Document

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 which included a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption.

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

10-Q 1 palacform10q-3q2018.htm 3Q 2018 10-Q Document

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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, 2018



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

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



Large accelerated filer	¨	Accelerated filer	¨

Non-accelerated filer	x	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 13, 2018, 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.

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TABLE OF CONTENTS



			Page
PART I FINANCIAL INFORMATION
	Item 1.	Financial Statements:
		Unaudited Interim Consolidated Statements of Financial Position as of September 30, 2018 and December 31, 2017	4
		Unaudited Interim Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2018 and 2017	5
		Unaudited Interim Consolidated Statements of Equity for the nine months ended September 30, 2018 and 2017	6
		Unaudited Interim Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017	7
		Notes to Unaudited Interim Consolidated Financial Statements	8
		1. Business and Basis of Presentation	8
		2. Significant Accounting Policies and Pronouncements	9
		3. Investments	18
		4. Derivative Instruments	28
		5. Fair Value of Assets and Liabilities	33
		6. Income Taxes	51
		7. Reinsurance	52
		8. Equity	55
		9. Related Party Transactions	57
		10. Commitments and Contingent Liabilities	62
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	63
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	74
	Item 4.	Controls and Procedures	74
PART II OTHER INFORMATION			75
	Item 1.	Legal Proceedings	75
	Item 1A.	Risk Factors	75
	Item 6.	Exhibits	76
SIGNATURES			77

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FORWARD LOOKING STATEMENTS

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

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PART I - Financial Information

Item 1. Financial Statements

Prudential Annuities Life Assurance Corporation

Unaudited Interim Consolidated Statements of Financial Position

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



	September 30, 2018			December 31, 2017
ASSETS
Fixed maturities, available-for-sale, at fair value (amortized cost, 2018: $9,871,624; 2017: $10,145,266)	$	9,322,358		$	10,110,786
Fixed maturities, trading, at fair value (amortized cost, 2018: $271,233; 2017: $161,393)(1)	261,226			166,360
Equity securities, at fair value (cost, 2018: $9,314; 2017: $11,614)(1)	13,164			15,375
Commercial mortgage and other loans	1,352,403			1,387,012
Policy loans	12,656			12,558
Short-term investments	20,685			711,071
Other invested assets (includes $7,567 and $151,481 measured at fair value at September 30, 2018 and December 31, 2017, respectively)(1)	254,050			335,811
Total investments	11,236,542			12,738,973
Cash and cash equivalents	394,262			1,639,939
Deferred policy acquisition costs	4,431,765			4,596,565
Accrued investment income	76,228			88,331
Reinsurance recoverables	487,748			563,428
Income taxes	1,372,877			1,116,735
Value of business acquired	34,967			35,109
Deferred sales inducements	907,575			1,020,786
Receivables from parent and affiliates	56,368			49,351
Other assets	116,861			121,086
Separate account assets	35,480,264			37,990,547
TOTAL ASSETS	$	54,595,457		$	59,960,850
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits	$	5,984,878		$	9,132,569
Policyholders’ account balances	5,062,233			4,846,152
Payables to parent and affiliates	50,967			36,026
Cash collateral for loaned securities	7,147			17,383
Short-term debt	184,303			43,734
Long-term debt	787,596			928,165
Reinsurance payables	214,420			262,588
Other liabilities	395,657			422,636
Separate account liabilities	35,480,264			37,990,547
Total liabilities	48,167,465			53,679,800
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 10)
EQUITY
Common stock, ($100 par value; 25,000 shares authorized, issued and outstanding)	2,500			2,500
Additional paid-in capital	6,345,436			7,145,436
Retained earnings (accumulated deficit)	510,750			(776,762		)
Accumulated other comprehensive income (loss)	(430,694		)	(90,124		)
Total equity	6,427,992			6,281,050
TOTAL LIABILITIES AND EQUITY	$	54,595,457		$	59,960,850


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

See Notes to Unaudited Interim Consolidated Financial Statements

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Prudential Annuities Life Assurance Corporation

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

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



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

See Notes to Unaudited Interim Consolidated Financial Statements

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Prudential Annuities Life Assurance Corporation

Unaudited Interim Consolidated Statements of Equity

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



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

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

See Notes to Unaudited Interim Consolidated Financial Statements

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Prudential Annuities Life Assurance Corporation

Unaudited Interim Consolidated Statements of Cash Flows

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



	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	1,250,461		$	800,701
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Policy charges and fee income	(2,147		)	(761		)
Realized investment (gains) losses, net	(633,822		)	327,512
Depreciation and amortization	6,227			(7,781		)
Interest credited to policyholders’ account balances	213,903			567
Change in:
Future policy benefits	795,294			728,762
Accrued investment income	12,103			16,263
Net receivables from/payables to parent and affiliates	1,490			12,391
Deferred sales inducements	(1,836		)	(993		)
Deferred policy acquisition costs	241,665			(248,160		)
Income taxes	(175,460		)	22,224
Reinsurance recoverables, net	(52,210		)	(3,342		)
Derivatives, net	(3,094,289		)	(615,583		)
Deferred (gain) loss on reinsurance	(23,108		)	5,448
Other, net	133,306			58,395
Cash flows from (used in) operating activities	(1,328,423		)	1,095,643
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale	2,144,273			854,872
Fixed maturities, trading(1)	99,623			1,728
Equity securities(1)	6,280			2,271
Commercial mortgage and other loans	137,766			56,883
Policy loans	553			956
Other invested assets(1)	16,864			71,152
Short-term investments	981,355			1,556,173
Payments for the purchase/origination of:
Fixed maturities, available for sale	(1,939,203		)	(1,109,624		)
Fixed maturities, trading(1)	(208,007		)	(15,964		)
Equity securities(1)	(3,253		)	(1,761		)
Commercial mortgage and other loans	(113,638		)	(228,825		)
Policy loans	(110		)	(330		)
Other invested assets(1)	(99,983		)	(5,115		)
Short-term investments	(291,399		)	(1,003,242		)
Notes receivable from parent and affiliates, net	2,967			521
Derivatives, net	19,929			18,029
Other, net	(69		)	2,992
Cash flows from (used in) investing activities	753,948			200,716
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash collateral for loaned securities	(10,236		)	(15,515		)
Net increase (decrease) in short-term borrowing	0			(28,101		)
Drafts outstanding	(2,550		)	6,790
Distribution to Parent	(800,000		)	(300,000		)
Policyholders' account deposits	2,128,976			1,905,487
Ceded policyholders' account deposits	(28,992		)	(6,818		)
Policyholders' account withdrawals	(1,979,186		)	(1,950,184		)
Ceded policyholders' account withdrawals	20,786			18,421
Cash flows from (used in) financing activities	(671,202		)	(369,920		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(1,245,677		)	926,439
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	1,639,939			1,848,039
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	394,262		$	2,774,478


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

Significant Non-Cash Transactions

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

See Notes to Unaudited Interim Consolidated Financial Statements

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

1. BUSINESS AND BASIS OF PRESENTATION

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

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

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

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

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

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

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

Variable Annuities Recapture

Through March 31, 2016, the Company reinsured the majority of its variable annuity living benefit guarantees to its affiliated companies, Pruco Reinsurance, Ltd. ("Pruco Re") and Prudential Insurance. Effective April 1, 2016, the Company recaptured the risks related to its variable annuity living benefit guarantees that were previously reinsured to Pruco Re and Prudential Insurance. In addition, the Company reinsured the variable annuity base contracts, along with the living benefit guarantees, from Pruco Life, excluding the PLNJ business which was reinsured to Prudential Insurance, under coinsurance and modified coinsurance agreements. 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".

