contract level based on the in-the-moneyness of the living benefit and reflect other factors, such as the applicability of any surrender charges. Lapse rates are reduced when contracts are more in-the-money. Lapse rates are also generally assumed to be lower for the period where surrender charges apply.

31

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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

(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. Utilization assumptions may vary by product type, tax status and age. The impact of changes in these assumptions is highly dependent on the product type, the age of the contractholder at the time of the sale, and the timing of the first lifetime income withdrawal. Range reflects the utilization rate for the vast majority of business with living benefits.

(6) The withdrawal rate assumption estimates the magnitude of annual contractholder withdrawals relative to the maximum allowable amount under the contract. These assumptions vary based on the age of the contractholder, the tax status of the contract and the duration since the contractholder began lifetime withdrawals. As of September 30, 2017 and December 31, 2016, the minimum withdrawal assumption rate is 78% and the maximum withdrawal assumption rate may be greater than 100%. The fair value of the liability will generally increase the closer the withdrawal rate is to 100% and decrease as the withdrawal rate moves further away from 100%.

(7) Range reflects the mortality rate for the vast majority of business with living benefits, with policyholders 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.

Interrelationships Between Unobservable Inputs– In addition to the sensitivities of fair value measurements to changes in each unobservable input in isolation, as reflected in the table above, interrelationships between these inputs may also exist, such that a change in one unobservable input may give rise to a change in another, or multiple, inputs. For the discussion of the relationships between unobservable inputs as well as market factors that may affect the range of inputs used in the valuation of Level 3 assets and liabilities, see Note 10 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

32

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Changes in Level 3 assets and liabilities – The following tables describe changes in fair values of Level 3 assets and liabilities as of the dates indicated, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at the end of their respective periods. When a determination is made to classify assets and liabilities within Level 3, the determination is based on the significance of the unobservable inputs in the overall fair value measurement. Transfers into Level 3 are generally the result of unobservable inputs utilized within the valuation methodologies or 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 availability of pricing service information for certain assets that the Company can validate. For further information on valuation processes, see Note 10 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

	Three Months Ended September 30, 2017
	Fixed Maturities, Available-For-Sale
	U.S Treasury Securities and Obligations of U.S. Government Authorities and Agencies			Foreign Government Bonds		U.S. Corporate Public Securities			U.S. Corporate Private Securities			Foreign Corporate Public Securities		Foreign Corporate Private Securities
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	3,151		$	0	$	1,911		$	122,609		$	0	$	9,047
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			0		11			(940		)	0		(16		)
Asset management fees and other income	0			0		0			0			0		0
Included in other comprehensive income (loss)	0			0		0			(1,659		)	13		(624		)
Net investment income	0			0		5			1,510			0		11
Purchases	917			0		0			306			0		28
Sales	0			0		0			0			0		0
Issuances	0			0		0			0			0		0
Settlements	0			0		(312		)	(1,358		)	0		0
Transfers into Level 3(1)	0			0		0			5,322			675		2,293
Transfers out of Level 3(1)	0			0		(1,056		)	0			0		0
Other(5)	(2		)	0		0			(3,014		)	0		(14		)
Fair Value, end of period assets/(liabilities)	$	4,066		$	0	$	559		$	122,776		$	688	$	10,725
Unrealized gains (losses) for assets/liabilities still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0		$	0	$	0		$	0		$	0	$	0
Asset management fees and other income	$	0		$	0	$	0		$	0		$	0	$	0

33

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	Three Months Ended September 30, 2017
	Fixed Maturities, Available-For-Sale
	Asset-Backed Securities (3)			Trading Account Assets -Equity Securities		Equity Securities, Available-For-Sale		Short-Term Investments			Cash Equivalents
				(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	215,503		$	5,854	$	0	$	450		$	375
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net(4)	527			0		0		0			0
Asset management fees and other income	0			630		0		0			0
Included in other comprehensive income (loss)	(306		)	0		0		0			0
Net investment income	111			0		0		0			0
Purchases	78,112			0		0		75			0
Sales	0			0		0		0			0
Issuances	0			0		0		0			0
Settlements	(6,720		)	0		0		0			0
Transfers into Level 3(1)	2,513			0		0		0			0
Transfers out of Level 3(1)	(12,502		)	0		0		0			0
Other(5)	0			3,853		0		(450		)	(375		)
Fair Value, end of period assets/(liabilities)	$	277,238		$	10,337	$	0	$	75		$	0
Unrealized gains (losses) for assets/liabilities still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0		$	0	$	0	$	0		$	0
Asset management fees and other income	$	0		$	630	$	0	$	0		$	0

34

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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

35

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	Nine Months Ended September 30, 2017
	Fixed Maturities, Available-For-Sale
	U.S Treasury Securities and Obligations of U.S. Government Authorities and Agencies		Foreign Government Bonds			U.S. Corporate Public Securities			U.S. Corporate Private Securities			Foreign Corporate Public Securities		Foreign Corporate Private Securities
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	0	$	87		$	15,598		$	124,864		$	0	$	11,527
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0		0			15			(2,976		)	0		(99		)
Asset management fees and other income	0		0			0			0			0		0
Included in other comprehensive income (loss)	0		0			(15		)	(1,769		)	13		152
Net investment income	0		0			20			6,329			0		34
Purchases	3,093		0			0			1,348			0		80
Sales	0		0			(14,026		)	(341		)	0		0
Issuances	0		0			0			0			0		0
Settlements	0		0			(976		)	(6,987		)	0		0
Transfers into Level 3(1)	0		0			2,350			5,322			675		2,293
Transfers out of Level 3(1)	0		(87		)	(1,433		)	0			0		(3,248		)
Other(5)	973		0			(974		)	(3,014		)	0		(14		)
Fair Value, end of period assets/(liabilities)	$	4,066	$	0		$	559		$	122,776		$	688	$	10,725
Unrealized gains (losses) for assets/liabilities still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0		$	0		$	(2,194	)	$	0	$	(83	)
Asset management fees and other income	$	0	$	0		$	0		$	0		$	0	$	0

36

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	Nine Months Ended September 30, 2017
	Fixed Maturities, Available-For-Sale
	Asset-Backed Securities(3)			Trading Account Assets -Equity Securities		Equity Securities, Available-For-Sale			Short-Term Investments			Cash Equivalents
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	31,735		$	4,864	$	0		$	450		$	375
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net(4)	535			0		0			0			0
Asset management fees and other income	0			1,268		0			0			0
Included in other comprehensive income (loss)	(35		)	0		351			0			0
Net investment income	163			0		0			0			0
Purchases	228,719			0		0			75			0
Sales	(1,595		)	0		0			0			0
Issuances	0			0		0			0			0
Settlements	(49,272		)	0		0			0			0
Transfers into Level 3(1)	94,979			0		0			0			0
Transfers out of Level 3(1)	(27,991		)	0		0			0			0
Other(5)	0			4,205		(351		)	(450		)	(375		)
Fair Value, end of period assets/(liabilities)	$	277,238		$	10,337	$	0		$	75		$	0
Unrealized gains (losses) for assets/liabilities still held(2):
Included in earnings:
Realized investment gains (losses), net	$	(1	)	$	0	$	0		$	0		$	0
Asset management fees and other income	$	0		$	917	$	0		$	0		$	0

37

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	Nine Months Ended September 30, 2017
	Other Long-term Investments		Reinsurance Recoverables			Receivables from Parent and Affiliates			Future Policy Benefits
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	0	$	240,091		$	33,962		$	(7,707,333	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net(4)	0		(12,834		)	0			455,564
Asset management fees and other income	0		0			0			0
Included in other comprehensive income (loss)	0		0			0			0
Net investment income	0		0			0			0
Purchases	0		14,659			0			0
Sales	0		0			0			0
Issuances	0		0			0			(747,282		)
Settlements	0		0			0			0
Transfers into Level 3(1)	0		0			0			0
Transfers out of Level 3(1)	0		0			(33,962		)	0
Other(5)	0		465			0			0
Fair Value, end of period assets/(liabilities)	$	0	$	242,381		$	0		$	(7,999,051	)
Unrealized gains (losses) for assets/liabilities still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0	$	(7,021	)	$	0		$	274,784
Asset management fees and other income	$	0	$	0		$	0		$	0

38

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	Three months ended September 30, 2016
	Fixed Maturities, Available-For-Sale(4)
	U.S. Corporate Public Securities		U.S. Corporate Private Securities			Foreign Corporate Public Securities			Foreign Corporate Private Securities			Asset-Backed Securities(3)			Trading Account Assets - Equity Securities
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	15,000	$	126,673		$	0		$	14,582		$	87,371		$	5,076
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0		42			0			877			(28		)	0
Asset management fees and other income	0		0			0			0			0			439
Included in other comprehensive income (loss)	0		(661		)	1			(710		)	329			0
Net investment income	0		1,417			(1		)	58			37			0
Purchases	0		1,245			0			1			7,820			(1		)
Sales	0		0			0			0			(6,489		)	0
Issuances	0		0			0			0			0			0
Settlements	0		(1,057		)	0			(5,390		)	(45		)	0
Transfers into Level 3(1)	0		0			129			0			7,137			0
Transfers out of Level 3(1)	0		0			0			(490		)	(51,690		)	0
Other(5)	0		0			0			0			0			0
Fair Value, end of period assets/(liabilities)	$	15,000	$	127,659		$	129		$	8,928		$	44,442		$	5,514
Unrealized gains (losses) for assets/(liabilities) still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0		$	0		$	0		$	(26	)	$	0
Asset management fees and other income	$	0	$	0		$	0		$	0		$	0		$	437

