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 March 31, 2014

OR

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

For the Transition Period from                      to                     

Commission File Number 033-44202

Prudential Annuities Life Assurance

Corporation

(Exact Name of Registrant as Specified in its Charter)

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

One Corporate Drive

Shelton, Connecticut 06484

(203) 926-1888

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

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

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

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

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

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

As of May 14, 2014, 25,000 shares of the registrant’s Common Stock (par value $100) consisting of 100 voting shares and 24,900 non-voting shares, were outstanding. As of such date, Prudential Annuities, Inc. formerly known as American Skandia, Inc., an indirect wholly owned subsidiary of Prudential Financial, Inc., a New Jersey corporation, owned all of the registrant’s Common Stock.

Prudential Annuities Life Assurance Corporation meets the conditions set

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

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

TABLE OF CONTENTS

			Page
PART I	FINANCIAL INFORMATION
	Item 1.	Financial Statements:
		Unaudited Interim Statements of Financial Position As of March 31, 2014 and December 31, 2013		4
		Unaudited Interim Statements of Operations and Comprehensive Income Three Months Ended March 31, 2014 and 2013		5
		Unaudited Interim Statements of Equity Three Months Ended March 31, 2014 and 2013		6
		Unaudited Interim Statements of Cash Flows Three Months Ended March 31, 2014 and 2013		7
		Notes to Unaudited Interim Financial Statements		8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		33
	Item 4.	Controls and Procedures		39
PART II	OTHER INFORMATION
	Item 1.	Legal Proceedings		40
	Item 1A.	Risk Factors		40
	Item 6.	Exhibits		41
SIGNATURES				42

2

FORWARD LOOKING STATEMENTS

Certain of the statements included in this Quarterly Report on Form 10-Q, including but not limited to those in Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Prudential Annuities Life Assurance Corporation. There can be no assurance that future developments affecting Prudential Annuities Life Assurance Corporation will be those anticipated by management. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (1) general economic, market and political conditions, including the performance and fluctuations of fixed income, equity, real estate and other financial markets; (2) the availability and cost of additional debt or equity capital or external financing for our operations; (3) interest rate fluctuations or prolonged periods of low interest rates; (4) the degree to which we choose not to hedge risks, or the potential ineffectiveness or insufficiency of hedging or risk management strategies we do implement, with regard to variable annuity or other product guarantees; (5) any inability to access our credit facilities; (6) reestimates of our reserves for future policy benefits and claims; (7) differences between actual experience regarding mortality, longevity, morbidity, persistency, surrender experience, interest rates, or market returns and the assumptions we use in pricing our products, establishing liabilities and reserves or for other purposes; (8) changes in our assumptions related to deferred policy acquisition costs or value of business acquired; (9) changes in our financial strength or credit ratings; (10) investment losses, defaults and counterparty non-performance; (11) competition in our product lines and for personnel; (12) changes in tax law; (13) regulatory or legislative changes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act; (14) inability to protect our intellectual property rights or claims of infringement of the intellectual property rights of others; (15) adverse determinations in litigation or regulatory matters and our exposure to contingent liabilities; (16) domestic or international military actions, natural or man-made disasters including terrorist activities or pandemic disease, or other events resulting in catastrophic loss of life; (17) ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks; (18) interruption in telecommunication, information technology or other operational systems or failure to maintain the security, confidentiality or privacy of sensitive data on such systems; and (19) changes in statutory or accounting principles generally accepted in the United States of America (“U.S. GAAP”), practices or policies. Prudential Annuities Life Assurance Corporation does not intend, and is under no obligation, to update any particular forward-looking statement included in this document. See “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2013 for a discussion of certain risks relating to our business and investment in our securities.

3

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Financial Position

As of March 31, 2014 and December 31, 2013 (in thousands, except share amounts)

	March 31, 2014		December 31, 2013
ASSETS
Fixed maturities, available-for-sale, at fair value (amortized cost, 2014: $3,012,502; 2013: $3,079,002)	$	3,220,376	$	3,264,216
Trading account assets, at fair value		6,398		6,677
Equity securities, available-for-sale, at fair value (cost, 2014: $206; 2013: $206)		209		208
Commercial mortgage and other loans, net of valuation allowance		407,190		398,991
Policy loans		12,581		12,454
Short-term investments		171,878		118,188
Other long-term investments		64,719		60,585
Total investments		3,883,351		3,861,319
Cash and cash equivalents		8,783		1,417
Deferred policy acquisition costs		1,306,168		1,345,504
Accrued investment income		33,119		32,169
Reinsurance recoverables		1,345,604		748,690
Value of business acquired		41,214		43,500
Deferred sales inducements		779,630		809,247
Receivables from parent and affiliates		38,150		35,594
Other assets		8,123		16,994
Separate account assets		46,021,782		46,626,828
TOTAL ASSETS	$	53,465,924	$	53,521,262
LIABILITIES AND EQUITY
LIABILITIES
Policyholders’ account balances	$	3,035,929	$	3,191,215
Future policy benefits and other policyholder liabilities		1,766,610		1,127,342
Payables to parent and affiliates		63,217		111,403
Cash collateral for loaned securities		24,806		47,896
Income taxes		370,825		358,818
Short-term debt		200,000		205,000
Other liabilities		153,023		113,125
Separate account liabilities		46,021,782		46,626,828
Total Liabilities		51,636,192		51,781,627
Commitments and Contingent Liabilities (See Note 6)
EQUITY
Common stock, $100 par value; 25,000 shares, authorized, issued and outstanding		2,500		2,500
Additional paid-in capital		901,422		901,422
Retained earnings		842,344		764,846
Accumulated other comprehensive income (loss)		83,466		70,867
Total Equity		1,829,732		1,739,635
TOTAL LIABILITIES AND EQUITY	$	53,465,924	$	53,521,262

