10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

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

For the quarterly period ended June 30, 2009

OR

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

For the Transition Period from              to             

Commission File Number 033-44202

Prudential Annuities Life Assurance Corporation

(Exact Name of Registrant as Specified in its Charter)

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

One Corporate Drive

Shelton, Connecticut 06484

(203) 926-1888

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of the Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

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

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

As of August 14, 2009, 25,000 shares of the registrant’s Common Stock (par value $100) consisting of 100 voting shares and 24,900 non-voting shares, were outstanding. As of such date, Prudential Annuities, Inc. formerly known as American Skandia, Inc., an indirect wholly owned subsidiary of Prudential Financial, Inc., a New Jersey corporation, owned all of the registrant’s Common Stock.

Prudential Annuities Life Assurance Corporation meets the conditions set

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

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

TABLE OF CONTENTS

		Page Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
	Unaudited Interim Statements of Financial Position As of June 30, 2009 and December 31, 2008	4
	Unaudited Interim Statements of Operations and Comprehensive Income Three Months Ended and Six Months Ended June 30, 2009 and 2008	5
	Unaudited Interim Statement of Equity Six Months Ended June 30, 2009 and 2008	6
	Unaudited Interim Statements of Cash Flows Six Months Ended June 30, 2009 and 2008	7
	Notes to Unaudited Interim Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 4.	Controls and Procedures	45
PART II OTHER INFORMATION
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	47
Item 6.	Exhibits	57
SIGNATURES		58

2

FORWARD LOOKING STATEMENTS

Certain of the statements included in this Quarterly Report on Form 10-Q, including but not limited to those in Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Prudential Annuities Life Assurance Corporation. There can be no assurance that future developments affecting Prudential Annuities Life Assurance Corporation will be those anticipated by management. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (1) general economic, market and political conditions, including the performance and fluctuations of fixed income, equity, real estate and other financial markets, particularly in light of ongoing severe economic conditions and the severe stress experienced by the global financial markets since the second half of 2007; (2) the availability and cost of external financing for our operations, which has been affected by the stress experienced by the global financial markets; (3) interest rate fluctuations; (4) reestimates of our reserves for future policy benefits and claims; (5) differences between actual experience regarding mortality, morbidity, persistency, surrender experience, interest rates, or market returns and the assumptions we use in pricing our products, establishing liabilities and reserves or for other purposes; (6) changes in our assumptions related to deferred policy acquisition costs, valuation of business acquired or goodwill; (7) changes in our claims-paying or credit ratings; (8) investment losses, defaults and counterparty non-performance; (9) competition in our product lines and for personnel; (10) changes in tax law; (11) regulatory or legislative changes, including government actions in response to the stress experienced by the global financial markets; (12) adverse determinations in litigation or regulatory matters and our exposure to contingent liabilities; (13) domestic or international military actions, natural or man-made disasters including terrorist activities or pandemic disease, or other events resulting in catastrophic loss of life; (14) ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks; (15) effects of acquisitions, divestitures and restructurings, including possible difficulties in integrating and realizing the projected results of acquisitions; (16) changes in statutory or U.S. GAAP accounting principles, practices or policies; and (17) changes in assumptions for retirement expense. As noted above, the period since the second half of 2007 has been characterized by extreme adverse market and economic conditions. The foregoing risks are even more pronounced in these unprecedented market and economic conditions. 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” for discussion of certain risks relating to our businesses and investment in our securities.

3

PART I-FINANCIAL INFORMATION

ITEM 1. Financial Statements

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Financial Position

As of June 30, 2009 and December 31, 2008 (in thousands, except share amounts)

	June 30, 2009			December 31, 2008
ASSETS
Fixed maturities available for sale, at fair value (amortized cost – 2009:7,934,211; 2008: $9,893,430)	$	8,132,590		$	9,869,342
Trading account assets, at fair value		80,672			51,422
Equity securities available for sale, at fair value (cost – 2009:$17,680; 2008: $12,024)		16,811			10,119
Commercial mortgage and other loans		289,473			371,744
Policy loans		13,280			13,419
Short-term investments		461,284			254,046
Other long-term investments		(10,215	)		37,529
Total investments		8,983,895			10,607,621
Cash and cash equivalents		52,313			26,549
Deferred policy acquisition costs		1,014,099			1,247,131
Accrued investment income		93,400			91,301
Reinsurance recoverable		504,136			2,110,264
Income taxes receivable		306,808			259,541
Valuation of business acquired		61,776			78,382
Deferred sales inducements		708,130			726,314
Receivables from parent and affiliates		111,235			65,151
Investment receivable on open trades		194,695			26,541
Other assets		6,125			52,461
Separate account assets		29,531,859			24,259,992
TOTAL ASSETS	$	41,568,471		$	39,551,248
LIABILITIES AND STOCKHOLDER’S EQUITY
LIABILITIES
Policyholders’ account balances	$	8,598,146		$	10,261,698
Future policy benefits and other policyholder liabilities		852,449			2,486,584
Payables to parent and affiliates		53,315			54,107
Cash collateral for loaned securities		412,790			269,461
Short-term borrowing		10,757			186,268
Long-term borrowing		175,000			179,547
Investment payable on open trades		69,713			5
Other liabilities		250,532			153,011
Separate account liabilities		29,531,859			24,259,992
TOTAL LIABILITIES	$	39,954,561		$	37,850,673
Commitments and Contingent Liabilities (See Note 3)
STOCKHOLDER’S EQUITY
Common stock, $100 par value; 25,000 shares, authorized, issued and outstanding	$	2,500		$	2,500
Additional paid-in capital		974,921			974,921
Retained earnings		593,487			729,100
Accumulated other comprehensive income (loss)		43,002			(5,946	)
Total stockholder’s equity	$	1,613,910		$	1,700,575
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	41,568,471		$	39,551,248

See Notes to Unaudited Interim Financial Statements

4

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Operations and Comprehensive Income

Three Months and Six Months Ended June 30, 2009 and 2008 (in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
REVENUES
Premiums	$	3,729		$	4,310		$	6,837		$	11,537
Policy charges and fee income		76,504			186,078			182,687			357,502
Net investment income		130,693			56,677			276,881			101,857
Asset administration fees and other income		43,183			58,169			78,686			112,909
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities		(6,419	)		(17,549	)		(21,759	)		(17,549	)
Other-than-temporary impairments on fixed maturity securities transferred to Other Comprehensive Income		3,596			—			15,529			—
Other realized investment gains (losses), net		24,429			(46,077	)		40,366			(47,284	)
Total realized investment gains (losses), net		21,606			(63,626	)		34,136			(64,833	)
Total revenues	$	275,715		$	241,608		$	579,227		$	518,972
BENEFITS AND EXPENSES
Policyholders’ benefits		(44,016	)		14,444			38,166			38,874
Interest credited to policyholders’ account balances		18,181			50,008			278,584			88,523
Amortization of deferred policy acquisition costs		(206,108	)		45,701			312,663			79,276
General, administrative and other expenses		88,870			96,279			175,751			192,571
Total benefits and expenses	$	(143,073	)	$	206,432		$	805,164		$	399,244
Income from operations before income taxes	$	418,788		$	35,176		$	(225,937	)	$	119,728
Income tax (benefit) expense		169,907			(40	)		(91,876	)		8,454
NET INCOME	$	248,881		$	35,216		$	(134,061	)	$	111,274
Change in net unrealized investment gains (losses), net of taxes (1)		29,184			(15,175	)		57,654			(11,664	)
COMPREHENSIVE INCOME	$	278,065		$	20,041		$	(76,407	)	$	99,610

(1) Amounts are net of tax benefits (expense) of $(16.0) million and $8.3 million for the three months ended June 30, 2009 and 2008, respectively; and $(31.6) and $6.4 million for the six months ended June 30, 2009 and 2008, respectively.

See Notes to Unaudited Interim Financial Statements

5

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statement of Equity

Six Months Ended June 30, 2009 and 2008 (in thousands)

	Common Stock		Additional paid-in capital		Retained earnings			Accumulated other comprehensive income			Total equity
Balance, December 31, 2008	$	2,500	$	974,921	$	729,100		$	(5,946	)	$	1,700,575
Net income (loss)		—		—		(134,061	)		—			(134,061	)
Impact of adoption of FSP FAS 115-2 & 124- 2, net of taxes		—		—		8,706			(8,706	)		—
Distribution from/(to) parent		—		—		(10,258	)		—			(10,258	)
Other comprehensive income (loss), net of taxes		—		—		—			57,654			57,654
Balance, June 30, 2009	$	2,500	$	974,921	$	593,487		$	43,002		$	1,613,910
	Common Stock		Additional paid-in capital		Retained earnings			Accumulated other comprehensive income			Total equity
Balance, December 31, 2007	$	2,500	$	434,096	$	709,142		$	2,537		$	1,148,275
Net income						111,274						111,274
Other comprehensive income, net of taxes									(11,664	)		(11,664	)
Balance, June 30, 2008	$	2,500	$	434,096	$	820,416		$	(9,127	)	$	1,247,885

See Notes to Unaudited Interim Financial Statements

6

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Cash Flows

Six Months Ended June 30, 2009 and 2008 (in thousands)

	Six months ended June 30, 2009			Six months ended June 30, 2008
CASH FLOWS (USED IN) FROM OPERATING ACTIVITIES:
Net income (loss)	$	(134,061	)	$	111,274
Adjustments to reconcile net income to net cash provided by operating activities:					—
Realized investment (gains) losses, net		(34,136	)		64,833
Amortization and depreciation		(3,139	)		12,252
Interest credited to policyholders’ account balances		233,190			80,958
Change in:
Policy reserves		(1,622,038	)		110,611
Accrued investment income		(2,558	)		(19,334	)
Trading account assets		(8,097	)		2,039
Net receivable (payable) to parent and affiliates		(38,773	)		9,806
Deferred sales inducements		18,184			(104,846	)
Deferred policy acquisition costs		88,871			(145,781	)
Income taxes payable (receivable)		(78,888	)		8,454
Reinsurance Recoverable		1,606,128			(103,112	)
Other, net		(76,469	)		(68,762	)
Cash Flows (Used in) From Operating Activities	$	(51,786	)	$	(41,608	)
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities, available for sale	$	5,099,594		$	3,430,315
Equity securities, available for sale		11,588			6,020,637
Commercial mortgage and other loans		75,916			359
Trading account assets		4,595			—
Policy loans		44			591
Other long-term investments		326			409
Short-term investments		3,166,498			—
Payments for the purchase/origination of:
Fixed maturities, available for sale		(3,067,469	)		(5,879,408	)
Equity securities, available for sale		(17,500	)		—
Commercial mortgage and other loans		(447	)		(721	)
Trading account assets		(22,656	)		—
Policy loans		(207	)		(1,163	)
Other long-term investments		(542	)		(7,487	)
Short-term investments		(3,373,654	)		(7,149,944	)
Cash Flows from (Used in) Investing Activities	$	1,876,086		$	(3,586,412	)
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES:
Decrease in future fees payable to PAI, net	$	(691	)	$	(8,052	)
Cash collateral for loaned securities		143,329			88,818
Repayments of debt (maturities longer than 90 days)		(4,547	)		(30,000	)
Net increase (decrease) in short-term borrowing		(175,511	)		1,390
Drafts outstanding		49,611			2,114
Capital contribution from (to) Parent		(10,258	)		—
Policyholders’ account balances
Deposits		2,102,145			4,984,416
Withdrawals		(3,902,614	)		(1,410,680	)
Cash Flows (Used in) From Financing Activities	$	(1,798,536	)	$	3,628,006
Net increase (decrease) in cash and cash equivalents		25,764			(14	)
Cash and cash equivalents, beginning of year		26,549			697
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	52,313		$	683
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid (received)	$	(13,015	)	$	—
Interest paid	$	5,834		$	18,991

See Notes to Unaudited Interim Financial Statements

7

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

1. BUSINESS

Prudential Annuities Life Assurance Corporation (the “Company”, “we”, or “our”), formerly known as American Skandia Life Assurance Corporation, with its principal offices in Shelton, Connecticut, is an indirect wholly-owned subsidiary of Prudential Financial, Inc. (“Prudential Financial”), a New Jersey corporation. The Company is a wholly owned subsidiary of Prudential Annuities, Inc. (“PAI”), formerly known as American Skandia, Inc., which in turn is an indirect wholly owned subsidiary of Prudential Financial. On December 19, 2002, Skandia Insurance Company Ltd. (publ) (“Skandia”), an insurance company organized under the laws of the Kingdom of Sweden, and the ultimate parent company of the Company prior to May 1, 2003, entered into a definitive purchase agreement (the “Acquisition Agreement”) with Prudential Financial, whereby Prudential Financial would acquire the Company and certain of its affiliates (the “Acquisition”) and would be authorized to use the American Skandia name through April, 2008. On May 1, 2003, the Acquisition was consummated. Thus, the Company is now an indirect wholly owned subsidiary of Prudential Financial. The Company’s name was changed effective January 1, 2008.

The Company develops long-term savings and retirement products, which are distributed through its affiliated broker/dealer company, Prudential Annuities Distributors, Incorporated (“PAD”), formerly known as American Skandia Marketing, which is a wholly owned subsidiary of PAI. The Company currently issues variable and fixed deferred and immediate annuities for individuals and groups in the United States of America and its territories.

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 insurance products, and individual and group annuities.

2. BASIS OF PRESENTATION

The unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and on a basis consistent with reporting interim financial information in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (the “SEC”). The Company has evaluated subsequent events through August 14, 2009, the date these financial statements were issued as part of this Quarterly Report on Form 10-Q.

These interim financial statements are unaudited but reflect all adjustments that, in the opinion of management, are necessary to provide a fair presentation of the results of operations and financial condition of the Company for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for any interim period are not necessarily indicative of results for a full year. These unaudited interim financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

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; valuation of business acquired and its amortization; valuation of investments including derivatives and the recognition of other-than-temporary impairments; future policy benefits including guarantees; pension and other postretirement benefits; provision for income taxes and valuation of deferred tax assets; reserves for contingent liabilities, including reserves for losses in connection with unresolved legal matters.

Reclassifications

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

3. ACCOUNTING POLICIES AND ACCOUNTING PRONOUNCEMENTS

Investments in Debt and Equity Securities

Fixed maturities are comprised of bonds, notes and redeemable preferred stock. Fixed maturities classified as “available for sale” are carried at fair value. The amortized cost of fixed maturities is adjusted for amortization of premiums and accretion of discounts to maturity. Interest income, as well as the related amortization of premium and accretion of discount is included in “Net investment income” under the effective yield method. For mortgage-backed and asset-backed securities, the effective yield is based on estimated cash flows, including prepayment assumptions based on data from widely accepted third-party data sources or internal estimates. In addition to prepayment assumptions, cash flow estimates vary based on assumptions regarding the underlying collateral including default rates and changes in value. These assumptions can significantly impact income recognition and the amount of other-than-temporary impairments

8

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

3. ACCOUNTING POLICIES AND ACCOUNTING PRONOUNCEMENTS (continued)

recognized in other comprehensive income. For high credit quality mortgage-backed and asset-backed securities (those rated AA or above), cash flows are provided quarterly, and the amortized cost and effective yield of the security are adjusted as necessary to reflect historical prepayment experience and changes in estimated future prepayments. The adjustments to amortized cost are recorded as a charge or credit to net investment income in accordance with the retrospective method. For asset-backed and mortgage-backed securities rated below AA, the effective yield is adjusted prospectively for any changes in estimated cash flows. See the discussion below on realized investment gains and losses for a description of the accounting for impairments as well as the impact of the Company’s adoption of Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” Unrealized gains and losses on fixed maturities classified as “available for sale,” net of tax, and the effect on deferred policy acquisition costs, valuation of business acquired, future policy benefits and policyholders’ dividends that would result from the realization of unrealized gains and losses, are included in “Accumulated other comprehensive income (loss).”

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

Equity securities, available for sale are comprised of common stock, and non-redeemable preferred stock, and are carried at fair value. The associated unrealized gains and losses, net of tax, and the effect on deferred policy acquisition costs, valuation of business acquired, and future policy benefits that would result from the realization of unrealized gains and losses, are included in “Accumulated other comprehensive income (loss)”. The cost of equity securities is written down to estimated fair value when a decline in value is considered to be other than temporary. See the discussion below on realized investment gains and losses for a description of the accounting for impairments. Dividends from these investments are recognized in “Net investment income” when declared.

Short-term investments primarily consist of investments in certain money market funds as well as highly liquid debt instruments with a maturity of greater than three months and less than twelve months when purchased. These investments are generally carried at fair value.

Realized investment gains (losses) are computed using the specific identification method. Realized investment gains and losses are generated from numerous sources, including the sale of fixed maturity securities, equity securities, investments in joint ventures and limited partnerships and other types of investments, as well as adjustments to the cost basis of investments for other than temporary impairments recognize in earnings. The Company’s available-for-sale securities with unrealized losses are reviewed quarterly to identify other-than-temporary impairments in value. In evaluating whether a decline in value is other-than-temporary, the Company considers several factors including, but not limited to the following: (1) the extent and the duration of the decline; (2) the reasons for the decline in value (credit event, currency or interest-rate related, including general credit spread widening); and (3) the financial condition of and near-term prospects of the issuer. With regard to available-for-sale equity securities, the Company also considers the ability and intent to hold the investment for a period of time to allow for a recovery of value. When it is determined that a decline in value of an equity security is other-than-temporary, the carrying value of the equity security is reduced to its fair value, with a corresponding charge to earnings.

In addition, in April 2009, the Financial FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” The Company early adopted this guidance on January 1, 2009. This guidance indicates that an other-than-temporary impairment must be recognized in earnings for a debt security in an unrealized loss position when an entity either (a) has the intent to sell the debt security or (b) more likely than not will be required to sell the debt security before its anticipated recovery. Prior to the adoption of this guidance the Company was required to record an other-than-temporary impairment for a debt security unless it could assert that it had both the intent and ability to hold the security for a period of time sufficient to allow for a recovery in its’ fair value to its amortized cost basis. For all debt securities in unrealized loss positions that do not meet either of these two criteria, FSP FAS 115-2 and FAS 124-2 requires that the Company analyze its ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security prior to impairment. The Company may use the estimated fair value of collateral as a proxy for the net present value if it believes that the security is dependent on the liquidation of collateral for recovery of its investment. If the net present value is less than the amortized cost of the investment, an other-than-temporary impairment is recorded.

Under FSP FAS 115-2 and FAS 124-2, when an other-than-temporary impairment of a debt security has occurred, the amount of the other-than-temporary impairment recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the debt security meets either of these two criteria, the other-than-temporary impairment recognized in earnings is equal to the entire difference between the security’s amortized cost basis and its fair value at the impairment measurement date. For other-than-temporary impairments of debt securities that do not meet these two criteria, the net amount recognized in earnings is equal to the difference between the amortized cost of the debt security and its net present value calculated as described above. Any difference between the fair value and the net present value of the debt security at the impairment measurement date is recorded in “Other comprehensive income (loss).” Unrealized gains or losses on securities for which an other-than-temporary impairment has

9

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

3. ACCOUNTING POLICIES AND ACCOUNTING PRONOUNCEMENTS (continued)

been recognized in earnings is tracked as a separate component of “Accumulated other comprehensive income (loss).” Prior to the adoption of FSP FAS 115-2 and FAS 124-2, an other-than-temporary impairment recognized in earnings for debt securities was equal to the total difference between amortized cost and fair value at the time of impairment.

For debt securities, the split between the amount of an other-than-temporary impairment recognized in other comprehensive income and the net amount recognized in earnings is driven principally by assumptions regarding the amount and timing of projected cash flows. For mortgage-backed and asset-backed securities, cash flow estimates including prepayment assumptions, are based on data from widely accepted third-party data sources or internal estimates. In addition to prepayment assumptions, cash flow estimates vary based on assumptions regarding the underlying collateral including default rates, recoveries and changes in value. For all other debt securities, cash flow estimates are driven by assumptions regarding probability of default and estimates regarding timing and amount of recoveries associated with a default.

The Company has developed these estimates using information based on its historical experience as well as using market observable data, such as industry analyst reports and forecasts, sector credit ratings and other data relevant to the collectability of a security.

The new cost basis of an impaired security is not adjusted for subsequent increases in estimated fair value. In periods subsequent to the recognition of an other-than-temporary impairment, the impaired security is accounted for as if it had been purchased on the measurement date of the impairment. For debt securities, the discount (or reduced premium) based on the new cost basis may be accreted into net investment income in future periods based on prospective changes in cash flow estimates, to reflect adjustments to the effective yield.

Derivative Financial Instruments

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

Derivatives are used to manage the characteristics of the Company’s asset/liability mix, manage the interest rate and currency characteristics of assets or liabilities. Additionally, derivatives may be used to seek to reduce exposure to interest rate and foreign currency risks associated with assets held or expected to be purchased or sold, and liabilities incurred or expected to be incurred.

Derivatives are recorded as assets, within “Other long-term investments,” in the Statement of Financial Position, except for embedded derivatives, which are recorded in the Statement of Financial Position with the associated host contract. The Company nets the fair value of all derivative financial instruments with counterparties for which a master netting arrangement has been executed pursuant to Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 39 and FASB Staff Position (“FSP”) No. 39-1. As discussed in detail below and in Note 8, all realized and unrealized changes in fair value of derivatives, with the exception of the effective portion of cash flow hedges, are recorded in current earnings. Cash flows from these derivatives are reported in the operating and investing activities sections in the Statements of Cash Flows.

The Company designates derivatives as either (1) a hedge of the fair value of a recognized asset or liability or unrecognized firm commitment (“fair value” hedge), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge), (3) a foreign currency fair value or cash flow hedge (“foreign currency” hedge), (4) a hedge of a net investment in a foreign operation, or (5) a derivative entered into as an economic hedge that does not qualify for hedge accounting. If a derivative does not qualify for hedge accounting, all changes in its fair value, including net receipts and payments, are included in “Realized investment (losses), net” without considering changes in the fair value of the economically associated assets or liabilities.

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

The Company formally documents at inception all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives designated as fair value, cash flow, or foreign currency, hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. Hedges of a net investment in a foreign operation are linked to the specific foreign operation.

10

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

3. ACCOUNTING POLICIES AND ACCOUNTING PRONOUNCEMENTS (continued)

When a derivative is designated as a fair value hedge and is determined to be highly effective, changes in its fair value, along with changes in the fair value of the hedged asset or liability (including losses or gains on firm commitments), are reported on a net basis in the income statement, generally in “Realized investment gains (losses), net.” When swaps are used in hedge accounting relationships, periodic settlements are recorded in the same income statement line as the related settlements of the hedged items.