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Basis of Presentation

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

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

Use of Estimates

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

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

Reclassifications

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

2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS

Recent Accounting Pronouncements

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

Adoption of ASU 2016-01

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

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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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

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



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

* - New line item effective January 1, 2018.

Strikethrough - Eliminated line item effective January 1, 2018.


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


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


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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

(2) Cumulative-effect Adjustment Upon Adoption

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



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

(3) Changes to Accounting Policies

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

ASSETS

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

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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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

REVENUES AND BENEFITS AND EXPENSES

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

Other ASU adopted during the nine months ended September 30, 2018.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a Consensus of the Emerging Issues Task Force)	This ASU addresses diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard provides clarity on the treatment of eight specifically defined types of cash inflows and outflows.	January 1, 2018 using the retrospective method (with early adoption permitted provided that all amendments are adopted in the same period).	Adoption of the ASU did not have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.
ASU 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).	Adoption of the ASU did not have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.
ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income	In February 2018, this ASU was issued following the enactment of the Tax Act of 2017. This ASU allows an entity to elect a reclassification from accumulated other comprehensive income to retained earnings for stranded effects resulting from the Tax Act of 2017.	January 1, 2019 with early adoption permitted. The ASU should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act of 2017 is recognized.	The Company early adopted the ASU effective January 1, 2018 and elected to apply the ASU in the period of adoption subsequent to recording the adoption impacts of ASU 2016-01 as described above. As a result, the Company reclassified stranded effects resulting from the Tax Act of 2017 by decreasing accumulated other comprehensive income and increasing retained earnings, each by $36.7 million. Stranded effects unrelated to the Tax Act of 2017 are generally released from accumulated other comprehensive income when an entire portfolio of the type of item related to the stranded effect is liquidated, sold or extinguished (i.e., portfolio approach).

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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

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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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



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 which will include a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption. However, prospective application is required for purchased credit deteriorated assets previously accounted for under ASU 310-30 and for debt securities for which an other-than-temporary impairment was recognized prior to the date of adoption. Early adoption is permitted beginning January 1, 2019.	The Company is currently assessing the impact of the ASU on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.
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) which will include a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption.	The Company does not expect the adoption of the ASU to have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.
ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities	This ASU makes targeted changes to the existing hedge accounting model to better portray the economics of an entity’s risk management activities and to simplify the use of hedge accounting.	January 1, 2019 using the modified retrospective method (with early adoption permitted) which will include a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption.	The Company does not expect the adoption of the ASU to have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

3. INVESTMENTS

Fixed Maturity Securities

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



	September 30, 2018
	Amortized 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	$	4,718,446	$	38	$	510,300	$	4,208,184	$	0
Obligations of U.S. states and their political subdivisions	134,396		433		3,967		130,862		0
Foreign government bonds	223,312		4,706		3,653		224,365		0
Public utilities	548,257		10,863		16,122		542,998		0
Redeemable preferred stock	29,445		0		786		28,659		0
All other U.S. public corporate securities	1,391,160		26,213		35,125		1,382,248		0
All other U.S. private corporate securities	846,203		13,898		20,665		839,436		0
All other foreign public corporate securities	284,819		2,075		5,761		281,133		0
All other foreign private corporate securities	672,681		14,883		16,638		670,926		0
Asset-backed securities(1)	510,463		3,333		1,685		512,111		(16		)
Commercial mortgage-backed securities	447,064		1,137		11,476		436,725		0
Residential mortgage-backed securities(2)	65,378		1,036		1,703		64,711		0
Total fixed maturities, available-for-sale	$	9,871,624	$	78,615	$	627,881	$	9,322,358	$	(16	)


(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 unrealized losses remaining in AOCI, from the impairment measurement date. Amount excludes $(1.0) million of net unrealized losses 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 Consolidated Financial Statements—(Continued)



	December 31, 2017
	Amortized 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	$	5,059,168	$	9,109	$	236,627	$	4,831,650	$	0
Obligations of U.S. states and their political subdivisions	102,709		2,089		158		104,640		0
Foreign government bonds	133,859		6,878		432		140,305		0
Public utilities	567,829		31,414		2,058		597,185		0
Redeemable preferred stock	29,504		615		59		30,060		0
All other U.S. public corporate securities	1,473,761		77,379		3,416		1,547,724		0
All other U.S. private corporate securities	938,144		35,327		3,795		969,676		0
All other foreign public corporate securities	194,201		5,663		918		198,946		0
All other foreign private corporate securities	638,785		38,030		3,231		673,584		0
Asset-backed securities(1)	341,277		4,438		128		345,587		(17		)
Commercial mortgage-backed securities	502,695		7,334		4,345		505,684		0
Residential mortgage-backed securities(2)	163,334		2,950		539		165,745		(4		)
Total fixed maturities, available-for-sale	$	10,145,266	$	221,226	$	255,706	$	10,110,786	$	(21	)


(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 unrealized losses remaining in AOCI, from the impairment measurement date. Amount excludes $12.3 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 Consolidated Financial Statements—(Continued)

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



	September 30, 2018
	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	$	998,734	$	28,769	$	3,194,749	$	481,531	$	4,193,483	$	510,300
Obligations of U.S. states and their political subdivisions	96,628		3,149		19,062		818		115,690		3,967
Foreign government bonds	138,696		2,510		23,115		1,143		161,811		3,653
Public utilities	284,042		12,460		61,961		3,662		346,003		16,122
Redeemable preferred stock	28,659		786		0		0		28,659		786
All other U.S. public corporate securities	755,392		29,258		134,461		5,867		889,853		35,125
All other U.S. private corporate securities	351,239		9,807		216,144		10,858		567,383		20,665
All other foreign public corporate securities	137,967		2,935		52,986		2,826		190,953		5,761
All other foreign private corporate securities	223,148		10,928		72,195		5,710		295,343		16,638
Asset-backed securities	268,933		1,539		5,052		146		273,985		1,685
Commercial mortgage-backed securities	137,333		2,773		181,463		8,703		318,796		11,476
Residential mortgage-backed securities	26,272		751		21,924		952		48,196		1,703
Total fixed maturities, available-for-sale	$	3,447,043	$	105,665	$	3,983,112	$	522,216	$	7,430,155	$	627,881



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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

As of September 30, 2018 and December 31, 2017, the gross unrealized losses on fixed maturity securities were composed of $617.5 million and $253.1 million, respectively, related to “1” highest quality or “2” high quality securities based on the National Association of Insurance Commissioners (“NAIC”) or equivalent rating and $10.4 million and $2.7 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. As of September 30, 2018, the $522.2 million of gross unrealized losses on fixed maturities of twelve months or more were concentrated in U.S. government bonds, commercial mortgage-backed securities and in the Company’s corporate securities within the consumer non-cyclical, finance and utility sectors. As of December 31, 2017, the $248.0 million of gross unrealized losses on fixed maturities of twelve months or more were concentrated in U.S. government bonds, commercial mortgage-backed securities and in the Company’s corporate securities within the consumer non-cyclical and finance sectors. 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, 2017, the Company concluded that an adjustment to earnings for OTTI for these fixed maturity securities was not warranted at either September 30, 2018 or December 31, 2017. 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, 2018, the Company did not intend to sell these securities, and it was not more likely than not that the Company would be required to sell these securities before the anticipated recovery of the remaining amortized cost basis.