See Notes to Unaudited Interim Financial Statements

4

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Operations and Comprehensive Income

Three Months Ended March 31, 2014 and 2013 (in thousands)

	Three Months Ended March 31,
	2014		2013
REVENUES
Premiums	$	8,142	$	6,493
Policy charges and fee income		201,667		198,864
Net investment income		44,501		58,540
Asset administration fees and other income		57,110		64,775
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		(171)		(38,096)
Total realized investment gains (losses), net		(171)		(38,096)
Total revenues		311,249		290,576
BENEFITS AND EXPENSES
Policyholders’ benefits		28,943		18,618
Interest credited to policyholders’ account balances		47,969		9,463
Amortization of deferred policy acquisition costs		38,983		(35,034)
General, administrative and other expenses		101,001		100,143
Total benefits and expenses		216,896		93,190
INCOME FROM OPERATIONS BEFORE INCOME TAXES		94,353		197,386
Income tax expense		16,855		49,998
NET INCOME		77,498		147,388
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments		(1)		(15)
Net unrealized investment gains (losses):
Unrealized investment gains (losses) for the period		20,190		(11,298)
Reclassification adjustment for (gains) losses included in net income		(806)		(2,713)
Net unrealized investment gains (losses)		19,384		(14,011)
Other comprehensive income (loss), before tax:		19,383		(14,026)
Less: Income tax expense (benefit) related to other comprehensive income (loss)
Foreign currency translation adjustments		(1)		(5)
Net unrealized income (losses)		6,785		(4,904)
Total		6,784		(4,909)
Other comprehensive income (loss), net of taxes		12,599		(9,117)
COMPREHENSIVE INCOME	$	90,097	$	138,271

See Notes to Unaudited Interim Financial Statements

5

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Equity

Three Months Ended March 31, 2014 and 2013 (in thousands)

	Common   stock		Additional   paid-in capital		Retained   earnings		Accumulated other   comprehensive   income (loss)		Total equity
Balance, December 31, 2013	$	2,500	$	901,422	$	764,846	$	70,867	$	1,739,635
Comprehensive income:
Net income		-		-		77,498		-		77,498
Other comprehensive income (loss), net of taxes		-		-		-		12,599		12,599
Total comprehensive income										90,097
Balance, March 31, 2014	$	2,500	$	901,422	$	842,344	$	83,466	$	1,829,732
	Common   stock		Additional   paid-in capital		Retained earnings		Accumulated other   comprehensive   income (loss)		Total equity
Balance, December 31, 2012	$	2,500	$	893,336	$	200,754	$	147,287	$	1,243,877
Contributed capital		-		8,086		-		-		8,086
Comprehensive income:
Net income		-		-		147,388		-		147,388
Other comprehensive income (loss), net of taxes		-		-		-		(9,117)		(9,117)
Total comprehensive income										138,271
Balance, March 31, 2013	$	2,500	$	901,422	$	348,142	$	138,170	$	1,390,234

See Notes to Unaudited Interim Financial Statements

6

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Cash Flows

Three Months Ended March 31, 2014 and 2013 (in thousands)

	2014		2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	77,498	$	147,388
Adjustments to reconcile net income to net cash provided by operating activities:
Policy charges and fee income		1,473		3,491
Realized investment (gains) losses, net		171		38,096
Depreciation and amortization		680		2,254
Interest credited to policyholders’ account balances		47,969		9,463
Change in:
Future policy benefit reserves		77,111		66,638
Accrued investment income		(950)		(2,340)
Net (payable) to affiliates		(17,487)		(55,377)
Deferred sales inducements		(4,366)		(9,042)
Deferred policy acquisition costs		38,145		(36,418)
Income taxes		5,222		99,326
Reinsurance recoverables		(70,004)		(68,724)
Other, net		(19,918)		(29,573)
Cash flows from operating activities	$	135,544	$	165,182
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale	$	365,885	$	306,441
Commercial mortgage and other loans		7,519		4,024
Trading account assets		987		2,078
Policy loans		162		76
Other long-term investments		985		925
Short-term investments		761,364		543,277
Payments for the purchase/origination of:
Fixed maturities, available-for-sale		(237,083)		(99,849)
Commercial mortgage and other loans		(15,718)		(9,222)
Trading account assets		(619)		(2,143)
Policy loans		(169)		(318)
Other long-term investments		(7,593)		(3,140)
Short-term investments		(816,271)		(575,797)
Notes receivable from parent and affiliates, net		3,865		5,699
Other, net		(14)		24
Cash flows from investing activities	$	63,300	$	172,075
CASH FLOWS USED IN FINANCING ACTIVITIES:
Cash collateral for loaned securities		(23,091)		(16,747)
Net (decrease) in short-term borrowing		(5,000)		-
Drafts outstanding		5,370		8,511
Contributed capital		-		12,439
Policyholders’ account balances
Deposits		312,039		215,301
Withdrawals		(480,796)		(551,829)
Cash flows used in financing activities	$	(191,478)	$	(332,325)
NET INCREASE IN CASH AND CASH EQUIVALENTS		7,366		4,932
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		1,417		266
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	8,783	$	5,198

See Notes to Unaudited Interim Financial Statements

7

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

1.    BUSINESS AND BASIS OF PRESENTATION

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

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

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

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

On August 30, 2013, the Company received approval from the Arizona and Connecticut Departments of Insurance to redomesticate the Company from Connecticut to Arizona effective August 31, 2013.