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

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

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

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

Income Taxes

The dividends received deduction (“DRD”), reduces the amount of dividend income subject to U.S. tax and is a significant component of the difference between the Company’s effective tax rate and the federal statutory tax rate of 35%. The DRD for the current period was estimated using information from 2008, current year results, and was adjusted to take into account the current year’s equity market performance. The actual current year DRD can vary from the estimate based on factors such as, but not limited to, changes in the amount of dividends received that are eligible for the DRD, changes in the amount of distributions received from mutual fund investments, changes in the account balances of variable life and annuity contracts, and the Company’s taxable income before the DRD.

In August 2007, the IRS, released Revenue Ruling 2007-54, which included, among other items, guidance on the methodology to be followed in calculating the DRD related to variable life insurance and annuity contracts. In September 2007, the IRS released Revenue Ruling 2007-61. Revenue Ruling 2007-61 suspends Revenue Ruling 2007-54 and informs taxpayers that the U.S. Treasury Department and the IRS have indicated that they intend to address through new regulations the issues considered in Revenue Ruling 2007-54, including the methodology to be followed in determining the DRD related to variable life insurance and annuity contracts. On May 11, 2009, the Obama Administration released the “General Explanations of the Administration’s Revenue Proposals.” Although the Administration has not released proposed statutory language, one proposal would change the method used to determine the amount of the DRD. A change in the DRD, including the possible retroactive or prospective elimination of this deduction through regulation or legislation, could increase actual tax expense and reduce the Company’s net income. These activities had no impact on the Company’s 2008 or 2009 results.

Accounting Pronouncements Adopted

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events.” This statement addresses the accounting for and disclosure of subsequent events not addressed in other applicable GAAP, including disclosure of the date through which subsequent events have been evaluated. This guidance is effective for interim or annual periods ending after June 15, 2009. The Company’s adoption of this guidance effective with the interim period ending June 30, 2009 did not have a material effect on the Company’s financial position or results of operations. The required disclosure of the date through which subsequent events have been evaluated is provided in Note 1.

11

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

3. ACCOUNTING POLICIES AND ACCOUNTING PRONOUNCEMENTS (continued)

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” This FSP requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends the disclosure requirements. This FSP is effective for interim reporting periods ending after June 15, 2009. The Company adopted this guidance effective with the interim period ending June 30, 2009. The required disclosures are provided in Note 7.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” This FSP amends the other-than-temporary impairment guidance for debt securities and expands the presentation and disclosure requirements of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP also requires that the required annual disclosures be made for interim reporting periods. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted this guidance on January 1, 2009, which resulted in a net after-tax increase to retained earnings and decrease to Accumulated other comprehensive income (loss) of $8.7 million, as of January 1, 2009. The disclosures required by this FSP are provided in Note 6. See “Realized investment gains (losses)” above for more information.

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This FSP amends FASB Statement No. 157, “Fair Value Measurements”, to provide guidance on (1) estimating the fair value of an asset or liability if there was a significant decrease in the volume and level of trading activity for these assets or liabilities, and (2) identifying transactions that are not orderly. Further, FSP 157-4 requires additional disclosures about fair value measurements in interim and annual periods and supersedes FSP FAS 157-3, “Determining the Fair Value of a Financial Asset in a Market That Is Not Active”. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. The Company’s early adoption of this guidance effective January 1, 2009 did not have a material effect on the Company’s financial position or results of operations. The disclosures required by this FSP are provided in Note 7.

In September 2008, the FASB Emerging Issues Task Force (“EITF”) reached consensus on EITF Issue No. 08-5, “Issuer’s Accounting for Liabilities Measured at Fair Value with a Third-Party Credit Enhancement.” The consensus concluded that (a) the issuer of a liability (including debt) with a third-party credit enhancement that is inseparable from the liability, shall not include the effect of the credit enhancement in the fair value measurement of the liability; (b) the issuer shall disclose the existence of any third-party credit enhancement on such liabilities, and (c) in the period of adoption the issuer shall disclose the valuation techniques used to measure the fair value of such liabilities and disclose any changes from valuation techniques used in prior periods. The Company’s adoption of this guidance on a prospective basis effective January 1, 2009 did not have a material effect on the Company’s financial position or results of operations.

In June 2008, the FASB EITF reached consensus on the following issues contained in EITF Issue No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock:” (1) how an entity should evaluate whether an instrument (or embedded feature) is indexed to the entity’s own stock; (2) how the currency in which the strike price of an equity-linked financial instrument (or embedded equity-linked feature) is denominated affects the determination of whether the instrument is indexed to the entity’s own stock; (3) how an issuer should account for equity-linked financial instruments issued to investors for purposes of establishing a market-based measure of the grant-date fair value of employee stock options. This guidance clarifies what instruments qualify as indexed to an entity’s own stock and are thereby exempt from requirements of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and eligible for equity classification under EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” The Company’s adoption of this guidance effective January 1, 2009 did not have a material effect on the Company’s financial position or results of operations.

In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the list of factors an entity should consider in developing renewal or extension assumptions used to determine the useful life of recognized intangible assets under SFAS No. 142. This FSP is effective for fiscal years and interim periods beginning after December 15, 2008, with the guidance for determining the useful life of a recognized intangible asset being applied prospectively to intangible assets acquired after the effective date and the disclosure requirements being applied prospectively to all intangible assets recognized as of, and after, the effective date. The Company’s adoption of this guidance effective January 1, 2009 did not have a material effect on the Company’s financial position or results of operations.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” an amendment of SFAS No. 133. This statement amends and expands the disclosure requirements for derivative instruments and hedging activities by requiring companies to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 and its related interpretations, and (c) how derivative instruments and

12

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

3. ACCOUNTING POLICIES AND ACCOUNTING PRONOUNCEMENTS (continued)

related hedged items affect an entity’s financial position, financial performance, and cash flows. The Company’s adoption of this guidance effective January 1, 2009 did not have a material effect on the Company’s financial position or results of operations. The required disclosure is included in Note 8.

In February 2008, the FASB issued FSP FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” The FSP provides recognition and derecognition guidance for a repurchase financing transaction, which is a repurchase agreement that relates to a previously transferred financial asset between the same counterparties, that is entered into contemporaneously with or in contemplation of, the initial transfer. The FSP is effective for fiscal years beginning after November 15, 2008. The Company’s adoption of this guidance on a prospective basis effective January 1, 2009 did not have a material effect on the Company’s financial position or results of operations.

In February 2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement No. 157.” This FSP applies to nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). FSP FAS 157-2 delays the effective date of SFAS No. 157 for these items to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company’s adoption of this guidance effective January 1, 2009 did not have a material effect on the Company’s financial position or results of operations.

Recent Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162.” The FASB’s Codification was launched on July 1, 2009 as the source of authoritative U.S. GAAP to be applied by nongovernmental entities. The Codification is not intended to change U.S. GAAP but is a new structure which takes accounting pronouncements and organizes them by accounting topic. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. This statement will become effective for the Company beginning with the interim reporting period ending September 30, 2009 and will impact the way the Company references U.S. GAAP accounting standards in the financial statements.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).” This statement amends the consolidation guidance for variable interest entities. It also makes certain changes to the disclosures required under FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities,” which the Company adopted effective December 31, 2008. This statement is effective for interim and annual reporting periods beginning after November 15, 2009. The Company will adopt this guidance effective January 1, 2010. The Company is currently assessing the impact of this statement on the Company’s financial position, results of operations and financial statement disclosures.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140.” This statement changes the accounting for transfers of financial assets, and is effective for transfers of financial assets occurring in interim and annual reporting periods beginning after November 15, 2009. It removes the concept of a qualifying special-purpose entity (QSPE) from Statement No. 140 and removes the exception from applying FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” to qualifying special-purpose entities. It also defines “participating interest” to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale. Disclosure provisions will be applied to transfers that occurred both before and after January 1, 2010. The Company will adopt this guidance effective January 1, 2010. The Company is currently assessing the impact of this statement on the Company’s financial position, results of operations and financial statement disclosures.

4. CONTINGENT LIABILITIES AND LITIGATION

Contingent Liabilities

On an ongoing basis, our internal supervisory and control functions review the quality of our sales, marketing, administration and servicing, 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 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, we may offer customers appropriate remediation and may incur charges, including the costs of such remediation, administrative costs and regulatory fines.

Litigation and Regulatory Matters

The Company is subject to legal and regulatory actions in the ordinary course of our businesses, including class action lawsuits. Our pending legal and regulatory actions include proceedings specific to the Company and proceedings generally applicable to business practices in the industry in which we operate. We are subject to class action lawsuits and other litigation alleging, among other things, that we made improper or inadequate disclosures in connection with the sale of annuity products or charged excessive or impermissible fees on these products, recommended unsuitable products to customers, mishandled customer accounts or breached fiduciary duties to customers. We are also subject to litigation arising out of our general business activities, such as our investments and contracts, and could be exposed to claims or litigation

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

4. CONTINGENT LIABILITIES AND LITIGATION (continued)

concerning certain business or process patents. Regulatory authorities from time to time make inquiries and conduct investigations and examinations relating particularly to us and our products. In addition, we, along with other participants in the business in which we engage, 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 our pending legal and regulatory actions, parties are seeking large and/or indeterminate amounts, including punitive or exemplary damages. The outcome of a litigation or regulatory matter, and the amount or range of potential loss at any particular time, is often inherently uncertain. The following is a summary of certain pending proceedings:

In April 2009, AST Investment Services, Inc., formerly named American Skandia Investment Services, Inc. (“ASISI”), reached a resolution of the previously disclosed investigations by the SEC and NYAG into market timing related misconduct involving certain variable annuities. The settlements relate to conduct that generally occurred between January 1998 and September 2003. ASISI is an affiliate of the Company and serves as investment manager for certain investment options under the Company’s variable life insurance and annuity products. Prudential Financial acquired ASISI from Skandia Insurance Company Ltd. (publ) (“Skandia”) in May 2003. Subsequent to the acquisition, Prudential Financial implemented controls, procedures and measures designed to protect customers from the types of activities involved in these investigations. These settlements resolve the investigations by the above named authorities into these matters, subject to the settlement terms. Under the terms of the settlements, ASISI has paid a total of $34 million in disgorgement and an additional $34 million as a civil money penalty. These amounts will be paid into a Fair Fund administered by the SEC to compensate those harmed by the market timing related activities. In the settlements, ASISI has agreed to retain, at its ongoing cost and expense, the services of an Independent Distribution consultant acceptable to the Staff of the SEC to develop a proposed plan for the distribution of Fair Fund amounts according to a methodology developed in consultation with and acceptable to the Staff. As part of these settlements, ASISI has undertaken that by the end of 2009 it will undergo a compliance review by an independent third party, who shall issue a report of its findings and recommendations to ASISI’s Board of Directors, the Audit Committee of the Advanced Series Trust Board of Trustees and the Staff of the SEC. In addition, ASISI has agreed, among other things, to continue to cooperate with the SEC and NYAG in any litigation, ongoing investigations or other proceedings relating to or arising from their investigations into these matters. Under the terms of the purchase agreement pursuant to which Prudential Financial acquired ASISI from Skandia, Prudential Financial was indemnified for the costs of the settlements.

The Company has substantially completed a remediation program to correct errors in the administration of approximately 11,000 annuity contracts issued by the Company. The owners of these contracts did not receive notification that the contracts were approaching or past their designated annuitization date or default annuitization date (both dates referred to as the “contractual annuity date”) and the contracts were not annuitized at their contractual annuity dates. Some of these contracts also were affected by data integrity errors resulting in incorrect contractual annuity dates. The lack of notice and the data integrity errors, as reflected on the annuities administrative system, all occurred before the Acquisition. The remediation and administrative costs of the remediation program are subject to the indemnification provisions of the Acquisition Agreement.

During the third quarter of 2004, the Company identified a system-generated calculation error in its annuity contract administration system that existed prior to the Acquisition. This error related to the calculation of amounts due to customers for certain transactions subject to a market value adjustment upon the surrender or transfer of monies out of their annuity contract’s fixed allocation options. The error resulted in an underpayment to policyholders, as well as additional anticipated costs to the Company associated with remediation, breakage and other losses. The Company’s consultants have developed the systems functionality to compute remediation amounts and are in the process of running the computations on affected contracts. The Company contacted state insurance regulators and commenced Phase I of its outreach to customers on November 12, 2007. Phase II commenced on June 6, 2008. Phase III commenced December 5, 2008. Phase IV commenced June 12, 2009. Contracts requiring manual calculations will be remediated in smaller batches over the next few months through the 4th quarter. The Company has advised Skandia that a portion of the remediation and related administrative costs are subject to the indemnification provisions of the Acquisition Agreement.

The Company’s litigation and regulatory matters are subject to many uncertainties, and given their complexity and scope, the outcomes cannot be predicted. It is possible that the results of operations or the cash flow of the Company in a particular quarterly or annual period could be materially affected by an ultimate unfavorable resolution of pending litigation and regulatory matters depending, in part, upon the results of operations or cash flow for such period. In light of the unpredictability of the Company’s litigation and regulatory matters, it is also possible that in certain cases an ultimate unfavorable resolution of one or more pending litigation or regulatory matters could have a material adverse effect on our 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 our financial position.

It should be noted that the judgments, settlements and expenses associated with many of these lawsuits, administrative and regulatory matters, and contingencies, including certain claims described above, may, in whole or in part, after satisfaction of certain retention requirements, fall within Skandia’s indemnification obligations to Prudential Financial and its subsidiaries under the terms of the Acquisition Agreement. Those obligations of Skandia provide for indemnification of certain judgments, settlements, and costs and expenses associated with lawsuits and other claims against the Company, and apply only to matters, or groups of related matters, for which the costs and expenses exceed

14

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

4. CONTINGENT LIABILITIES AND LITIGATION (continued)

$25,000 individually. Additionally, those obligations only apply to such otherwise indemnifiable losses that exceed $10 million in the aggregate, subject to reduction for insurance proceeds, certain accruals and any realized tax benefit applicable to such amounts, and those obligations do not apply to the extent that such aggregate exceeds $1 billion. We are in discussions with Skandia regarding the satisfaction of the $10 million deductible.

5. RELATED PARTY TRANSACTIONS

The Company is a party to numerous transactions and relationships with its affiliate The Prudential Insurance Company of America (“Prudential Insurance”) and other affiliates. It is possible that the terms of these transactions are not the same as those that would result from transactions among unrelated parties.

Expense Charges and Allocations

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

The Company’s general and administrative expenses are charged to the Company using allocation methodologies based on business 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. Since 2003, general and administrative expenses also include allocations of stock compensation expenses related to a stock option program and a deferred compensation program sponsored by Prudential Financial.

The Company is charged for its share of employee benefits expenses. These expenses include costs for funded and non-funded contributory and non-contributory defined benefit pension plans. Some of these benefits are based on earnings and length of service. Other benefits are based on an account balance, which takes into consideration age, service and earnings during career. The Company’s share of net expense for the pension plans was $1.4 million and $1.5 million for the three months ended June 30, 2009 and 2008, respectively; and $2.7 million and $2.9 million for the six months ended June 30, 2009 and 2008, respectively.

Prudential Insurance sponsors voluntary savings plans for the Company’s employees (“401(k) plans”). The 401(k) plans provide for salary reduction contributions by employees and matching contributions by the Company of up to 4% of annual salary. The expense charged the Company for the matching contribution to the 401(k) plans was $0.8 million and $0.7 million for the three months ended June 30, 2009 and 2008, respectively; and $1.5 million and $1.4 million for the six months ended June 30, 2009 and 2008, respectively.

Debt Agreements

Short-term and Long-term borrowings

On December 14, 2006, the Company entered into a $300 million loan with Prudential Financial. This loan has an interest rate of 5.18% and matures on December 14, 2011. A partial payment was made to reduce this loan to $179.5 million on December 29, 2008 with the proceeds received from a capital contribution from PAI. On March 27, 2009, a partial payment of $4.5 million was paid to further reduce this loan to $175 million.

On May 1, 2004, the Company entered into a $500 million credit facility agreement with Prudential Funding, LLC. Effective July 3, 2007, the credit facility agreement was increased to $800 million. As of June 30, 2009 and December 31, 2008, $10.8 million and $186.3 million, respectively, was outstanding under this credit facility.

Reinsurance Agreements

During 2009, the Company entered into a new reinsurance agreement with an affiliate as part of its risk management and capital management strategies. Effective June 30, 2009, the Company entered into a coinsurance agreement with Pruco Reinsurance, Ltd. (“Pruco Re”) providing for the 100% reinsurance of its Highest Daily Lifetime Seven Plus (“HD7 Plus”) and Spousal Highest Daily Lifetime Seven Plus (“SHD7 Plus”) benefit features sold on certain of its annuities.

During 2008, the Company entered into three new reinsurance agreements with an affiliate as part of its risk management and capital management strategies. Effective January 28, 2008, the Company entered into a coinsurance agreement with Pruco Re providing for the 100% reinsurance of its Highest Daily Lifetime Seven (“HD7”) and Spousal Highest Daily Lifetime Seven (“SHD7”) benefit features sold on certain of its annuities. Effective January 28, 2008, the Company entered into a coinsurance agreement with Pruco Re providing for the 100% reinsurance of its Guaranteed Return Option Plus (“GRO Plus”) benefit feature sold on certain of its annuities. Effective January 28, 2008 the Company entered into a coinsurance agreement with Pruco Re providing for the 100% reinsurance of its Highest Daily Guaranteed Return Option (“HD GRO”) benefit feature sold on certain of its annuities.

The Company reinsures 100% of the risk on its Lifetime 5 (“LT5”) feature sold on certain of its annuities through an automatic coinsurance agreement with Pruco Re. During 2007, the Company amended the reinsurance agreements it entered into in 2005 covering its LT5 feature.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

5. RELATED PARTY TRANSACTIONS (continued)

The coinsurance agreement entered into with Prudential Insurance in 2005 provided for the 100% reinsurance of its LT5 feature sold on new business prior to May 6, 2005. This agreement was recaptured effective August 1, 2007. Effective July 1, 2005, the Company entered into a coinsurance agreement with Pruco Re providing for the 100% reinsurance of its LT5 feature sold on new business after May 5, 2005 as well as for riders issued on or after March 15, 2005 forward on business in-force before March 15, 2005. This agreement was amended effective August 1, 2007 to include the reinsurance of business sold prior to May 6, 2005 that was previously reinsured to Prudential Insurance.

Effective November 20, 2006, the Company entered into a new coinsurance agreement with Pruco Re providing for the 100% reinsurance of its Highest Daily Lifetime Five benefit (“HDLT5”) feature.

Effective March 20, 2006, the Company entered into a new coinsurance agreement with Pruco Re providing for the 100% reinsurance of its Spousal Lifetime Five benefit (“SLT5”) feature.

During 2004, the Company entered into two reinsurance agreements with affiliates as part of our risk management and capital management strategies. We entered into a 100% coinsurance agreement with Prudential Insurance providing for the reinsurance of its guaranteed minimum withdrawal benefit feature (“GMWB”). The Company also entered into a 100% coinsurance agreement with Pruco Re providing for the reinsurance of its guaranteed return option (“GRO”).

Affiliated Asset Administration Fee Income

In accordance with an agreement with AST Investment Services, Inc., formerly known as American Skandia Investment Services, Inc, the Company receives fee income calculated on contractholder separate account balances invested in the Advanced Series Trust, formerly known as American Skandia Trust. Income received from AST Investment Services, Inc. related to this agreement was $30.8 million and $47.4 million, for the three months ended June 30, 2009 and 2008, respectively; and $55.6 million and $92.7 million for the six months ended June 30, 2009 and 2008 respectively. These revenues are recorded as “Asset administration fees” in the Unaudited Interim Statements of Operations and Comprehensive Income.

Derivative Trades

In its ordinary course of business, the Company enters into over-the-counter (“OTC”) derivative contracts with an affiliate, Prudential Global Funding, LLC. For these OTC derivative contracts, Prudential Global Funding, LLC has a substantially equal and offsetting position with an external counterparty.

Purchase of fixed maturities from an affiliate

During 2009, the Company purchased fixed maturities securities from an affiliated company, Prudential Insurance. These securities were recorded at an amortized cost of $618.3 million and a fair value of $628.6 million. The net difference between historic amortized cost and the fair value was $10.3 million and was recorded as a capital distribution on the Company’s financial statements and cashflows.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

6. INVESTMENTS

Fixed Maturities and Equity Securities

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

	June 30, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Other-than- temporary impairments in AOCI (3)
	(in thousands)
Fixed maturities, available for sale
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	300,761	$	854	$	5,626	$	295,989	$	—
Obligations of U.S. states and their political subdivisions		67,716		4,209		—		71,925		—
Foreign government bonds		154,511		9,632		17		164,126		—
Corporate securities		5,052,949		278,360		54,254		5,277,055		(728	)
Asset-backed securities (1)		269,261		14,768		26,496		257,533		(18,868	)
Commercial mortgage-backed securities		926,199		2,246		85,386		843,059
Residential mortgage-backed securities (2)		1,162,814		60,214		125		1,222,903		(124	)
Total fixed maturities, available for sale	$	7,934,211	$	370,283	$	171,904	$	8,132,590	$	(19,720	)
Equity securities, available for sale	$	17,680	$	874	$	1,744	$	16,811	$	—

(1) Includes credit tranched securities collateralized by 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 other-than-temporary impairment losses in “Accumulated other comprehensive income (loss),” or “AOCI,” which from January 1, 2009 were not included in earnings under FSP FAS 115-2 and FAS 124-2. Amount excludes $0.119 million of net unrealized gains (losses) on impaired securities relating to changes in the fair value of such securities subsequent to the impairment measurement date.