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



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

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

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(in thousands)
Fixed maturities, available-for-sale
Proceeds from sales(1)	$	391,271		$	115,316		$	1,834,190		$	382,792
Proceeds from maturities/prepayments	67,980			156,822			308,339			480,794
Gross investment gains from sales and maturities	2,532			(1,299		)	20,109			2,461
Gross investment losses from sales and maturities	(10,764		)	(1,406		)	(85,869		)	(2,081		)
OTTI recognized in earnings(2)	(2,523		)	41			(2,960		)	(4,787		)


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


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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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



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


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

Equity Securities

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

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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Commercial Mortgage and Other Loans

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



	September 30, 2018					December 31, 2017
	Amount (in thousands)			% of Total		Amount (in thousands)			% of Total
Commercial mortgage and agricultural property loans by property type:
Apartments/Multi-Family	$	306,807		22.6	%	$	348,718		25.0	%
Hospitality	3,671			0.3		3,782			0.3
Industrial	358,883			26.5		327,987			23.6
Office	299,216			22.1		294,072			21.2
Other	135,790			10.0		139,362			10.0
Retail	195,520			14.4		216,544			15.6
Total commercial mortgage loans	1,299,887			95.9		1,330,465			95.7
Agricultural property loans	55,488			4.1		59,197			4.3
Total commercial mortgage and agricultural property loans by property type	1,355,375			100.0	%	1,389,662			100.0	%
Valuation allowance	(2,972		)			(2,650		)
Total commercial mortgage and other loans	$	1,352,403				$	1,387,012

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

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



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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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



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


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


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



	December 31, 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	2,616		34		2,650
Total ending balance(1)	$	2,616	$	34	$	2,650
Recorded investment(2):
Individually evaluated for impairment	$	1,571	$	4,865	$	6,436
Collectively evaluated for impairment	1,328,894		54,332		1,383,226
Total ending balance(1)	$	1,330,465	$	59,197	$	1,389,662


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


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

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



	September 30, 2018
	Debt Service Coverage Ratio
	≥ 1.2X		1.0X to <1.2X		< 1.0X		Total
	(in thousands)
Loan-to-Value Ratio:
0%-59.99%	$	658,709	$	15,079	$	0	$	673,788
60%-69.99%	478,402		23,469		0		501,871
70%-79.99%	169,409		7,281		0		176,690
80% or greater	2,000		1,026		0		3,026
Total commercial mortgage and agricultural property loans	$	1,308,520	$	46,855	$	0	$	1,355,375

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



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

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



	September 30, 2018
	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	$	1,299,887	$	0	$	0	$	0	$	1,299,887	$	0
Agricultural property loans	55,488		0		0		0		55,488		0
Total	$	1,355,375	$	0	$	0	$	0	$	1,355,375	$	0


(1)	As of September 30, 2018, there were no loans in this category accruing interest.


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



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


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


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

For the three and nine months ended September 30, 2018, there were no commercial mortgage and other loans acquired, other than those through direct origination, and there were $13 million and $96 million of commercial mortgage and other loans sold. For the three and nine months ended September 30, 2017, there were no commercial mortgage and other loans acquired, other than those through direct origination, and there were no commercial mortgage and other loans sold.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Other Invested Assets

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



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


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


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

Net Investment Income

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



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


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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Realized Investment Gains (Losses), Net

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



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


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


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

Net Unrealized Gains (Losses) on Investments within AOCI

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



	September 30, 2018			December 31, 2017
	(in thousands)
Fixed maturity securities, available-for-sale — with OTTI	$	(1,034	)	$	12,311
Fixed maturity securities, available-for-sale — all other	(548,232		)	(46,791		)
Equity securities, available-for-sale(1)	0			4
Derivatives designated as cash flow hedges(2)	(23,867		)	(25,851		)
Affiliated notes	635			829
Other investments	1,075			86
Net unrealized gains (losses) on investments	$	(571,423	)	$	(59,412	)


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


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

Repurchase Agreements and Securities Lending

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

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



	September 30, 2018						December 31, 2017
	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)
Foreign government bonds	$	0	$	0	$	0	$	10,505	$	0	$	10,505
U.S. public corporate securities	7,147		0		7,147		6,878		0		6,878
Total cash collateral for loaned securities(1)	$	7,147	$	0	$	7,147	$	17,383	$	0	$	17,383


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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

4. DERIVATIVE INSTRUMENTS

Types of Derivative Instruments and Derivative Strategies

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


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

•Equity contracts: futures, options and total return swaps

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

•Credit contracts: single and index reference credit default swaps

•Other contracts: embedded 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, 2017.

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



	September 30, 2018							December 31, 2017
Primary Underlying Risk/Instrument Type			Gross Fair Value							Gross Fair Value
Primary Underlying Risk/Instrument Type	Notional		Assets		Liabilities			Notional		Assets		Liabilities
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Currency/Interest Rate
Foreign Currency Swaps	$	748,787	$	18,033	$	(38,666	)	$	677,257	$	13,348	$	(47,209	)
Total Qualifying Hedges	$	748,787	$	18,033	$	(38,666	)	$	677,257	$	13,348	$	(47,209	)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Futures	$	903,500	$	272	$	(2,508	)	$	1,964,000	$	8,296	$	0
Interest Rate Swaps	80,605,225		3,378,320		(2,578,179		)	87,939,425		4,374,658		(1,065,549		)
Interest Rate Options	19,050,000		157,095		(326,477		)	15,775,000		175,156		(160,181		)
Interest Rate Forwards	1,626,323		14		(32,402		)	975,929		19,870		(2		)
Foreign Currency
Foreign Currency Forwards	15,281		104		0			12,455		1		(319		)
Currency/Interest Rate
Foreign Currency Swaps	157,819		7,414		(6,740		)	151,400		7,779		(7,488		)
Equity
Equity Futures	253,208		78		0			672,055		2,442		0
Total Return Swaps	14,200,030		17,006		(270,367		)	13,841,333		8,517		(341,700		)
Equity Options	32,801,821		630,109		(569,941		)	31,702,334		460,597		(318,955		)
Total Non-Qualifying Hedges	$	149,613,207	$	4,190,412	$	(3,786,614	)	$	153,033,931	$	5,057,316	$	(1,894,194	)
Total Derivatives(1)	$	150,361,994	$	4,208,445	$	(3,825,280	)	$	153,711,188	$	5,070,664	$	(1,941,403	)


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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The fair value of the embedded derivatives, included in "Future policy benefits," was a net liability of $4,995 million and $8,152 million as of September 30, 2018 and December 31, 2017, respectively. The fair value of the related reinsurance recoverables to Prudential Insurance was a net asset of $156 million and $232 million as of September 30, 2018 and December 31, 2017, 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 recoverables" or "Reinsurance payables," was a net asset of $3 million and $12 million as of September 30, 2018 and December 31, 2017, respectively.

The fair value of the embedded derivatives, included in "Policyholders' account balances," was a net liability of $34 million as of September 30, 2018 with no related reinsurance recoverables.