As a result of the redomestication, the Company is now an Arizona insurance company and its principal insurance regulatory authority is the Arizona Department of Insurance. Additionally, the Company is now domiciled in the same jurisdiction as the primary reinsurer of the Company’s living benefits, Pruco Reinsurance, Ltd. (“Pruco Re”), which is also regulated by the Arizona Department of Insurance. This change enables the Company to claim statutory reserve credit for business ceded to Pruco Re without the need for Pruco Re to collateralize its obligations under the reinsurance agreement.

Basis of Presentation

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

Use of Estimates

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

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

2.    SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS

This section supplements, and should be read in conjunction with, Note 2 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Adoption of New Accounting Pronouncements

In December 2013, the Financial Accounting Standards Board (“FASB”) issued updated guidance establishing a single definition of a public entity for use in financial accounting and reporting guidance. This new guidance is effective for all current and future reporting periods and did not have a significant effect on the Company’s financial position, results of operations, or financial statement disclosures.

In July 2013, the FASB issued new guidance regarding derivatives. The guidance permits the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) to be used as a U.S. benchmark interest rate for hedge accounting, in addition to the United States Treasury rate and London Inter-Bank Offered Rate (“LIBOR”). The guidance also removes the restriction on using different benchmark rates for similar hedges. The guidance is effective for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013 and should be applied prospectively. Adoption of the guidance did not have a significant effect on the Company’s financial position, results of operations, and financial statement disclosures.

8

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

In July 2013, the FASB issued updated guidance regarding the presentation of unrecognized tax benefits when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. This new guidance is effective for interim or annual reporting periods that begin after December 15, 2013, and should be applied prospectively, with early application permitted. Adoption of the guidance did not have a significant effect on the Company’s financial position, results of operations, and financial statement disclosures.

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

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

Future Adoption of New Accounting Pronouncements

In January 2014, the FASB issued updated guidance for troubled debt restructurings clarifying when an in substance repossession or foreclosure occurs, and when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The new guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2014. This guidance can be elected for prospective adoption or by using a modified retrospective transition method. This guidance is not expected to have a significant effect on the Company’s financial position, results of operations, or financial statement disclosures.

3.    INVESTMENTS

Fixed Maturities and Equity Securities

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

	March 31, 2014
	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	$	6,374	$	19	$	26	$	6,367	$	-
Obligations of U.S. states and their political subdivisions		67,926		2,692		575		70,043		-
Foreign government bonds		25,298		6,355		-		31,653		-
Public utilities		240,630		23,106		1,436		262,300		-
Corporate securities		1,907,066		165,232		3,974		2,068,324		-
Asset-backed securities (1)		204,686		6,020		290		210,416		(41)
Commercial mortgage-backed securities		414,602		10,034		4,223		420,413		-
Residential mortgage-backed securities (2)		145,920		5,032		92		150,860		(40)
Total fixed maturities, available-for-sale	$	3,012,502	$	218,490	$	10,616	$	3,220,376	$	(81)
Equity securities, available-for-sale
Common Stocks:
Public utilities	$	192	$	-	$	-	$	192
Mutual funds		14		3		-		17
Total equity securities, available-for-sale	$	206	$	3	$	-	$	209

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

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

(3) Represents the amount of other-than-temporary impairment losses in AOCI, which were not included in earnings. Amount excludes $0.1 million of net unrealized gains on impaired available-for-sale securities relating to changes in the value of such securities subsequent to the impairment measurement date.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Other-than- temporary Impairments in AOCI (3)
	(in thousands)
Fixed maturities, available-for-sale
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	6,382	$	36	$	34	$	6,384	$	-
Obligations of U.S. states and their political subdivisions		67,225		2,911		1,570		68,566		-
Foreign government bonds		25,437		5,717		-		31,154		-
Public utilities		229,807		17,048		3,190		243,665		-
Corporate securities		2,029,720		158,360		9,103		2,178,977		-
Asset-backed securities (1)		182,888		6,513		1,509		187,892		(1,351	)
Commercial mortgage-backed securities		384,764		11,387		5,518		390,633		-
Residential mortgage-backed securities (2)		152,779		5,138		972		156,945		(40	)
Total fixed maturities, available-for-sale	$	3,079,002	$	207,110	$	21,896	$	3,264,216	$	(1,391	)
Equity securities, available-for-sale
Common Stocks:
Public utilities	$	192	$	-	$	-	$	192
Mutual funds		14		2		-		16
Total equity securities, available-for-sale	$	206	$	2	$	-	$	208

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

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

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

The amortized cost and fair value of fixed maturities by contractual maturities at March 31, 2014, are as follows:

	Available-for-Sale
	Amortized Cost		Fair Value
	(in thousands)
Due in one year or less	$	347,647	$	358,035
Due after one year through five years		938,910		1,011,996
Due after five years through ten years		553,767		605,703
Due after ten years		406,970		462,953
Asset-backed securities		204,686		210,416
Commercial mortgage-backed securities		414,602		420,413
Residential mortgage-backed securities		145,920		150,860
Total	$	3,012,502	$	3,220,376

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 investment gains / (losses), as well as losses on impairments of both fixed maturities and equity securities:

	Three Months Ended March 31,
	2014			2013
	(in thousands)
Fixed maturities, available-for-sale
Proceeds from sales	$	52,030		$	114,927
Proceeds from maturities/repayments		307,613			206,415
Gross investment gains from sales, prepayments, and maturities		1,132			2,792
Gross investment losses from sales and maturities		(326	)		(80	)
Equity securities, available-for-sale
Proceeds from sales	$	-		$	1
Gross investment gains from sales		-			1
Fixed maturity and equity security impairments
Net writedowns for other-than-temporary impairment losses on fixed maturities recognized in earnings (1)	$	-		$	-

(1) Excludes the portion of other-than-temporary impairments recorded in “Other comprehensive income (loss),” representing any difference between the fair value of the impaired debt security and the net present value of its projected future cash flows at the time of the impairment.