	December 31, 2008
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in thousands)
Fixed maturities, available for sale
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	931,416	$	29,907	$	28,130	$	933,193
Obligations of U.S. states and their political subdivisions		33,389		3,407		34		36,762
Foreign government bonds		36,730		357		1,797		35,290
Corporate securities		4,403,655		155,085		96,492		4,462,248
Asset-backed securities		229,212		318		22,212		207,318
Commercial mortgage-backed securities		937,129		482		167,173		770,438
Residential mortgage-backed securities		3,321,899		102,503		309		3,424,093
Total fixed maturities, available for sale	$	9,893,430	$	292,059	$	316,147	$	9,869,342
Equity securities, available for sale	$	12,024	$	111	$	2,016	$	10,119

The amortized cost and fair value of fixed maturities by contractual maturities at June 30, 2009 are as follows:

	Available for sale
	Amortized Cost		Fair value
	(in thousands)
Due in one year or less	$	173,383	$	176,468
Due after one year through five years		3,434,195		3,639,163
Due after five years through ten years		1,407,417		1,430,265
Due after ten years		560,942		563,200
Commercial mortgage backed securities		926,199		843,059
Residential mortgage-backed securities		1,162,814		1,222,901
Asset backed securities		269,261		257,534
Total	$	7,934,211	$	8,132,590

17

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

6. INVESTMENTS (continued)

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

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

	Six Months Ended June 30,						Three Months Ended June 30,
	2009			2008			2009			2008
	(in thousands)
Fixed maturities, available for sale:
Proceeds from sales	$	4,805,802		$	3,338,006		$	3,192,876		$	1,972,990
Proceeds from maturities/repayments		443,996			180,254			217,781			106,434
Gross investment gains from sales, prepayments and maturities		142,078			13,875			93,746			4,108
Gross investment losses from sales and maturities		(1,206	)		(20,176	)		(1,172	)		(18,338	)
Fixed maturity and equity security impairments:								—			—
Total writedowns for other-than-temporary impairment losses on fixed maturities	$	(21,759	)	$	(17,549	)	$	(6,419	)	$	(17,549	)
Portion of loss recognized in other comprehensive income (before taxes)	$	15,529		$	—		$	3,596		$	—
Net writedowns for other-than-temporary impairment losses on fixed maturities recognized in earnings	$	(6,230	)	$	(17,549	)	$	(2,823	)	$	(17,549	)
Writedowns for other-than-temporary impairment losses on equity securities	$	(1,844	)	$	(397	)	$	(533	)	$	—

As discussed, a portion of certain other-than-temporary impairment, (“OTTI”) losses on fixed maturity securities are recognized in “Other comprehensive income (loss),” (“OCI”). The net amount recognized in earnings (“credit loss impairments”) represents the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. Any remaining difference between the fair value and amortized cost is recognized in OCI. The following tables set forth the amount of credit loss impairments on fixed maturity securities held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized in OCI, and the corresponding changes in such amounts.

Credit losses recognized in earnings on fixed maturity securities held by the Company for which a portion of the other- than-temporary impairment was recognized in OCI	Six Months Ended June 30, 2009
	(in thousands)
Balance, December 31, 2008	$	—
Credit losses remaining in retained earnings related to adoption of FSP FAS 115-2 and FAS 124-2		6,397
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period		(161	)
Credit loss impairments previously recognized on securities impaired to fair value during the period (1)		—
Credit loss impairment recognized in the current period on securities not previously impaired		1,638
Additional credit loss impairments recognized in the current period on securities previously impaired		2,363
Increases due to the passage of time on previously recorded credit losses		263
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected		(55	)
Balance, June 30, 2009	$	10,445

(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.

Credit losses recognized in earnings on fixed maturity securities held by the Company for which a portion of the other-than-temporary impairment was recognized in OCI	Three Months Ended June 30, 2009
	(in thousands)
Balance, March 31, 2008	$	9,749
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period		(161	)
Credit loss impairments previously recognized on securities impaired to fair value during the period (1)		—
Credit loss impairment recognized in the current period on securities not previously impaired		544
Additional credit loss impairments recognized in the current period on securities previously impaired		50
Increases due to the passage of time on previously recorded credit losses		263
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected		—
Balance, June 30, 2009	$	10,445

(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.

18

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

6. INVESTMENTS (continued)

Other Trading Account Assets

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

	June 30, 2009				December 31, 2008
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in thousands)				(in thousands)
Short-term investments and cash equivalents	$	—	$	—	$	50	$	50
Fixed maturities:
Asset-backed securities		65,061		71,703		42,196		41,199
Total fixed maturities	$	65,061	$	71,703	$	42,196	$	41,199
Equity securities		10,096		8,969		12,418		10,173
Total other trading account assets	$	75,157	$	80,672	$	54,664	$	51,422

The net change in unrealized gains (losses) from other trading account assets still held at period end, recorded within “Asset administration fees and other income” was $5.7 million and $0.3 million during the three months ended June 30, 2009 and 2008, respectively, and $8.8 million and $(1.0) million during the six months ended June 30, 2009 and 2008, respectively.

Net Investment Income

Net investment income for the three months and six months ended June 30, 2009 and 2008 was from the following sources:

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
	(in thousands)
Fixed maturities, available for sale	$	127,790		$	55,344		$	268,455		$	92,786
Equity securities, available for sale		217			217			434			434
Trading account assets		970			91			1,867			199
Commercial mortgage and other loans		3,528			568			9,595			1,134
Policy loans		193			169			315			313
Short-term investments and cash equivalents		748			2,014			1,904			9,974
Other long-term investments		57			8			85			(19	)
Gross investment income		133,503			58,411			282,655			104,821
Less investment expenses		(2,810	)		(1,734	)		(5,774	)		(2,964	)
Net investment income	$	130,693		$	56,677		$	276,881		$	101,857

Realized Investment Gains (Losses), Net

Realized investment gains (losses), net, for the three months and six months ended June 30, 2009 and 2008 were from the following sources:

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
	(in thousands)
Other-than-temporary impairment losses on fixed maturities	$	(6,419	)	$	(17,549	)	$	(21,759	)	$	(17,549	)
Portion of loss recognized in other comprehensive income (before taxes)		3,596			—			15,529			—
Net other-than-temporary impairment losses on fixed maturities recognized in earnings		(2,823	)		(17,549	)		(6,230	)		(17,549	)
Fixed maturities – all other		92,574			(14,230	)		140,873			(6,302	)
Fixed maturities, net		89,751			(31,779	)		134,643			(23,851	)
Equity securities		1,054			—			(257	)		(397	)
Commercial mortgage and other loans		(2,657	)		—			(6,812	)		50
Derivatives		(66,606	)		(31,847	)		(93,557	)		(40,635	)
Other		64			—			119			—
Realized investment gains (losses), net	$	21,606		$	(63,626	)	$	34,136		$	(64,833	)

19

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

6. INVESTMENTS (continued)

Net Unrealized Investment Gains (Losses)

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

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

	Net Unrealized Gains (Losses) on Investments			Deferred Policy Acquisition Costs and Valuation of Business Acquired		Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses)
	(in thousands)
Balance, December 31, 2008	$	—		$	—	$	—		$	—
Cumulative impact of the adoption of FSP FAS115-2 and FAS124-2		(18,191	)		510		6,259			(11,422	)
Net investment gains (losses) on investments arising during the period		(112	)		—		40			(72	)
Reclassification adjustment for OTTI losses included in net income (1)		2,836			—		(1,005	)		1,831
Reclassification adjustment for OTTI losses excluded from net income (2)		(4,372	)		—		1,548			(2,824	)
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and valuation of business acquired		—			13,350		(4,726	)		8,624
Impact of net unrealized investment (gains) losses on future policy benefits		—					—			—
Impact of net unrealized investment (gains) losses on policyholders’ dividends		—					—			—
Balance, June 30, 2009	$	(19,839	)	$	13,860	$	2,116		$	(3,863	)

(1) OTTI losses are included in net income upon sale or maturity of the security, if the Company intends to sell the security, or if more likely that not the Company will be required to sell the security.

(2) Transfers in related to the portion of OTTI losses recognized during the period that were not recognized in earnings.

20

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

6. INVESTMENTS (continued)

All Other Net Unrealized Investment Gains and Losses in AOCI

	Net Unrealized Gains (Losses) on Investments			Deferred Policy Acquisition Costs and Valuation of Business Acquired			Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses)
	(in thousands)
Balance, December 31, 2008	$	(25,993	)	$	16,789		$	3,258		$	(5,946	)
Cumulative impact of the adoption of FSP FAS115-2 and FAS124-2		4,312			(109	)		(1,488	)		2,715
Net investment gains (losses) on investments arising during the period		375,680			—			(132,991	)		242,689
Reclassification adjustment for (gains) losses included in net income		(137,223	)		—			48,575			(88,648	)
Reclassification adjustment for OTTI losses excluded from net income (2)		4,372			—			(1,548	)		2,824
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and valuation of business acquired		—			(165,279	)		58,509			(106,770	)
Impact of net unrealized investment (gains) losses on future policy benefits		—			—			—			—
Impact of net unrealized investment (gains) losses on policyholders’ dividends		—			—			—			—
Balance, June 30, 2009	$	221,148		$	(148,599	)	$	(25,685	)	$	46,864

(1) Transfers out related to the portion of OTTI losses recognized during the period that were not recognized in earnings.

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

	June 30, 2009			December 31, 2008
	(in thousands)
Fixed maturity securities on which an OTTI loss has been recognized	$	(19,839	)	$	—
Fixed maturity securities, available for sale – all other		218,219			(24,088	)
Equity securities, available for sale		(869	)		(1,905	)
Other Investments		3,798			—
All other net unrealized gains (losses) on investments	$	201,309		$	(25,993	)

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

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

	June 30, 2009
	Less than twelve months (1)				Twelve months or more (1)				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in thousands)
Fixed maturities
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	275,016	$	5,626	$	—	$	—	$	275,016	$	5,626
Foreign government bonds		1,023		17		—		—		1,023		17
Corporate securities		686,830		28,175		461,200		26,079		1,148,030		54,254
Commercial mortgage-backed securities		335,779		32,507		402,935		52,879		738,713		85,386
Asset-backed securities		32,249		23,571		14,790		2,925		47,039		26,496
Residential mortgage-backed securities		670		125		—		—		670		125
Total	$	1,331,567	$	90,021	$	878,925	$	81,883	$	2,210,491	$	171,904
Equity securities, available for sale	$	9,215	$	1,288	$	873	$	456	$	10,088	$	1,744

(1) The month count for aging of unrealized losses was reset back to historical unrealized loss month counts for securities impacted by the adoption of FSP FAS 115-2 and FAS 124-2.

21

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

6. INVESTMENTS (continued)

	December 31, 2008
	Less than twelve months				Twelve months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in thousands)
Fixed maturities
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	18,957	$	13	$	—	$	—	$	18,957	$	13
Obligations of U.S. states and their political subdivisions		1,573		34		—		—		1,573		34
Foreign government bonds		22,200		1,797		—		—		22,200		1,797
Corporate securities		1,835,328		108,372		71,771		16,238		1,907,099		124,610
Commercial mortgage-backed securities		646,878		139,941		116,685		27,232		763,563		167,173
Asset-backed securities		178,309		17,908		17,646		4,304		195,955		22,212
Residential mortgage-backed securities		616		308		—		—		616		308
Total	$	2,703,861	$	268,373	$	206,102	$	47,774	$	2,909,963	$	316,147
Equity securities, available for sale	$	4,393	$	1,277	$	3,495	$	740	$	7,888	$	2,016

As of June 30, 2009 and December 31, 2008, unrealized gains (losses) on fixed maturities and equity securities were comprised of $173.6 million and $318.2 million of gross unrealized losses and $371.2 million and $292.2 million of gross unrealized gains. Gross unrealized losses includes $82.3 million of gross losses that have been in such a position for twelve months or greater. In accordance with its policy described in Note 2, the Company concluded that an adjustment to earnings for other-than-temporary impairments for these securities was not warranted at June 30, 2009 or December 31, 2008. The gross unrealized losses are primarily attributable to credit spread widening and increased liquidity discounts. At June 30, 2009, the Company does not intend to sell the securities and it is not more likely than not that the Company will be required to sell the securities before the anticipated recovery of their remaining amortized cost basis.

7. FAIR VALUE OF ASSETS AND LIABILITIES

Fair Value Measurement – Fair value is defined as 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. SFAS No. 157 establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. 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 us for identical assets or liabilities. These generally provide the most reliable evidence and are used to measure fair value whenever available. Active markets are defined as having the following for the measured asset/liability: i) many transactions, ii) current prices, iii) price quotes not varying substantially among market makers, iv) narrow bid/ask spreads and v) most information publicly available. The company’s Level 1 assets and liabilities primarily include certain cash equivalents and short term investments, equity securities and derivative contracts that are traded in an active exchange market. Prices are obtained from readily available sources for market transactions involving identical assets or liabilities.

Level 2 – Fair value is based on significant inputs, other than Level 1 inputs, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets and liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities and other market observable inputs. The Company’s Level 2 assets and liabilities include: fixed maturities (corporate public and private bonds, most government securities, certain asset- and mortgage-backed securities, etc.), certain equity securities and commercial mortgage loans, short-term investments and certain cash equivalents (primarily commercial paper) and certain over-the-counter derivatives. Valuations are generally obtained from third party pricing services for identical or comparable assets or liabilities, or through the use of valuation methodologies using observable market inputs.

Prices from pricing services are sourced from multiple vendors, and a vendor hierarchy is maintained by asset type based on historical pricing experience and vendor expertise. The Company generally receives prices from multiple pricing services for each security, but ultimately uses the price from the pricing service highest in the vendor hierarchy based on the respective asset type. In order to validate reasonability, prices are reviewed by internal asset managers through comparison with directly observed recent market trades and internal estimates of current fair value, developed using market observable inputs and economic indicators.

22

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

7. FAIR VALUE OF ASSETS AND LIABILITIES (continued)

The fair value of private fixed maturities are primarily determined using a discounted cash flow model. In certain cases these models primarily use observable inputs with a discount rate based upon the average of spread surveys collected from private market intermediaries who are active in both primary and secondary transactions, taking into account, among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements. Private fixed maturities also include debt investments in funds that, in addition to a stated coupon, pay a return based upon the results of the underlying portfolios. The fair values of these securities are determined by reference to the funds’ net asset value (“NAV”). Any restrictions on the ability to redeem interests in these funds at NAV are considered to have a de minimis effect on the fair value.

The majority of the Company’s derivative positions is traded in the OTC derivative market and is classified within Level 2 in the fair value hierarchy. OTC derivatives classified within Level 2 are valued using models generally accepted in the financial services industry that use actively quoted or observable market input values from external market data providers, non-binding broker-dealer quotations, third-party pricing vendors and/or recent trading activity. The fair values of most OTC derivatives, including interest rate swaps, cross currency swaps and single name credit default swaps are determined using discounted cash flow models. These models’ key assumptions include the contractual terms of the respective contract, along with significant observable inputs, including interest rates, currency rates, credit spreads, yield curves, index dividend yields and nonperformance risk. Substantially all of the Company’s OTC derivative contracts are transacted with an affiliate. In instances where the Company transacts with unaffiliated counterparties derivative agreements are with highly rated major international financial institutions. Consistent with the practice of major international financial institutions, the Company uses the credit spread embedded in the London Interbank Offered Rate (“LIBOR”) interest rate curve to reflect nonperformance risk when determining the fair value of derivative assets and liabilities. The Company believes this credit spread is an appropriate estimate of the nonperformance risk for derivative related assets and liabilities between highly rated institutions after consideration of the impacts of the collateral posting process. Most OTC derivative contracts have bid and ask prices that are actively quoted or can be readily obtained from external market data providers. The Company’s policy is to use mid-market pricing in determining its best estimate of fair value.

Level 3 – Fair value is based on at least one or more significant unobservable inputs for the asset or liability. These inputs reflect our assumptions about the assumptions market participants would use in pricing the asset or liability. Our Level 3 assets and liabilities primarily include: certain private fixed maturities and equity securities, certain manually priced public equity securities and fixed maturities, certain highly structured over-the-counter derivative contracts and embedded derivatives resulting from certain products with guaranteed benefits. In circumstances where vendor pricing is not available, internally developed valuations or non-binding broker quotes are used to determine fair value. Non-binding broker quotes are reviewed for reasonableness based on our understanding of the market. These estimates may use significant unobservable inputs, which reflect the Company’s own assumptions about the inputs market participants would use in pricing the asset. Circumstances where observable market data are not available may include events such as market illiquidity and credit events related to the security. Under certain conditions, based on its observations of transactions in active markets, we may conclude the prices received from independent third party pricing services or brokers are not reasonable or reflective of market activity. In those instances, we may choose to over-ride the third-party pricing information or quotes received and apply internally developed values to the related assets or liabilities. In such cases, the valuations are generally classified as Level 3. As of June 30, 2009 and December 31, 2008 over-rides on a net basis were not material.

For certain private fixed maturities, the discounted cash flow model may also incorporate significant unobservable inputs, which reflect the Company’s own assumptions about the inputs market participants would use in pricing the asset. Certain public fixed maturities and private fixed maturities priced internally are based on observable and unobservable inputs. Significant unobservable inputs used include: issue specific credit adjustments, material non-public financial information, management judgment, estimation of future earnings and cashflows, default rate assumptions, liquidity assumptions and non-binding quotes from market makers. These inputs are usually considered unobservable, as not all market participants will have access to this data.

The fair values of the GMAB, GMWB and GMIWB liabilities are calculated as the present value of future expected benefit payments to customers less the present value of assessed rider fees attributable to the embedded derivative feature. Since there is no observable active market for the transfer of these obligations, the valuations are calculated using internally developed models with option pricing techniques. The models are based on a risk neutral valuation framework and incorporate premiums for risks inherent in valuation techniques, inputs, and the general uncertainty around the timing and amount of future cash flows. The determination of these risk premiums requires the use of management judgment. Under FAS No.157, the Company is also required to incorporate the Company’s own risk of non-performance in the valuation of the embedded derivatives associated with the Company’s optional living benefit features. Since insurance liabilities are senior to debt, the Company believes that reflecting the claims-paying ratings of the Company in the valuation of the liability appropriately takes into consideration the Company’s own risk of non-performance. Historically, the expected cash flows were discounted using forward LIBOR interest rates, which were commonly viewed as being consistent with AA quality claims-paying ratings. However, in light of first quarter of 2009 developments, including rating agency downgrades to the claims-paying ratings of the Company, the Company determined that forward LIBOR interest rates were no longer

23

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

7. FAIR VALUE OF ASSETS AND LIABILITIES (continued)

indicative of the Company’s claims-paying ability. As a result, beginning in the first quarter of 2009, to reflect the market’s perception of its non-performance risk, the Company incorporated an additional spread over LIBOR into the discount rate used in the valuations of the embedded derivatives associated with our optional living benefit features, thereby increasing the discount rate and reducing the fair value of the embedded derivative liabilities. The additional spread over LIBOR is determined taking into consideration publicly available information relating to the claims-paying ability of the Company, as indicated by the credit spreads associated with funding agreements issued by the Company. The Company adjusts these credit spreads to remove any liquidity risk premium. The additional spread over LIBOR incorporated into the discount rate as of June 30, 2009 generally ranged from 100 to 200 basis points for the portion of the interest rate curve most relevant to these liabilities.

Other significant inputs to the valuation models for the embedded derivatives associated with the optional living benefit features of the Company’s variable annuity products include capital market assumptions, such as interest rate and implied volatility assumptions, as well as various policyholder behavior assumptions that are actuarially determined, including lapse rates, benefit utilization rates, mortality rates and withdrawal rates. These assumptions are reviewed at least annually, and updated based upon historical experience and give consideration to any observable market data, including market transactions such as acquisitions and reinsurance transactions. In the first quarter of 2009 the Company updated the volatility assumptions to reflect both the implied volatility of over-the-counter equity options and an index based on historical volatilities.

Level 3 includes OTC derivatives where the bid-ask spreads are generally wider than derivatives classified within Level 2 thus requiring more judgment in estimating the mid-market price of such derivatives. Derivatives that are valued based upon models with unobservable market input values or input values from less actively traded or less-developed markets are classified within Level 3 in the fair value hierarchy. Derivatives classified as Level 3 include first-to-default credit basket swaps. The fair values of first-to-default credit basket swaps are derived from relevant observable inputs such as: individual credit default spreads, interest rates, recovery rates and unobservable model-specific input values such as correlation between different credits within the same basket. Level 3 methodologies are validated through periodic comparison of the Company’s fair values to broker-dealer’s values.

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis, as of June 30, 2009.

	Level 1		Level 2			Level 3			Total
	(in thousands)
Fixed maturities, available for sale:
Corporate Securities	$	—	$	5,210,480		$	66,575		$	5,277,055
Foreign government securities		—		162,982			1,144			164,126
Asset-backed securities		—		234,109			23,424			257,533
Residential mortgage-backed securities		—		1,222,903			—			1,222,903
Commercial mortgage-backed securities		—		843,059			—			843,059
U.S. government securities		—		295,989			—			295,989
State and municipal securities		—		71,925			—			71,925
Sub-total	$	—	$	8,041,447		$	91,143		$	8,132,590
Trading account assets:
Corporate securities		—		71,703			—			71,703
All other activity		8,969		—			—			8,969
Sub-total	$	8,969	$	71,703		$	—		$	80,672
Equity securities, available for sale		15,674		1,137			—			16,811
Other long-term investments		—		(11,903	)		(836	)		(12,739	)
Short term investments		436,294		24,990			—			461,284
Reinsurance recoverable		—		—			503,999			503,999
Other Assets				36,055			—			36,055
Sub-total excluding separate account assets	$	460,937	$	8,163,429		$	594,306		$	9,218,672
Separate account assets (1)		18,205,642		11,275,750			50,467			29,531,859
Total assets	$	18,666,579	$	19,439,179		$	644,773		$	38,750,531
Future policy benefits		—		—			492,998			492,998
Total liabilities	$	—	$	—		$	492,998		$	492,998

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

24

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

7. FAIR VALUE OF ASSETS AND LIABILITIES (continued)

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis, as of December 31, 2008.

	Level 1		Level 2		Level 3			Total
	(in thousands)
Fixed maturities, available for sale	$	—	$	9,778,618	$	90,724		$	9,869,342
Trading account assets		10,223		41,199		—			51,422
Equity securities, available for sale		9,219		900		—			10,119
Other long-term investments		—		36,852		(1,496	)		35,356
Short term investments		254,046		—		—			254,046
Reinsurance recoverable		—		—		2,110,146			2,110,146
Sub-total excluding separate account assets	$	273,488	$	9,857,569	$	2,199,374		$	12,330,431
Separate account assets (1)		13,884,682		10,375,310		—			24,259,992
Total assets	$	14,158,170	$	20,232,879	$	2,199,374		$	36,590,423
Future policy benefits		—		—	$	2,111,242		$	2,111,242
Total liabilities	$	—	$	—	$	2,111,242		$	2,111,242

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

The following tables provide a summary of the changes in fair value of Level 3 assets and liabilities for the three and six months ended June 30, 2009, as well as the portion of gains or losses included in income for the three and six months ended June 30, 2009 attributable to unrealized gains or losses related to those assets and liabilities still held at June 30, 2009.