Offsetting Assets and Liabilities

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



	September 30, 2018
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Consolidated Statements of Financial Position			Net Amounts Presented in the Consolidated Statements of Financial Position		Financial Instruments/ Collateral(1)			Net Amount
	(in thousands)
Offsetting of Financial Assets:
Derivatives(1)	$	4,208,445	$	(4,208,445	)	$	0	$	0		$	0
Securities purchased under agreements to resell	327,000		0			327,000		(327,000		)	0
Total Assets	$	4,535,445	$	(4,208,445	)	$	327,000	$	(327,000	)	$	0
Offsetting of Financial Liabilities:
Derivatives(1)	$	3,825,280	$	(3,818,167	)	$	7,113	$	(3,781	)	$	3,332
Securities sold under agreements to repurchase	0		0			0		0			0
Total Liabilities	$	3,825,280	$	(3,818,167	)	$	7,113	$	(3,781	)	$	3,332



	December 31, 2017
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statements of Financial Position			Net Amounts Presented in the Statements of Financial Position		Financial Instruments/ Collateral(1)		Net Amount
	(in thousands)
Offsetting of Financial Assets:
Derivatives(1)	$	5,070,517	$	(4,919,486	)	$	151,031	$	0	$	151,031
Securities purchased under agreements to resell	0		0			0		0		0
Total Assets	$	5,070,517	$	(4,919,486	)	$	151,031	$	0	$	151,031
Offsetting of Financial Liabilities:
Derivatives(1)	$	1,941,403	$	(1,941,403	)	$	0	$	0	$	0
Securities sold under agreements to repurchase	0		0			0		0		0
Total Liabilities	$	1,941,403	$	(1,941,403	)	$	0	$	0	$	0


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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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

Cash Flow Hedges

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

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



	Three Months Ended September 30, 2018
	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		$	2,141	$	2,484	$	257
Total cash flow hedges	0			2,141		2,484		257
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	(772,889		)	0		0		0
Currency	213			0		0		0
Currency/Interest Rate	1,224			0		33		0
Equity	(640,413		)	0		0		0
Embedded Derivatives	1,487,675			0		0		0
Total non-qualifying hedges	75,810			0		33		0
Total	$	75,810		$	2,141	$	2,517	$	257

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Nine Months Ended September 30, 2018
	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		$	5,841	$	8,973	$	1,984
Total cash flow hedges	0			5,841		8,973		1,984
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	(2,360,922		)	0		0		0
Currency	537			0		0		0
Currency/Interest Rate	5,279			0		62		0
Equity	(879,866		)	0		0		0
Embedded Derivatives	3,937,437			0		0		0
Total non-qualifying hedges	702,465			0		62		0
Total	$	702,465		$	5,841	$	9,035	$	1,984



	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	)

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	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	)


(1)	Amounts deferred in AOCI.

For the nine months ended September 30, 2018 and 2017, the ineffective portion of derivatives accounted for using hedge accounting was de minimis 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.

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



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

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

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

Credit Derivatives

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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Credit Risk

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

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

5. FAIR VALUE OF ASSETS AND LIABILITIES

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

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

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

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

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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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



	As of September 30, 2018
	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	$	4,201,271	$	6,913	$	0		$	4,208,184
Obligations of U.S. states and their political subdivisions	0		130,862		0		0			130,862
Foreign government bonds	0		224,365		0		0			224,365
U.S. corporate public securities	0		1,618,433		1,060		0			1,619,493
U.S. corporate private securities	0		998,383		54,457		0			1,052,840
Foreign corporate public securities	0		309,792		211		0			310,003
Foreign corporate private securities	0		733,928		29,136		0			763,064
Asset-backed securities(2)	0		502,704		9,407		0			512,111
Commercial mortgage-backed securities	0		436,180		545		0			436,725
Residential mortgage-backed securities	0		64,711		0		0			64,711
Subtotal	0		9,220,629		101,729		0			9,322,358
Fixed maturities, trading	0		261,226		0		0			261,226
Equity securities	5,473		12		7,679		0			13,164
Short-term investments	2,653		10,274		8		0			12,935
Cash equivalents	0		46,859		0		0			46,859
Other invested assets(3)	350		4,208,095		0		(4,208,445		)	0
Reinsurance recoverables	0		0		159,206		0			159,206
Receivables from parent and affiliates	0		37,719		0		0			37,719
Subtotal excluding separate account assets	8,476		13,784,814		268,622		(4,208,445		)	9,853,467
Separate account assets(4)	0		35,480,264		0		0			35,480,264
Total assets	$	8,476	$	49,265,078	$	268,622	$	(4,208,445	)	$	45,333,731
Future policy benefits(5)	$	0	$	0	$	4,995,305	$	0		$	4,995,305
Policyholders' account balances	0		0		34,069		0			34,069
Payables to parent and affiliates	0		3,822,772		0		(3,817,815		)	4,957
Other liabilities	2,508		0		0		(352		)	2,156
Total liabilities	$	2,508	$	3,822,772	$	5,029,374	$	(3,818,167	)	$	5,036,487

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	As of December 31, 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	$	4,826,413	$	5,237	$	0		$	4,831,650
Obligations of U.S. states and their political subdivisions	0		104,640		0		0			104,640
Foreign government bonds	0		140,305		0		0			140,305
U.S. corporate public securities	0		1,806,888		1,562		0			1,808,450
U.S. corporate private securities	0		1,148,536		59,408		0			1,207,944
Foreign corporate public securities	0		229,006		215		0			229,221
Foreign corporate private securities	0		737,539		34,021		0			771,560
Asset-backed securities(2)	0		160,229		185,358		0			345,587
Commercial mortgage-backed securities	0		505,684		0		0			505,684
Residential mortgage-backed securities	0		165,745		0		0			165,745
Subtotal	0		9,824,985		285,801		0			10,110,786
Fixed maturities, trading(6)	0		166,360		0		0			166,360
Equity securities(6)	5,599		18		9,758		0			15,375
Short-term investments	448,712		262,272		87		0			711,071
Cash equivalents	0		1,146,466		0		0			1,146,466
Other invested assets(3)(6)	10,738		5,059,779		147		(4,919,486		)	151,178
Reinsurance recoverables	0		0		244,006		0			244,006
Receivables from parent and affiliates	0		38,145		0		0			38,145
Subtotal excluding separate account assets	465,049		16,498,025		539,799		(4,919,486		)	12,583,387
Separate account assets(4)	0		37,990,547		0		0			37,990,547
Total assets	$	465,049	$	54,488,572	$	539,799	$	(4,919,486	)	$	50,573,934
Future policy benefits(5)	$	0	$	0	$	8,151,902	$	0		$	8,151,902
Payables to parent and affiliates	0		1,941,403		0		(1,941,403		)	0
Other liabilities	0		0		0		0			0
Total liabilities	$	0	$	1,941,403	$	8,151,902	$	(1,941,403	)	$	8,151,902


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


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


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

(4)

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

(5)

As of September 30, 2018, the net embedded derivative liability position of $4,995 million includes $1,039 million of embedded derivatives in an asset position and $6,034 million of embedded derivatives in a liability position. As of December 31, 2017, the net embedded derivative liability position of $8,152 million includes $819 million of embedded derivatives in an asset position and $8,971 million of embedded derivatives in a liability position.