10

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

As discussed in Note 2 to the Company’s Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2013, a portion of certain other-than-temporary-impairment (“OTTI”) losses on fixed maturity securities are recognized in “Other comprehensive income (loss)” (“OCI”). For these securities, the net amount recognized in earnings (“credit loss impairments”) represents the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. Any remaining difference between the fair value and amortized cost is recognized in OCI. The following table sets forth the amount of pre-tax credit loss impairments on fixed maturity securities held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized in OCI, and the corresponding changes in such amounts.

Credit losses recognized in earnings on fixed maturity securities held by the Company for which a portion of the OTTI loss was recognized in OCI

	Three Months Ended March 31,
	2014			2013
	(in thousands)
Balance, beginning of period	$	1,800		$	3,381
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period		(1,673	)		(1,614	)
Increases due to the passage of time on previously recorded credit losses		-			27
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected		(8	)		(68	)
Balance, end of period	$	119		$	1,726

Trading Account Assets

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

	March 31, 2014				December 31, 2013
	Cost		Fair Value		Cost		Fair Value
	(in thousands)
Total trading account assets—Equity securities	$	4,828	$	6,398	$	5,164	$	6,677

The net change in unrealized gains / (losses) from trading account assets still held at period end, recorded within “Asset administration fees and other income”, was $0.1 million and $0.4 million during the three months ended March 31, 2014 and 2013, respectively.

Commercial Mortgage and Other Loans

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

	March 31, 2014					December 31, 2013
	Amount (in thousands)		% of Total			Amount (in thousands)		% of Total
Commercial and agricultural mortgage loans by property type:
Apartments/Multi-Family	$	133,174		32.8	%	$	125,045		31.5	%
Industrial		83,870		20.7			88,009		22.1
Retail		71,822		17.7			72,325		18.2
Office		44,696		11.0			40,976		10.3
Other		14,466		3.6			13,796		3.5
Hospitality		5,122		1.3			5,133		1.3
Total commercial mortgage loans		353,150		87.0			345,284		86.9
Agricultural property loans		52,556		13.0			52,223		13.1
Total commercial and agricultural mortgage loans by property type		405,706		100.0	%		397,507		100.0	%
Valuation allowance		(1,256)					(1,256)
Total net commercial and agricultural mortgage loans by property type		404,450					396,251
Other Loans
Uncollateralized loans		2,740					2,740
Total other loans		2,740					2,740
Total commercial mortgage and other loans	$	407,190				$	398,991

The commercial mortgage and agricultural property loans are geographically dispersed throughout the United States with the largest concentrations in California (17%), Texas (11%) and Ohio (9%) at March 31, 2014.

11

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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

	March 31, 2014		December 31, 2013
	(in thousands)
Allowance for losses, beginning of year	$	1,256	$	2,177
Addition to / (release of) allowance for losses		-		(921)
Total ending balance (1)	$	1,256	$	1,256

(1) Agricultural loans represent $0.1 million of the ending allowance at both March 31, 2014 and December 31, 2013.

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

	March 31, 2014		December 31, 2013
	(in thousands)
Allowance for Credit Losses:
Ending balance: individually evaluated for impairment (1)	$	-	$	-
Ending balance: collectively evaluated for impairment (2)		1,256		1,256
Total ending balance	$	1,256	$	1,256
Recorded Investment (3):
Ending balance gross of reserves: individually evaluated for impairment (1)	$	-	$	-
Ending balance gross of reserves: collectively evaluated for impairment (2)		408,446		400,247
Total ending balance, gross of reserves	$	408,446	$	400,247

(1) There were no loans individually evaluated for impairments at March 31, 2014 and December 31, 2013.

(2) Agricultural loans collectively evaluated for impairment had a recorded investment of $53 million and $52 million at March 31, 2014 and December 31, 2013, respectively, and a related allowance of $0.1 million for both periods. Uncollateralized loans collectively evaluated for impairment had a recorded investment of $3 million at both March 31, 2014 and December 31, 2013 and no related allowance for both periods.

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

Impaired loans include those loans for which it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. There were no impaired commercial mortgage and other loans identified in management’s specific review of probable loan losses and the related allowance for losses at March 31, 2014 and December 31, 2013. There were no recorded investments in impaired loans with an allowance recorded, before the allowance for losses, at both March 31, 2014 and December 31, 2013.

Impaired commercial mortgage and other loans with no allowance for losses are loans in which the fair value of the collateral or the net present value of the loans’ expected future cash flows equals or exceeds the recorded investment. The Company had no such loans at March 31, 2014 and December 31, 2013. See Note 2 to the Company’s Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2013, for information regarding the Company’s accounting policies for non-performing loans.

The following table sets forth the credit quality indicators as of March 31, 2014, based upon the recorded investment gross of allowance for credit losses.