39

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	Three months ended September 30, 2016
	Short-Term Investments		Cash Equivalents			Reinsurance Recoverables			Receivables from Parent and Affiliates			Future Policy Benefits
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	450	$	375		$	345,918		$	2,776		$	(12,326,533	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net(4)	0		0			(15,688		)	(23		)	528,717
Asset management fees and other income	0		0			0			0			0
Included in other comprehensive income (loss)	0		0			0			19			0
Net investment income	0		150			0			0			0
Purchases	0		(150		)	4,959			0			0
Sales	0		0			0			24			0
Issuances	0		0			0			0			(243,012		)
Settlements	0		0			0			0			0
Transfers into Level 3(1)	0		0			0			0			0
Transfers out of Level 3(1)	0		0			0			(1		)	0
Other(5)	0		0			0			0			0
Fair Value, end of period assets/(liabilities)	$	450	$	375		$	335,189		$	2,795		$	(12,040,828	)
Unrealized gains (losses) for assets/(liabilities) still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0		$	(10,472	)	$	(1,772	)	$	460,383
Asset management fees and other income	$	0	$	0		$	0		$	0		$	0

40

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	Nine Months Ended September 30, 2016
	Fixed Maturities, Available-For-Sale(4)
	U.S. Corporate Public Securities		U.S. Corporate Private Securities			Foreign Corporate Public Securities			Foreign Corporate Private Securities			Asset-Backed Securities(3)			Trading Account Assets - Equity Securities
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	15,000	$	107,777		$	0		$	4,531		$	46,493		$	0
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0		(920		)	0			877			(26		)	0
Asset management fees and other income	0		0			0			0			0			527
Included in other comprehensive income (loss)	0		(3,548		)	1			277			367			0
Net investment income	0		4,198			(1		)	185			125			0
Purchases	0		12,472			0			1,990			61,939			3,422
Sales	0		0			0			0			(6,739		)	0
Issuances	0		0			0			0			0			0
Settlements	0		(1,481		)	0			(7,128		)	(533		)	0
Transfers into Level 3(1)	0		10,176			129			8,686			24,961			0
Transfers out of Level 3(1)	0		(1,015		)	0			(490		)	(82,145		)	0
Other(5)	0		0			0			0			0			1,565
Fair Value, end of period assets/(liabilities)	$	15,000	$	127,659		$	129		$	8,928		$	44,442		$	5,514
Unrealized gains (losses) for assets/(liabilities) still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0	$	(962	)	$	0		$	0		$	(26	)	$	0
Asset management fees and other income	$	0	$	0		$	0		$	0		$	0		$	526

41

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	Nine Months Ended September 30, 2016
	Short-Term Investments		Cash Equivalents		Other Long- Term Investments			Reinsurance Recoverables			Receivables from Parent and Affiliates			Future Policy Benefits
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	450	$	225	$	1,565		$	3,012,653		$	7,664		$	(3,134,077	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net(4)	0		0		0			(2,742,989		)	(11		)	(8,369,767		)
Asset management fees and other income	0		0		0			0			0			0
Included in other comprehensive income (loss)	0		0		0			0			88			0
Net investment income	0		150		0			0			0			0
Purchases	0		0		0			65,525			0			0
Sales	0		0		0			0			(1,988		)	0
Issuances	0		0		0			0			0			(536,984		)
Settlements	0		0		0			0			0			0
Transfers into Level 3(1)	0		0		0			0			0			0
Transfers out of Level 3(1)	0		0		0			0			(2,958		)	0
Other(5)	0		0		(1,565		)	0			0			0
Fair Value, end of period assets/(liabilities)	$	450	$	375	$	0		$	335,189		$	2,795		$	(12,040,828	)
Unrealized gains (losses) for assets/(liabilities) still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0	$	0		$	91,513		$	(1,772	)	$	(8,124,372	)
Asset management fees and other income	$	0	$	0	$	0		$	0		$	0		$	0

(1) Transfers into or out of any level are generally reported at the value as of the beginning of the quarter in which the transfer occurs for any such assets still held at the end of the quarter.

(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.

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

(4) Realized investment gains (losses) on Future Policy Benefits and Reinsurance Recoverables primarily represent the change in the fair value of the Company's living benefit guarantees on certain of its variable annuity contracts. Refer to Note 1 for impacts to Realized investment gains (losses) related to the Variable Annuities Recapture for the three and nine months ended September 30, 2016.

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

42

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. The financial instruments presented below are reported at carrying value on the Company’s Unaudited Interim Statements of Financial Position. In some cases, as described below, the carrying amount equals or approximates fair value. For additional information regarding the methods and significant assumptions used to estimate their fair value, see Note 10 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

	September 30, 2017(1)
	Fair Value								Carrying Amount(2)
	Level 1		Level 2		Level 3		Total		Total
	(in thousands)
Assets:
Commercial mortgage and other loans	$	0	$	0	$	1,425,278	$	1,425,278	$	1,408,660
Policy loans	0		0		12,644		12,644		12,644
Short-term investments	0		0		0		0		0
Cash and cash equivalents	340,610		0		0		340,610		340,610
Accrued investment income	0		69,741		0		69,741		69,741
Reinsurance recoverables	0		0		60,083		60,083		60,083
Receivables from parent and affiliates	0		16,469		0		16,469		16,469
Other assets	0		14,710		0		14,710		14,710
Total assets	$	340,610	$	100,920	$	1,498,005	$	1,939,535	$	1,922,917
Liabilities:
Policyholders’ account balances - investment contracts	$	0	$	0	$	272,416	$	272,416	$	270,411
Cash collateral for loaned securities	0		7,835		0		7,835		7,835
Short-term debt	0		0		0		0		0
Long-term debt	0		1,009,668		0		1,009,668		971,899
Reinsurance payables	0		0		60,083		60,083		60,083
Payables to parent and affiliates	0		51,270		0		51,270		51,270
Other liabilities	0		201,592		0		201,592		201,592
Separate account liabilities - investment contracts	0		106		0		106		106
Total liabilities	$	0	$	1,270,471	$	332,499	$	1,602,970	$	1,563,196

43

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	December 31, 2016(1)
	Fair Value								Carrying Amount(2)
	Level 1		Level 2		Level 3		Total		Total
	(in thousands)
Assets:
Commercial mortgage and other loans	$	0	$	0	$	1,235,842	$	1,235,842	$	1,231,893
Policy loans	0		0		12,719		12,719		12,719
Short-term investments	0		35,000		0		35,000		35,000
Cash and cash equivalents	6,886		255,000		0		261,886		261,886
Accrued investment income	0		86,004		0		86,004		86,004
Reinsurance recoverables	0		0		63,775		63,775		63,775
Receivables from parent and affiliates	0		70,779		0		70,779		70,779
Other assets	0		53,858		0		53,858		53,858
Total assets	$	6,886	$	500,641	$	1,312,336	$	1,819,863	$	1,815,914
Liabilities:
Policyholders’ account balances - investment contracts	$	0	$	0	$	247,986	$	247,986	$	250,493
Cash collateral for loaned securities	0		23,350		0		23,350		23,350
Short-term debt	0		28,146		0		28,146		28,101
Long-term debt	0		994,198		0		994,198		971,899
Reinsurance payables	0		0		63,775		63,775		63,775
Payables to parent and affiliates	0		91,432		0		91,432		91,432
Other liabilities	0		189,366		0		189,366		189,366
Separate account liabilities - investment contracts	0		187		0		187		187
Total liabilities	$	0	$	1,326,679	$	311,761	$	1,638,440	$	1,618,603

(1) Other long-term investments excluded from the fair value hierarchy include certain hedge funds, private equity funds and other funds for which fair value is measured at NAV per share (or its equivalent) as a practical expedient. At September 30, 2017 and December 31, 2016, the fair values of these cost method investments were $5.6 million and $3.4 million, respectively. The carrying values of these investments were $5.2 million and $3.1 million as of September 30, 2017 and December 31, 2016, respectively.

(2) 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.

5.    DERIVATIVE INSTRUMENTS

Types of Derivative Instruments and Derivative Strategies

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

• Interest rate contracts: swaps, options, swaptions, caps and floors

•Equity contracts: futures, options and total return swaps

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

•Credit contracts: single and index reference credit default swaps

•Other contracts: embedded derivatives

For detailed information on these contracts and the related strategies, see Note 11 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

44

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Primary Risks Managed by Derivatives

The table below provides a summary of the gross notional amount and fair value of derivatives contracts by the primary underlying, excluding embedded derivatives which are recorded with the associated host and related reinsurance recoverables. Many derivative instruments contain multiple underlyings. The fair value amounts below represent the gross fair value of derivative contracts prior to taking into account the netting effects of master netting agreements, cash collateral held with the same counterparty, and non-performance risk.