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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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

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



	As of September 30, 2018
	Fair Value		Valuation Techniques	Unobservable Inputs	Minimum		Maximum		Weighted Average		Impact of Increase in Input on Fair Value(1)
	(in thousands)
Assets:
Corporate securities(2)	$	16,066	Discounted cash flow	Discount rate	7.00	%	20.00	%	11.15	%	Decrease
			Liquidation	Liquidation	6.00	%	54.00	%	50.00	%	Increase
Reinsurance recoverables	$	159,206	Fair values are determined in the same manner as future policy benefits
Liabilities:
Future policy benefits(3)	$	4,995,305	Discounted cash flow	Lapse rate(4)	1	%	13	%			Decrease
				Spread over LIBOR(5)	0.16	%	1.21	%			Decrease
				Utilization rate(6)	50	%	97	%			Increase
				Withdrawal rate	See table footnote (7) below.
				Mortality rate(8)	0	%	15	%			Decrease
				Equity volatility curve	14	%	22	%			Increase



	As of December 31, 2017
	Fair Value		Valuation Techniques	Unobservable Inputs	Minimum		Maximum		Weighted Average		Impact of Increase in Input on Fair Value(1)
	(in thousands)
Assets:
Corporate securities(2)	$	22,215	Discounted cash flow	Discount rate	5.06	%	22.23	%	8.57	%	Decrease
Reinsurance recoverables	$	244,006	Fair values are determined in the same manner as future policy benefits
Liabilities:
Future policy benefits(3)	$	8,151,902	Discounted cash flow	Lapse rate(4)	1	%	12	%			Decrease
				Spread over LIBOR(5)	0.12	%	1.10	%			Decrease
				Utilization rate(6)	52	%	97	%			Increase
				Withdrawal rate	See table footnote (7) below.
				Mortality rate(8)	0	%	14	%			Decrease
				Equity volatility curve	13	%	24	%			Increase


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


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

(3)

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


(4)	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.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

(5)

The spread over the London Inter-Bank Offered Rate ("LIBOR") swap curve represents the premium added to the proxy for the risk-free rate (LIBOR) to reflect our 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 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.

(6)

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

(7)

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, 2018 and December 31, 2017, the minimum withdrawal rate assumption is 78% and the maximum withdrawal rate assumption may be greater than 100%. The fair value of the liability will generally increase the closer the withdrawal rate is to 100% and decrease as the withdrawal rate moves further away from 100%.

(8)

Range reflects the mortality rate for the vast majority of business with living benefits, with policyholders ranging from 50 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, 2017.

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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



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

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



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


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


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


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


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


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


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


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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated 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 Consolidated Statements of Financial Position. In some cases, as described below, the carrying amount equals or approximates fair value.



	September 30, 2018(1)
	Fair Value								Carrying Amount(2)
	Level 1		Level 2		Level 3		Total		Total
	(in thousands)
Assets:
Commercial mortgage and other loans	$	0	$	0	$	1,324,292	$	1,324,292	$	1,352,403
Policy loans	0		0		12,656		12,656		12,656
Short-term investments	7,750		0		0		7,750		7,750
Cash and cash equivalents	20,403		327,000		0		347,403		347,403
Accrued investment income	0		76,228		0		76,228		76,228
Reinsurance recoverables	0		0		56,348		56,348		56,348
Receivables from parent and affiliates	0		18,649		0		18,649		18,649
Other assets	0		15,047		0		15,047		15,047
Total assets	$	28,153	$	436,924	$	1,393,296	$	1,858,373	$	1,886,484
Liabilities:
Policyholders’ account balances - investment contracts	$	0	$	0	$	431,293	$	431,293	$	438,448
Cash collateral for loaned securities	0		7,147		0		7,147		7,147
Short-term debt	0		183,673		0		183,673		184,303
Long-term debt	0		789,881		0		789,881		787,596
Reinsurance payables	0		0		56,348		56,348		56,348
Payables to parent and affiliates	0		46,010		0		46,010		46,010
Other liabilities	0		138,859		0		138,859		138,859
Separate account liabilities - investment contracts	0		86		0		86		86
Total liabilities	$	0	$	1,165,656	$	487,641	$	1,653,297	$	1,658,797

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	December 31, 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	$	1,396,167	$	1,396,167	$	1,387,012
Policy loans	0		0		12,558		12,558		12,558
Cash and cash equivalents	493,473		0		0		493,473		493,473
Accrued investment income	0		88,331		0		88,331		88,331
Reinsurance recoverables	0		0		59,588		59,588		59,588
Receivables from parent and affiliates	0		11,206		0		11,206		11,206
Other assets	0		13,802		0		13,802		13,802
Total assets	$	493,473	$	113,339	$	1,468,313	$	2,075,125	$	2,065,970
Liabilities:
Policyholders’ account balances - investment contracts	$	0	$	0	$	281,582	$	281,582	$	281,051
Cash collateral for loaned securities	0		17,383		0		17,383		17,383
Short-term debt	0		43,734		0		43,734		43,734
Long-term debt	0		1,003,251		0		1,003,251		928,165
Reinsurance payables	0		0		59,588		59,588		59,588
Payables to parent and affiliates	0		36,026		0		36,026		36,026
Other liabilities	0		135,556		0		135,556		135,556
Separate account liabilities - investment contracts	0		102		0		102		102
Total liabilities	$	0	$	1,236,052	$	341,170	$	1,577,222	$	1,501,605

(1)

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


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

6. INCOME TAXES

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

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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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

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

7. REINSURANCE

The Company uses reinsurance as part of its risk management and capital management strategies for certain of its living benefit guarantees and variable annuity base contracts. Through March 31, 2016 the Company reinsured its living benefit guarantees on certain variable annuity products to Pruco Re and Prudential Insurance, which are the legal entities in which the Company previously executed its living benefit hedging program. Effective April 1, 2016, the Company recaptured the risks related to its variable annuity living benefit guarantees that were previously reinsured to Pruco Re and Prudential Insurance, as discussed further in Note 1. 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". For additional information related to the accounting for embedded derivatives, see Note 11 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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



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


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


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

The reinsurance recoverables by counterparty are broken out below:



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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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



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


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


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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated 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 ended September 30, 2018 and 2017 are as follows:



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



	Accumulated Other Comprehensive Income (Loss)
	Foreign Currency Translation 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	)


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

Reclassifications out of Accumulated Other Comprehensive Income (Loss)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(in thousands)
Amounts reclassified from AOCI(1)(2):
Net unrealized investment gains (losses):
Cash flow hedges—Currency/ Interest rate(3)	$	4,339		$	(1,484	)	$	13,850		$	(1,861	)
Net unrealized investment gains (losses) on available-for-sale securities	(10,755		)	(1,180		)	(68,720		)	(2,546		)
Total net unrealized investment gains (losses)(4)	(6,416		)	(2,664		)	(54,870		)	(4,407		)
Total reclassifications for the period	$	(6,416	)	$	(2,664	)	$	(54,870	)	$	(4,407	)


(1)	All amounts are shown before tax.