Total commercial and agricultural mortgage loans

	Debt Service Coverage Ratio - March 31, 2014
	Greater than 1.2X		1.0X to <1.2X		Less than 1.0X		Total
	(in thousands)
Loan-to-Value Ratio
0%-59.99%	$	262,918	$	7,412	$	1,551	$	271,881
60%-69.99%		101,075		-		-		101,075
70%-79.99%		29,634		-		-		29,634
Greater than 80%		3,116		-		-		3,116
Total commercial and agricultural mortgage loans	$	396,743	$	7,412	$	1,551	$	405,706

12

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

The following table sets forth the credit quality indicators as of December 31, 2013, based upon the recorded investment gross of allowance for credit losses.

Total commercial and agricultural mortgage loans

	Debt Service Coverage Ratio - December 31, 2013
	Greater than 1.2X		1.0X to <1.2X		Less than 1.0X		Total
	(in thousands)
Loan-to-Value Ratio
0%-59.99%	$	251,278	$	7,650	$	1,865	$	260,793
60%-69.99%		102,755		-		-		102,755
70%-79.99%		31,712		2,247		-		33,959
Greater than 80%		-		-		-		-
Total commercial and agricultural mortgage loans	$	385,745	$	9,897	$	1,865	$	397,507

As of March 31, 2014 and December 31, 2013, all commercial mortgage and other loans were in current status. The Company defines current in its aging of past due commercial mortgage and agricultural loans as less than 30 days past due.

There were no commercial mortgage and other loans in nonaccrual status as of March 31, 2014 and December 31, 2013. Nonaccrual loans are those on which the accrual of interest has been suspended after the loans become 90 days delinquent as to principal or interest payments, or earlier when the Company has doubts about collectability and loans for which a loan-specific reserve has been established. See Note 2 to the Company’s Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2013, for further discussion regarding non-accrual status loans.

For the three months ended both March 31, 2014 and 2013, there were no new commercial mortgage and other loans acquired, other than those through direct origination.

The Company’s commercial mortgage and other loans may occasionally be involved in a troubled debt restructuring. As of both March 31, 2014 and December 31, 2013, the Company had no significant commitments to fund to borrowers that have been involved in a troubled debt restructuring. During the three months ended March 31, 2014 and 2013, respectively, there were no new troubled debt restructurings related to commercial mortgage loans, and no payment defaults on commercial mortgage and other loans that were modified as a troubled debt restructuring with the 12 months preceding each respective period. For additional information relating to the accounting for troubled debt restructurings, see Note 2 to the Company’s Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2013.

Net Investment Income

Net investment income for the three months ended March 31, 2014 and 2013, was from the following sources:

	Three Months Ended March 31,
	2014		2013
	(in thousands)
Fixed maturities, available-for-sale	$	38,376	$	53,294
Trading account assets		9		32
Commercial mortgage and other loans		6,166		6,128
Policy loans		127		114
Short-term investments		57		82
Other long-term investments		1,213		691
Gross investment income		45,948		60,341
Less: investment expenses		(1,447)		(1,801)
Net investment income	$	44,501	$	58,540

Realized Investment Gains (Losses), Net

Realized investment gains (losses), net, for the three months ended March 31, 2014 and 2013, were from the following sources:

	Three Months Ended March 31,
	2014		2013
	(in thousands)
Fixed maturities	$	806	$	2,712
Equity securities		-		1
Commercial mortgage and other loans		-		38
Derivatives		(977)		(40,826)
Other		-		(21)
Realized investment gains (losses), net	$	(171)	$	(38,096)

13

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Accumulated Other Comprehensive Income (Loss)

The balance of and changes in each component of “Accumulated other comprehensive income (loss)” for the three months ended March 31, 2014 and 2013 are as follows:

	Accumulated Other Comprehensive Income (Loss)
	Foreign Currency Translation Adjustment		Net Unrealized Investment Gains (Losses) (1)		Total Accumulated Other Comprehensive Income (Loss)
	(in thousands)
Balance, December 31, 2013	$	10	$	70,857	$	70,867
Change in other comprehensive income before reclassifications		(1)		20,191		20,190
Amounts reclassified from AOCI		-		(806)		(806)
Income tax benefit (expense)		-		(6,785)		(6,785)
Balance, March 31, 2014	$	9	$	83,457	$	83,466

	Accumulated Other Comprehensive Income (Loss)
	Foreign Currency Translation Adjustment		Net Unrealized Investment Gains (Losses) (1)		Total Accumulated Other Comprehensive Income (Loss)
	(in thousands)
Balance, December 31, 2012	$	7	$	147,280	$	147,287
Change in other comprehensive income before reclassifications		(15)		(11,298)		(11,313)
Amounts reclassified from AOCI		-		(2,713)		(2,713)
Income tax benefit (expense)		5		4,904		4,909
Balance, March 31, 2013	$	(3)	$	138,173	$	138,170

(1) Includes cash flow hedges of ($3) million and ($4) million as of March 31, 2014 and December 31, 2013, respectively, and ($1) million and ($3) million as of March 31, 2013 and December 31, 2012, respectively.

Reclassifications out of Accumulated Other Comprehensive Income (Loss)

	Three Months Ended March 31, 2014
	(in thousands)
Amounts reclassified from AOCI (1)(2):
Net unrealized investment gains (losses):
Cash flow hedges—Currency/Interest rate (3)	$	(15)
Net unrealized investment gains (losses) on available-for-sale securities		821
Total net unrealized investment gains (losses) (4)		806
Total reclassifications for the period	$	806

(1) All amounts are shown before tax.

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

(3) See Note 5 for additional information on cash flow hedges.