25

	Three Months Ended June 30, 2009
	Fixed Maturities, Available For Sale – Foreign Government Bonds		Fixed Maturities, Available For Sale – Corporate Securities			Fixed Maturities, Available For Sale – Asset- Backed Securities			Other Long- Term Investments			Reinsurance Recoverable
	(in thousands)
Fair value, beginning of period	$	995	$	60,788		$	21,772		$	(1,769	)	$	1,168,198
Total gains or (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net:
Other-than temporary impairments on fixed maturity securities transferred to Other Comprehensive Income		—		(10	)		—			—			—
Other realized investment gains (losses), net		—		—			—			933			(684,187	)
Total realized investment gains (losses), net		—		(10	)		—			933			(684,187	)
Included in other comprehensive income (loss)		149		438			1,666			—			—
Net investment income		—		900			(14	)		—			—
Purchases, sales, issuances, and settlements		—		—			—			—			19,988
Transfers into (out of) Level 3 (1)		—		4,459			—			—			—
Fair value, end of period	$	1,144	$	66,575		$	23,424		$	(836	)	$	503,999
Unrealized gains (losses) for the period relating to those Level 3 assets that were still held by the Company at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net:
Other-than temporary impairments on fixed maturity securities transferred to Other Comprehensive Income		—		—			—			—			—
Other realized investment gains (losses), net		—		—			—			934			(638,223	)
Total realized investment gains (losses), net	$	—	$	—		$	—		$	934		$	(638,223	)
Included in other comprehensive income (loss)	$	149	$	438		$	1,666		$	—		$	—

26

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

7. FAIR VALUE OF ASSETS AND LIABILITIES (continued)

	Three Months Ended June 30, 2009
	Future Policy Benefits			Separate Account Assets(3)
	(in thousands)
Fair value, beginning of period	$	(1,165,772	)	$	55,477
Total gains or (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net:
Other-than temporary impairments on fixed maturity securities transferred to Other Comprehensive Income		—			—
Other realized investment gains (losses), net		693,029			—
Total realized investment gains (losses), net		693,029			—
Included in other comprehensive income (loss)		—			—
Interest Credited to Policyholder Account Balances (SA Only)		—			(3,279	)
Purchases, sales, issuances, and settlements		(20,255	)		(1,731	)
Transfers into (out of) Level 3 (1)		—			—
Fair value, end of period	$	(492,998	)	$	50,467
Unrealized gains (losses) for the period relating to those Level 3 assets that were still held by the Company at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net:
Other-than temporary impairments on fixed maturity securities transferred to Other Comprehensive Income		—			—
Other realized investment gains (losses), net		641,209			—
Total realized investment gains (losses), net	$	641,209		$	—
Interest credited to policyholder account	$	—		$	(3,279	)
Included in other comprehensive income (loss)	$	—		$	—

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

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

(3) 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 Statement of Financial Position.

Transfers – Transfers into level 3 for Fixed Maturities Available for Sale – Corporate securities for the three months ended June 30, 2009 was primarily due to use of unobservable inputs within valuation methodologies when previously, a discounted cash flow model with observable inputs was utilized.

27

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

7. FAIR VALUE OF ASSETS AND LIABILITIES (continued)

	Six Months Ended June 30, 2009
	Fixed Maturities, Available For Sale – Foreign Government Bonds			Fixed Maturities, Available For Sale – Corporate Securities			Fixed Maturities, Available For Sale – Asset- Backed Securities			Other Long- Term Investments			Reinsurance Recoverable
	(in thousands)
Fair value, beginning of period	$	977		$	68,559		$	21,188		$	(1,496	)	$	2,110,146
Total gains or (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities		—			(48	)		—			—			—
Other-than temporary impairments on fixed maturity securities transferred to Other Comprehensive Income		—			(385	)		—			—			—
Other realized investment gains (losses), net		—			—			—			660			(1,641,358	)
Total realized investment gains (losses), net		—			(433	)		—			660			(1,641,358	)
Included in other comprehensive income (loss)		168			(7,794	)		2,264			—			—
Net investment income		(1	)		1,784			(28	)		—			—
Purchases, sales, issuances, and settlements		—			—			—			—			35,211
Transfers into (out of) Level 3 (1)		—			4,459			—			—			—
Fair value, end of period	$	1,144		$	66,575		$	23,424		$	(836	)	$	503,999
Unrealized gains (losses) for the period relating to those Level 3 assets that were still held by the Company at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities		—			(48	)		—			—			—
Other-than temporary impairments on fixed maturity securities transferred to Other Comprehensive Income		—			(385	)		—			—			—
Other realized investment gains (losses), net		—			—			—			660			(1,602,771	)
Total realized investment gains (losses), net	$	—		$	(433	)	$	—		$	660		$	(1,602,771	)
Asset management fees and other income	$	—		$	—		$	—		$	—		$	—
Included in other comprehensive income (loss)	$	168		$	(7,794	)	$	2,264		$	—		$	—

28

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

7. FAIR VALUE OF ASSETS AND LIABILITIES (continued)

	Six Months Ended June 30, 2009
	Future Policy Benefits			Separate Account Assets(3)
	(in thousands)
Fair value, beginning of period	$	(2,111,242	)	$	—
Total gains or (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities		—			—
Other-than temporary impairments on fixed maturity securities transferred to Other Comprehensive Income		—			—
Other realized investment gains (losses), net		1,654,021			—
Total realized investment gains (losses), net		1,654,021			—
Interest Credited to Policyholder Account Balances (SA Only)		—			(3,279	)
Purchases, sales, issuances, and settlements		(35,777	)		53,746
Transfers into (out of) Level 3 (2)		—			—
Fair value, end of period	$	(492,998	)	$	50,467
Unrealized gains (losses) for the period relating to those Level 3 assets that were still held by the Company at the end of the period (3):
Included in earnings:
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities		—			—
Other-than temporary impairments on fixed maturity securities transferred to Other Comprehensive Income		—			—
Other realized investment gains (losses), net		1,614,269			—
Total realized investment gains (losses), net	$	1,614,269		$	—
Interest credited to policyholder account	$	—		$	(3,279	)
Included in other comprehensive income (loss)	$	—		$	—

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

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

(3) 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 Statement of Financial Position.

Transfers – Transfers into level 3 for Fixed Maturities Available for Sale – Corporate securities for the six months ended June 30, 2009 was primarily due to use of unobservable inputs within valuation methodologies when previously, a discounted cash flow model with observable inputs was utilized.

29

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

7. FAIR VALUE OF ASSETS AND LIABILITIES (continued)

The following tables provide a summary of the changes in fair value of Level 3 assets and liabilities for the three and six months ended June 30, 2008, as well as the portion of gains or losses included in income for the three and six months ended June 30, 2008 attributable to unrealized gains or losses related to those assets and liabilities still held at June 30, 2008.

	Three Months Ended June 30, 2008
	Fixed Maturities, Available For Sale			Other Long-term Investments			Reinsurance Recoverable			Future Policy Benefits
	(in thousands)
Fair value, beginning of period	$	23,549		$	(413	)	$	289,108		$	(289,108	)
Total gains or (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		—			94			(97,481	)		97,481
Included in other comprehensive income (loss)		(505	)		—			—			—
Net investment income		(18	)		—			—			—
Purchases, sales, issuances, and settlements		16,049			—			15,398			(15,398	)
Foreign currency translation		—			—			—			—
Transfers into (out of) level 3 (1)		(18,436	)		—			—			—
Fair value, end of period	$	20,639		$	(319	)	$	207,025		$	(207,025	)
Unrealized gains (losses) relating to those level 3 assets that were still held by the Company at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	—		$	94		$	(85,454	)	$	85,454
Interest credited to policyholder account	$	—		$	—		$	—		$	—
Included in other comprehensive income (loss)	$	(505	)	$	—		$	—		$	—

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

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

	Six Months Ended June 30, 2008
	Fixed Maturities, Available For Sale			Other Long-term Investments			Reinsurance Recoverable		Future Policy Benefits
	(in thousands)
Fair value, beginning of period	$	9,502		$	(56	)	$	103,909	$	(103,909	)
Total gains or (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		—			(263	)		75,035		(75,035	)
Included in other comprehensive income (loss)		(1,124	)		—			—		—
Net investment income		(14	)		—			—		—
Purchases, sales, issuances, and settlements		18,279			—			28,081		(28,081	)
Foreign currency translation		—			—			—		—
Transfers into (out of) level 3 (1)		(6,004	)		—			—		—
Fair value, end of period	$	20,639		$	(319	)	$	207,025	$	(207,025	)
Unrealized gains (losses) relating to those level 3 assets that were still held by the Company at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	—		$	(263	)	$	88,033	$	(88,033	)
Interest credited to policyholder account	$	—		$	—		$	—	$	—
Included in other comprehensive income (loss)	$	(1,124	)	$	—		$	—	$	—

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

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

Transfers – Transfers out of Level 3 for Fixed Maturities Available for Sale totaled $18.0 million at three months ended June 30, 2008, and $6.0 million at six months ended June 30, 2008. This activity was a result of pricing service information that the Company was able to validate in the second quarter of 2008 but was not available in the first quarter of 2008.

30

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

7. FAIR VALUE OF ASSETS AND LIABILITIES (continued)

Fair Value of Financial Instruments – Under SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” the Company is required to disclose the fair value of certain financial instruments. For the following financial instruments the carrying amount equals or approximates fair value: fixed maturities classified as available for sale, trading account assets, equity securities, short-term investments, cash and cash equivalents, separate account assets and long-term and short-term borrowing.

The following table discloses the Company’s financial instruments where the carrying amounts and fair values may differ:

	June 30, 2009
	Carrying value		Fair Value
	(in thousands)
Commercial Mortgage and other Loans	$	289,473	$	284,599
Policy loans	$	13,280	$	15,664
Investment Contracts - Policyholders’ Account Balances & Separate Account Liabilities	$	56,696	$	54,696

The fair values presented above for those financial instruments where the carrying amounts and fair values may differ have been determined by using available market information and by applying market valuation methodologies, as described in more detail below.

Commercial mortgage and other loans

The fair value of commercial mortgage and other loans is primarily based upon the present value of the expected future cash flows discounted at the appropriate U.S. Treasury rate adjusted for the current market spread for similar quality loans.

Policy Loans

The fair value of U.S. insurance policy loans is calculated using a discounted cash flow model based upon current U.S. Treasury rates and historical loan repayment patterns.

Investment Contracts – Policyholders’ Account Balances & Separate Account Liabilities

Only the portion of policyholders’ account balances and separate account liabilities related to products that are investment contracts (those without significant mortality or morbidity risk) are reflected in the table above. For payout annuities and other similar contracts without life contingencies, fair values are derived using discounted projected cash flows based on interest rates that are representative of the Company’s claims paying ratings, and hence reflects the Company’s own nonperformance risk.

8. DERIVATIVE INSTRUMENTS

Types of Derivative Instruments and Derivative Strategies

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

Exchange-traded futures are used by the Company to reduce risks from changes in interest rates, to alter mismatches between the duration of assets in a portfolio and the duration of liabilities supported by those assets, and to hedge against changes in the value of securities it owns or anticipates acquiring or selling. In exchange-traded futures transactions, the Company agrees to purchase or sell

31

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

8. DERIVATIVE INSTRUMENTS (continued)

a specified number of contracts, the values of which are determined by the values of underlying referenced investments, and to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. The Company enters into exchange-traded futures and options with regulated futures commission merchants who are members of a trading exchange.

Currency swaps are used by the Company to reduce risks from changes in currency exchange rates with respect to investments denominated in foreign currencies that the Company either holds or intends to acquire or sell. Under currency swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between one currency and another at an exchange rate and calculated by reference to an agreed principal amount. Generally, the principal amount of each currency is exchanged at the beginning and termination of the currency swap by each party. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty for payments made in the same currency at each due date.

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

The Company sells variable annuity products, which contain embedded derivatives. The Company has entered into reinsurance agreements to transfer the risk related to the embedded derivatives to affiliates. These embedded derivatives are marked to market through “Realized investment gains (losses), net” based on the change in value of the underlying contractual guarantees, which are determined using valuation models. In the affiliates, the Company maintains a portfolio of derivative instruments that is intended to economically hedge the risks related to the above products’ features. The derivatives may include, but are not limited to equity options, total return swaps, interest rate swap options, caps, floors, and other instruments. Also, some variable annuity products feature an automatic rebalancing element to minimize risks inherent in the Company’s guarantees which reduces the need for hedges. In addition to the hedging of guaranteed risks by Pruco Re, the Company started hedging the risk associated with the guaranteed minimum death benefits feature and employs similar types of hedging instruments as described above.

The Company invests in fixed maturities that, in addition to a stated coupon, provide a return based upon the results of an underlying portfolio of fixed income investments and related investment activity. The Company accounts for these investments as available for sale fixed maturities containing embedded derivatives. Such embedded derivatives are marked to market through “Realized investment gains (losses), net,” based upon the change in value of the underlying portfolio.

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

	June 30, 2009							December 31, 2008
	Notional Amount		Fair Value					Notional Amount		Fair Value
			Assets		Liabilities					Assets		Liabilities
	(in thousands)
Qualifying Hedge Relationships
Interest Rate	$	—	$	—	$	—		$	—	$	—	$	—
Currency		—		—		—			—		—		—
Currency/Interest Rate		5,058		—		(60	)		—		—		—
Total Qualifying Hedge Relationships	$	5,058	$	—	$	(60	)	$	—	$	—	$	—
Non-qualifying Hedge Relationships
Interest Rate	$	774,830	$	23,071	$	(37,373	)	$	1,034,800	$	49,529	$	(3,444	)
Currency		—		—		—			1,500		—		(77	)
Credit		365,350		2,041		(4,333	)		330,500		106		(10,757	)
Currency/Interest Rate		87,630		2,910		(13,808	)		—		—		—
Equity		150,000		14,812		—			—		—		—
Total Non-qualifying Hedge Relationships	$	1,377,810	$	42,834	$	(55,514	)	$	1,366,800	$	49,635	$	(14,278	)
Total Derivatives(1)	$	1,382,868	$	42,834	$	(55,574	)	$	1,366,800	$	49,635	$	(14,278	)

(1) Excludes embedded derivatives which contain multiple underlyings. The fair value of these embedded derivatives was a liability of $498 million as of June 30, 2009 and a liability of $2,116 million as of December 31, 2008, included in “Future policy benefits” and “Fixed maturities available for sale.”

32

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

8. DERIVATIVE INSTRUMENTS (continued)

Cash Flow Hedges

The Company uses currency swaps in its cash flow hedge accounting relationships. This instrument is only designated for hedge accounting in instances where the appropriate criteria are met. The Company does not use futures, options, credit, and equity or embedded derivatives in any of its cash flow hedge accounting relationships.

The following table provides 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:

	Six Months ended June 30, 2009
	(in thousands)
Qualifying
Cash Flow Hedges
Currency /Interest Rate	$	4
Net Investment Income		—
Other Income		(1	)
Accumulated Other Comprehensive Income(1)		(63	)
	$	(60	)
Non- qualifying hedges
Realized investment gains (losses), net
Interest Rate	$	(104,150	)
Currency/Interest Rate		2,387
Credit		8,316
Equity		(509	)
Embedded Derivatives (Interest/Equity/Credit)		399
Total non-qualifying hedges	$	(93,557	)
Total Derivative Impact	$	(93,617	)

(1) Amounts deferred in Equity

	Three Months ended June 30, 2009
	(in thousands)
Qualifying
Cash Flow Hedges
Currency /Interest Rate	$	4
Net Investment Income		—
Other Income		(1	)
Accumulated Other Comprehensive Income(1)		(63	)
	$	(60	)
Non- qualifying hedges
Realized investment gains (losses), net
Interest Rate	$	(76,764	)
Currency/Interest Rate		2,361
Credit		4,343
Equity		(509	)
Embedded Derivatives (Interest/Equity/Credit)		3,963
Total non-qualifying hedges	$	(66,606	)
Total Derivative Impact	$	(66,665	)

(1) Amounts deferred in Equity

33

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

8. DERIVATIVE INSTRUMENTS (continued)

For the period ending June 30, 2009, the ineffective portion of derivatives accounted for using hedge accounting was not material to the Company’s results of operations and there were no material amounts reclassified into earnings relating to instances in which the Company discontinued cash flow hedge accounting because the forecasted transaction did not occur by the anticipated date or within the additional time period permitted by SFAS No. 133.

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

	(in thousands)
Balance, December 31, 2008	$	0
Net deferred gains on cash flow hedges from January 1 to June 30, 2009		4
Amount reclassified into current period earnings		(67	)
Balance, June 30, 2009	$	(63	)

As of June 30, 2009, the Company does not have any qualifying cash flow hedges of forecasted transactions other than those related to the variability of the payment or receipt of interest or foreign currency amounts on existing financial instruments. The maximum length of time for which these variable cash flows are hedged is 7 years. Income amounts deferred in “Accumulated other comprehensive income (loss)” as a result of cash flow hedges are included in “Net unrealized investment gains (losses)” in the Statements of Equity.

Credit Derivatives Written

The following tables set forth our exposure from credit derivatives where we have written credit protection excluding embedded derivatives contained in externally-managed investments in European markets, by NAIC rating of the underlying credits as of the dates indicated.

		June 30, 2009
		Single Name				First To Default Basket					Total
NAIC Designation (1)	Rating Agency Equivalent	Notional		Fair Value		Notional		Fair Value			Notional		Fair Value
		(in thousands)
1	Aaa, Aa, A	$	295,000	$	495	$	1,000	$	(76	)	$	296,000	$	419
2	Baa		25,000		141		—		—			25,000		141
	Subtotal Investment Grade	$	320,000	$	636	$	1,000	$	(76	)	$	321,000	$	560
3	Ba	$	—	$	—	$	9,500	$	(760	)	$	9,500	$	(760	)
	Subtotal Below Investment Grade	$	—	$	—	$	9,500	$	(760	)	$	9,500	$	(760	)
Total		$	320,000	$	636	$	10,500	$	(836	)	$	330,500	$	(200	)

(1) First-to-default credit swap baskets, which may include credits of varying qualities, are grouped above based on the lowest credit in the basket. However, such basket swaps may entail greater credit risk than the rating level of the lowest credit.

		December 31, 2008
		Single Name					First To Default Basket					Total
NAIC Designation (1)	Rating Agency Equivalent	Notional		Fair Value			Notional		Fair Value			Notional		Fair Value
		(in thousands)
1	Aaa, Aa, A	$	320,000	$	(9,155	)	$	1,000	$	(133	)	$	321,000	$	(9,288	)
2	Baa		—		—			9,500		(1,363	)		9,500		(1,363	)
Total		$	320,000	$	(9,155	)	$	10,500	$	(1,496	)	$	330,500	$	(10,651	)

(1) First-to-default credit swap baskets, which may include credits of varying qualities, are grouped above based on the lowest credit in the basket. However, such basket swaps may entail greater credit risk than the rating level of the lowest credit.

34

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

8. DERIVATIVE INSTRUMENTS (continued)

The following table sets forth the composition of our credit derivatives where we have written credit protection excluding credit protection written on our own credit and embedded derivatives contained in externally-managed investments in European markets, by industry category as of the dates indicated.

	June 30, 2009					December 31, 2008
Industry	Notional		Fair Value			Notional		Fair Value
	(in thousands)
Corporate Securities:
Manufacturing	$	40,000	$	40		$	40,000	$	(1,179	)
Services		20,000		132			20,000		(10	)
Energy		20,000		224			20,000		(754	)
Transportation		30,000		174			30,000		(944	)
Retail and Wholesale		20,000		153			20,000		(351	)
Other		190,000		(87	)		190,000		(5,917	)
First to Default Baskets(1)		10,500		(836	)		10,500		(1,496	)
Total Credit Derivatives	$	330,500	$	(200	)	$	330,500	$	(10,651	)

(1) Credit default baskets may include various industry categories.

The Company writes credit derivatives under which the Company is obligated to pay the counterparty the referenced amount of the contract and receive in return the defaulted security or similar security. The Company’s maximum amount at risk under these credit derivatives, assuming the value of the underlying referenced securities become worthless, is $330.5 million notional of credit default swap (“CDS”) selling protection at June 30, 2009. These credit derivatives generally have maturities of five years or less.

The Company holds certain externally-managed investments in the European market which contain embedded derivatives whose fair value are primarily driven by changes in credit spreads. These investments are medium term notes that are collateralized by investment portfolios primarily consisting of investment grade European fixed income securities, including corporate bonds and asset-backed securities, and derivatives, as well as varying degrees of leverage. The notes have a stated coupon and provide a return based on the performance of the underlying portfolios and the level of leverage. The Company invests in these notes to earn a coupon through maturity, consistent with its investment purpose for other debt securities. The notes are accounted for under U.S. GAAP as available for sale fixed maturity securities with bifurcated embedded derivatives (total return swaps). Changes in the value of the fixed maturity securities are reported in Stockholders’ Equity under the heading “Accumulated Other Comprehensive Income” and changes in the market value of the embedded total return swaps are included in current period earnings in “Realized investment gains (losses), net.” The Company’s maximum exposure to loss from these interests was $5.5 million and $5.2 million at June 30, 2009 and December 31, 2008, respectively.

In addition to selling credit protection, the Company has purchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio. As of June 30, 2009 the Company had $35.0 million of outstanding notional amounts, reported at fair value as an asset of $2.0 million.

Credit Risk

The Company is exposed to credit-related losses in the event of nonperformance by counterparties to financial derivative transactions. Substantially all of the Company’s over-the-counter derivative contracts are transacted with an affiliate. In instances where the Company transacts with unaffiliated counterparties, the Company manages credit risk by entering into derivative transactions with major international financial institutions and other creditworthy counterparties, and by obtaining collateral where appropriate. Additionally, limits are set on single party credit exposures which are subject to periodic management review.

The credit exposure of the Company’s over-the-counter (OTC) derivative transactions is represented by the contracts with a positive fair value (market value) at the reporting date. The Company effects exchange-traded futures transactions through regulated exchanges and these transactions are settled on a daily basis, thereby reducing credit risk exposure in the event of nonperformance by counterparties to such financial instruments.