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


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


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

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Net Unrealized Investment Gains (Losses)

Net unrealized investment gains (losses) on securities classified as available-for-sale, certain other invested assets and other assets are included in the Company’s Unaudited Interim Consolidated Statements of Financial Position as a component of AOCI. Changes in these amounts include reclassification adjustments to exclude from “Other comprehensive income (loss)” 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, 2017	$	12,311		$	(1,008	)	$	(157	)	$	(3,263	)	$	7,883
Net investment gains (losses) on investments arising during the period	(12,928		)	0			0			2,715			(10,213		)
Reclassification adjustment for (gains) losses included in net income	(192		)	0			0			40			(152		)
Reclassification adjustment for OTTI (gains) losses excluded from net income(1)	(225		)	0			0			47			(178		)
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs	0			2,841			0			(597		)	2,244
Impact of net unrealized investment (gains) losses on future policy benefits and other liabilities	0			0			518			(109		)	409
Balance, September 30, 2018	$	(1,034	)	$	1,833		$	361		$	(1,167	)	$	(7	)


(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.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

All Other Net Unrealized Investment Gains (Losses) in AOCI



	Net Unrealized Gains (Losses) on Investments(1)			Deferred Policy Acquisition Costs and Other Costs			Future Policy Benefits and Other Liabilities			Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related to Net Unrealized Investment Gains (Losses)
	(in thousands)
Balance, December 31, 2017	$	(71,723	)	$	(82,212	)	$	(16,997	)	$	72,932		$	(98,000	)
Net investment gains (losses) on investments arising during the period	(553,949		)	0			0			116,330			(437,619		)
Reclassification adjustment for (gains) losses included in net income	55,062			0			0			(11,562		)	43,500
Reclassification adjustment for OTTI (gains) losses excluded from net income(2)	225			0			0			(47		)	178
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs	0			105,676			0			(22,192		)	83,484
Impact of net unrealized investment (gains) losses on future policy benefits and other liabilities	0			0			19,538			(4,103		)	15,435
Cumulative effect of adoption of ASU 2016-01	(4		)	0			0			1			(3		)
Cumulative effect of adoption of ASU 2018-02	0			0			0			(36,712		)	(36,712		)
Balance, September 30, 2018	$	(570,389	)	$	23,464		$	2,541		$	114,647		$	(429,737	)


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


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

9. RELATED PARTY TRANSACTIONS

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

Expense Charges and Allocations

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

The Company’s general and administrative expenses are charged to the Company using allocation methodologies based on business production processes. Management believes that the methodology is reasonable and reflects costs incurred by Prudential Insurance to process transactions on behalf of the Company. The Company operates under service and lease agreements whereby services of officers and employees, supplies, use of equipment and office space are provided by Prudential Insurance. The Company reviews its allocation methodology periodically which it may adjust accordingly. General and administrative expenses include allocations of stock compensation expenses related to a stock-based awards program and a deferred compensation program issued by Prudential Financial. The expense charged to the Company for the stock-based awards program was $0.0 million for both the three months ended September 30, 2018 and 2017, and $0.1 million and $0.0 million for the nine months ended September 30, 2018 and 2017, respectively. The expense charged to the Company for the deferred compensation program was $0.2 million for both the three months ended September 30, 2018 and 2017, and $0.5 million and $0.6 million for the nine months ended September 30, 2018 and 2017, respectively.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The Company is charged for its share of employee benefit expenses. These expenses include costs for funded and non-funded contributory and non-contributory defined benefit pension plans. Some of these benefits are based on final earnings and length of service while others are based on an account balance, which takes into consideration age, service and earnings during a career. The Company’s share of net expense for the pension plans was $0.4 million and $0.3 million for the three months ended September 30, 2018 and 2017, respectively, and $1 million for both the nine months ended September 30, 2018 and 2017.

The Company is also charged for its share of the costs associated with welfare plans issued by Prudential Insurance. These expenses include costs related to medical, dental, life insurance and disability. The Company's share of net expense for the welfare plans was $0.5 million and $0.4 million for the three months ended September 30, 2018 and 2017, respectively, and $2 million and $1 million for the nine months ended September 30, 2018 and 2017, respectively.

Prudential Insurance sponsors voluntary savings plans for its employee 401(k) plans. The plans provide for salary reduction contributions by employees and matching contributions by the Company of up to 4% of annual salary. The Company's expense for its share of the voluntary savings plan was $0.2 million and $0.1 million for the three months ended September 30, 2018 and 2017, respectively, and $0.5 million and $0.4 million for the nine months ended September 30, 2018 and 2017, respectively.

The Company pays commissions and certain other fees to PAD in consideration for PAD’s marketing and underwriting of the Company’s products. Commissions and fees are paid by PAD to broker-dealers who sell the Company’s products. Commissions and fees paid by the Company to PAD were $32 million and $27 million for the three months ended September 30, 2018 and 2017, respectively, and $91 million and $81 million for the nine months ended September 30, 2018 and 2017, respectively.

The Company is charged for its share of corporate expenses incurred by Prudential Financial to benefit its businesses, such as advertising, executive oversight, external affairs and philanthropic activity. The Company’s share of corporate expenses was $4 million and $(2) million for the three months ended September 30, 2018 and 2017, respectively, and $12 million and $10 million for the nine months ended September 30, 2018 and 2017, respectively.

Certain operating costs, including rental of office space, furniture, and equipment, have been charged to the Company at cost by Prudential Annuities Information Services and Technology Corporation (“PAIST”), an affiliated company. The Company signed a written service agreement with PAIST for these services executed and approved by the Connecticut Insurance Department in 1995. This agreement automatically continues in effect from year to year and may be terminated by either party upon 30 days written notice. There was no allocated lease expense for both the three and nine months ended September 30, 2018 and 2017. There was no sub-lease rental income, recorded as a reduction to lease expense, for both the three and nine months ended September 30, 2018 and 2017.

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 for both the three months ended September 30, 2018 and 2017, respectively, and $9 million for both the nine months ended September 30, 2018 and 2017, respectively. These expenses are recorded as “Net investment income” in the Company's Unaudited Interim Consolidated Statements of Operations and Comprehensive Income (Loss).

Derivative Trades

In its ordinary course of business, the Company enters into OTC derivative contracts with an affiliate, PGF. For these OTC derivative contracts, PGF has a substantially equal and offsetting position with an external counterparty. See Note 4 for additional information.

Joint Ventures

The Company has made investments in joint ventures with certain subsidiaries of Prudential Financial. "Other invested assets" includes $160 million and $111 million as of September 30, 2018 and December 31, 2017, respectively. "Net investment income" related to these ventures includes a gain of $2 million and $2 million for the three months ended September 30, 2018 and 2017, respectively, and $4 million and $7 million for the nine months ended September 30, 2018 and 2017, respectively.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Affiliated Asset Administration Fee Income

The Company has a revenue sharing agreement with AST Investment Services, Inc. (“ASTISI”) and PGIM Investments LLC (“PGIM Investments”) whereby the Company receives fee income based on policyholders' separate account balances invested in the Advanced Series Trust and the Prudential Series Fund. Income received from ASTISI and PGIM Investments related to this agreement was $26 million and $28 million for the three months ended September 30, 2018 and 2017, respectively, and $80 million and $83 million for the nine months ended September 30, 2018 and 2017, respectively. These revenues are recorded as “Asset administration fees and other income” in the Company's Unaudited Interim Consolidated Statements of Operations and Comprehensive Income (Loss).