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

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 Company’s Unaudited Interim Statements of Financial Position as a component of AOCI. Changes in these amounts include reclassification adjustments to exclude from “Other comprehensive income (loss)” those items that are included as part of “Net income” for a period

14

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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 Other Costs		Future Policy Benefits		Deferred Income Tax (Liability) Benefit		Accumulated Other Comprehensive Income (Loss) Related to  Net Unrealized Investment Gains (Losses)
	(in thousands)
Balance, December 31, 2013	$	323	$	(116)	$	(14)	$	(51)	$	142
Net investment gains (losses) on investments arising during the period		8		-		-		(3)		5
Reclassification adjustment for (gains) losses included in net income		(282)		-		-		98		(184)
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs		-		100		-		(36)		64
Impact of net unrealized investment (gains) losses on future policy benefits		-		-		12		(4)		8
Balance, March 31, 2014	$	49	$	(16)	$	(2)	$	4	$	35

All Other Net Unrealized Investment Gains and Losses in AOCI

	Net Unrealized Gains (Losses) on Investments (1)		Deferred Policy Acquisition Costs and Other Costs		Future Policy Benefits		Deferred Income Tax (Liability) Benefit		Accumulated Other Comprehensive Income (Loss) Related To  Net Unrealized Investment Gains (Losses)
	(in thousands)
Balance, December 31, 2013	$	184,727	$	(66,452)	$	(8,187)	$	(39,363)	$	70,725
Net investment gains (losses) on investments arising during the period		24,132		-		-		(8,450)		15,682
Reclassification adjustment for (gains) losses included in net income		(524)		-		-		182		(342)
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs		-		(3,128)		-		1,093		(2,035)
Impact of net unrealized investment (gains) losses on future policy benefits		-		-		(933)		325		(608)
Balance, March 31, 2014	$	208,335	$	(69,580)	$	(9,120)	$	(46,213)	$	83,422

(1) Includes cash flow hedges. See Note 5 for additional discussion of the Company’s cash flow hedges.

Net Unrealized Gains (Losses) on Investments by Asset Class

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

	March 31, 2014		December 31, 2013
	(in thousands)
Fixed maturity securities on which an OTTI loss has been recognized	$	49	$	323
Fixed maturity securities, available-for-sale—all other		207,825		184,891
Equity securities, available-for-sale		3		2
Affiliated notes		2,955		3,113
Derivatives designated as cash flow hedges (1)		(3,016)		(3,653)
Other investments		568		374
Net Unrealized gains (losses) on investments	$	208,384	$	185,050

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

15

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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:

	March 31, 2014
	Less than twelve months				Twelve months or more				Total
	Fair Value		Gross   Unrealized   Losses		Fair Value		Gross   Unrealized   Losses		Fair Value		Gross   Unrealized   Losses
	(in thousands)
Fixed maturities, available-for-sale
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	3,234	$	26	$	-	$	-	$	3,234	$	26
Obligations of U.S. States and their political subdivisions		-		-		6,794		575		6,794		575
Corporate securities		312,686		4,997		6,004		413		318,690		5,410
Asset-backed securities		36,910		276		986		14		37,896		290
Commercial mortgage-backed securities		100,400		3,751		6,502		472		106,902		4,223
Residential mortgage-backed securities		77,385		92		-		-		77,385		92
Total	$	530,615	$	9,142	$	20,286	$	1,474	$	550,901	$	10,616
Equity securities, available-for-sale	$	-	$	-	$	-	$	-	$	-	$	-

	December 31, 2013
	Less than twelve months				Twelve months or more				Total
	Fair Value		Gross   Unrealized   Losses		Fair Value		Gross   Unrealized   Losses		Fair Value		Gross   Unrealized   Losses
	(in thousands)
Fixed maturities, available-for-sale
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	3,347	$	34	$	-	$	-	$	3,347	$	34
Obligations of U.S. States and their political subdivisions		5,420		588		6,402		982		11,822		1,570
Corporate securities		351,306		11,923		2,704		370		354,010		12,293
Asset-backed securities		97,575		1,509		-		-		97,575		1,509
Commercial mortgage-backed securities		86,132		5,249		2,941		269		89,073		5,518
Residential mortgage-backed securities		100,150		972		-		-		100,150		972
Total	$	643,930	$	20,275	$	12,047	$	1,621	$	655,977	$	21,896
Equity securities, available-for-sale	$	-	$	-	$	-	$	-	$	-	$	-

The gross unrealized losses on fixed maturity securities at March 31, 2014 and December 31, 2013, are composed of $9.8 million and $20.4 million, related to high or highest quality securities based on The National Association of Insurance Commissioners (“NAIC”) or equivalent rating and $0.8 million and $1.5 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. At March 31, 2014, none of the gross unrealized losses represented declines in value of greater than 20%, as compared to December 31, 2013, when $0.2 million of the gross unrealized losses represented declines in value of greater than 20%, all of which had been in that position for less than six months. At March 31, 2014, $1.5 million of gross unrealized losses of twelve months or more were concentrated in U.S. obligations, commercial mortgage-backed securities, and the consumer non-cyclical and finance sectors of the Company’s corporate securities. At December 31, 2013, $1.6 million of gross unrealized losses of twelve months or more were concentrated in U.S. obligations and the consumer non-cyclical sector of the Company’s corporate securities.