	September 30, 2017							December 31, 2016
			Gross Fair Value							Gross Fair Value
Primary Underlying	Notional		Assets		Liabilities			Notional		Assets		Liabilities
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Currency/Interest Rate
Foreign Currency Swaps	$	626,315	$	18,743	$	(35,244	)	$	472,701	$	38,249	$	(2,776	)
Total Qualifying Hedges	$	626,315	$	18,743	$	(35,244	)	$	472,701	$	38,249	$	(2,776	)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Futures	$	2,034,000	$	7,982	$	0		$	2,474,000	$	23,967	$	0
Interest Rate Swaps	88,985,926		4,519,412		(1,062,495		)	81,872,695		4,439,270		(1,163,388		)
Interest Rate Options	13,010,000		186,644		(99,906		)	10,825,000		278,763		(135,554		)
Interest Rate Forwards	1,198,032		1,425		(5,168		)	498,311		0		(25,082		)
Foreign Currency
Foreign Currency Forwards	9,525		1		(283		)	1,491		6		0
Currency/Interest Rate
Foreign Currency Swaps	144,334		8,840		(5,588		)	130,470		16,627		(635		)
Equity
Equity Futures	0		0		0			1,269,044		0		(5,051		)
Total Return Swaps	11,602,226		1,384		(284,030		)	12,784,166		69,827		(281,193		)
Equity Options	6,185,001		234,899		(167,987		)	4,610,001		29,650		(45,732		)
Total Non-Qualifying Hedges	$	123,169,044	$	4,960,587	$	(1,625,457	)	$	114,465,178	$	4,858,110	$	(1,656,635	)
Total Derivatives (1)	$	123,795,359	$	4,979,330	$	(1,660,701	)	$	114,937,879	$	4,896,359	$	(1,659,411	)

(1) Excludes embedded derivatives and the related reinsurance recoverables which contain multiple underlyings.

Based on notional amounts, most of the Company’s derivatives do not qualify for hedge accounting. Derivatives that economically hedge embedded derivatives do not qualify for hedge accounting because changes in the fair value of the embedded derivatives are already recorded in net income.

The fair value of the embedded derivatives, included in "Future policy benefits," was a net liability of $7,999 million and $7,707 million as of September 30, 2017 and December 31, 2016, respectively. The fair value of the related reinsurance recoverables was an asset of $232 million and $231 million as of September 30, 2017 and December 31, 2016, respectively, included in "Reinsurance recoverables". See Note 7 for additional information on these reinsurance agreements.

The fair value of the embedded derivatives pertaining to the variable annuity products with a market value adjustment option assumed from Pruco Life as part of the Variable Annuities Recapture, included in "Reinsurance payables," was a net asset of $10 million as of both September 30, 2017 and December 31, 2016.

45

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Offsetting Assets and Liabilities

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

	September 30, 2017
	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(1)		Net Amount
	(in thousands)
Offsetting of Financial Assets:
Derivatives	$	4,979,330	$	(4,970,040	)	$	9,290	$	0	$	9,290
Securities purchased under agreements to resell	0		0			0		0		0
Total Assets	$	4,979,330	$	(4,970,040	)	$	9,290	$	0	$	9,290
Offsetting of Financial Liabilities:
Derivatives	$	1,660,701	$	(1,660,701	)	$	0	$	0	$	0

	December 31, 2016
	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(1)			Net Amount
	(in thousands)
Offsetting of Financial Assets:
Derivatives	$	4,872,392	$	(4,582,540	)	$	289,852	$	0		$	289,852
Securities purchased under agreements to resell	255,000		0			255,000		(255,000		)	0
Total Assets	$	5,127,392	$	(4,582,540	)	$	544,852	$	(255,000	)	$	289,852
Offsetting of Financial Liabilities:
Derivatives	$	1,654,360	$	(1,654,360	)	$	0	$	0		$	0

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

For information regarding the rights of offset associated with the derivative assets and liabilities in the table above see “Credit Risk” below and Note 9.

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.

46

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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

	Three Months Ended September 30, 2017
	Realized Investment Gains (Losses)			Net Investment Income		Other Income			AOCI(1)
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	0		$	1,678	$	(3,496	)	$	(12,020	)
Total cash flow hedges	0			1,678		(3,496		)	(12,020		)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	52,535			0		0			0
Currency	(230		)	0		0			0
Currency/Interest Rate	(11,358		)	0		(314		)	0
Equity	(453,516		)	0		0			0
Embedded Derivatives	1,585,732			0		0			0
Total non-qualifying hedges	1,173,163			0		(314		)	0
Total	$	1,173,163		$	1,678	$	(3,810	)	$	(12,020	)

	Nine Months Ended September 30, 2017
	Realized Investment Gains (Losses)			Net Investment Income		Other Income			AOCI(1)
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	0		$	4,523	$	(9,308	)	$	(27,143	)
Total cash flow hedges	0			4,523		(9,308		)	(27,143		)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	618,534			0		0			0
Currency	(307		)	0		0			0
Currency/Interest Rate	(22,712		)	0		(592		)	0
Equity	(1,468,601		)	0		0			0
Embedded Derivatives	550,630			0		0			0
Total non-qualifying hedges	(322,456		)	0		(592		)	0
Total	$	(322,456	)	$	4,523	$	(9,900	)	$	(27,143	)

47

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	Three Months Ended September 30, 2016
	Realized Investment Gains (Losses)			Net Investment Income		Other Income		AOCI(1)
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	0		$	909	$	179	$	(6,351	)
Total cash flow hedges	0			909		179		(6,351		)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	265,560			0		0		0
Currency	(136		)	0		0		0
Currency/Interest Rate	(5,303		)	0		65		0
Equity	(859,560		)	0		0		0
Embedded Derivatives	554,300			0		0		0
Total non-qualifying hedges	(45,139		)	0		65		0
Total	$	(45,139	)	$	909	$	244	$	(6,351	)

	Nine Months Ended September 30, 2016
	Realized Investment Gains (Losses)			Net Investment Income		Other Income		AOCI(1)
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	0		$	1,954	$	5,724	$	(7,108	)
Total cash flow hedges	0			1,954		5,724		(7,108		)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	2,817,119			0		0		0
Currency	(15		)	0		0		0
Currency/Interest Rate	2,568			0		271		0
Equity	(1,346,122		)	0		0		0
Embedded Derivatives	(4,064,100		)	0		0		0
Total non-qualifying hedges	(2,590,550		)	0		271		0
Total	$	(2,590,550	)	$	1,954	$	5,995	$	(7,108	)

(1) Amounts deferred in AOCI.

For both the three and nine months ended September 30, 2017 and 2016, the ineffective portion of derivatives accounted for using hedge accounting was not material to the Company’s results of operations. Also, 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.

48

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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

	(in thousands)
Balance, December 31, 2016	$	11,745
Net deferred gains (losses) on cash flow hedges from January 1 to September 30, 2017	(29,004		)
Amounts reclassified into current period earnings	1,861
Balance, September 30, 2017	$	(15,398	)

Using September 30, 2017 values, it is estimated that a pre-tax gain of approximately $6 million will be reclassified from AOCI to earnings during the subsequent twelve months ending September 30,2018, offset by amounts pertaining to the hedged item. As of September 30, 2017, 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 18 years. Income amounts deferred in AOCI as a result of cash flow hedges are included in "Net unrealized investment gains (losses)" within OCI in the Unaudited Interim Statements of Operations and Comprehensive Income (Loss).

Credit Derivatives

The Company has no exposure from credit derivative positions where it has written or purchased credit protection as of September 30, 2017 and December 31, 2016.

Credit Risk

The Company is exposed to credit-related losses in the event of non-performance by 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, such as cash and securities, when appropriate. 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 has made commitments to fund $97 million and $9 million of commercial loans as of September 30, 2017 and December 31, 2016, respectively. The Company also made commitments to purchase or fund investments, mostly private fixed maturities, of $135 million and $121 million as of September 30, 2017 and December 31, 2016, respectively.

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.

49

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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

Litigation and Regulatory Matters

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

The Company establishes accruals for litigation and regulatory matters when it is probable that a loss has been incurred and the amount of that loss can be reasonably estimated. For litigation and regulatory matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but the matter, if material, is disclosed. The Company estimates that as of September 30, 2017, the aggregate range of reasonably possible losses in excess of accruals established for those litigation and regulatory matters for which such an estimate currently can be made is less than $150 million. This estimate is not an indication of expected loss, if any, or the Company’s maximum possible loss exposure on such matters. The Company reviews relevant information with respect to its litigation and regulatory matters on a quarterly and annual basis and updates its accruals, disclosures and estimates of reasonably possible loss based on such reviews.

Securities Lending Matter

In 2016, Prudential Financial self-reported to the SEC and the U.S. Department of Labor, and notified other regulators, that in some cases it failed to maximize securities lending income for the benefit of certain separate account investments. Prudential Financial has substantially implemented a remediation plan for the benefit of customers. Prudential Financial is cooperating with regulators in their review of this matter (which includes a review of the remediation plan) and has entered into discussions with the SEC staff regarding a possible settlement that would potentially involve charges under the Investment Advisers Act and financial remedies. We cannot predict the outcome of these discussions.

For a discussion of the Company's litigation and regulatory matters, see Note 12 to the Company's Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

Summary

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

50

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

7.    REINSURANCE

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

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

Realized investment gains and losses include the impact of reinsurance agreements, particularly reinsurance agreements involving living benefit guarantees. These reinsurance agreements are derivatives and have been accounted for in the same manner as embedded derivatives and the changes in the fair value of these derivatives are recognized through "Realized investment gains (losses), net". See Note 5 for additional information related to the accounting for embedded derivatives.