The vast majority of the Company’s OTC derivative agreements are with highly rated major international financial institutions. Consistent with the practice of major international financial institutions, the Company utilizes the credit spread embedded in the LIBOR curve to reflect non-performance risk when determining the fair value of OTC derivative assets and liabilities after consideration of the impacts of the collateral posting process discussed above. This credit spread captures the non-performance risk of the Company’s OTC derivative related assets and liabilities.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

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

Prudential Annuities Life Assurance Corporation meets the conditions set forth in General Instruction H(1)(a) and (b) on Form 10-Q and is therefore filing this form with the reduced disclosure format.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) addresses the financial condition of Prudential Annuities Life Assurance Corporation (“PALAC” or the “Company”), formerly known as American Skandia Life Assurance Corporation, as of June 30, 2009 compared with December 31, 2008 and its results of operations for the three month and six month periods ended June 30, 2009 and 2008. You should read the following analysis of our financial condition and results of operations in conjunction with the “Risk Factors” section, the MD&A and the audited Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, as well as the “Risk Factors” section, the statements under “Forward Looking Statements”, and the Interim Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

General

The Company was established in 1988 and is a significant provider of variable annuity contracts for the individual market in the United States of America and its territories. The Company’s products are sold primarily to individuals to provide for savings and retirement needs, including variable annuity optional benefits designed to address the risk of outliving one’s retirement assets. The investment performance of the registered investment companies supporting the variable annuity contracts, which is principally correlated to equity market performance, can significantly impact the market for the Company’s products.

Products

The Company offers a wide array of annuities, including deferred and immediate variable annuities that are registered with the United States Securities and Exchange Commission (the “SEC”), which may include (1) fixed interest rate allocation options, subject to a market value adjustment, and 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, but it no longer actively sells such policies.

The Company offers variable annuities that provide its customers with tax-deferred asset accumulation together with a full suite of optional guaranteed death and living benefits. The optional benefit features contractually guarantee the contractholder a return of no less than (1) total deposits made to the contract less any partial withdrawals (“return of net deposits”), (2) total deposits made to the contract less any partial withdrawals plus a minimum return (“minimum return”), and/or (3) the highest contract value on a specified date minus any withdrawals (“contract value”). These guarantees may include benefits that are payable in the event of death, annuitization or at specified dates during the accumulation period and withdrawal and income benefits payable during specified periods. Our variable annuity investment options provide our customers with the opportunity to invest in proprietary and non-proprietary mutual fund sub-accounts, frequently under asset transfer programs, and fixed-rate options. The investments made by customers in the proprietary and non-proprietary mutual funds represent an interest in separate investment companies that provide a return linked to an underlying investment portfolio. The investments made in the fixed rate options are credited with interest at rates we determine, subject to certain minimums.

The primary risk exposures of our variable annuity contracts relate to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including equity market returns, interest rates, market volatility, timing of annuitization and withdrawals, contract surrenders and contractholder mortality. As part of our risk management strategy we hedge or limit our exposure to these risks, excluding those risks we have deemed suitable to retain, through a combination of product design elements, such as an automatic rebalancing element, externally purchased hedging instruments and affiliated reinsurance arrangements. The automatic rebalancing element included in the design of certain variable annuity products transfers assets between contractholder sub-accounts depending on a number of factors, including the investment performance of the sub-accounts. Negative investment performance may result in transfers to either a fixed-rate general account option or a separate account bond portfolio. In certain situations, assets may transfer back when investment performance improves. Other product design elements we utilize for certain products to manage these risks include asset allocation and minimum purchase age requirements.

Variable annuity account values with living benefit features were $26.9 billion and $24.4 billion as of June 30, 2009 and 2008, respectively. For risk management purposes, in addition to reinsurance of living benefit features to Pruco Reinsurance, Ltd. (“Pruco Re”) and the Prudential Insurance Company of America (“Prudential Insurance”), we segregate our variable annuity living benefit features into four broad product groupings, described in more detail below: (1) those where we utilize both an automatic rebalancing element and capital markets hedging in Pruco Re, (2) those where we utilize only an automatic rebalancing element, (3) those where we utilize only capital markets hedging in Pruco Re and Prudential Insurance and (4) those with risks we have deemed suitable to retain.

(1) In addition to reinsurance to Pruco Re, we manage the equity market, interest rate and market volatility risks associated with our Highest Daily products by utilizing both an automatic rebalancing element and capital markets hedging. Our Highest Daily optional living benefits features guarantee, among other features, the ability to make withdrawals based on the highest daily contract value plus a minimum return credited for a period of time. This guaranteed value is accessible through withdrawals for the life of the contractholder (or joint lives, for the spousal version of the benefit,) and not as a lump-sum surrender value. For our Highest Daily products we utilize an automatic rebalancing element to limit our exposure to equity market risk and market volatility. Asset allocation and minimum purchase age requirements are also included in the design of our Highest Daily products to limit our exposure to equity market risk and market volatility. In addition to these product design elements, we actively hedge in Pruco Re our Highest Daily products, primarily for changes in interest rates, and to a lesser extent for changes

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in equity markets and market volatility, through the use of interest rate derivatives and equity options. Contracts with living benefit features where we utilize both an automatic rebalancing element and capital markets hedging represented $11.4 billion or 42%, and $5.1 billion or 21% of our variable annuity account values with living benefit features as of June 30, 2009 and 2008, respectively.

(2) In addition to reinsurance to Pruco Re, we manage the equity market, interest rate and market volatility risks associated with our guaranteed return option, or GRO and GRO Plus, features through an automatic rebalancing element, included in the product’s design. Our GRO and GRO Plus features include a guaranteed minimum accumulation benefit which provides the contractholder with a guaranteed return of initial account value (adjusted for purchase payments and withdrawals) or an enhanced value, if applicable. Contracts with living benefit features where we utilize only an automatic rebalancing element represented $7.6 billion or 28%, and $9.0 billion or 37% of our variable annuity account values with living benefit features as of June 30, 2009 and 2008, respectively. These amounts exclude products that contain the Highest Daily GRO rider, which is included in the previous paragraph related to our Highest Daily product guarantees.

(3) We manage the risks associated with all other accumulation and withdrawal guarantees through reinsurance agreements with Pruco Re and Prudential Insurance. The Company has entered into reinsurance agreements to transfer the risk related to these guarantees to affiliates. In the affiliates, we manage the risks associated with all other accumulation and withdrawal guarantees through capital markets hedging. We actively hedge these guarantees for changes in equity markets, interest rates, and market volatility through the use of equity options and interest rate derivatives. Contracts with living benefit features where we utilize only capital markets hedging represented $7.4 billion or 27%, and $9.6 billion or 39% of our variable annuity account values with living benefit features as of June 30, 2009 and 2008, respectively. As a result of the volatility and disruption in the global financial markets, we have ceased sales of certain of these products.

(4) We have deemed the risks associated with our guaranteed minimum income benefits suitable to retain. Our guaranteed minimum income benefits guarantee a minimum return on the contract value or an enhanced value, if applicable, to be used for purposes of determining annuity income payments. Contracts with living benefit features and only with risks we have deemed suitable to retain represented $0.5 billion or 2%, and $0.7 billion or 3% of our variable annuity account values with living benefit features as of June 30, 2009 and 2008, respectively.

During the second quarter of 2009, the Company started hedging the risk associated with guaranteed minimum death benefits feature, as previously discussed in Note 8. Our guaranteed minimum death benefits guarantee a minimum return on the contract value or an enhanced value, if applicable, to be used for purposes of determining benefits payable in the event of death. All of the $26.9 billion and $24.4 billion of variable annuity account values with living benefit features as of June 30, 2009 and 2008, respectively, also contain guaranteed minimum death benefits, with $19.0 billion or 71% and $14.1 billion or 56% benefiting from an automatic rebalancing element, as discussed above. An additional $10.8 billion and $15.9 billion of variable annuity account values as of June 30, 2009 and 2008, respectively, contain guaranteed minimum death benefits, but no living benefit features.

Marketing and Distribution

The Company sells its annuity products through multiple distribution channels, including (1) independent broker-dealer firms and financial planners; (2) broker-dealers that are members of the New York Stock Exchange, including “wirehouse” and regional broker-dealer firms; and (3) broker-dealers affiliated with banks or that specialize in marketing to customers of banks. Although the Company is active in each of those distribution channels, the majority of the Company’s sales have come from the independent broker-dealer firms and financial planners. The Company has selling agreements with approximately nine hundred broker-dealer firms and financial institutions. On June 1, 2006, Prudential Insurance an affiliate of the Company acquired the variable annuity business of The Allstate Corporation (“Allstate”), which included access to the Allstate affiliated broker-dealer. The Company began distributing variable annuities through the Allstate affiliated broker-dealer registered representatives in the third quarter of 2006.

Although many of the Company’s competitors have acquired or are seeking to acquire their distribution channels as a means of securing sales, the Company typically does not follow that model. Instead, the Company believes that its success is dependent on its ability to enhance its relationships with both the selling firms and their registered representatives. In cooperation with its affiliated broker-dealer, Prudential Annuities Distributors Incorporated, (“PAD”), formerly known as American Skandia Marketing, Incorporated, the Company uses wholesalers to provide support to its distribution channels.

The Company’s Changes in Financial Position and Results of Operations are described below.

Significant Accounting Policies

For information on the Company’s significant accounting policies, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

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Changes in Financial Position

2009 versus 2008

Assets increased by $2.0 billion, from $39.6 billion at December 31, 2008 to $41.6 billion at June 30, 2009. Separate account assets increased by $5.3 billion, primarily driven by positive net flows, market appreciation during the current year and transfers from the general account fixed rate option as a result of the automatic rebalancing element. Partially offsetting the above increase was a decrease in reinsurance recoverables of $1.6 billion from $2.1 billion at December 31, 2008 to $0.5 billion at June 30, 2009 driven by a decrease in the reinsured liability for living benefit embedded derivatives resulting from a decrease in the underlying base reserve due to an increase in LIBOR which is used to discount liabilities. Also contributing to the decrease were updates of inputs used in the valuation of the embedded derivatives under SFAS No.157. Under SFAS No. 157 we are required to incorporate our own risk of non-performance in the valuation of the embedded derivatives associated with our living benefit features. In light of recent developments, including rating agency downgrades to the claims-paying ratings of the Company, beginning in the first quarter of 2009, we incorporated an additional spread over LIBOR into the discount rate used in the valuation of the embedded derivative liabilities to reflect an increase in our market perceived non-performance risk, thereby reducing the value of the embedded derivative liabilities. Additionally, fixed maturities decreased by $1.7 billion driven by lower general account balances due to the automatic rebalancing element in certain of our living benefit features. Also, deferred policy acquisition costs (“DAC”) and deferred sales inducements (“DSI”) decreased by $233.0 million and $18.2 million from December 31, 2008 to June 30, 2009, respectively, mainly due to increased amortization resulting from the aforementioned impact of the change in non-performance risk.

During the period, total liabilities increased by $2.0 billion, from $37.9 billion at December 31, 2008 to $39.9 billion at June 30, 2009. Separate account liabilities increased by $5.3 billion driven by positive net flows, market appreciation during the current year and transfers from the general account fixed rate option as a result of the automatic rebalancing element. Partially offsetting the above increase was a decrease in future policy benefits and other policyholder liabilities of $1.6 billion from $2.5 billion at December 31, 2008 to $0.9 billion at June 30, 2009 driven by a decrease in the liability for living benefit embedded derivatives resulting from a decrease in the underlying base reserve due to an increase in LIBOR and equity level. Also contributing to the decrease were updates of inputs used in the valuation of the embedded derivatives under SFAS No. 157, as previously discussed. Additionally, policyholders’ account balances decreased by $1.7 billion driven by transfers of customer account values to the separate account variable investment options from the general account fixed rate investment options due to the asset transfer feature in certain of our living benefit riders. Also, short-term debt decreased by $175.5 million resulting from the repayment debt.

Results of Operations

2009 to 2008 Three Month Comparison

Net Income

Net income increased $213.7 million from $35.2 million for the three months ended June 30, 2008 to $248.9 million for the three months ended June 30, 2009. This is driven by a $383.6 million increase in income from operations before income taxes, as discussed below, partially offset by a $169.9 million increase in income tax expense driven by the aforementioned impact of the change in non-performance risk in the valuation of embedded derivatives under SFAS No. 157.

Gains from operations for the three months ended June 30, 2009 included a $333.5 million favorable variance in the amortization of deferred policy acquisition and other costs driven by an increase in the reinsured liability for living benefit embedded derivatives and its impact on actual gross profits resulting from the impact of the change in non-performance risk in the valuation of embedded derivatives under SFAS No. 157. The $333.5 million favorable variance in the three months ended June 30, 2009 resulted from a reduction in our adjustment to the embedded derivative liabilities for the market’s perception of our non-performance risk. Under SFAS No. 157 we are required to incorporate our own risk of non-performance in the valuation of the embedded derivative liabilities associated with our living benefit features. In addition to the risk premium inherent in LIBOR, to reflect our market-perceived non-performance risk, we incorporate an additional spread over LIBOR into the discount rate used in the valuation of the embedded derivative liabilities. The reduction in the non-performance risk adjustment in the second quarter of 2009 was primarily driven by the application of this additional spread over LIBOR to an overall lower level of embedded derivative liabilities, resulting from the impact of improved market conditions and higher interest rates. A decrease in the additional spread over LIBOR in the second quarter 2009 also contributed to the reduction in our adjustment for market-perceived non-performance risk. We amortize deferred policy acquisition and other costs over the expected lives of the contracts based on the level and timing of gross profits on the underlying product. In calculating gross profits, we consider mortality, persistency, and other elements as well as rates of return on investments associated with these contracts and include profits and losses related to these contracts that are reported in affiliated legal entities other than the Company as a result of, for example, reinsurance agreements with those affiliated entities.

Gains from operations for the three months ended June 30, 2009 also included benefits of $139.0 million related to the quarterly adjustments to the reserves for the guaranteed minimum death and income benefit features of our variable annuity products and to our estimate of total gross profits used as a basis for amortizing deferred policy acquisition and other costs. The $139.0 million of benefits included $106.6 million relating to the quarterly market performance adjustments and $32.5 million relating to the quarterly adjustments for current period experience, and were driven by market appreciation in the second quarter of 2009 as discussed below. Gains for the second quarter of 2008 included $7.3 million of charges related to the quarterly adjustments for current period experience.

The $106.6 million of benefits in the second quarter of 2009 relating to the quarterly market performance adjustments referred to above, including $56.8 million relating to releases of reserves for the guaranteed minimum death and income benefit features of our variable annuity products and $49.8 million relating to decreases to the amortization of deferred policy acquisition and other costs, reflect market performance related adjustments to our estimate of total gross profits to reflect actual fund performance in the second quarter of 2009. The actual rate of return on variable annuity account values for the second quarter of 2009 was 11.2% compared to our previously expected rate of return of 2.6%. In light of recent market conditions, beginning in the fourth quarter of 2008 we

38

determined that adjustments to our estimate of total gross profits to reflect actual fund performance and any corresponding changes to the future rate of return assumptions should no longer be dependent on a comparison to a statistically generated range of estimated gross profits. Instead, for purposes of evaluating deferred policy acquisition and other costs and the reserves for the guaranteed minimum death and income benefit features of our variable annuity products, total estimated gross profits are updated for these items each quarter. The better than expected market return in the second quarter of 2009 increased our estimates of total gross profits by establishing a new, higher starting point for the variable annuity account values used in estimating gross profits for future periods. The previously expected rate of return for the second quarter of 2009 was based upon our current maximum future rate of return assumption under the reversion to the mean approach, as discussed below. The increase in our estimate of total gross profits results in a lower required rate of amortization, which is applied to all prior periods’ gross profits. The resulting cumulative adjustment to prior amortization is recognized in the current period. In addition, the lower rate of amortization will also be applied to future gross profits in calculating amortization in future periods which, all else being equal will result in higher net profits in future periods.

We continue to derive our future rate of return assumptions using a reversion to the mean approach, a common industry practice. Under this approach, we consider actual returns over a period of time and initially adjust future projected returns over a four year period so that the assets grow at the long-term expected rate of return for the entire period. However, beginning in the fourth quarter of 2008 and continuing through the second quarter of 2009, the projected future annual rate of return calculated using the reversion to the mean approach for most contract groups was greater than 10.5%, our current maximum future rate of return assumption across all asset types for this business. In those cases, we utilize the maximum future rate of return over the four year period, thereby limiting the impact of the reversion to the mean on our estimate of total gross profits. Further or continued market volatility could result in additional market value changes within our separate account assets and corresponding changes to our gross profits, as well as additional adjustments to the amortization of deferred policy acquisition and other costs, and the costs relating to the reserves for the guaranteed minimum death and income benefit features of our variable annuity products. Given that the estimates of future gross profits are based upon our maximum future rate of return assumption for most contract groups as discussed above, all else being equal, future quarterly rates of return higher or lower than 2.6% will result in decreases or increases in the amortization of deferred policy acquisition and other costs, and the costs relating to the reserves for the guaranteed minimum death and income benefit features of our variable annuity products.

The quarterly adjustments for current period experience referred to above reflect the cumulative impact of differences between actual gross profits for the period and the previously estimated expected gross profits for the period, as well as an update for current and future expected claims costs associated with the guaranteed minimum death and income benefit features of our variable annuity products. To the extent each period’s actual experience differs from the previous estimate for that period, the assumed level of total gross profits may change, and a cumulative adjustment to previous periods’ amortization, referred to as an adjustment for current period experience, may be required in the current period. This adjustment to previous periods’ amortization is in addition to the direct impact of actual gross profits on current period amortization and the market performance related adjustment to our estimates of gross profits for future periods. The $32.5 million of benefits in the second quarter of 2009 relating to the quarterly adjustments for current period experience included a $19.3 million decrease to the amortization of deferred policy acquisition and other costs and $13.2 million relating to releases of reserves for the guaranteed minimum death and income benefit features of our variable annuity products. The adjustment for deferred policy acquisition and other costs reflects a reduction in amortization due to better than expected gross profits, resulting primarily from a favorable variance in the mark-to-market of embedded derivatives and related hedge positions associated with our living benefit features excluding the adjustment for non-performance risk and better than expected lapse experience. The adjustment for the reserves for the guaranteed minimum death and income benefit features of our variable annuity products primarily reflects higher than expected fee income as well as lower than expected actual contract guarantee claims costs in the second quarter of 2009.

Absent the effect of the change in non-performance risk in the valuation of embedded derivatives under SFAS No. 157 and market performance adjustments discussed above, income from operations before income taxes for the three months ended June 30, 2009 decreased $96.1 million from the three months ended June 30, 2008, primarily relating to a decrease in policy charges and fee income and asset administration fees and other income of $124.6 million driven by lower average variable annuity asset balances invested in separate accounts due to market depreciation and transfers of balances to a fixedrate general account option over the twelve months ended June 30, 2009. The transfer of balances to our general account relates to an automatic rebalancing element in some of our living benefit features, which, as part of the overall product design, transferred approximately $4 billion of investments out of the separate accounts and into our general account over the twelve months ended June 30, 2009, due to equity market declines. Also contributing to the decrease was higher amortization of deferred policy acquisition and other costs of $78.1 million due to higher levels of actual gross profits from embedded derivative breakage. Additionally, interest credited to policyholder account balances increased $40.7 million due to the aforementioned general account transfers. Partially offsetting the unfavorable variances in pre-tax net income were higher realized investment gains of $85.2 million driven by increased gains on our MVA portfolio. In addition, net investment income increased by $74.0 million due to the aforementioned transfers from the separate account variable investment options into the general account fixed rate investment options.

Revenues

Revenues increased $34.1 million, from $241.6 million for the three months ended June 30, 2008 to $275.7 million for the three months ended June 30, 2009.

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Policy charges and fee income decreased $109.6 million, from $186.1 million for the three months ended June 30, 2008 to $76.5 million for the three months ended June 30, 2009 driven by lower mortality and expense (“M&E”) fees of $41.7 million and a decrease in optional benefit charges on our living and death benefit features of $7.6 million, primarily driven by lower average variable annuity asset balances invested in separate accounts due to market depreciation over the twelve months ending June 30, 2009 and the transfer of balances to our general account relating to an automatic rebalancing element in some of our living benefit features, as discussed above. The decrease in optional benefit charges was primarily offset in realized investment gains, net because these features are reinsured with affiliates. Additionally, policy charges and fee income decreased $63.9 million from the prior year due to the change in realized market value adjustments related to the Company’s market value adjusted investment option (the “MVA option”) driven by changes in the interest rate environment.

Net investment income increased $74.0 million from $56.7 million for the three months ended June 30, 2008 to $130.7 million for the three months ended June 30, 2009 as a result of higher general account assets as these assets moved from separate account variable investment options into the general account fixed rate investment options due to the automatic rebalancing element, as discussed above.

Realized investment gains, net, increased by $85.2 million from losses of $63.6 million for the three months ended June 30, 2008 to gains of $21.6 million for the three months ended June 30, 2009. This increase was driven by the reinsurance of our living benefit features to affiliates, as previously discussed and increased investment gains on our general account and MVA portfolio.

Asset administration fees and other income decreased $15.0 million, from $58.2 million for the three months ended June 30, 2008 to $43.2 million for the three months ended June 30, 2009 as a result of lower variable annuity asset balances invested in separate accounts due to market depreciation over the twelve months ending June 30, 2009. Asset administration fees are asset based fees, which are dependent on the value of assets under management.

Benefits and Expenses

Benefits and expenses decreased $349.5 million, from $206.4 million for the three months ended June 30, 2008 to a benefit of $143.1 million for the three months ended June 30, 2009. Included within this decrease is $333.5 million of lower amortization of deferred acquisition cost and other cost related to the impact of the change in non-performance risk in the valuation of embedded derivatives under SFAS No. 157, as discussed above. Benefits and expenses also included a benefit of $146.3 million related to the quarterly market performance adjustments to the reserves for the guaranteed minimum death and income benefit features of our variable annuity products and to our estimate of total gross profits used as a basis for amortizing deferred policy acquisition and other costs, as discussed above. Absent the effect of the change in non-performance risk in the valuation of embedded derivatives under SFAS No. 157 and market performance adjustments, benefits and expenses for the three months ended June 30, 2009 increased $130.3 million from the three months ended June 30, 2008.