In accordance with its policy described in Note 2 to the Company’s Financial Statements included in its 2013 Annual Report on Form 10-K, the Company concluded that an adjustment to earnings for other-than-temporary impairments for these securities was not warranted at March 31, 2014 or December 31, 2013. These conclusions are based on a detailed analysis of the underlying credit and cash flows on each security. The gross unrealized losses are primarily attributable to credit spread widening and increased liquidity discounts. At March 31, 2014, the Company does not intend to sell the securities and it is not more likely than not that the Company will be required to sell the securities before the anticipated recovery of its remaining amortized cost basis.

4.    FAIR VALUE OF ASSETS AND LIABILITIES

Fair Value Measurement – Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative fair value guidance establishes a framework for measuring fair

16

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

value that includes a hierarchy used to classify the inputs used in measuring fair value. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level 1 - Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities. The Company’s Level 1 assets and liabilities primarily include short term investments and equity securities that trade on an active exchange market.

Level 2 - Fair value is based on significant inputs, other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets and liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities, and other market observable inputs. The Company’s Level 2 assets and liabilities include: fixed maturities (corporate public and private bonds, most government securities, certain asset-backed and mortgage-backed securities, etc.), certain equity securities (mutual funds, which do not actively trade and are priced based on a net asset value), certain short term investments and certain over-the-counter derivatives.

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

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

	As of March 31, 2014
	Level 1		Level 2		Level 3		Netting (2)		Total
	(in thousands)
Fixed maturities, available-for-sale:
U.S Treasury securities and obligations of U.S. government authorities and agencies	$	-	$	6,367	$	-	$	-	$	6,367
Obligations of U.S. states and their political subdivisions		-		70,043		-		-		70,043
Foreign government bonds		-		31,653		-		-		31,653
Corporate securities		-		2,231,369		99,255		-		2,330,624
Asset-backed securities		-		107,691		102,725		-		210,416
Commercial mortgage-backed securities		-		375,048		45,365		-		420,413
Residential mortgage-backed securities		-		150,860		-		-		150,860
Sub-total		-		2,973,031		247,345		-		3,220,376
Trading account assets:
Equity securities		6,070		-		328		-		6,398
Sub-total		6,070		-		328		-		6,398
Equity securities, available-for-sale		-		17		192		-		209
Short-term investments		171,878		-		-		-		171,878
Cash equivalents		-		-		400		-		400
Other long-term investments		-		81,497		520		(79,222)		2,795
Reinsurance recoverables		-		-		1,344,587		-		1,344,587
Receivables from parent and affiliates		-		16,928		8,344		-		25,272
Sub-total excluding separate account assets		177,948		3,071,473		1,601,716		(79,222)		4,771,915
Separate account assets (1)		1,122,554		44,899,228		-		-		46,021,782
Total assets	$	1,300,502	$	47,970,701	$	1,601,716	$	(79,222)	$	50,793,697
Future policy benefits (3)	$	-	$	-	$	1,402,029	$	-	$	1,402,029
Payables to parent and affiliates		-		67,940		-		(67,940)		0
Total liabilities	$	-	$	67,940	$	1,402,029	$	(67,940)	$	1,402,029
	As of December 31, 2013
	Level 1		Level 2		Level 3		Netting (2)		Total
	(in thousands)
Fixed maturities, available-for-sale:
U.S Treasury securities and obligations of U.S. government authorities and agencies	$	-	$	6,384	$	-	$	-	$	6,384
Obligations of U.S. states and their political subdivisions		-		68,566		-		-		68,566
Foreign government securities		-		31,154		-		-		31,154
Corporate securities		-		2,325,846		96,796		-		2,422,642
Asset-backed securities		-		124,103		63,789		-		187,892

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	As of December 31, 2013
	Level 1		Level 2		Level 3		Netting (2)		Total
	(in thousands)
Commercial mortgage-backed securities	$	-	$	390,633	$	-	$	-	$	390,633
Residential mortgage-backed securities		-		156,945		-		-		156,945
Sub-total		-		3,103,631		160,585		-		3,264,216
Trading account assets:
Asset-backed securities		-		-		-		-		-
Equity securities		6,364		-		313		-		6,677
Sub-total		6,364		-		313		-		6,677
Equity securities, available-for-sale		-		16		192		-		208
Short-term investments		118,188		-		-		-		118,188
Other long-term investments		-		73,535		486		(73,535)		486
Reinsurance recoverables		-		-		748,005		-		748,005
Receivables from parent and affiliates		-		19,071		6,347		-		25,418
Sub-total excluding separate account assets		124,552		3,196,253		915,928		(73,535)		4,163,198
Separate account assets (1)		1,190,903		45,435,925		-		-		46,626,828
Total assets	$	1,315,455	$	48,632,178	$	915,928	$	(73,535)	$	50,790,026
Future policy benefits (3)	$	-	$	-	$	778,226	$	-	$	778,226
Payables to parent and affiliates		-		94,580		-		(72,822)		21,758
Total liabilities	$	-	$	94,580	$	778,226	$	(72,822)	$	799,984

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

(2) “Netting” amounts represent swap variation margin of $11.3 million and $0.7 million as of March 31, 2014 and December 31, 2013, respectively, and the impact of offsetting asset and liability positions held with the same counterparty, subject to master netting arrangements.

(3) As of March 31, 2014, the net embedded derivative liability position of $1,402 million includes $167 million of embedded derivatives in an asset position and $1,569 million of embedded derivatives in a liability position. As of December 31, 2013, the net embedded derivative liability position of $778 million includes $245 million of embedded derivatives in an asset position and $1,023 million of embedded derivatives in a liability position.