Reinsurance amounts included in the Company's Unaudited Interim Statements of Financial Position as of September 30, 2017 and December 31, 2016 were as follows:

	September 30, 2017			December 31, 2016
	(in thousands)
Reinsurance recoverables	$	534,694		$	588,608
Deferred policy acquisition costs	3,722,540			3,557,248
Deferred sales inducements	542,311			520,182
Value of business acquired	(2,732		)	(2,357		)
Other assets	104,074			112,802
Policyholders’ account balances	2,738,620			2,576,357
Future policy benefits	5,352,110			5,130,753
Reinsurance payables(1)	234,859			275,822
Other liabilities	332,821			335,713

(1) "Reinsurance payables" includes $0.1 million of unaffiliated activity as of both September 30, 2017 and December 31, 2016.

The reinsurance recoverables by counterparty are broken out below:

	September 30, 2017		December 31, 2016
	(in thousands)
Prudential Insurance	$	299,828	$	306,191
Pruco Life	234,829		282,326
Unaffiliated	37		91
Total reinsurance recoverables	$	534,694	$	588,608

51

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(in thousands)
Premiums:
Direct	$	8,028		$	11,909		$	26,216		$	28,958
Assumed	5,849			(10,248		)	25,402			821,089
Ceded	(1,372		)	(2,256		)	(2,952		)	(2,554		)
Net premiums	12,505			(595		)	48,666			847,493
Policy charges and fee income:
Direct	153,835			163,547			469,128			487,837
Assumed	413,400			392,156			1,210,789			766,451
Ceded(1)	(11,328		)	(11,522		)	(33,607		)	(34,582		)
Net policy charges and fee income	555,907			544,181			1,646,310			1,219,706
Asset administration fees and other income:
Direct	30,573			29,814			97,972			97,246
Assumed	74,586			69,493			216,697			135,902
Ceded	(2,446		)	(2,502		)	(7,285		)	(7,316		)
Net asset administration fees and other income	102,713			96,805			307,384			225,832
Realized investment gains (losses), net:
Direct	(32,663		)	(409,674		)	(779,499		)	507,527
Assumed	1,237,967			394,419			470,545			(3,366,784		)
Ceded	(35,227		)	(20,470		)	(18,558		)	361,596
Realized investment gains (losses), net	1,170,077			(35,725		)	(327,512		)	(2,497,661		)
Policyholders' benefits (including change in reserves):
Direct	10,061			10,835			36,627			49,471
Assumed	6,114			(8,895		)	28,505			526,292
Ceded(2)	(2,119		)	(10,873		)	15,119			(21,417		)
Net policyholders' benefits (including change in reserves)	14,056			(8,933		)	80,251			554,346
Interest credited to policyholders’ account balances:
Direct	42,401			(64,111		)	(5,421		)	87,752
Assumed	52,559			(27,278		)	9,108			18,816
Ceded	(4,461		)	5,774			(3,120		)	(5,384		)
Net interest credited to policyholders’ account balances	90,499			(85,615		)	567			101,184
Reinsurance expense allowances and general and administrative expenses, net of capitalization and amortization	352,114			(14,625		)	524,961			504,820

(1) "Policy charges and fee income ceded" includes $(0.6) million and $(0.3) millionof unaffiliated activity for the three months ended September 30, 2017 and 2016, respectively, and $(2) million and $(1) million for the nine months ended September 30, 2017 and 2016, respectively.

(2) "Policyholders' benefits (including change in reserves) ceded" includes $0 million and $0.0 million of unaffiliated activity for the three months ended September 30, 2017 and 2016, respectively, and $0 million and $(0.2) million for the nine months ended September 30, 2017 and 2016, respectively.

52

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

8. EQUITY

Accumulated Other Comprehensive Income (Loss)

The balance of and changes in each component of “Accumulated other comprehensive income (loss)” for the nine months endedSeptember 30, 2017 and 2016 are as follows:

	Accumulated Other Comprehensive Income (Loss)
	Foreign Currency Translation Adjustments			Net Unrealized Investment Gains (Losses)(1)			Total Accumulated Other Comprehensive Income (Loss)
	(in thousands)
Balance, December 31, 2016	$	(78	)	$	(314,870	)	$	(314,948	)
Change in OCI before reclassifications	95			222,991			223,086
Amounts reclassified from AOCI	0			4,407			4,407
Income tax benefit (expense)	(33		)	(79,589		)	(79,622		)
Balance, September 30, 2017	$	(16	)	$	(167,061	)	$	(167,077	)

	Accumulated Other Comprehensive Income (Loss)
	Foreign Currency Translation Adjustments			Net Unrealized Investment Gains (Losses)(1)			Total Accumulated Other Comprehensive Income (Loss)
	(in thousands)
Balance, December 31, 2015	$	(65	)	$	46,231		$	46,166
Change in OCI before reclassifications	20			371,299			371,319
Amounts reclassified from AOCI	0			(94,834		)	(94,834		)
Income tax benefit (expense)	(7		)	(96,762		)	(96,769		)
Balance, September 30, 2016	$	(52	)	$	225,934		$	225,882

(1) Includes cash flow hedges of $(15) million and $12 million as of September 30, 2017 and December 31, 2016, respectively, and $8 millionand$15 million as of September 30, 2016 and December 31, 2015, respectively.

Reclassifications out of Accumulated Other Comprehensive Income (Loss)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017			2016
	(in thousands)
Amounts reclassified from AOCI(1)(2):
Net unrealized investment gains (losses):
Cash flow hedges—Currency/ Interest rate(3)	$	(1,484	)	$	1,342	$	(1,861	)	$	6,989
Net unrealized investment gains (losses) on available-for-sale securities	(1,180		)	8,555		(2,546		)	87,845
Total net unrealized investment gains (losses)(4)	(2,664		)	9,897		(4,407		)	94,834
Total reclassifications for the period	$	(2,664	)	$	9,897	$	(4,407	)	$	94,834

(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 costs, other costs and future policy benefits.

53

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Net Unrealized Investment Gains (Losses)

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

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

	Net Unrealized Gains (Losses) on Investments			Deferred Policy Acquisition Costs and Other Costs			Future Policy Benefits and Other Liabilities			Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related to Net Unrealized Investment Gains (Losses)
	(in thousands)
Balance, December 31, 2016	$	(1,261	)	$	(2,133	)	$	(522	)	$	1,387		$	(2,529	)
Net investment gains (losses) on investments arising during the period	8,351			0			0			(2,923		)	5,428
Reclassification adjustment for (gains) losses included in net income	1,834			0			0			(642		)	1,192
Reclassification adjustment for OTTI (gains) losses excluded from net income(1)	61			0			0			(21		)	40
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs	0			1,804			0			(630		)	1,174
Impact of net unrealized investment (gains) losses on future policy benefits and other liabilities	0			0			524			(183		)	341
Balance, September 30, 2017	$	8,985		$	(329	)	$	2		$	(3,012	)	$	5,646

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

54

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

All Other Net Unrealized Investment Gains (Losses) in AOCI

	Net Unrealized Gains (Losses) on Investments(2)			Deferred Policy Acquisition Costs and Other Costs			Future Policy Benefits and Other Liabilities			Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related to Net Unrealized Investment Gains (Losses)
	(in thousands)
Balance, December 31, 2016	$	(442,314	)	$	(31,251	)	$	(5,664	)	$	166,888		$	(312,341	)
Net investment gains (losses) on investments arising during the period	275,382			0			0			(96,384		)	178,998
Reclassification adjustment for (gains) losses included in net income	(6,241		)	0			0			2,184			(4,057		)
Reclassification adjustment for OTTI (gains) losses excluded from net income(1)	(61		)	0			0			21			(40		)
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs	0			(44,571		)	0			15,600			(28,971		)
Impact of net unrealized investment (gains) losses on future policy benefits and other liabilities	0			0			(9,685		)	3,389			(6,296		)
Balance, September 30, 2017	$	(173,234	)	$	(75,822	)	$	(15,349	)	$	91,698		$	(172,707	)

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

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

9.    RELATED PARTY TRANSACTIONS

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

Expense Charges and Allocations

Many of the Company’s expenses are allocations or charges from Prudential Insurance or other affiliates. These expenses can be grouped into general and administrative expenses and agency distribution expenses.

The Company’s general and administrative expenses are charged to the Company using allocation methodologies based on business production processes. Management believes that the methodology is reasonable and reflects costs incurred by Prudential Insurance to process transactions on behalf of the Company. The Company operates under service and lease agreements whereby services of officers and employees, supplies, use of equipment and office space are provided by Prudential Insurance. The Company reviews its allocation methodology periodically which it may adjust accordingly. General and administrative expenses include allocations of stock compensation expenses related to a stock option program and a deferred compensation program issued by Prudential Financial. The expense charged to the Company for the stock option program was $0.0 million for both the three months ended September 30, 2017 and 2016, and $0.0 million and $0.1 million for the nine months ended September 30, 2017 and 2016, respectively. The expense charged to the Company for the deferred compensation program was $0.2 million for both the three months ended September 30, 2017 and 2016, and $0.6 million and $0.5 million for the nine months ended September 30, 2017 and 2016, respectively.

The Company is charged for its share of employee benefit expenses. These expenses include costs for funded and non-funded contributory and non-contributory defined benefit pension plans. Some of these benefits are based on final earnings and length of service while others are based on an account balance, which takes into consideration age, service and earnings during a career.

55

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

The Company’s share of net expense for the pension plans was $0.3 million for both the three months ended September 30, 2017 and 2016, and $1 million and $0.9 million for the nine months ended September 30, 2017 and 2016, respectively.