Policyholders’ benefits decreased $58.4 million, from $14.4 million for the three months ended June 30, 2008 to a benefit of $44.0 million for the three months ended June 30, 2009, driven primarily by the quarterly adjustments of $70.8 million relating to releases of reserves for the guaranteed minimum death and income benefit features of our variable annuity products, as discussed above. Partially offsetting the above decrease was an increase of $13.9 million reflecting higher actual and expected contract guarantee claims costs related to the reserves for the guaranteed minimum death and income benefit features of our variable annuity products due to market depreciation over the past twelve months.

Interest credited to policyholders’ account balances decreased $31.8 million, from $50.0 million for the three months ended June 30, 2008 to $18.2 million for the three months ended June 30, 2009, primarily driven by decreased DSI amortization of $80.2 million due to the impact of the change in non-performance risk in the valuation of embedded derivatives under SFAS No. 157, as discussed above. Also contributing to the decrease was a benefit of $17.5 million related to the quarterly adjustments to our estimate of total gross profits used as a basis for amortizing DSI, as discussed above. Partially offsetting the above decreases was an increase in interest credited to policyholders’ account balances of $40.7 million primarily reflecting higher average annuity account values invested in our general account resulting from transfers relating to an automatic rebalancing element in some of our living benefit features over the past twelve months.

Amortization of deferred policy acquisition costs decreased by $251.8 million, from $45.7 million for the three months ended June 30, 2008 to a benefit $206.1 million for the three months ended June 30, 2009 primarily due to the impact of the change in non-performance risk in the valuation of embedded derivatives under SFAS No. 157 as discussed above.

General, administrative and other expenses decreased by $7.4 million, from $96.2 million for the three months ended June 30, 2008 to $88.8 million for the three months ended June 30, 2009, primarily due to lower interest expense driven by the repayment of debt.

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2009 to 2008 Six Month Comparison

Net Income

Net income decreased $245.3 million from $111.3 million for the six months ended June 30, 2008 to loss $134.1 million for the six months ended June 30, 2009. This is driven by a $345.7 million decrease in income from operations before income taxes, as discussed below, partially offset by a $100.3 million decrease in income tax expense driven by the aforementioned impact of the change in non-performance risk in the valuation of embedded derivatives under SFAS No. 157.

Loss from operations for the six months ended June 30, 2009 included a $250.5 million unfavorable variance in the amortization of deferred policy acquisition and other costs driven by a decrease in the reinsured liability for living benefit embedded derivatives and its impact on actual gross profits resulting from the impact of the change in non-performance risk in the valuation of embedded derivatives under SFAS No. 157. Under SFAS No. 157 we are required to incorporate our own risk of non-performance in the valuation of the embedded derivatives associated with our living benefit features. In light of recent developments, including rating agency downgrades to the claims-paying ratings of the Company, beginning in the first quarter of 2009, we incorporated an additional spread over LIBOR into the discount rate used in the valuation of the embedded derivative liabilities to reflect an increase in our market perceived non-performance risk, thereby reducing the value of the embedded derivative liabilities. We amortize deferred policy acquisition and other costs over the expected lives of the contracts based on the level and timing of gross profits on the underlying product. In calculating gross profits, we consider mortality, persistency, and other elements as well as rates of return on investments associated with these contracts and include profits and losses related to these contracts that are reported in affiliated legal entities other than the Company as a result of, for example, reinsurance agreements with those affiliated entities.

Loss from operations for the six months ended June 30, 2009 also included benefits of $65.3 million related to the quarterly adjustments to the reserves for the guaranteed minimum death and income benefit features of our variable annuity products and to our estimate of total gross profits used as a basis for amortizing deferred policy acquisition and other costs. The $65.3 million of benefits included $31.4 million relating to the quarterly adjustments for current period experience and $33.9 million relating to the quarterly market performance adjustments, and were driven by market appreciation in the first six months of 2009 as discussed below. Adjusted operating income for the first six months of 2008 included $15.9 million of charges related to the quarterly adjustments for current period experience.

The quarterly adjustments for current period experience referred to above reflect the cumulative impact of differences between actual gross profits for the period and the previously estimated expected gross profits for the period, as well as an update for current and future expected claims costs associated with the guaranteed minimum death and income benefit features of our variable annuity products. The $31.4 million of benefits in the first six months of 2009 relating the quarterly adjustments for current period experience included $35.6 million relating to decreases to the amortization of deferred policy acquisition and other costs, partially offset by a $4.2 million charge relating to reserve increases for the guaranteed minimum death and income benefit features of our variable annuity products. The adjustments for deferred policy acquisition and other costs in the first six months of 2009 reflect a reduction in amortization due to better than expected gross profits, resulting primarily from the favorable variance in the mark-to-market of embedded derivatives and related hedge positions associated with our living benefit features and better than expected lapse experience. The adjustment for the reserves for the guaranteed minimum death and income benefit features of our variable annuity products primarily reflects higher than expected actual contract guarantee claims costs in the first six months of 2009 due to lower than expected lapses, partially offset by higher than expected fee income.

The $33.9 million of benefits in the first six months of 2009 from the quarterly market performance adjustments referred to above include $16.7 million relating to releases of reserves for the guaranteed minimum death and income benefit features of our variable annuity products and a $17.2 million benefit relating to decreases to the amortization of deferred policy acquisition and other costs. These market performance related adjustments largely reflect updates to our estimate of total gross profits for better than expected actual fund performance in the first six months of 2009. The market value appreciation in the first six months of 2009 increased our estimates of total gross profits by establishing a new, higher starting point for the variable annuity account values used in estimating gross profits for future periods. The increase in our estimate of total gross profits results in a lower required rate of amortization, which is applied to all prior periods’ gross profits. The resulting cumulative adjustment to prior amortization is recognized in the current period.

Absent the effect of the change in non-performance risk in the valuation of embedded derivatives under SFAS No. 157 and market performance adjustments discussed above, income from operation before income taxes for the six months ended June 30, 2009 decreased $176.5 million from the six months ended June 30, 2008, primarily relating to a decrease in policy charges and fee income and asset administration fees and other income of $209.0 million driven by lower average variable annuity asset balances invested in separate accounts due to market depreciation and transfers of balances to a fixed rate general account option over the twelve months ended June 30, 2009. The transfer of balances to our general account relates to an automatic rebalancing element in some of our living benefit features, which, as part of the overall product design, transferred approximately $4 billion of investments out of the separate accounts and into our general account over the twelve months ended June 30, 2009, due to equity market declines. Also contributing to the decrease was higher amortization of deferred policy acquisition and other costs increased by $143.4 million due to higher levels of actual gross profits from embedded derivative breakage. Additionally, interest credited to policyholder account balances increased $91.9 million due to the aforementioned general account transfers. Partially offsetting the unfavorable variances in pre-tax net income was higher realized investment gains of $99.0 million driven by increased gains on our MVA portfolio. In addition, net investment income increased by $175.0 million due to transfers from the separate account variable investment options into the general account fixed rate investment options.

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Revenues

Revenues increased $60.3 million, from $518.9 million for the six months ended June 30, 2008 to $579.2 million for the six months ended June 30, 2009. Premiums decreased $4.7 million, from $11.5 million for the six months June 30, 2008 to $6.8 million for the six months June 30, 2009, reflecting a decrease in funds from customers electing to enter into the payout phase of their annuity contracts.

Policy charges and fee income decreased $174.8 million, from $357.5 million for the six months ended June 30, 2008 to $182.7 million for the six months ended June 30, 2009 driven by lower mortality and expense (“M&E”) fees of $95.6 million and a decrease in optional benefit charges on our living and death benefit features of $15.9 million, primarily driven by lower average variable annuity asset balances invested in separate accounts due to market depreciation over the twelve months ending June 30, 2009 and the transfer of balances to our general account relating to an automatic rebalancing element in some of our living benefit features, as discussed above. The decrease in optional benefit charges was primarily offset in realized investment gains, net because these features are reinsured with affiliates. Additionally, policy charges and fee income decreased $70.7 million from the prior year due to the change in realized market value adjustments related to the Company’s market value adjusted investment option (the “MVA option”) driven by changes in the interest rate environment.

Net investment income increased $175.0 million from $101.9 million for the six months ended June 30, 2008 to $276.9 million for the six months ended June 30, 2009 as a result of higher general account assets as assets moved from separate account variable investment options into the general account fixed rate investment options due to the automatic rebalancing element, as discussed above.

Realized investment gains, net, increased by $99.0 million from losses of $64.8 million for the six months ended June 30, 2008 to gains of $34.2 million for the six months ended June 30, 2009. This increase was driven by the reinsurance of our living benefit features to affiliates, as previously discussed and increased investment gains on our general account and MVA portfolio.

Asset administration fees and other income decreased $34.2 million, from $112.9 million for the six months ended June 30, 2008 to $78.7 million for the six months ended June 30, 2009 as a result of lower variable annuity asset balances invested in separate accounts due to market depreciation over the twelve months ending June 30, 2009. Asset administration fees are asset based fees, which are dependent on the value of assets under management.

Benefits and Expenses

Benefits and expenses increased $406.0 million, from $399.2 million for the six months ended June 30, 2008 to $805.2 million for the six months ended June 30, 2009. Included within this increase is $250.5 million of higher amortization of deferred acquisition cost and other cost related to the impact of the change in non-performance risk in the valuation of embedded derivatives under SFAS No. 157 as discussed above. Benefits and expenses also included a benefit of $81.3 million related to the quarterly market performance adjustments to the reserves for the guaranteed minimum death and income benefit features of our variable annuity products and to our estimate of total gross profits used as a basis for amortizing deferred policy acquisition and other costs. Absent the effect of the change in non-performance risk in the valuation of embedded derivatives under SFAS No. 157 and market performance adjustments, benefits and expenses for the six months ended June 30, 2009 increased $236.8 million from the six months ended June 30, 2008.

Interest credited to policyholders’ account balances increased $190.1 million, from $88.5 million for the six months ended June 30, 2008 to $278.6 million for the six months ended June 30, 2009, primarily driven by an increase in interest credited to policyholders’ account balances of $91.9 million primarily reflecting higher average annuity account values invested in our general account resulting from transfers relating to an automatic rebalancing element in some of our living benefit features. Also contributing to the increase was increased DSI amortization of $59.9 million due to the impact of the change in non-performance risk in the valuation of embedded derivatives under SFAS No. 157, as discussed above.

Amortization of deferred policy acquisition costs increased by $233.4 million, from $79.3 million for the six months ended June 30, 2008 to $312.7 million for the six months ended June 30, 2009 primarily due to $189.9 million from the impact of the change in non-performance risk in the valuation of embedded derivatives under SFAS No. 157 as discussed above. Also contributing to the above increase was an increase of $96.6 million increase in DAC amortization driven by higher level of actual gross profits. Partially offsetting the above increases was a benefit of $53.2 million related to the quarterly adjustments to our estimate of total gross profits used as a basis for amortizing DAC, as discussed above.

General, administrative and other expenses decreased by $16.8 million, from $192.6 million for the six months ended June 30, 2008 to $175.8 million for the six months ended June 30, 2009, primarily due to lower interest expense driven by the repayment of debt.

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Income Taxes

Our income tax provision amounted to an income tax expense of $169.9 million for the three months ended June 30, 2009 compared to income tax benefit of $0.0 million for the three months ended June 30, 2008. The decline in income tax expense was primarily driven by the increase in pretax income.

Our income tax provision amounted to an income tax benefit of $91.9 million in the six months ended June 30, 2009 compared to income tax expense of $8.5 million for the six months ended June 30, 2008. The decline in income tax expense was primarily driven by the decline in pretax income.

The dividends received deduction (“DRD”) reduces the amount of dividend income subject to U.S. tax and is a significant component of the difference between the Company’s effective tax rate and the federal statutory tax rate of 35%. The DRD for the current period was estimated using information from 2008, current year results, and was adjusted to take into account the current year’s equity market performance. The actual current year DRD can vary from the estimate based on factors such as, but not limited to, changes in the amount of dividends received that are eligible for the DRD, changes in the amount of distributions received from mutual fund investments, changes in the account balances of variable life and annuity contracts, and the Company’s taxable income before the DRD.

In August 2007, the IRS released Revenue Ruling 2007-54, which included, among other items, guidance on the methodology to be followed in calculating the DRD related to variable life insurance and annuity contracts. In September 2007, the IRS released Revenue Ruling 2007-61. Revenue Ruling 2007-61 suspends Revenue Ruling 2007-54 and informs taxpayers that the U.S. Treasury Department and the IRS have indicated that they intend to address through new regulations the issues considered in Revenue Ruling 2007-54, including the methodology to be followed in determining the DRD related to variable life insurance and annuity contracts. On May 11, 2009, the Obama Administration released the “General Explanations of the Administration’s Revenue Proposals.” Although the Administration has not released proposed statutory language, one proposal would change the method used to determine the amount of the DRD. A change in the DRD, including the possible retroactive or prospective elimination of this deduction through regulation or legislation, could increase actual tax expense and reduce the Company’s consolidated net income. These activities had no impact on the Company’s 2008 or 2009 results.

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Liquidity and Capital Resources

Extraordinary Market Conditions and their Impact on our Liquidity and Capital Resources

The disruptions in the capital markets that began in the latter half of 2007, initially due to concerns over sub-prime mortgage holdings of financial institutions, accelerated to unprecedented levels in 2008, resulting in failure, consolidation, or U.S. federal government intervention on behalf of several significant financial institutions. The ensuing volatility in markets, and the adverse impact on availability and cost of credit and capital, have largely continued into 2009. We, like other financial institutions, have not been immune to these events.

Prudential Financial continues to operate with significant cash on the balance sheet and has access to alternate sources of liquidity. However, a continuation or worsening of the disruptions in the credit and capital markets could adversely affect our ability to access sources of liquidity, as well as threaten to reduce our capital below a level that is consistent with our existing ratings objectives. Therefore, we may need to take additional actions, which may include but are not limited to: (1) further access external sources of capital, including the debt or equity markets; (2) limit or curtail sales of certain products and/or restructuring existing products; and (3) seek temporary or permanent changes to regulatory rules. Certain of these actions may require regulatory approval and/or agreement of counterparties which are outside of our control or have economic costs associated with them.

Management monitors the liquidity of Prudential Financial and the Company on a daily basis and projects borrowing and capital needs over a multi-year time horizon through our quarterly planning process. We believe that cash flows from the sources of funds presently available to us are sufficient to satisfy our current liquidity requirements, including reasonably foreseeable contingencies.

General Liquidity

Liquidity refers to a company’s ability to generate sufficient cash flows to meet the needs of its operations. 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 those operations. We segment our investment portfolios and employ an asset/liability management approach specific to the requirements of our product lines. This enhances the discipline applied in managing the liquidity, as well as the interest rate and credit risk profiles, of each portfolio in a manner consistent with the unique characteristics of the product liabilities. We use a projection process for cash flows from operations to ensure sufficient liquidity to meet projected cash outflows, including claims.

Liquidity is measured against internally developed benchmarks that take into account the characteristics of both the asset portfolio and the liabilities that they support. The results are affected substantially by the overall asset type and quality of our investments.

Cash Flow

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

We believe that the cash flows from our operations are adequate to satisfy the current liquidity requirements of these operations, including under reasonably foreseeable stress scenarios. The continued adequacy of this liquidity will depend upon factors such as future securities market conditions, changes in interest rate levels, policyholder perceptions of our financial strength, and the relative safety of competing products (including those with enhancements under EESA), each of which could lead to reduced cash inflows or increased cash outflows. In addition, market volatility can impact the level of capital required to support our businesses. Our cash flows from investment activities result from repayments of principal, proceeds from maturities and sales of invested assets, net of amounts reinvested. The primary liquidity risks with respect to these cash flows are the risk of default by debtors or bond insurers, our counterparties’ willingness to extend repurchase and/or securities lending arrangements, commitments to invest and market volatility. We closely manage these risks through our credit risk management process and regular monitoring of our liquidity position.

In managing our liquidity, we also consider the risk of policyholder and contractholder withdrawals of funds earlier than our assumptions when selecting assets to support these contractual obligations. We use surrender charges and other contract provisions to mitigate the extent, timing and profitability impact of withdrawals of funds by customers from annuity contracts and deposit liabilities.

Liquid Assets

Liquid assets include cash, cash equivalents, short-term investments, fixed maturities that are not designated as held to maturity and public equity securities. As of June 30, 2009 and December 31, 2008, the Company had liquid assets of $8.6 billion and $10.2 billion, respectively, which includes a portion financed with asset-based financing. The portion of liquid assets comprised of cash and cash equivalents and short-term investments was $0.5 billion and $0.3 billion as of June 30, 2009 and December 31, 2008, respectively. We consider attributes of the various categories of liquid assets (for example, type of asset and credit quality) in calculating internal liquidity measures in order to evaluate the adequacy of our operations’ liquidity under a variety of stress scenarios. We believe that the liquidity profile of our assets is sufficient to satisfy current liquidity requirements, including under foreseeable stress scenarios.

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Given the size and liquidity profile of our investment portfolios, we believe that claim experience varying from our projections does not constitute a significant liquidity risk. Our asset/liability management process takes into account the expected maturity of investments and expected claim payments as well as the specific nature and risk profile of the liabilities. Historically, there has been no significant variation between the expected maturities of our investments and the payment of claims.

Our liquidity is managed through access to substantial investment portfolios as well as a variety of instruments available for funding and/or managing short-term cash flow mismatches, including from time to time those arising from claim levels in excess of projections. To the extent we need to pay claims in excess of projections, we may borrow temporarily or sell investments sooner than anticipated to pay these claims, which may result in increased borrowing costs or realized investment gains or losses affecting results of operations.

We believe that borrowing temporarily or selling investments earlier than anticipated will not have a material impact on our liquidity. Payment of claims and sale of investments earlier than anticipated would have an impact on the reported level of cash flow from operating and investing activities, respectively, in our financial statements.

Prudential Funding, LLC

Prudential Funding, LLC, or Prudential Funding, a wholly owned subsidiary of Prudential Insurance, serves as an additional source of financing to meet our working capital needs up to limits established with the New Jersey Department of Banking and Insurance.

Capital

The Risk Based Capital, or RBC, ratio is a primary measure by which we evaluate the capital adequacy of the Company. Prudential Financial manages its domestic insurance subsidiaries’ RBC ratio to a level consistent with an “AA” ratings target for those subsidiaries, and in excess of the minimum levels required by applicable insurance regulations. RBC is determined by statutory guidelines and formulas that consider, among other things, risks related to the type and quality of the invested assets, insurance-related risks associated with an insurer’s products, interest rate risks and general business risks. The RBC ratio calculations are intended to assist insurance regulators in measuring the adequacy of an insurer’s statutory capitalization. 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.

The level of statutory capital 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, among other items. The level of statutory capital of the Company is affected by statutory accounting rules, including those for loan-backed and structured securities. Mandatory adoption of changes to the rules for loan-backed and structured securities was recently deferred until periods ending on or after September 30, 2009. Further changes to these rules by insurance regulators, or the timing of the Company’s application of these rules, are possible, given the deferral and other uncertainty around the resolution of these accounting rules.

The implementation of VACARVM, a new statutory reserve methodology for variable annuities with guaranteed benefits, effective December 31, 2009 is not expected to have a material impact on the statutory surplus of the Company. However, VACARVM is expected to result in higher statutory reserves ceded to our offshore captive reinsurance company, which we currently anticipate will increase statutory reserve credit requirements by approximately $800 million from December 31, 2008. Several strategies are currently under review to meet the increased statutory reserve credit requirement. The activities we may undertake to mitigate or address these needs include obtaining letters of credit, executing capital market strategies, or holding assets equal to the statutory reserve credit in a trust. However, our ability to successfully execute these strategies may depend on market or other conditions.

As discussed above, market conditions during 2008 negatively impacted the level of our capital. In order to address these impacts on our capital, Prudential Financial made capital contributions to certain domestic insurance subsidiaries, including the Company, which was subsequently used to repay portions of our outstanding loans with Prudential Financial.

Item 4. Controls and Procedures

In order to ensure that the information we must disclose in our filings with the SEC is recorded, processed, summarized and reported on a timely basis, the Company’s management, including our Chief Executive Officer and Chief Financial Officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended, or the “Exchange Act”, as of June 30, 2009. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2009, our disclosure controls and procedures were effective. No change in our internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), occurred during the quarter ended March 31, 2009 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

We are subject to legal and regulatory actions in the ordinary course of our businesses, including class action lawsuits. Our pending legal and regulatory actions include proceedings specific to the Company and proceedings generally applicable to business practices in the industry in which we operate. We are subject to class action lawsuits and other litigation alleging, among other things, that we made improper or inadequate disclosures in connection with the sale of annuity products or charged excessive or impermissible fees on these products, recommended unsuitable products to customers, mishandled customer accounts or breached fiduciary duties to customers. We are also subject to litigation arising out of our general business activities, such as our investments and contracts, and could be exposed to claims or litigation concerning certain business or process patents. Regulatory authorities from time to time make inquiries and conduct investigations and examinations relating particularly to us and our products. In addition, we, along with other participants in the business in which we engage, 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 our pending legal and regulatory actions, parties are seeking large and/or indeterminate amounts, including punitive or exemplary damages. The outcome of a litigation or regulatory matter, and the amount or range of potential loss at any particular time, is inherently uncertain.

During the third quarter of 2004, the Company identified a system-generated calculation error in its annuity contract administration system that existed prior to the Acquisition. This error related to the calculation of amounts due to customers for certain transactions subject to a market value adjustment upon the surrender or transfer of monies out of their annuity contract’s fixed allocation options. The error resulted in an underpayment to policyholders, as well as additional anticipated costs to the Company associated with remediation, breakage and other losses. The Company’s consultants have developed the systems functionality to compute remediation amounts and are in the process of running the computations on affected contracts. The Company contacted state insurance regulators and commenced Phase I of its outreach to customers on November 12, 2007. Phase II commenced June 6, 2008. Phase III commenced December 5, 2008. Phase IV commenced June 12, 2009. Contracts requiring manual calculations will be remediated in smaller batches over the next few months through the 4^th quarter. The Company has advised Skandia that a portion of the remediation and related administrative costs are subject to the indemnification provisions of the Acquisition Agreement.

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 results of operations or cash flow of the Company in a particular quarterly or annual period could be materially affected by an ultimate unfavorable resolution of pending litigation and regulatory matters depending, in part, upon the results of operations or cash flow for such period. In light of the unpredictability of the Company’s litigation and regulatory matters, it is also possible that in certain cases an ultimate unfavorable resolution of one or more pending litigation or regulatory matters could have a material adverse effect on the Company’s financial position. Management believes, however, that, based on information currently known to it, the ultimate outcome of all pending litigation and regulatory matters, after consideration of applicable reserves and rights to indemnification, is not likely to have a material adverse effect on the Company’s financial position. The foregoing discussion is limited to recent developments concerning our legal and regulatory proceedings. See Note 4 to the Unaudited Interim Financial Statements included herein for additional discussion of our litigation and regulatory matters.