Affiliated Notes Receivable

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



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


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

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

Accrued interest receivable related to these loans was $0.5 million and $0.2 million at September 30, 2018 and December 31, 2017, respectively, and is included in “Other assets”. Revenues related to these assets were $0.1 million and $0.2 million for the three months ended September 30, 2018 and 2017, respectively, and $0.3 million and $0.5 million for the nine months ended September 30, 2018 and 2017, 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, 2018 and for the year ended December 31, 2017.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



Affiliate	Date	Transaction	Security Type	Fair Value		Book Value		APIC, Net of Tax Increase/(Decrease)		Realized Investment Gain (Loss), Net of Tax
				(in thousands)
Pruco Life	January 2017	Sale	Fixed Maturities	$	29	$	29	$	0	$	0
Prudential Insurance	October 2017	Sale	Commercial Mortgages	$	131,953	$	128,529	$	0	$	2,226
Gibraltar Universal Life Reinsurance Company	October 2017	Purchase	Fixed Maturities	$	113,686	$	96,583	$	0	$	(11,117	)
Prudential Insurance	December 2017	Purchase	Other Invested Assets - Derivatives	$	171,363	$	171,363	$	0	$	0
Prudential Insurance	December 2017	Sale	Fixed Maturities	$	13,793	$	7,113	$	0	$	4,342
Prudential Insurance	February 2018	Purchase	Fixed Maturities	$	136,963	$	136,963	$	0	$	0
Pruco Life Insurance Company of Arizona	April 2018	Sale	Fixed Maturity	$	64,313	$	64,514	$	0	$	(159	)
Prudential Insurance	April 2018	Sale	Fixed Maturity	$	57,747	$	43,434	$	0	$	11,308
Prudential Insurance	May 2018	Sale	Fixed Maturity & Commercial Mortgages	$	162,111	$	159,237	$	0	$	2,271
Passaic Fund LLC	June 2018	Transfer Out	Other Invested Assets - Privates	$	15,281	$	15,281	$	0	$	0
Prudential Insurance	July 2018	Sale	Fixed Maturity	$	11,160	$	9,277	$	0	$	1,488
Prudential Insurance	August 2018	Sale	Commercial Mortgages	$	13,414	$	13,165	$	0	$	196

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Debt Agreements

The Company is authorized to borrow funds up to $9 billion from Prudential Financial and its affiliates to meet its capital and other funding needs. The debt issued during the second quarter of 2016 in the table below was assigned from affiliates as part of the Variable Annuities Recapture, as described further in Note 1. The following table provides the breakout of the Company's short and long term debt to affiliates as of September 30, 2018 and December 31, 2017.



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

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

Contributed Capital and Dividends

Through September 30, 2018 and December 31, 2017, the Company did not receive any capital contributions.

In March, June and September 2018, there was a $300 million, $250 million and $250 million return of capital, respectively, to PAI. In June, September and December 2017, there was a $100 million, $200 million and $650 million return of capital, respectively, to PAI.

Reinsurance with Affiliates

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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

10. COMMITMENTS AND CONTINGENT LIABILITIES

Commitments

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

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, 2018, the aggregate range of reasonably possible losses in excess of accruals established for those litigation and regulatory matters for which such an estimate currently can be made is less than $150 million. This estimate is not an indication of expected loss, if any, or the Company’s maximum possible loss exposure on such matters. The Company reviews relevant information with respect to its litigation and regulatory matters on a quarterly and annual basis and updates its accruals, disclosures and estimates of reasonably possible loss based on such reviews.

For a 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, 2017.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Securities Lending and Foreign Tax Reclaim Matter

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

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

Summary

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

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

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

Overview

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

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

selling such products in March 2010.

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

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

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

Regulatory Developments

Regulation as a Designated Financial Company

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

Fiduciary Rules and other Standards of Care

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

In April 2018, the SEC proposed a package of rulemakings and interpretative guidance that would, among other things, require broker-dealers to act in the best interest of retail customers when recommending securities transactions or investment strategies to them. The proposals would also clarify the SEC’s views of the fiduciary duty that investment advisers owe to their clients. If enacted in their current form, we believe the primary impact of the proposals would be to sales of certain of our products and to our affiliated Prudential Advisors distribution system.

In July 2018, the New York Department of Financial Services issued an amendment to its suitability regulations which will impose a best-interest standard on the sale of annuity and life insurance products in New York. In addition, in October 2018 the New Jersey Bureau of Securities issued proposed regulations that would impose a fiduciary standard on all New Jersey investment professionals, and other state regulators and legislatures have adopted or are considering adopting best interest standards.

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

State Insurance Exam

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

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Risk-Based Capital

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

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

Impact of a Low Interest Rate Environment

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

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

new money rates, mortgage loan prepayments and bond redemptions;

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

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

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

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

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

• policyholder behavior, including surrender or withdrawal activity.

Interest rates in the U.S. have experienced a period of historically low levels in large part due to Federal Reserve efforts to assist with the economic recovery subsequent to the financial crisis of 2008. However, more recently market interest rates have begun to climb in conjunction with a series of Federal Reserve decisions to raise interest rates in response to a strengthening economy. While market conditions and events make uncertain the timing, amount and impact of any further monetary policy decisions by the Federal Reserve, a trend of rising interest rates may enhance our reinvestment yields, primarily for our investments in fixed maturity securities and commercial mortgage loans. As interest rates rise, our reinvestment yield may approach or exceed the overall portfolio yield.

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

Revenues and Expenses

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

Profitability

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

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

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Products

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

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

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

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

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

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

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

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

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Accounting Policies & Pronouncements

Application of Critical Accounting Estimates

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

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


•	DAC, DSI and VOBA;


•	Policyholder liabilities;


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


•	Reinsurance recoverables;


•	Taxes on income; and


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

Market Performance - Equity and Interest Assumptions

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

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

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

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

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Adoption of New Accounting Pronouncements

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

Changes in Financial Position

September 30, 2018 versus December 31, 2017

Total assets decreased $5.4 billion from $60.0 billion at December 31, 2017 to $54.6 billion at September 30, 2018. Significant components were:


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


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


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

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


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


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

Total equity increased $0.1 billion from $6.3 billion at December 31, 2017 to $6.4 billion at September 30, 2018, primarily driven by after-tax net income of $1.3 billion for the nine months ended September 30, 2018 partially offset by a return of capital of $0.8 billion and unrealized losses on investments of $0.4 billion, as discussed above.

Results of Operations

Income (loss) from Operations before Income Taxes

2018 to 2017 Three Months Comparison

Income (loss) from operations before income taxes decreased $1.1 billion from income of $1.4 billion in the third quarter of 2017 to income of $0.3 billion in the third quarter of 2018, primarily driven by less favorable impact from living benefit results in the current year quarter as a result of widening credit spreads in the third quarter of 2017 and higher realized losses in the current quarter driven by $245 million in capital hedge losses.

2018 to 2017 Nine Months Comparison

Income (loss) from operations before income taxes increased $0.1 billion from income of $1.2 billion for the first nine months of 2017 to income of $1.3 billion for the first nine months of 2018, primarily driven by an unfavorable impact from living benefit results in the prior year as a result of significant NPR losses due to spread tightening and a favorable impact from rising rates, favorable equity markets and spread widening in the current year.