The Company is also charged for its share of the costs associated with welfare plans issued by Prudential Insurance. These expenses include costs related to medical, dental, life insurance and disability. The Company's share of net expense for the welfare plans was $0.4 million for both the three months ended September 30, 2017 and 2016, and $1 million for both the nine months ended September 30, 2017 and 2016.

Prudential Insurance sponsors voluntary savings plans for its employee 401(k) plans. The plans provide for salary reduction contributions by employees and matching contributions by the Company of up to 4% of annual salary. The Company's expense for its share of the voluntary savings plan was $0.1 million for both the three months ended September 30, 2017 and 2016, and $0.4 million for both the nine months ended September 30, 2017 and 2016.

The Company pays commissions and certain other fees to PAD in consideration for PAD’s marketing and underwriting of the Company’s products. Commissions and fees are paid by PAD to broker-dealers who sell the Company’s products. Commissions and fees paid by the Company to PAD were $27 million and $28 million for the three months ended September 30, 2017 and 2016, respectively, and $81 million and $82 million for the nine months ended September 30, 2017 and 2016, respectively.

The Company is charged for its share of corporate expenses incurred by Prudential Financial to benefit its businesses, such as advertising, executive oversight, external affairs and philanthropic activity.  The Company’s share of corporate expenses (benefits) was $(2) million and $2 million for the three months ended September 30, 2017 and 2016, respectively, and $10 million and $7 million for the nine months ended September 30, 2017 and 2016, respectively.

Certain operating costs, including rental of office space, furniture, and equipment, have been charged to the Company at cost by Prudential Annuities Information Services and Technology Corporation (“PAIST”), an affiliated company. The Company signed a written service agreement with PAIST for these services executed and approved by the Connecticut Insurance Department in 1995. This agreement automatically continues in effect from year to year and may be terminated by either party upon 30 days written notice. Allocated lease expense was $0 million and $0.1 million for the three months ended September 30, 2017 and 2016, respectively, and $0 million and $0.1 million for the nine months ended September 30, 2017 and 2016, respectively. Sub-lease rental income, recorded as a reduction to lease expense, was $0 million and $0.0 million for the three and nine months ended September 30, 2017 and 2016, respectively.

Affiliated Investment Management Expenses

In accordance with an agreement with PGIM, Inc. (“PGIM”), the Company pays investment management expenses to PGIM who acts as investment manager to certain Company general account and separate account assets. Investment management expenses paid to PGIM related to this agreement were $3 million and $4 million for the three months ended September 30, 2017 and 2016, respectively, and $9 million and $8 million for the nine months ended September 30, 2017 and 2016, respectively. These expenses are recorded as “Net investment income” in the Company's Unaudited Interim Statements of Operations and Comprehensive Income (Loss).

Derivative Trades

In its ordinary course of business, the Company enters into OTC derivative contracts with an affiliate, PGF. For these OTC derivative contracts, PGF has a substantially equal and offsetting position with an external counterparty. See Note 5 for additional information.

Joint Ventures

The Company has made investments in joint ventures with certain subsidiaries of Prudential Financial. "Other long-term investments" includes $109 million and $102 million as of September 30, 2017 and December 31, 2016, respectively. "Net investment income" related to these ventures includes a gain of $2 million and $3 million for the three months ended September 30, 2017 and 2016, respectively, and a gain of $7 million and $3 million for the nine months ended September 30, 2017 and 2016, respectively.

56

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Affiliated Asset Administration Fee Income

The Company has a revenue sharing agreement with AST Investment Services, Inc. (“ASTISI”) and PGIM Investments LLC (“PGIM Investments”) whereby the Company receives fee income based on policyholders' separate account balances invested in the Advanced Series Trust and the Prudential Series Fund. Income received from ASTISI and PGIM Investments related to this agreement was $28 million and $29 million for the three months ended September 30, 2017 and 2016, respectively, and $83 million and $84 million for the nine months ended September 30, 2017 and 2016, respectively. These revenues are recorded as “Asset administration fees and other income” in the Company's Unaudited Interim Statements of Operations and Comprehensive Income (Loss).

Affiliated Notes Receivable

Affiliated notes receivable included in "Other assets" at September 30, 2017 and December 31, 2016 were as follows:

	Maturity Dates			Interest Rates				September 30, 2017		December 31, 2016
								(in thousands)
U.S. Dollar floating rate notes			2028	2.73%	-	2.76	%	$	34,293	$	0
U.S. Dollar fixed rate notes	2027	-	2028	2.31%	-	14.85	%	6,720		40,925
Total long-term notes receivable - affiliated(1)								$	41,013	$	40,925

(1) All long-term notes receivable may be called for prepayment prior to the respective maturity dates under specified circumstances.

The affiliated notes receivable shown above include those classified as loans and carried at unpaid principal balance, net of any allowance for losses, and those classified as available-for-sale securities and other trading account assets carried at fair value. The Company monitors the internal and external credit ratings of these loans and loan performance. The Company also considers any guarantees made by Prudential Insurance for loans due from affiliates.

Accrued interest receivable related to these loans was $0.6 million and $0.1 million at September 30, 2017 and December 31, 2016, respectively, and is included in “Other assets”. Revenues related to these loans were $0.2 million for both the three months ended September 30, 2017 and 2016, and $0.5 million and $0.7 million for the nine months ended September 30, 2017 and 2016, respectively, and are included in “Asset administration fees and other income”.

Affiliated Asset Transfers

The Company participates in affiliated asset trades with parent and sister companies. Book and market value differences for trades with a parent and sister are recognized within "Additional paid-in capital" (“APIC”) and "Realized investment gains (losses), net", respectively. The table below shows affiliated asset trades for the nine months ended September 30, 2017 and for the year ended December 31, 2016, excluding those related to the Variable Annuities Recapture effective April 1, 2016, as described in Note 1.

Affiliate	Date	Transaction	Security Type	Fair Value		Book Value		APIC, Net of Tax Increase/(Decrease)			Realized Investment Gain/(Loss), Net of Tax
				(in thousands)
Gibraltar Life Insurance Co., Ltd	August 2016	Sale	Fixed Maturities	$	11,559	$	11,485	$	0		$	48
Prudential Insurance	September 2016	Sale	Fixed Maturities	$	47,066	$	36,639	$	0		$	6,777
Pruco Re	September 2016	Transfer in	Fixed Maturities	$	91,586	$	80,732	$	(7,055	)	$	0
Pruco Life	January 2017	Sale	Fixed Maturities	$	29	$	29	$	0		$	0

57

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Debt Agreements

The Company is authorized to borrow funds up to $9 billion from Prudential Financial and its affiliates to meet its capital and other funding needs. The debt issued during the second quarter of 2016 in the table below was assigned from affiliates as part of the Variable Annuities Recapture, as described further in Note 1. The following table provides the breakout of the Company's short-term and long-term debt with affiliates:

Affiliate	Date Issued	Amount of Notes - September 30, 2017		Amount of Notes - December 31, 2016		Interest Rate			Date of Maturity
		(in thousands)
Prudential Insurance	4/20/2016	$	0	$	28,101		1.89	%		6/20/2017
Prudential Insurance	4/20/2016	18,734		18,734			2.60	%		12/15/2018
Prudential Insurance	4/20/2016	25,000		25,000			2.60	%		12/15/2018
Prudential Insurance	4/20/2016	46,835		46,835			2.80	%		6/20/2019
Prudential Insurance	4/20/2016	18,734		18,734			2.80	%		6/20/2019
Prudential Insurance	4/20/2016	37,468		37,468			3.64	%		12/6/2020
Prudential Insurance	4/20/2016	93,671		93,671			3.64	%		12/15/2020
Prudential Insurance	4/20/2016	103,039		103,039			3.64	%		12/15/2020
Prudential Insurance	4/20/2016	93,671		93,671			3.47	%		6/20/2021
Prudential Insurance	4/20/2016	93,671		93,671			4.39	%		12/15/2023
Prudential Insurance	4/20/2016	28,102		28,102			4.39	%		12/15/2023
Prudential Insurance	4/20/2016	37,468		37,468			3.95	%		6/20/2024
Prudential Insurance	4/20/2016	93,671		93,671			3.95	%		6/20/2024
Prudential Insurance	4/20/2016	46,835		46,835			3.95	%		6/20/2024
Prudential Insurance	6/28/2016	30,000		30,000			2.08	%		6/28/2019
Prudential Insurance	6/28/2016	50,000		50,000			3.87	%		6/28/2026
Prudential Insurance	6/28/2016	25,000		25,000			3.49	%		6/28/2026
Prudential Insurance	6/28/2016	26,000		26,000			2.59	%		6/28/2021
Prudential Insurance	6/28/2016	25,000		25,000			2.08	%		6/28/2019
Prudential Insurance	6/28/2016	20,000		20,000			2.08	%		6/28/2019
Prudential Insurance	6/28/2016	25,000		25,000			3.49	%		6/28/2026
Prudential Retirement Insurance & Annuity	6/28/2016	34,000		34,000			3.09	%		6/28/2023
Total Loans Payable to Affiliates		$	971,899	$	1,000,000

The total interest expense to the Company related to loans and other payables to affiliates was $19 million and $20 million for the three months ended September 30, 2017 and 2016, respectively, and $48 million and $39 million for the nine months ended September 30, 2017 and 2016, respectively.

Contributed Capital and Dividends

In June 2016, the Company received a capital contribution in the amount of $8,422 million from PAI, related to the Variable Annuities Recapture, as discussed in Note 1.