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Item 1A. Risk Factors

The Company is an indirectly owned subsidiary of Prudential Financial. The following risks could materially affect Prudential Financial’s and/or the Company’s business, results of operations or financial condition or cause our actual results to differ materially from those expected or those expressed in any forward looking statements made by or on behalf of the Company. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” above and the risks of our businesses described elsewhere in this Quarterly Report on Form 10-Q and in our Form 10-K for the year ended December 31, 2008.

Our business and our results of operations have been materially adversely affected by the adverse conditions in the global financial markets and economic conditions generally. Our business, results of operations and financial condition may be further adversely affected, possibly materially, if these conditions persist or deteriorate.

Our results of operations have been materially adversely affected by conditions in the global financial markets and the economy generally, both in the U.S. and elsewhere around the world. The global financial markets have experienced extreme stress since the second half of 2007. Volatility and disruption in the global financial markets reached unprecedented levels for the post World War II period. The availability and cost of credit has been materially affected. These factors, combined with recent economic conditions in the U.S. including depressed home and commercial real estate prices and increasing foreclosures, falling equity market values, declining business and consumer confidence and rising unemployment, have precipitated a severe economic recession and fears of even more severe and prolonged adverse economic conditions.

Due to the economic environment, the global fixed-income markets have experienced both extreme volatility and limited market liquidity conditions, which has affected a broad range of asset classes and sectors. As a result, the market for fixed income instruments has experienced decreased liquidity, increased price volatility, credit downgrade events, and increased probability of default. Global equity markets have also experienced heightened volatility. These events have had and may continue to have an adverse effect on us. Our revenues are likely to decline in such circumstances, the cost of meeting our obligations to our customers may increase, and our profit margins would likely erode. In addition, in the event of a prolonged or severe economic downturn, we could incur significant losses in our investment portfolio.

The demand for our products could be adversely affected in an economic downturn characterized by higher unemployment, lower family income, lower consumer spending, lower corporate earnings and lower business investment. We also may experience a higher incidence of claims and lapses or surrenders of policies. Our policyholders may choose to defer or stop paying insurance premiums. We cannot predict definitively whether or when such actions, which could impact our business, results of operations, cash flows, and financial condition, may occur.

Markets in the United States and elsewhere have experienced extreme and unprecedented volatility and disruption, with adverse consequences to our liquidity, access to capital and cost of capital. Market conditions such as we have experienced since the second half of 2007 may significantly affect our ability to meet liquidity needs, our access to capital and our cost of capital. We may seek additional debt or equity capital but be unable to obtain such.

Adverse capital market conditions have affected and may continue to affect the availability and cost of borrowed funds and could impact our ability to refinance existing borrowings, thereby ultimately impacting our profitability and ability to support or grow our businesses. We need liquidity to pay our operating expenses, interest on our debt and replace certain maturing debt obligations. Without sufficient liquidity, we could be forced to curtail certain of our operations, and our business could suffer. The principal sources of our liquidity are annuity considerations, deposit funds and cash flow from our investment portfolio and assets, consisting mainly of cash or assets that are readily convertible into cash. Sources of liquidity in normal markets also include a variety of short- and long-term instruments, including securities lending and repurchase agreements, commercial paper, medium and long-term debt and capital securities.

Disruptions, uncertainty or volatility in the financial markets have limited and may be expected to continue to limit our access to capital required to operate our business. These market conditions may limit our ability to replace, in a timely manner, maturing debt obligations and access the capital necessary to grow our business, and replace capital withdrawn by customers as a result of volatility in the markets. As a result, we may be forced to delay raising capital, issue shorter tenor securities than would be optimal, bear an unattractive cost of capital or be unable to raise capital at any price, which could decrease our profitability and significantly reduce our financial flexibility. Actions we might take to access financing may in turn cause rating agencies to reevaluate our ratings. Prudential Financial’s ability to borrow under its commercial paper programs is also dependent upon market conditions. Future deterioration of its capital position at a time when it is unable to access the long-term debt or commercial paper markets could have a material adverse effect on our liquidity. Prudential Financial internal sources of liquidity may prove to be insufficient.

We may seek additional debt or equity financing to satisfy our needs. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the financial services industry, and our credit ratings and credit capacity. We may not be able to successfully obtain additional financing on favorable terms, or at all.

The Risk Based Capital, or RBC, ratio is the primary measure by which we evaluate our capital adequacy. We manage our RBC ratio to a level consistent with a “AA” ratings objective; however, rating agencies take into account a variety of factors in assigning ratings in addition to RBC levels. RBC is determined by statutory rules that consider risks related to the type and quality of the invested assets, insurance-related risks associated with our products, interest rate risks and general business risks. The RBC ratio calculations are intended to assist insurance regulators in measuring the adequacy of our statutory capitalization. Subsequent to September 30,

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2008 market conditions negatively impacted our level of capital and caused Prudential Financial to take capital management actions to maintain capital consistent with these ratings objectives, which included redeployment of financial resources from internal sources. The RBC ratio is an annual calculation; however, based upon June 30, 2009 amounts, the RBC for Prudential Insurance and its other domestic life insurance subsidiaries including the Company would exceed the minimum level required by applicable insurance regulations. The level of statutory capital of our domestic life insurance subsidiaries is affected by the statutory account rules for loan-backed and structured securities. Mandatory adoption of changes to these rules was recently deferred until periods ending on or after September 30, 2009. Further changes to these rules by insurance regulators, or the timing of the Company’s application of these rules, are possible, given the deferral and other uncertainty around the resolution of these accounting rules.

Disruptions in the capital markets could adversely affect the Company’s ability to access sources of liquidity, as well as threaten to reduce our capital below a level that is consistent with our existing ratings objectives. Therefore, we may need to take additional actions, which may include but are not limited to: (1) further access external sources of capital, including the debt or equity markets, as noted above; (2) limiting or curtailing sales of certain products and/or restructuring existing products; (3) undertake additional capital management activities, including reinsurance transactions; and (4) seek temporary or permanent changes to regulatory rules. Certain of these actions may require regulatory approval and/or agreement of counterparties which are outside of our control or have economic costs associated with them.

The Company is a wholly owned subsidiary of PAI and indirectly owned by Prudential Financial. As such, it is possible that we may need to rely on our parent company to meet our liquidity needs in the future. Therefore, we are subject to the same risks as PAI and Prudential Financial.

Governmental actions in response to the current financial crisis may not be effective and could subject us to additional regulation. Participation by Prudential Financial or its affiliates in certain of these governmental programs could also result in limitations or restrictions on our businesses or otherwise restrict our flexibility.

In response to the market dislocation affecting the banking system and financial markets, on October 3, 2008, President Bush signed the Emergency Economic Stabilization Act of 2008, or EESA, into law. Pursuant to the EESA, the U.S. Treasury has the authority to, among other things, purchase up to $700 billion of mortgage-backed and other securities from financial institutions for the purpose of stabilizing the financial markets. On October 14, 2008, the U.S. Treasury announced that it would use EESA authority to invest an aggregate of $250 billion (of the first $350 billion released under EESA) in capital issued by qualifying U.S. financial institutions under the U.S. Treasury’s Capital Purchase Program, which is part of the Troubled Asset Relief Program, or TARP. The TARP Capital Purchase Program involves the issuance by qualifying institutions of preferred stock and warrants to purchase common stock to the U.S. Treasury. Concurrently, with the announcement of the TARP Capital Purchase Program in coordination with the U.S. Treasury, the Federal Deposit Insurance Corporation, or FDIC announced the Temporary Liquidity Guarantee Program, through which it guarantees certain newly issued senior unsecured debt issued by FDIC insured institutions and their qualifying holding companies, as well as funds over $250,000 in non-interest-bearing transaction deposit accounts. In addition, since March 2008, the Federal Reserve has created several lending facilities to stabilize financial markets including the Term Asset-Backed Securities Loan Facility, or TALF. The TALF is designed to provide secured financing for certain types of asset-backed securities, including (as of July 2009) certain high-quality commercial mortgage-backed securities issued before January 1, 2009. On February 10, 2009, the U.S. Treasury announced a Financial Stability Plan to build upon existing programs and earmark the second $350 billion of funds that were authorized under the EESA and released in January 2009. The elements of the Financial Stability Plan, as described by the U.S. Treasury, are a Capital Assistance Program and Financial Stability Trust to make capital available to financial institutions through additional purchases of preferred stock, a Public-Private Investment Program, or PPIP, to buy legacy loans and assets from financial institutions, a Consumer and Business Lending Initiative to restart securitization markets for loans to consumers and businesses by expanding upon TALF, and a comprehensive housing program to, among other things, help reduce mortgage payments and interest rates. The U.S. Treasury has stated that the Financial Stability Plan will require high levels of transparency and accountability standards and dividend, acquisition and executive compensation restrictions for financial institutions that receive government assistance going forward.

In the first and second quarters of 2009, the U.S. Treasury, in conjunction with the FDIC and the Federal Reserve, announced details regarding the PPIP. The PPIP has two separate parts to address the problem of “legacy assets” — real estate loans held directly on the books of banks (“legacy loans”) and securities backed by loan portfolios (“legacy securities”). Under the Legacy Loans Program portion of the PPIP, the U.S. Treasury will invest alongside private investors in individual investment funds referred to as Public-Private Investment Funds, which will purchase eligible asset pools from depository institutions and the FDIC on a discrete basis. The FDIC will provide a guarantee for the debt financing issued by the Public-Private Investment Funds to fund the asset purchases. The FDIC has stated that it plans to test the funding mechanism contemplated by the Legacy Loan Program during the summer of 2009, but an official commencement date for the program has not been announced. Under the Legacy Securities Program, the U.S. Treasury will co-invest with, and provide leverage to pre approved asset managers to support the market for certain legacy securities. Legacy securities eligible for the program include commercial mortgage backed and residential mortgage backed securities originated prior to 2009 with a rating of AAA at the time of origination. In July 2009, the U.S. Treasury selected nine firms to participate as fund managers in the initial round of the Legacy Securities Program and announced that it will invest up to $30 billion in the debt and equity of the corresponding Public-Private Investment Funds.

Prudential Financial applied in October 2008 to participate in the TARP Capital Purchase Program, and in May 2009 we received preliminary approval from the U.S. Treasury to participate in the Program. However, on June 1, 2009 the Prudential Financial announced that it would not participate in the Capital Purchase Program.

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In the second half of 2009, Prudential Financial participated in TALF as an eligible borrower. As of June 30, 2009, it had $1.250 million securities purchased under TALF that are reflected within “Other trading account assets” and received secured financing from the Federal Reserve of $1.167 million related to the purchase of these securities that is reflected within “long-term debt.” Prudential Financial also continue to evaluate participation in other government sponsored programs for which it may be eligible.

The U.S. federal government has taken or is considering taking other actions to address the financial crisis, including mortgage and credit card program modification proposals, that could further impact Prudential Financial’s business and investments, particularly its mortgage and consumer debt related investments, which are significant. We cannot predict with any certainty whether these actions will be effective or the effect they may have on the financial markets or on our business, results of operations, cash flows and financial condition.

On June 17, 2009, the Obama Administration announced proposals to reform the national regulation of various financial institutions. Depending on the manner of adoption of these or other proposals, Prudential Financial could become subject to increased federal regulation, either as a bank holding company or a “Tier 1 financial holding company”. Such regulation could involve higher capital requirements, limits on business activities, limits on leverage and other regulatory supervision, including by the Board of Governors of the Federal Reserve System. Prudential Financial cannot predict the form in which such proposals will be adopted (if at all) or their applicability to or effect on our business, financial condition or results of operations.

Market fluctuations and general economic, market and political conditions may adversely affect our business and profitability.

Even under relatively more favorable market conditions (such as those prevailing before the second half of 2007), our products, , as well as our investment returns and our access to and cost of financing, are sensitive to fixed income, equity, real estate and other market fluctuations and general economic, market and political conditions. These fluctuations and conditions could adversely affect our results of operations, financial position and liquidity, including in the following respects:

• The profitability of many of our insurance products depends in part on the value of the separate accounts supporting these products, which fluctuate substantially depending on the foregoing conditions.

• Hedging instruments held by our affiliates to manage product and other risks might not perform as intended or expected resulting in higher realized losses and unforeseen cash needs. Market conditions can also further increase the cost of executing product related hedges and such costs may not be recovered in the pricing of the underlying products being hedged. Our hedging strategies rely on the performance of counterparties to such hedges. These counterparties may fail to perform for various reasons resulting in hedge ineffectiveness and higher losses.

• Market conditions resulting in reductions in the value of assets we administer have an adverse effect on the revenues and profitability of our asset administration, which depends on fees related primarily to the value of assets under management, and could further decrease the value of our proprietary investments.

• Sales of our products may decline, and lapses and surrenders of variable life and annuity products may increase if a market downturn, increased market volatility or other market conditions result in customers becoming dissatisfied with their products.

• A change in market conditions, including prolonged periods of high inflation, could cause a change in consumer sentiment adversely affecting sales and persistency of our long-term savings and protection products. Similarly, changing economic conditions can influence customer behavior including but not limited to increasing claims in certain annuities.

• A market decline could further result in guaranteed minimum benefits contained in many of our variable annuity products being higher than current account values or our pricing assumptions would support, requiring us to materially increase reserves for such products and may cause customers to retain contracts in force in order to benefit from the guarantees, thereby increasing their cost to us. Our valuation of the liabilities for the minimum benefits contained in many of our variable annuity products requires us to consider the market perception of our risk of non-performance; and a decrease in our own credit spreads resulting from ratings upgrades or other events or market conditions could cause the recorded value of these liabilities to increase, which in turn could adversely affect our results of operations and financial position.

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• We have significant investment and derivative portfolios, including but not limited to corporate and asset-backed securities, equities and commercial real estate. Economic conditions as well as adverse capital market conditions, including but not limited to a lack of buyers in the marketplace, volatility, credit spread changes, and benchmark interest rate changes, will impact the liquidity and value of our investments and derivatives, potentially resulting in higher realized or unrealized losses, the latter especially if we were to need to sell a significant amount of investments under such conditions. For example, a widening of credit spreads, increases the net unrealized loss position of our investment portfolio and may ultimately result in increased realized losses. Values of our investments and derivatives can also be impacted by reductions in price transparency, changes in assumptions or inputs we use in estimating fair value and changes in investor confidence and preferences, potentially resulting in higher realized or unrealized losses. Volatility can make it difficult to value certain of our securities if trading becomes less frequent. As such, valuations may include assumptions or estimates that may have significant period to period changes which could have a material adverse effect on our results of operations or financial condition and in certain cases under U.S, GAAP such period to period changes in the value of investments are not recognized in our results of operations or statements of financial condition.

• Regardless of market conditions, certain investments we hold, including private bonds and commercial mortgages, are relatively illiquid. If we needed to sell these investments, we may have difficulty doing so in a timely manner at a price that we could otherwise realize.

As described above, the period since the second half of 2007 has been characterized by extreme adverse market and economic conditions. The foregoing risks are even more pronounced in these unprecedented market and economic conditions.

Interest rate fluctuations could adversely affect our business and profitability.

Our products, and certain of our investment returns, may be sensitive to interest rate fluctuations, and changes in interest rates could adversely affect our investment returns and results of operations, including in the following respects:

• Some of our products expose us to the risk that changes in interest rates will reduce the spread between the amounts that we are required to pay under the contracts and the rate of return we are able to earn on our general account investments supporting the contracts. When interest rates decline, we have to reinvest the cash income from our investments in lower yielding instruments. Since many of our policies and contracts have guaranteed minimum interest or crediting rates or limit the resetting of interest rates, the spreads could decrease and potentially become negative. When interest rates rise, we may not be able to replace the assets in our general account with the higher yielding assets needed to fund the higher crediting rates necessary to keep these products and contracts competitive. This risk is heightened in the current market and economic environment, in which many desired securities are unavailable.

• Changes in interest rates may reduce net investment income and thus our spread income which is a substantial portion of our profitability. Changes in interest rates can also result in potential losses in our investment activities in which we borrow funds and purchase investments to earn additional spread income on the borrowed funds. A decline in market interest rates could also reduce our returns from investment of equity.

• When interest rates rise, policy loans and surrenders and withdrawals of life insurance policies and annuity contracts may increase as policyholders seek to buy products with perceived higher returns, requiring us to sell investment assets potentially resulting in realized investment losses, or requiring us to accelerate the amortization of DAC or VOBA (both defined below).

• A decline in interest rates accompanied by unexpected prepayments of certain investments could result in reduced investments and a decline in our profitability. An increase in interest rates accompanied by unexpected extensions of certain lower yielding investments could result in a decline in our profitability.

• Changes in the relationship between long-term and short-term interest rates could adversely affect the profitability of some of our products.

• Changes in interest rates could increase our costs of financing.

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• Our mitigation efforts with respect to interest rate risk are primarily focused on maintaining an investment portfolio with diversified maturities that has a weighted average duration that is approximately equal to the duration of our estimated liability cash flow profile. However, there are practical and capital market limitations on our ability to accomplish this and our estimate of the liability cash flow profile may be inaccurate. Due to these and other factors we may need to liquidate investments prior to maturity at a loss in order to satisfy liabilities or be forced to reinvest funds in a lower rate environment. Although we take measures to manage the economic risks of investing in a changing interest rate environment, we may not be able to effectively mitigate, and may choose based on factors, including economic considerations, not to fully mitigate, the interest rate risk of our assets relative to our liabilities.

If our reserves for future policyholder benefits and claims are inadequate, we may be required to increase our reserves, which would adversely affect our results of operations and financial condition.

We establish and carry reserves to pay future policyholder benefits and claims. Our reserves do not represent an exact calculation of liability, but rather are actuarial or statistical estimates based on models that include many assumptions and projections which are inherently uncertain and involve the exercise of significant judgment, including as to the levels and/or timing of benefits, claims, expenses, investment results, including equity market returns, mortality, morbidity and persistency. We cannot determine with precision the ultimate amounts that we will pay for, or the timing of payment of, actual benefits, claims and expenses or whether the assets supporting our policy liabilities, will be sufficient for payment of benefits and claims. If we conclude that our reserves are insufficient to cover future policy benefits and claims, we would be required to increase our reserves and incur income statement charges for the period in which we make the determination, which would adversely affect our results of operations and financial condition.

For certain of our products, market performance and interest rates impact the level of statutory reserves and statutory capital we are required to hold, and may have an adverse effect on returns on capital associated with these products. For example, equity market declines in the fourth quarter of 2008 caused a significant increase in the level of statutory reserves and statutory capital we are required to hold in relation to our annuities business. Capacity for reserve funding structures available in the marketplace is currently limited as a result of market conditions generally. Our ability to efficiently manage capital and economic reserve levels may be impacted, thereby impacting profitability and return on capital.

Our profitability may decline if mortality rates or persistency rates differ significantly from our pricing expectations.

We set prices for many of our products based upon expected claims and payment patterns, using assumptions for mortality rates, or likelihood of death, of our policyholders. In addition to the potential effect of natural or man-made disasters, significant changes in mortality or morbidity could emerge gradually over time, due to changes in the natural environment, the health habits of the insured population, treatment patterns for disease or disability, the economic environment, or other factors. Pricing of our products is also based in part upon expected persistency of these products, which is the probability that a policy or contract will remain in force from one period to the next. Persistency may be significantly impacted by the value of guaranteed minimum benefits contained in many of our variable annuity products being higher than current account values in light of equity market declines. Results may also vary based on differences between actual and expected premium deposits and withdrawals for these products. Significant deviations in actual experience from our pricing assumptions could have an adverse effect on the profitability of our products.

We may be required to accelerate the amortization of deferred policy acquisition costs, or DAC, or valuation of business acquired, or VOBA, or recognize impairment in certain investments, or be required to establish a valuation allowance against deferred income tax assets, any of which could adversely affect our results of operations and financial condition.

Deferred policy acquisition costs, (“DAC”), represent the costs that vary with and are related primarily to the acquisition of new and renewal insurance and annuity contracts, and we amortize these costs over the expected lives of the contracts. Valuation of business acquired, (“VOBA”), represents the present value of future profits embedded in acquired contracts and is amortized over the expected effective lives of the acquired contracts. Management, on an ongoing basis, tests the DAC and VOBA recorded on our balance sheet to determine if these amounts are recoverable under current assumptions. In addition, we regularly review the estimates and assumptions underlying DAC and VOBA for those products for which we amortize DAC and VOBA in proportion to gross profits. Given changes in facts and circumstances, these tests and reviews could lead to further reductions in DAC and/or VOBA that could have an adverse effect on the results of our operations and our financial condition. Significant or sustained equity market declines as well as investment could result in acceleration of amortization of the DAC and VOBA , resulting in a charge to income.

Deferred income tax represents the tax effect of the differences between the book and tax basis of assets and liabilities. Deferred tax assets are assessed periodically by management to determine if they are realizable. Factors in management’s determination include the performance of the business including the ability to generate capital gains from a variety of sources and tax planning strategies. If based on available information, it is more likely than not that the deferred income tax asset will not be realized then a valuation allowance must be established with a corresponding charge to net income. Such charges could have a material adverse effect on our results of operations or financial position.

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Our valuation of fixed maturity, equity and trading securities may include methodologies, estimations and assumptions that are subject to differing interpretations and could result in changes to investment valuations that may materially adversely affect our results of operations or financial condition.

During periods of market disruption, such as the unprecedented market conditions since the second half of 2007, it may be difficult to value certain of our securities, such as sub-prime mortgage backed securities, if trading becomes less frequent and/or market data becomes less observable. There are and may continue to be certain asset classes that were in active markets with significant observable data that become illiquid due to the current financial environment or market conditions. As a result, valuations may include inputs and assumptions that are less observable or require greater estimation and judgment as well as valuation methods which are more complex. These values may not be ultimately realizable in a market transaction, and such values may change very rapidly as market conditions change and valuation assumptions are modified. Decreases in value may have a material adverse effect on our results of operations or financial condition.

The decision on whether to record an other-than-temporary impairment or write-down is determined in part by management’s assessment of the financial condition and prospects of a particular issuer, projections of future cash flows and recoverability of the particular security. Management’s conclusions on such assessments are highly judgmental and include assumptions and projections of future cash flows which ultimately prove to be incorrect as assumptions, facts and circumstances change.