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



	Three Months Ended						Nine Months Ended
	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017
	(in millions)(1)						(in millions)(1)
Excluding impact of assumption updates and other refinements:
Net hedging impact(2)	$	(42	)	$	79		$	(154	)	$	433
Change in portions of U.S. GAAP liability, before NPR(3)	562			1,832			1,011			2,109
Change in the NPR adjustment	(258		)	(814		)	(144		)	(2,872		)
Net impact from changes in the U.S. GAAP embedded derivative and hedge positions	262			1,097			713			(330		)
Related benefit (charge) to amortization of DAC and other costs	(60		)	(251		)	(215		)	64
Net impact of assumption updates and other refinements	0			0			(159		)	(75		)
Net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs.	$	202		$	846		$	339		$	(341	)


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


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


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

For the three months ended September 30, 2018, the net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of non-performance risk ("NPR"), DAC and other costs, was a benefit of $202 million, which primarily reflects the impact of a net benefit of $262 million due to changes in the U.S. GAAP embedded derivative and hedge positions as a result of rising interest rates used in measuring our living benefit contracts partially offset by $60 million of related charges to amortization of DAC and other costs.

For the nine months ended September 30, 2018, the net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs, was a benefit of $339 million which primarily reflected a $713 million net impact from changes in the U.S. GAAP embedded derivative and hedge positions as a result of rising interest rates, favorable equity markets and widening credit spreads used in measuring our living benefit contracts. Partial offsets include $215 million of related charges to amortization of DAC and other costs and a $159 million net charge from our annual reviews and update of assumptions and other refinements, including updates to expected withdrawal rates as well as economic assumptions.

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 which primarily reflected the impact of a net benefit of $1,097 million due to changes in the U.S. GAAP embedded derivative and hedge positions as a result of spread widening used in measuring our living benefit contracts partially offset by $251 million of related charges to amortization of DAC and other costs.

For the nine 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 charge of $341 million which primarily reflected the impact from changes in the NPR adjustment as a result of tightening credit spreads and a $75 million net charge from our annual reviews and update of assumptions and other refinements, including updates to expected withdrawal rates as well as economic assumptions. Partial offsets are included in the $64 million related benefits to amortization of DAC and other costs.

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Revenues, Benefits and Expenses

2018 to 2017 Three Months Comparison

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

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

2018 to 2017 Nine Months Comparison

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

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

Variable Annuity Risks and Risk Mitigants

The following is a summary of: (i) certain risks associated with individual annuity products; (ii) certain 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, 2017.

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

Product Design Features

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

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

Our current ALM strategy utilizes a combination of both traditional fixed income instruments and derivatives to defray potential claims associated with our variable annuity living benefit guarantees. The economic liability we manage with this ALM strategy consists of expected living benefit claims under less severe market conditions, which are managed using a traditional ALM strategy through the accumulation of fixed income and derivative instruments, and potential living benefit claims resulting from more severe market conditions, which are hedged using derivative instruments. For the portion of our ALM strategy executed with derivatives, we enter into a range of exchange-traded, cleared, and over-the-counter (“OTC”) 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 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.



	As of September 30, 2018			As of December 31, 2017
	(in millions)			(in millions)
U.S. GAAP liability (including non-performance risk)	$	4,995		$	8,152
Non-performance risk adjustment	2,777			2,998
Subtotal	7,772			11,150
Adjustments including risk margins and valuation methodology differences	(1,860		)	(2,603		)
Economic liability managed by ALM strategy	$	5,912		$	8,546

As of September 30, 2018, 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.

Capital Hedge Program

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

Product Specific Risks and Risk Mitigants

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

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

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

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Income Taxes

For information regarding income taxes, see Note 6 to the Unaudited Interim Consolidated Financial Statements.

Liquidity and Capital Resources

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

Overview

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

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

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

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

Capital

Our capital management framework is primarily based on statutory RBC 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, 2018 we estimate that the Company’s RBC ratio exceeds the minimum level required by applicable insurance regulations.

In June 2018, the Capital Adequacy Task Force of the NAIC approved revisions to the NAIC RBC framework as a result of the adoption of the Tax Act of 2017 and the corresponding reduction of the corporate tax rate from 35% to 21%. The revisions will apply to the calculation of our RBC ratios as of December 31, 2018. The reduction of the corporate tax rate under the Tax Act of 2017 has the effect of increasing certain RBC factors, resulting in an overall decrease in insurers’ RBC ratios. The Company expects to have the necessary resources to maintain its “AA” ratings targets under this proposed RBC framework.

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

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

Capital Protection Framework

Prudential Financial and the Company employ 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 under a range of potential stress scenarios.

Liquidity

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

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

Cash Flow

The principal sources of the Company’s liquidity are certain annuity considerations, investment and fee income, investment maturities and internal borrowings. The principal uses of that liquidity include benefits, claims, and payments to policyholders and contractholders in connection with surrenders, withdrawals and net policy loan activity. Other uses of liquidity include commissions, general and administrative expenses, purchases of investments, the payment of dividends and return of capital to the parent company, hedging activity and payments in connection with financing activities. In March 2010, the Company ceased offering its existing variable annuity products to new investors upon the launch of a new product line by certain affiliates, but has launched a new fixed indexed annuity in January 2018 and a new deferred income annuity in March 2018.

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, 2018 and December 31, 2017, the Company had liquid assets of $10.0 billion and $12.6 billion, respectively. The portion of liquid assets comprised of cash and cash equivalents and short-term investments was $0.4 billion and $2.4 billion as of September 30, 2018 and December 31, 2017, respectively. As of September 30, 2018, $8.9 billion, or 95%, 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.

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Hedging activities

For the portion of our ALM strategy executed through hedging, as well as the capital hedge program, we enter into a range of exchange-traded, cleared and other OTC equity and interest rate derivatives in order to hedge certain capital market risks related to more severe market conditions. This portion of our ALM strategy and capital hedge program requires access to liquidity to meet 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 our ALM strategy and capital hedge program may also result in derivative related collateral postings to (when we are in a net pay position) or from (when we are in a net receive position) counterparties. The net collateral position depends on changes in interest rates and equity markets related to the amount of the exposures hedged. Depending on market conditions, the collateral posting requirements can result in material liquidity needs when we are in a net pay position. As of September 30, 2018, the derivatives comprising the hedging portion of our ALM strategy and capital hedge program were in a net receive position of $0.4 billion compared to a net receive position of $3.0 billion as of December 31, 2017. The change in collateral position was primarily driven by an increase in interest rates.

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, is being managed within the Company. For the portion of the risk management strategy executed through hedging, we enter into a range of exchange-traded, cleared and other OTC equity and interest rate derivatives in order to hedge certain living benefit guarantees accounted for as embedded derivatives against changes in certain capital market risks above a designated threshold. The portion of the risk management strategy comprising the hedging portion requires access to liquidity to meet the Company's payment obligations relating to these derivatives, such as payments for periodic settlements, purchases, maturities and terminations.

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, 2018, there have been no material changes in our economic exposure to market risk from December 31, 2017, a description of which may be found in our Annual Report on Form 10-K for the year ended December 31, 2017, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” filed with the SEC. See Item 1A, “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2017, 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, 2018. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2018, 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, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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Item 6. Exhibits

EXHIBIT INDEX

31.1 Section 302 Certification of the Chief Executive Officer

31.2 Section 302 Certification of the Chief Financial Officer

32.1 Section 906 Certification of the Chief Executive Officer

32.2 Section 906 Certification of the Chief Financial Officer

101.INS - XBRL Instance Document

101.SCH - XBRL Taxonomy Extension Schema Document.

101.CAL - XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB - XBRL Taxonomy Extension Label Linkbase Document

101.PRE - XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF - XBRL Taxonomy Extension Definition Linkbase Document

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SIGNATURES

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



PRUDENTIAL ANNUITIES LIFE ASSURANCE CORPORATION

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

Date: November 13, 2018