The Company did not pay any dividends through September 30, 2017. In June and September 2017, there was a $100 million and $200 million return of capital, respectively, to PAI. In December 2016, there was a $1,140 million return of capital to PAI.

Reinsurance with Affiliates

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

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) addresses the financial condition of Prudential Annuities Life Assurance Corporation (“PALAC” or the “Company”) as of September 30, 2017, compared with December 31, 2016, and its results of operations for the three and nine months ended September 30, 2017 and 2016. You should read the following analysis of our financial condition and results of operations in conjunction with the MD&A, the “Risk Factors” section, and the audited Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as well as the statements under “Forward-Looking Statements” and the Unaudited Interim Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Overview

The Company was established in 1969 and has been a provider of 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 deferred and immediate variable annuities with (1) fixed interest rate allocation options, subject to a market value adjustment, that are registered with the United States Securities and Exchange Commission (the “SEC”), and (2) fixed-rate allocation options not subject to a market value adjustment and not registered with the SEC. In addition, the Company has a relatively small in force block of variable life insurance policies. The Company no longer actively sells such products.

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

On August 31, 2013, the Company redomesticated from Connecticut to Arizona. As a result of the redomestication, the Company is now an Arizona insurance company and its principal insurance regulatory authority is the Arizona Department of Insurance. See Note 1 to the Unaudited Interim Financial Statements for additional information.

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

Variable Annuities Recapture

Through March 31, 2016, the Company reinsured the majority of its variable annuity living benefit guarantees to its affiliated companies, Pruco Reinsurance, Ltd. (“Pruco Re”) and Prudential Insurance, in order to facilitate the capital markets hedging program for these living benefit guarantees. Effective April 1, 2016, the Company recaptured the risks related to its variable annuity living benefit guarantees that were previously reinsured to Pruco Re and Prudential Insurance. In addition, the Company reinsured the variable annuity base contracts, along with the living benefit guarantees, from Pruco Life excluding the PLNJ business which was reinsured to Prudential Insurance, under a coinsurance and modified coinsurance agreement. The reinsurance agreement covers new and in force business and excludes business reinsured externally by Pruco Life. The product risks related to the reinsured business are being managed in the Company. These series of transactions are collectively referred to as the "Variable Annuities Recapture". After the foregoing transactions, Pruco Re no longer had any material active reinsurance with affiliates. On September 30, 2016, Pruco Re was merged with and into PALAC.

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The Variable Annuities Recapture allows the Company to manage the capital and liquidity risks of these products more efficiently by aggregating both the risks and the assets supporting these risks. In connection with this transaction, the Company evaluated the overall risk management strategy including potential future enhancements to the living benefit hedging program. During the third quarter of 2016, the Company implemented modifications to the risk management strategy in order to more efficiently manage the capital and liquidity associated with these products while continuing to mitigate fluctuations in net income due to capital market movements. These modifications include utilizing a combination of traditional fixed income instruments and derivatives to manage the associated risks.

Regulatory Developments

Fiduciary Rules

The U.S. Department of Labor’s (“DOL”) new fiduciary rules became applicable, in part, on June 9, 2017, with certain additional provisions scheduled to become applicable on January 1, 2018. In August 2017, the DOL issued a proposed 18-month extension of the January 1, 2018 applicability date to July 1, 2019. In connection with the ongoing examination of the rules as directed by President Trump in February 2017, the DOL also issued a request for information seeking public comment on the rules. In addition, the Secretary of Labor has stated that he will seek to engage with the SEC on the rules, and in June 2017, the Chairman of the SEC issued a public statement soliciting comments on the standard of conduct for investment advisers and broker-dealers when they provide advice to retail investors. The National Association of Insurance Commissioners ("NAIC") has also formed an Annuity Suitability Working Group which is considering the development of enhanced standards for the sale of annuities.  We cannot predict what impact these developments will have on the rules or the standard of conduct applicable to the Company.

Regulation as a Designated Financial Company

Presidential Memorandum Regarding the Financial Stability Oversight Council - In April 2017, President Trump issued a memorandum directing the Secretary of the Treasury, among other things, to conduct a review of the Financial Stability Oversight Council's (the "Council") process for designating non-bank financial companies (“Designated Financial Companies”) for supervision by the Board of Governors of the Federal Reserve System (the "FRB") and to report conclusions to the President within 180 days regarding issues raised in the memorandum, and recommendations for process improvements, including necessary legislative changes. We cannot predict what impact the review will ultimately have on the designation process or Prudential Financial.

The Financial CHOICE Act - In June 2017, the U.S. House of Representatives passed the Financial CHOICE Act, which would amend certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), including the authority of the Council to designate non-bank financial companies for FRB supervision. We cannot predict whether this or other legislation impacting Dodd-Frank will ultimately be passed into law, or how such legislation will impact Prudential Financial.

Resolution Planning - In July 2017, the FRB and the Federal Deposit Insurance Corporation announced that for Designated Financial Companies the next resolution plan filing deadline will be delayed from December 31, 2017 to December 31, 2018.

U.S. Department of the Treasury Report

In October 2017, in response to President Trump’s February 2017 executive order, the U.S. Department of the Treasury released a report titled “A Financial System That Creates Economic Opportunities - Asset Management and Insurance.” The report identifies laws, regulations and other requirements that promote or inhibit certain core principles of financial regulation that are outlined in the order. Among other things, the report recommends that primary federal and state regulators should focus on potential systemic risks arising from products and activities, and on implementing regulations that strengthen the asset management and insurance industries as a whole, rather than focus on an entity-based regulatory regime. The report also affirms the role of the U.S. state-based system of insurance regulation. In addition, the report also supports current efforts at the DOL to reexamine, and delay full implementation of, the fiduciary rules, and encourages the DOL and SEC to work with state insurance regulators to evaluate the impacts of a fiduciary rule across markets. The Company is evaluating the recommendations set forth in the report and their potential impact on our business. We cannot predict whether any of the recommendations will ultimately become laws, regulations or other requirements applicable to our business.

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U.S. Tax Legislation

In September 2017, the Trump Administration and Republican Congressional leadership released a Unified Framework for Fixing Our Broken Tax Code ("the Framework") that is intended to serve as a template for the tax-writing committees as they develop tax reform legislation. The Framework would reduce the corporate tax rate to 20%, provide for a partial limitation of the deduction for net interest, introduce a territorial tax system with a one-time deemed repatriation tax and aim to repeal the corporate alternative minimum tax. The Framework does not address insurance industry specific provisions such as the dividends received deduction, tax reserves and deferred policy acquisition costs. The Framework would also reduce individual tax rates from seven brackets to three with a top rate of 35%, repeal the individual alternative minimum tax, increase the standard deduction, eliminate many other deductions and repeal the estate tax.

In November 2017, the Tax Cuts and Jobs Act (the “House Tax Bill”) was introduced in the U.S. House of Representatives. The House Tax Bill would, among other changes, permanently reduce the corporate tax rate from 35% to 20% and modify the taxation of life insurance companies and non-U.S. subsidiaries. For individuals and families, the House Tax Bill would also modify certain deductions and income tax brackets and repeal the alternative minimum tax.

We cannot predict whether the Framework and/or House Tax Bill will ultimately form the basis for changes in the tax laws applicable to the Company, our products or our customers, or the timing of any such changes. Tax reform may change the Company’s tax profile, make our products less attractive and/or reduce our statutory capital position. We are currently analyzing the House Tax Bill for the impact on the Company should it become law.

For additional information on the potential impacts of regulation on the Company see “Business-Regulation” and “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.

Impact of a Low Interest Rate Environment

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

• investment-related activity, including: investment income returns, net interest margins, net investment spread results, new money rates, mortgage loan prepayments and bond redemptions;

• insurance reserve levels, amortization of deferred policy acquisition costs (“DAC”)/value of business acquired (“VOBA”) and market experience true-ups;

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

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

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

• policyholder behavior, including surrender or withdrawal activity.

For more information on interest rate risks, see “Risk Factors—Risks Relating to Economic and Market Conditions” included in our Annual Report on Form 10-K for the year ended December 31, 2016.

Revenues and Expenses

The Company earns revenues principally from policy charges, fee income, asset administration fees from insurance and investment products 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 and costs of managing risk related to these products, interest credited to contractholders' account balances, general business expenses, reinsurance premiums, commissions and other costs of selling and servicing the various products it sold.

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 offered through the Company’s variable annuity and variable life insurance products. Under the Rule 12b-1 Plan, AST pays an affiliate of the Company for distribution and administrative services. In June 2015, AST received shareholder approval to amend the Rule 12b-1 Plan. Effective July 1, 2015, there was an increase in the amount AST pays the Company's affiliate for distribution and administrative services with respect to these portfolios. However, there was also a reduction in contractual investment management fees. In addition, due to the revised Rule 12b-1 Plan, the asset administration fees received by the Company from AST Investment Services, Inc., and related distribution expenses of the Company, have decreased.

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Profitability

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

See “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 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 in force variable annuities provide its contractholders with tax-deferred asset accumulation together with a base death benefit and a suite of optional guaranteed death and living benefits and annuitization options. Certain living benefit guarantees include, among other features, the ability to make withdrawals based on the highest daily contract value plus a specified return, credited for a period of time. This guaranteed contract value is a notional amount that forms the basis for determining periodic withdrawals for the life of the contractholder, and cannot be accessed as a lump-sum surrender value. Most contracts also guarantee the contractholder’s beneficiary a return of the greater of account value or total premium payments made to the contract less any partial withdrawals upon death. Certain in force contracts include guaranteed benefits which are not currently offered, such as annuitization benefits based on a guaranteed notional amount and benefits payable at specified dates after the accumulation period.