A downgrade or potential downgrade in our claims-paying or credit ratings could limit our ability to market products, increase the number or value of policies being surrendered, increase our borrowing costs and/or hurt our relationships with creditors or trading counterparties and restrict our access to alternative sources of liquidity.

Claims-paying ratings, which are sometimes referred to as “financial strength” ratings, represent opinions of rating agencies regarding the financial ability of an insurance company to meet its obligations under an insurance policy, and are important factors affecting public confidence in an insurer and its competitive position in marketing products. Credit ratings represent the opinions of rating agencies regarding an entity’s ability to repay its indebtedness, and credit ratings are important to our ability to raise capital through the issuance of debt and to the cost of such financing. A downgrade in our claims-paying or credit ratings could potentially, among other things, limit our ability to market products, reduce our competitiveness, increase the number or value of policy surrenders and withdrawals, increase our borrowing costs and potentially make it more difficult to borrow funds, adversely affect the availability of financial guarantees, such as letters of credit, cause additional collateral requirements under certain agreements, allow counterparties to terminate derivative, and/or hurt our relationships with creditors or trading counterparties. In addition, actions we might take to access third party financing or to realign our capital structure may in turn cause rating agencies to reevaluate our ratings.

In view of the difficulties experienced recently by many financial institutions, the rating agencies have heightened the level of scrutiny that they apply to such institutions, have increased the frequency and scope of their credit reviews, have requested additional information from the companies that they rate, and may adjust upward the capital and other requirements employed in the rating agency models for maintenance of certain ratings levels, such as the financial strength ratings currently held the Company. The outcome of such reviews may have adverse ratings consequences, which could have a material adverse effect on our results of operation and financial condition.

In late September and early October, 2008, A.M. Best Company, Inc., Fitch Ratings Ltd., Moody’s Investors Service, and Standard & Poor’s, respectively, each revised its outlook for the U.S. life insurance sector to negative from stable, citing, among other things, the significant deterioration and volatility in the credit and equity markets, economic and political uncertainty, and the expected impact of realized and unrealized investment losses on life insurers’ capital levels and profitability.

On June 26, 2009, Moody’s affirmed the long-term senior debt rating of Prudential Financial at “Baa2” and the financial strength ratings of its life insurance subsidiaries at “A2,” and revised the outlook from negative to stable. The short-term debt rating of Prudential Funding remains on review for possible downgrade.

On June 3, 2009, S&P affirmed Prudential Financial’s long-term senior debt rating at “A” and short-term rating at “A-1.” S&P also affirmed the financial strength ratings of its life insurance subsidiaries at “AA-” and the short-term debt rating of Prudential Funding at “A1+.” The outlook for all of these companies remains stable.

On May 27, 2009, A.M. Best affirmed the financial strength ratings of Prudential Financial’s life subsidiaries at “A+,” and affirmed Prudential Financial’s long-term senior debt rating at “a-.” The outlook for both was revised from stable to negative.

On March 18, 2009, Moody’s lowered the long-term senior debt rating of Prudential Financial to “Baa2” from “A3” and lowered the financial strength ratings of its life insurance subsidiaries to “A2” from “Aa3,” with a negative outlook. Moody’s also placed the short-term debt rating of Prudential Funding on review for possible downgrade.

On February 26, 2009, S&P lowered the financial strength ratings of its life insurance subsidiaries, including the Company, to “AA-” from “AA” and affirmed Prudential Financial’s long-term senior debt ratings as “A.” The outlook for both ratings was revised from negative to stable.

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On February 17, 2009, S&P lowered Prudential Financial’s long-term senior debt rating to “A” from “A+” and affirmed the “AA” ratings of its life insurance subsidiaries, including the Company. The long-term ratings outlook was revised from stable to negative.

On February 10, 2009, Moody’s placed the long-term ratings of Prudential Financial and our life insurance subsidiaries on review for possible downgrade. The short-term ratings of Prudential Financial and Prudential Funding were affirmed with a stable outlook.

Both Prudential Financial’s and Prudential Funding’s commercial paper programs were granted approval to participate in the Federal Reserve’s Commercial Paper Funding Facility, or CPFF, during the fourth quarter of 2008. Commercial paper issuers must maintain ratings of at least A-1/P-1/F-1 by two rating agencies in order to be eligible for CPFF. On February 19, 2009, Prudential Financial’s commercial paper rating was downgraded by Fitch from F1 to F2 and, consequently, as of that date, Prudential Financial was no longer eligible to issue commercial paper under the CPFF. As of the date of this filing, Prudential Funding’s commercial paper is rated A-1+/P-1/F1; however, as noted above, on March 18, 2009, Moody’s placed Prudential Funding’s commercial paper rating on review for possible downgrade. If Prudential Funding fails to maintain the required A-1/F-1/F-1 ratings by at least two rating agencies, its program would no longer be eligible for CPFF, and it would lose its access to CPFF completely.

Prudential Insurance has been a member of the Federal Home Loan Bank of New York, or FHLBNY, since June 2008. Membership allows Prudential Insurance to participate in FHLBNY’s product line of financial services, including collateralized funding agreements, general asset/liability management, and collateralized advances that can be used for liquidity management and as an alternative source of funding. Under FHLBNY guidelines, if Prudential Insurance’s claims-paying ratings decline below certain levels, and the FHLBNY does not receive written assurances from the New Jersey Department of Banking and Insurance regarding Prudential Insurance’s solvency, new borrowings from the FHLBNY would be limited to a term of 90 days or less. Although Prudential Insurance’s ratings are currently at or above the required minimum levels, there can be no assurance that the ratings will remain at these levels in the future.

We cannot predict what additional actions rating agencies may take, or what actions we may take in response to the actions of rating agencies, which could adversely affect our business. As with other companies in the financial services industry, our ratings could be downgraded at any time and without notice by any rating agency.

Ratings downgrades and changes in credit spreads may require Prudential Financial to post collateral, thereby affecting its liquidity, and we may be unable to effectively implement certain capital management activities as a result, or for other reasons.

A downgrade in the credit or financial strength ratings of Prudential Financial or its rated subsidiaries could result in additional collateral requirements for Prudential Financial or other required payments under certain agreements including derivative agreements, which are eligible to be satisfied in cash or by posting securities held by the subsidiaries subject to the agreements.

Losses due to defaults by others, including issuers of investment securities or reinsurance, bond insurers and derivative instrument counterparties, downgrades in the ratings of securities we hold or of bond insurers, insolvencies of insurers in jurisdictions where we write business, and other factors affecting our counterparties or the value of their securities could adversely affect the value of our investments, the realization of amounts contractually owed to us, result in assessments or additional statutory capital requirements or reduce our profitability or sources of liquidity.

Issuers and borrowers whose securities or loans we hold, customers, vendors, trading counterparties, counterparties under swaps and other derivative contracts, reinsurers, clearing agents, exchanges, clearing houses and other financial intermediaries and guarantors, including bond insurers, may default on their obligations to us or be unable to perform service functions that are significant to our business due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions, operational failure, fraud or other reasons. Such defaults, instances of which have occurred in recent months, could have an adverse effect on our results of operations and financial condition. A downgrade in the ratings of bond insurers could also result in declines in the value of our fixed maturity investments supported by guarantees from bond insurers.

In addition, we use derivative instruments to hedge various risks, including certain guaranteed minimum benefits contained in many of our variable annuity products. We enter into a variety of derivative instruments, including options, forwards, interest rate, credit default and currency swaps with a number of counterparties. Our obligations under our variable annuity products are not changed by our hedging activities and we are liable for our obligations even if our derivative counterparties do not pay us. This is a more pronounced risk to us in view of the recent stresses suffered by financial institutions. Such defaults could have a material adverse effect on our financial condition and results of operations.

Under state insurance guaranty association laws, we are subject to assessments, based on the share of business we write in the relevant jurisdiction, for certain obligations of insolvent insurance companies to policyholders and claimants.

The eligible collateral that Prudential Insurance is required to pledge to the FHLBNY in support of its borrowings includes qualifying mortgage-related assets, such as commercial mortgage-backed securities. Recently, the major rating agencies have downgraded the credit ratings of certain commercial mortgage-backed securities and may continue to do so. If future downgrades affect the commercial mortgage-backed securities pledged by Prudential Insurance to the FHLBNY, those securities would no longer constitute eligible collateral under FHLBNY guidelines. This could require Prudential Insurance to repay outstanding borrowings or to pledge replacement collateral to the FHLBNY, which could materially reduce the Company’s borrowing capacity from the FHLBNY and/or prevent use of that replacement collateral for asset-based financing transactions.

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Intense competition, including the impact of government sponsored programs and other actions on us and our competitors, could adversely affect our ability to maintain or increase our market share or profitability.

We face intense competition both for the ultimate customers for our products and, in some cases, for distribution through non-affiliated distribution channels. We compete based on a number of factors including brand recognition, reputation, quality of service, investment performance of our products, product features, scope of distribution and distribution arrangements, price, perceived financial strength and claims-paying and credit ratings. A decline in our competitive position as to one or more of these factors could adversely affect our profitability and assets under management. Many of our competitors are large and well established and some have greater market share, breadth of distribution, offer a broader range of products, services or features, assume a greater level of risk, have lower profitability expectations or have higher claims-paying or credit ratings than we do. We could be subject to claims by competitors that our products infringe their patents, which could adversely affect our sales, profitability and financial position. Competition for personnel for our annuities businesses is intense. The loss of personnel could have an adverse effect on our business and profitability. As noted above, if Prudential Financial were to participate in certain U.S. government financial assistance programs, Prudential Financial would become subject to various restrictions, including restrictions on executive compensation, that could harm its competitive position.

The adverse market and economic conditions that began in the second half of 2007 and have continued can be expected to result in changes in the competitive landscape. Such conditions may also lead to changes by us or our competitors in product offerings, product pricing and business mix that could affect our and their relative sales volumes, market shares and profitability. It is also possible that such conditions may put U.S. companies with financial operations in non-U.S. locations at a competitive disadvantage relative to domestic companies operating in those locations and may impact sales in those locations. Additionally, the competitive landscape in which we operate may be further affected by the government programs in the U.S. and similar governmental actions outside of the U.S. in response to the severe dislocations in financial markets. Competitors receiving governmental financing or other assistance or subsidies, including governmental guarantees of their obligations, may obtain pricing or other competitive advantages.

Changes in U.S. federal income tax law or in the income tax laws of other jurisdictions in which we operate could make some of our products less attractive to consumers and increase our tax costs.

Current U.S. federal income tax laws generally permit certain holders to defer taxation on the build-up of value of annuities and life insurance products until payments are actually made to the policyholder or other beneficiary and to exclude from taxation the death benefit paid under a life insurance contract. Congress from time to time considers legislation that could make our products less attractive to consumers, including legislation that would reduce or eliminate the benefit of this deferral on some annuities and insurance products, as well as other types of changes that could reduce or eliminate the attractiveness of annuities and life insurance products to consumers, such as repeal of the estate tax.

For example, the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 generally provided for lower income tax, capital gains and dividend tax rates that had the effect of reducing the benefits of tax deferral on the build-up of value of annuities and life insurance products. Continuation of these reduced rates, which are due to sunset in 2011, may hinder our sales and result in the increased surrender of insurance and annuity products.

Congress, as well as state and local governments, also considers from time to time legislation that could increase the amount of corporate taxes we pay. For example, changes in the law relating to tax reserving methodologies for term life or universal life insurance policies with secondary guarantees could result in higher corporate taxes. If such legislation is adopted our net income could decline.

The U.S. Treasury Department and the Internal Revenue Service have indicated that they intend to address through regulations the methodology to be followed in determining the dividends received deduction, or DRD, related to variable life insurance and annuity contracts. The DRD reduces the amount of dividend income subject to tax and is a significant component of the difference between our actual tax expense and expected amount determined using the federal statutory tax rate of 35%. A change in the DRD, including the possible retroactive or prospective elimination of this deduction through regulations or legislation, could increase our actual tax expense and reduce our net income.

On May 11, 2009, the Obama Administration released the “General Explanations of the Administration’s Revenue Proposals.” Although the Administration has not released proposed statutory language, the “General Explanations of the Administration’s Revenue Proposals” includes proposals which if enacted, would affect the taxation of life insurance companies and certain life insurance products. In particular, the proposals would affect the treatment of corporate owned life insurance policies, or COLIs, by limiting the availability of certain interest deductions for companies that purchase those policies. The proposals would also change the method used to determine the amount of dividend income received by a life insurance company on assets held in separate accounts used to support products, including variable life insurance and variable annuity contracts, that is eligible DRD. If proposals of this type were enacted, Prudential Financial’s sale of COLI, variable annuities, and variable life products could be adversely affected and its actual tax expense could increase, reducing earnings.

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The products we sell have different tax characteristics, in some cases generating tax deductions. The level of profitability of certain of our products are significantly dependent on these characteristics and our ability to continue to generate taxable income, which are taken into consideration when pricing products and are a component of our capital management strategies. Accordingly, a change in tax law, our ability to generate taxable income, or other factors impacting the availability of the tax characteristics generated by our products, could impact product pricing and returns or require us to reduce our sales of these products or implement other actions that could be disruptive to our business.

Our businesses are heavily regulated and changes in regulation may reduce our profitability.

Our businesses are subject to comprehensive regulation and supervision. The purpose of this regulation is primarily to protect our customers and not necessarily our shareholder. Many of the laws and regulations to which we are subject are regularly re-examined, and existing or future laws and regulations may become more restrictive or otherwise adversely affect our operations. This is particularly the case under current market conditions. It appears likely that the continuing financial markets dislocation will lead to extensive changes in existing laws and regulations, and regulatory frameworks, applicable to our businesses.

The Company is subject to the rules and regulations of the SEC relating to public reporting and disclosure, securities trading, accounting and financial reporting, and corporate governance matters. The Sarbanes-Oxley Act of 2002 and rules and regulations adopted in furtherance of that Act have substantially increased the requirements in these and other areas for public companies.

Many insurance regulatory and other governmental or self-regulatory bodies have the authority to review our products and business practices and those of our agents and employees and to bring regulatory or other legal actions against us if, in their view, our practices, or those of our agents or employees, are improper. These actions can result in substantial fines, penalties or prohibitions or restrictions on our business activities and could adversely affect our business, reputation, results of operations or financial condition. For a discussion of material pending litigation and regulatory matters, see “Contingent Liabilities and Litigation and Regulatory Matters” in the Notes to Unaudited Financial Statements included in this Quarterly Report on Form 10-Q.

Insurance regulators, as well as industry participants, have begun to consider potentially significant changes in the way in which statutory reserves and statutory capital are determined, particularly for products with embedded options and guarantees. New regulatory capital requirements have already gone into effect for variable annuity products and new reserving requirements for these products are scheduled to be implemented as of the end of 2009. The timing of, and extent of, such changes to the statutory reporting framework are uncertain; however, the result could be increases to statutory reserves and capital, and an adverse effect on our products, sales and operating costs. Moreover, insurance regulators recently deferred mandatory adoption of changes to the statutory accounting rules for loan-backed and structured securities. Further changes to these rules by insurance regulators, or the timing of the Company’s application of these rules, are possible, given the deferral and other uncertainty around the resolution of these accounting rules.

In view of recent events involving certain financial institutions, it is likely that the U.S. federal government will heighten its oversight of companies in the financial services industry such as us, including broad regulations intended to address systemic risks to the financial system. The Obama Administration has proposed the creation of an Office of National Insurance within the U.S. Treasury. In recently circulated draft legislation, the Administration has proposed that the role of the Office of National Insurance would be , among other things, to monitor the insurance industry, designate insurers or their affiliates as entities subject to regulation as “Tier 1 financial holding companies”, as discussed above, gather information, develop expertise, negotiate international agreements, and coordinate policy in the insurance sector. We cannot predict whether this or other proposals will be adopted, or what impact, if any, such proposals or, if enacted, such laws, could have on our business, financial condition or results of operations. Significant regulatory changes are under consideration in other jurisdictions as well, as they consider their responses to current financial industry issues.

Compliance with applicable laws and regulations is time consuming and personnel-intensive, and changes in these laws and regulations may materially increase our direct and indirect compliance and other expenses of doing business, thus having a material adverse effect on our financial condition and results of operations.

See “Business—Regulation” in our Annual Report on Form 10-K for the year ended December 31, 2008 for further discussion of the impact of regulations on our businesses.

Legal and regulatory actions are inherent in our businesses and could adversely affect our results of operations or financial position or harm our businesses or reputation.

We are, and in the future may be, subject to legal and regulatory actions in the ordinary course of our businesses. Some of these proceedings have been brought on behalf of various alleged classes of complainants. In certain of these matters, the plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary damages. Substantial legal liability in these or future legal or regulatory actions could have an adverse affect on us or cause us reputational harm, which in turn could harm our business prospects.

Material pending litigation and regulatory matters affecting us, and certain risks to our businesses presented by such matters, are discussed under “Contingent Liabilities and Litigation and Regulatory Matters” in the Notes to Unaudited Financial Statements included in this Quarterly Report on Form 10-Q. As described there, settlement of the market timing matters relating to certain Skandia entities could involve, in addition to the payment of fines, penalties and restitution, continuing monitoring, changes to and/or supervision of our business practices, findings that may adversely affect existing or cause additional litigation, adverse publicity and other adverse effects on our businesses.

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Although we believe we have adequately reserved in all material respects for the costs of our litigation and regulatory matters, we can provide no assurance of this. It is possible that our results of operations or cash flow in particular quarterly or annual periods could materially decline due to an ultimately unfavorable outcome in one or more of these matters. 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.

The occurrence of natural or man-made disasters could adversely affect our results of operations and financial condition.

The occurrence of natural disasters, including hurricanes, floods, earthquakes, tornadoes, fires, explosions, pandemic disease and man-made disasters, including acts of terrorism and military actions, could adversely affect our results of operations or financial condition, including in the following respects:

• Catastrophic loss of life due to natural or man-made disasters could cause us to pay benefits at higher levels and/or materially earlier than anticipated and could lead to unexpected changes in persistency rates.

• A natural or man-made disaster could result in losses in our investment portfolio or the failure of our counterparties to perform, or cause significant volatility in global financial markets.

• A terrorist attack affecting financial institutions in the United States or elsewhere could negatively impact the financial services industry in general and our business operations, investment portfolio and profitability in particular. As previously reported, in August 2004, the U.S. Department of Homeland Security identified our Newark, New Jersey facilities, along with those of several other financial institutions in New York and Washington, D.C., as possible targets of a terrorist attack.

• Pandemic disease, caused by a virus such as H5N1, the “avian flu” virus, or H1N1, the “swine flu” virus, could have a severe adverse effect on Prudential Financial’s business. The potential impact of such a pandemic on Prudential Financial’s results of operations and financial position is highly speculative, and would depend on numerous factors, including: in the case of the avian flu virus, the probability of the virus mutating to a form that can be passed easily from human to human; the effectiveness of vaccines and the rate of contagion; the regions of the world most affected; the effectiveness of treatment for the infected population; the rates of mortality and morbidity among various segments of the insured versus the uninsured population; the collectability of reinsurance; the possible macroeconomic effects of a pandemic on the Company’s asset portfolio; the effect on lapses and surrenders of existing policies, as well as sales of new policies; and many other variables.

There can be no assurance that our business continuation plans and insurance coverages would be effective in mitigating any negative effects on our operations or profitability in the event of a terrorist attack, other disaster or pandemic.

Our risk management policies and procedures may leave us exposed to unidentified or unanticipated risk, which could adversely affect our business.

Our policies and procedures to monitor and manage risks, may not be fully effective and leave us exposed to unidentified and unanticipated risks. The Company uses models in many aspects of its operations, including but not limited to the estimation of actuarial reserves, the amortization of deferred acquisition costs and the value of business acquired, and the valuation of certain other assets and liabilities. These models rely on assumptions and projections that are inherently uncertain. Management of operational, legal and regulatory risks requires, among other things, policies and procedures to record properly and verify a large number of transactions and events, and these policies and procedures may not be fully effective. Past or future misconduct by our employees or employees of our vendors could result in violations of law by us, regulatory sanctions and/or serious reputational or financial harm and the precautions we take to prevent and detect this activity may not be effective in all cases. A failure of our computer systems or a compromise of their security could also subject us to regulatory sanctions or other claims, harm our reputation, interrupt our operations and adversely affect our business, results of operations or financial condition.

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Item 6. Exhibits

31.1	Section 302 Certification of the Chief Executive Officer.
31.2	Section 302 Certification of the Chief Financial Officer.
32.1	Section 906 Certification of the Chief Executive Officer.
32.2	Section 906 Certification of the Chief Financial Officer.

Schedules are omitted because they are either inapplicable or the information required therein is included in the notes to the Unaudited Interim Financial Statements included herein.

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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/ Kenneth Y. Tanji
	Kenneth Y. Tanji
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

August 14, 2009

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Exhibit Index

Exhibit Number and Description

31.1	Section 302 Certification of the Chief Executive Officer.
31.2	Section 302 Certification of the Chief Financial Officer.
32.1	Section 906 Certification of the Chief Executive Officer.
32.2	Section 906 Certification of the Chief Financial Officer.

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EX-31.1

Exhibit 31.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

I, Stephen Pelletier, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Prudential Annuities Life Assurance Corporation;

2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, is made known to us by others within such entity, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 14, 2009

/s/ Stephen Pelletier

Stephen Pelletier

Chief Executive Officer and President

EX-31.2

Exhibit 31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

I, Kenneth Y. Tanji, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Prudential Annuities Life Assurance Corporation;

2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within such entity, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 14, 2009

/s/ Kenneth Y. Tanji

Kenneth Y. Tanji

Executive Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

Pursuant to 18 U.S.C. Section 1350, I, Stephen Pelletier, Chief Executive Officer and President of Prudential Annuities Life Assurance Corporation (the “Company”), hereby certify that the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 14, 2009

/s/ Stephen Pelletier
Name:	Stephen Pelletier
Title:	Chief Executive Officer and President

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.

EX-32.2

Exhibit 32.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

Pursuant to 18 U.S.C. Section 1350, I, Kenneth Y. Tanji, Executive Vice President and Chief Financial Officer of Prudential Annuities Life Assurance Corporation (the “Company”), hereby certify that the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 14, 2009

/s/ Kenneth Y. Tanji
Name:	Kenneth Y. Tanji
Title:	Executive Vice President and Chief Financial Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.