Our variable annuities generally provide our contractholders with the opportunity to allocate purchase payments to sub-accounts that invest in underlying mutual funds managed by our affiliates ("proprietary") or a mix of proprietary and non-proprietary mutual funds, frequently under asset allocation programs. Certain allocations made in the fixed-rate accounts of our variable annuities and certain fixed annuities impose a market value adjustment if the invested amount is not held to maturity.

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

The reserves for GMDB and GMIB are calculated based on best estimates applying our actuarial and capital markets return assumptions in accordance with an insurance fulfillment accounting framework whereby a liability is established over time representing the portion of fees collected that is expected to be used to satisfy the obligation to pay benefits in future periods.

In contrast, certain of our guaranteed living benefits (e.g., GMAB, GMWB and GMIWB) are accounted for in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) as embedded derivatives and reported using a fair value accounting framework. These benefit features are carried at fair value based on estimates of assumptions a market participant would use in valuing these embedded derivatives and the change in fair value during each reporting period is recorded within “Realized investment gains (losses), net”.

Accounting Policies & Pronouncements

Application of Critical Accounting Estimates

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

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

• DAC and other costs, including deferred sales inducements ("DSI") and VOBA;

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

• Policyholder liabilities;

• Reinsurance recoverables;

• Taxes on income; and

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

DAC and Other Costs

We generally amortize DAC and other costs over the expected life of the contracts in proportion to total gross profits. Total gross profits include both actual gross profits and estimates of gross profits for future periods. In calculating gross profits, we consider mortality, persistency, and other elements as well as rates of return on investments associated with these contracts, and the cost related to our guaranteed minimum death benefits (“GMDB”) and guaranteed minimum income benefits (“GMIB”). Gross profits and amortization rates also include the impacts of the embedded derivatives associated with certain of the living benefit guarantees of our variable annuity contracts and related hedging activities. In calculating amortization expense, we estimate the amounts of gross profits that will be included in our U.S. GAAP results, and utilize these estimates to calculate amortization rates and expense amounts. In addition, in calculating gross profits, we include the profits and losses related to contracts previously issued by the Company 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 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 a DAC amortization pattern representative of the total economics of the products. For a further discussion of the amortization of DAC and other costs, see “—Results of Operations”.

The near-term future equity rate of return assumptions used in evaluating DAC and DSI for our domestic variable annuity products are derived using a reversion to the mean approach, a common industry practice. Under this approach, we consider historical equity returns and adjust projected equity returns over an initial future period of five years (the “near-term”) so that equity returns converge to the long-term expected rate of return. If the near-term projected future rate of return is greater than our near-term maximum future rate of return of 15%, we use our maximum future rate of return. As of September 30, 2017, we assume an 8.0% long-term equity expected rate of return and a 4.2% near-term mean reversion equity rate of return.

The weighted average rate of return assumptions consider many factors, including asset durations, asset allocations and other factors. We generally 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. We generally update the future interest rates used to project fixed income returns annually and in any quarter when interest rates vary significantly from these assumptions. As a result of our 2017 annual reviews and update of assumptions and other refinements, we reduced our long-term expectation of the 10-year U.S. Treasury rate by 25 basis points and now grade to 3.75% over ten years. 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.

For additional information on our policies for DAC and other costs and for the remaining critical accounting estimates listed above, see our Annual Report on Form 10-K for the year ended December 31, 2016, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Accounting Policies & Pronouncements—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 and

accounting pronouncements issued but not yet adopted.

Changes in Financial Position

September 30, 2017 versus December 31, 2016

Total assets increased $1.4 billion from $59.8 billion at December 31, 2016 to $61.2 billion at September 30, 2017. Significant components were:

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• Total investments and cash and cash equivalents increased $0.8 billion primarily driven by cash flows from insurance operations and unrealized gains on investments due to a decline in rates, partially offset by a decline in affiliated derivative assets due to favorable equity markets.

• Separate account assets increased $0.5 billion primarily driven by market appreciation partially offset by net outflows and policy charges.

• DAC and DSI increased $0.3 billion primarily due to positive unlocks and capitalization of new business, partially offset by base amortization.

Total liabilities increased by $0.7 billion, from $52.7 billion at December 31, 2016 to $53.4 billion at September 30, 2017. Significant components were:

• Separate account liabilities increased $0.5 billion, corresponding to the increase in separate account assets described above.

• Future policy benefits increased $0.3 billion primarily driven by credit spread tightening and living benefit reserve growth, partially offset by favorable markets.

Total equity increased $0.6 billion from $7.1 billion at December 31, 2016 to $7.7 billion at September 30, 2017, primarily driven by an after-tax gain of $0.8 billion for the nine months ended September 30, 2017 and an increase in unrealized gains on investments, as discussed above. These gains were partially offset by a return of capital of $0.3 billion.

Results of Operations

Income (loss) from Operations before Income Taxes

2017 to 2016 Three Months Comparison

Income (loss) from operations before income taxes increased $0.5 billion from $0.9 billion in the third quarter of 2016 to $1.4 billion in the third quarter of 2017, primarily driven by realized investment gains as a result of widening credit spreads used in measuring our living benefit contracts, partially offset by related charges to the amortization of DAC and other costs. See table below for more information.

2017 to 2016 Nine Months Comparison

Income (loss) from operations before income taxes increased $2.7 billion from a loss of $1.5 billion for the first nine months of 2016 to income of $1.2 billion for the first nine months of 2017, primarily driven by favorable variance of $2.0 billion for recapture and reinsurance losses for the nine months ended September 30, 2016, driven by the Variable Annuities Recapture, as well as a favorable variance from the annual review and update of assumptions and other refinements. Also contributing to the increase was a favorable variance in fees driven by the Variable Annuities Recapture. See table below for more information.

The following table illustrates the net impact of changes in the U.S. GAAP embedded derivative liability and hedge positions,

and the related amortization of DAC and other costs, for the periods indicated:

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	Three Months Ended						Nine Months Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
	(in millions)(1)						(in millions)(1)
Excluding impact of assumption updates and other refinements:
Net hedging impact(2)(3)	$	79		$	(149	)	$	433		$	(243	)
Change in portions of U.S. GAAP liability, before NPR(4)	1,832			337			2,109			(190		)
Change in the NPR adjustment	(814		)	(155		)	(2,872		)	(250		)
Net impact from changes in the U.S. GAAP embedded derivative and hedge positions	1,097			33			(330		)	(683		)
Related benefit (charge) to amortization of DAC and other costs	(251		)	429			64			396
Net impact of assumption updates and other refinements	—			—			(75		)	1,390
Recapture and reinsurance gains (losses)	—			—			—			(2,866		)
Net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs.	$	846		$	462		$	(341	)	$	(1,763	)

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

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

the derivatives utilized with respect to that risk.

(3) Excludes $0 million and $(31) million for the three months ended September 30, 2017 and 2016, respectively, and $0 million and $(389) million for the nine months ended September 30, 2017 and 2016, respectively, representing the impact of managing interest rate risk through capital management strategies other than hedging of particular exposures.

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

For the three months ended September 30, 2017, the net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs, was a benefit of $846 million. The net impact from changes in the U.S. GAAP embedded derivative and hedge positions resulted in a net benefit of $1,097 million, predominantly as a result of widening credit spreads used in measuring our living benefit contracts. Partial offsets are included in the $251 million of related charges to amortization of DAC and other costs. For the nine months ended September 30, 2017, the net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impacts of NPR, DAC and other costs, was a charge of $341 million. The net impact from changes in the U.S. GAAP embedded derivative and hedge positions resulted in a net charge of $330 million, predominantly as a result of tightening credit spreads used in measuring our living benefit contracts.

The net benefit of $462 million for the three months ended September 30, 2016, was primarily driven by the amortization of DAC and other costs, which included a benefit of $429 million related to changes in our estimate of total gross profits as a result of the ALM strategy implemented in the third quarter of 2016. Excluding the impacts of the Variable Annuities Recapture of $2,866 million, the net benefit of $1,103 million for the nine months ended September 30, 2016 was predominantly due to the net benefit of $1,390 million from the impact of assumption updates and other refinements resulted from our annual review and update of assumptions, primarily driven by modifications to our actuarial assumptions and other refinements, including updates to expected withdrawal rates, as well as economic assumptions.

Revenues, Benefits and Expenses

2017 to 2016 Three Months Comparison

Revenues increased $1.2 billion, from $0.7 billion for the three months ended September 30, 2016 to $1.9 billion for the three months ended September 30, 2017, primarily driven by an increase of $1.2 billion in realized investment gains / (losses), as discussed above.

Benefits and expenses increased $0.7 billion, from a benefit of $0.1 billion for the three months ended September 30, 2016 to an expense of $0.6 billion for the three months ended September 30, 2017, primarily driven by an increase of $0.7 billion related to the amortization of deferred policy acquisition costs and interest credited to policyholders' account balances primarily due to changes in the living benefit reserves due to credit spread widening in the current period.

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2017 to 2016 Nine Months Comparison

Revenues increased $2.0 billion, from $0.0 billion for the nine months ended September 30, 2016 to $2.0 billion for the nine months ended September 30, 2017, primarily driven by a decline of $2.2 billion in realized investment losses, as well as an increase of $0.5 billion in policy charges and fee income and asset administration fees and other income, due to the Variable Annuities Recapture. Partially offsetting these increases was a decline of $0.8 billion in premiums mainly due to the consideration received for the Variable Annuities Recapture in 2016.

Benefits and expenses decreased $0.7 billion, from $1.5 billion for the nine months ended September 30, 2016 to $0.8 billion for the nine months ended September 30, 2017, primarily driven by Policyholders' benefits decrease of $0.5 billion primarily due to the Variable Annuities Recapture offset in premiums discussed above, as well as $0.2 billion decline in the amortization of deferred policy acquisition costs and interest credited to policyholders' account balances primarily due to favorable variance related to the annual review and update of assumptions and other refinements and credit spread tightening in the current period.

Variable Annuity Risks and Risk Mitigants

The following is a summary of: (i) the risks associated with Individual Annuities’ products; (ii) our strategies in mitigating those risks, including any updates to those strategies since the previous year end; and (iii) the related financial results. For a more detailed description of these items and their related accounting treatment, refer to the complete descriptions provided in our Annual Report on Form 10-K for the year ended December 31, 2016.

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

Product Design Features

A portion of the variable annuity contracts that we offered include an asset transfer feature. This feature is implemented at the contract level, and transfers assets between certain variable investment sub-accounts selected by the annuity contractholder and, depending on the benefit feature, a fixed-rate account in the general account or a bond fund sub-account within the separate account. The objective of the asset transfer feature is to reduce our exposure to equity market risk and market volatility. Other product design features we utilize include, among others, asset allocation restrictions, minimum issuance age requirements and certain limitations on the amount of contractholder deposits. In addition, there is diversity in our fee arrangements, as certain fees are primarily based on the benefit guarantee amount, the contractholder account value and/or premiums, which helps preserve certain revenue streams when market fluctuations cause account values to decline.

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

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

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

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	As of September 30, 2017
	(in millions)
U.S. GAAP liability (including non-performance risk)	$	7,999
Non-performance risk adjustment	3,695
Subtotal	11,694
Adjustments including risk margins and valuation methodology differences	(2,878		)
Economic liability managed by ALM strategy	$	8,816

As of September 30, 2017, our fixed income instruments and derivative assets exceed the economic liability in which the risks reside.

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

Income Taxes

The Company uses a full year projected effective tax rate approach to calculate year-to-date taxes. In addition, certain items impacting total income tax expense are recorded in the periods in which they occur. The projected effective tax rate is the ratio of projected “Total income tax expense” divided by projected “Income from operations before income taxes”.

Our income tax provision amounted to an income tax expense of $370 million, or 31.6% of gain from operations before income taxes in the first nine months of 2017, compared to an income tax benefit of $578 million, or 39.3% of loss from operations before income taxes in the first nine months of 2016. The Company’s current and prior effective tax rates differed from the U.S. statutory rate of 35% primarily due to non-taxable investment income.

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, 2016.

Overview

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

Effective and prudent liquidity and capital management is a priority across the organization. Management monitors the liquidity of Prudential Financial, Prudential Insurance and the Company on a daily basis and projects borrowing and capital needs over a multi-year time horizon through our periodic planning process. We believe that cash flows from available sources of funds are sufficient to satisfy the current liquidity requirements of Prudential Financial and the Company, including under reasonably foreseeable stress scenarios. Prudential Financial has a capital management framework in place that governs the allocation of capital and approval of capital uses. Prudential Financial and the Company also employ a “Capital Protection Framework” to ensure the availability of capital resources to maintain adequate capitalization and competitive risk-based capital ("RBC") ratios under various stress scenarios.

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Prudential Financial is a Designated Financial Company under Dodd-Frank. As a Designated Financial Company, Prudential Financial is subject to supervision and examination by the Federal Reserve Bank of Boston and to stricter prudential regulatory standards, which include or will include requirements and limitations (many of which are the subject of ongoing rule-making) relating to capital, leverage, liquidity, stress-testing, overall risk management, resolution and recovery plans, credit exposure reporting, early remediation, management interlocks, and credit concentration. They may also include standards regarding enhanced public disclosure, short-term debt limits and other related subjects. In addition, the Financial Stability Board has identified Prudential Financial as a global systemically important insurer (“G-SII”). For information on these regulatory initiatives and their potential impact on us, see "Overview-Regulatory Developments-Capital and Prudential Standards" above and “Business-Regulation” and “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2016.

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

Capital

Our capital management framework is primarily based on statutory RBC measures. The RBC ratio is a primary measure of the capital adequacy of the Company. RBC is calculated based on statutory financial statements and risk formulas consistent with the practices of the NAIC. RBC considers, among other things, risks related to the type and quality of the invested assets, insurance-related risks associated with an insurer’s products and liabilities, interest rate risks and general business risks. RBC ratio calculations are intended to assist insurance regulators in measuring an insurer’s solvency and ability to pay future claims. The reporting of RBC measures is not intended for the purpose of ranking any insurance company or for use in connection with any marketing, advertising or promotional activities, but is available to the public. The RBC ratio is an annual calculation, however, as of September 30, 2017 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. In addition, the recapture of business subject to reinsurance arrangements due to defaults by, or credit quality migration affecting, the reinsurers or for other reasons could negatively impact regulatory capital levels. The Company’s regulatory capital level is also affected by statutory accounting rules, which are subject to change by each applicable insurance regulator.

In September 2017, June 2017 and December 2016 the Company returned capital of $200 million, $100 million and $1,140 million, respectively, to its parent, Prudential Annuities, Inc.

Capital Protection Framework

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

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

Affiliated Captive Reinsurance Companies

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital—Affiliated Captive Reinsurance Companies” included in our Annual Report on Form 10-K for the year ended December 31, 2016 for a discussion of our use of captive reinsurance companies.

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Liquidity

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

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

Cash Flow

The principal sources of the Company’s liquidity are 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 may include commissions, general and administrative expenses, purchases of investments, the payment of dividends to the parent holding company, hedging and reinsurance activity and payments in connection with financing activities.

Liquid Assets

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 September 30, 2017 and December 31, 2016, the Company had liquid assets of $13.3 billion and $12.3 billion, respectively. The portion of liquid assets comprised of cash and cash equivalents and short-term investments was $3.2 billion and $2.8 billion as of September 30, 2017 and December 31, 2016, respectively. As of September 30, 2017, $9.5 billion, or 96%, of the fixed maturity investments in Company general account portfolios, were rated "1" highest quality or "2" high quality based on NAIC or equivalent rating. The remaining $0.4 billion, or 4%, of these fixed maturity investments were rated other than high or highest quality.

Prudential Financial and Prudential Funding 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’s positive tangible net worth at all times.

Hedging activities associated with living benefit guarantees

As noted above, effective April 1, 2016, the hedging portion of our risk management strategy associated with the living benefit guarantees recaptured from Pruco Re and Prudential Insurance, as well as the living benefit guarantees reinsured from Pruco Life, are being managed within the Company.

For the portion of the ALM strategy executed through hedging, we enter into a range of exchange-traded, cleared and other OTC equity and interest rate derivatives in order to hedge certain living benefit guarantees accounted for as embedded derivatives against changes in certain capital market risks above a designated threshold. The portion of the ALM strategy comprising the hedging portion requires access to liquidity to meet its payment obligations relating to these derivatives, such as payments for periodic settlements, purchases, maturities and terminations. These liquidity needs can vary materially due to, among other items, changes in interest rates, equity markets, mortality and policyholder behavior.

The hedging portion of the ALM strategy may also result in collateral postings on derivatives to or from counterparties. The net collateral position depends on changes in interest rates and equity markets related to the amount of the exposures hedged. Depending on market conditions, the collateral posting requirements can result in material liquidity needs.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of fluctuations in the value of financial instruments as a result of absolute or relative changes in interest rates, foreign currency exchange rates, equity prices or commodity prices. To varying degrees, our products and services, and the investment activities supporting them, generate exposure to market risk. The market risk incurred, and our strategies for managing this risk, vary by product. As of September 30, 2017, there have been no material changes in our economic exposure to market risk from December 31, 2016, a description of which may be found in our Annual Report on Form 10-K for the year ended December 31, 2016, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” filed with the Securities and Exchange Commission. See Item 1A, “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2016, for a discussion of how difficult conditions in the financial markets and the economy generally may materially adversely affect our business and results of our operations.

Item 4. Controls and Procedures

In order to ensure that the information we must disclose in our filings with the SEC is recorded, processed, summarized and reported on a timely basis, the Company’s management, including our Chief Executive Officer and Chief Financial Officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Securities Exchange Act of 1934, as amended (“Exchange Act”) Rule 13a-15(e), as of September 30, 2017. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2017, our disclosure controls and procedures were effective. No change in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), occurred during the quarter ended September 30, 2017 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 certain 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, 2016. 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.

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Item 6. Exhibits

EXHIBIT INDEX

31.1 Section 302 Certification of the Chief Executive Officer

31.2 Section 302 Certification of the Chief Financial Officer

32.1 Section 906 Certification of the Chief Executive Officer

32.2 Section 906 Certification of the Chief Financial Officer

101.INS - XBRL Instance Document

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

SIGNATURES

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

PRUDENTIAL ANNUITIES LIFE ASSURANCE CORPORATION
By:	/s/    John Chieffo
Name	John Chieffo
	Executive Vice President and Chief Financial Officer
	(Authorized Signatory and Principal Financial Officer)

Date: November 9, 2017

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