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

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

Internally-developed valuations or indicative broker quotes are also used to determine fair value in circumstances where vendor pricing is not available, or where the Company ultimately concludes that pricing information received from the independent pricing service is not reflective of market activity. If the Company concludes the values from both pricing services and brokers are not reflective of market activity, it may over-ride the information with an internally developed valuation. As of March 31, 2014 and December 31, 2013 over-rides on a net basis were not material. Pricing service over-rides, internally developed valuations and indicative broker quotes are generally included in Level 3 in the fair value hierarchy.

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

Trading Account Assets – Trading account assets consist primarily of equity securities whose fair values are determined consistent with similar instruments described below under “Equity Securities.”

Equity Securities – Equity securities consist principally of investments in common stock of publicly traded companies, perpetual preferred stock, privately traded securities, as well as mutual fund shares. The fair values of most publicly traded equity securities are based on quoted market prices in active markets for identical assets and are classified within Level 1 in the fair value hierarchy. Estimated fair values for most privately traded equity securities are determined using discounted cash flow, earnings multiple and other valuation models that require a substantial level of judgment

18

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

around inputs and therefore are classified within Level 3. The fair values of mutual fund shares that transact regularly (but do not trade in active markets because they are not publicly available) are based on transaction prices of identical fund shares and are classified within Level 2 in the fair value hierarchy. The fair values of perpetual preferred stock are based on inputs obtained from independent pricing services that are primarily based on indicative broker quotes. As a result, the fair values of perpetual preferred stock are classified as Level 3.

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

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

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

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

Derivatives classified as Level 3 include structured products. These derivatives are valued based upon models, such as Monte Carlo simulation models and other techniques, that utilize significant unobservable inputs. Level 3 methodologies are validated through periodic comparison of the Company’s fair values to external broker-dealer values. As of March 31, 2014 and December 31, 2013, there were no internally valued derivatives with the fair value classified within Level 3, and all other derivatives were classified within Level 2. See Note 5 for more details on the fair value of derivative instruments by primary underlying.

Short-Term Investments – Short-term investments include money market instruments and other highly liquid debt instruments. Certain money market instruments are valued using unadjusted quoted prices in active markets that are accessible for identical assets and are primarily classified as Level 1.

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

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

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

Future Policy Benefits – The liability for future policy benefits primarily includes general account liabilities for the optional living benefit features of the Company’s variable annuity contracts, including guaranteed minimum accumulation benefits (“GMAB”), guaranteed minimum withdrawal benefits (“GMWB”) and guaranteed minimum income and withdrawal benefits (“GMIWB”), accounted for as embedded derivatives. The fair values of the GMAB, GMWB, and GMIWB liabilities are calculated as the present value of future expected benefit payments to contractholders less the present value of assessed rider fees attributable to the optional living benefit feature. This methodology could result in either a liability or contra-liability balance, given changing capital market conditions and various actuarial assumptions. Since there is no observable active market for the transfer of these obligations, the valuations are calculated using internally developed models with option pricing techniques. The models are based on a risk neutral valuation framework and incorporate premiums for risks inherent in valuation techniques, inputs, and the general uncertainty around the timing and amount of future cash flows. The determination of these risk premiums requires the use of management judgment.

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

Capital market inputs and actual policyholders’ account values are updated each quarter based on capital market conditions as of the end of the quarter, including interest rates, equity markets, and volatility. In the risk neutral valuation, the initial swap curve drives the total return used to grow the policyholders’ account value. The Company’s discount rate assumption is based on the LIBOR swap curve, adjusted for an additional spread relative to LIBOR to reflect NPR.

19

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Actuarial assumptions, including contractholder behavior and mortality, are reviewed at least annually, and updated based upon emerging experience, future expectations, and other data, including any observable market data. These assumptions are generally updated in the third quarter of each year unless a material change that the Company feels is indicative of a long term trend is observed in an interim period.

Transfers between Levels 1 and 2 – Transfers between levels are generally reported at the values as of the beginning of the period in which the transfers occur. Periodically there are transfers between Level 1 and Level 2 for assets held in the Company’s Separate Account. The classification of Separate Account funds may vary dependent on the availability of information to the public. Should a fund’s net asset value become publicly observable, the fund would be transferred from Level 2 to Level 1. During the three months ended March 31, 2014, $7 million was transferred from Level 1 to Level 2. During the three months ended March 31, 2013, there were no transfers between Level 1 and Level 2.

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

	As of March 31, 2014
	Internal (1)		External (2)		Total
	(in thousands)
Corporate securities	$	97,374	$	1,881	$	99,255
Asset-backed securities		-		102,725		102,725
Commercial mortgage-backed securities		15,113		30,252		45,365
Equity securities		192		328		520
Cash and cash equivalents		400		-		400
Other long-term Investments		-		520		520
Reinsurance recoverables		1,344,587		-		1,344,587
Receivables from parent and affiliates		-		8,344		8,344
Total assets	$	1,457,666	$	144,050	$	1,601,716
Future policy benefits		1,402,029		-		1,402,029
Total liabilities	$	1,402,029	$	-	$	1,402,029
	As of December 31, 2013
	Internal (1)		External (2)		Total
	(in thousands)
Corporate securities	$	94,730	$	2,066	$	96,796
Asset-backed securities		-		63,789		63,789
Equity securities		192		313		505
Other long-term Investments		-		486		486
Reinsurance recoverables		748,005		-		748,005
Receivables from parent and affiliates		-		6,347		6,347
Total assets	$	842,927	$	73,001	$	915,928
Future policy benefits		778,226		-		778,226
Total liabilities	$	778,226	$	-	$	778,226

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

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

Quantitative Information Regarding Internally Priced Level 3 Assets and Liabilities – The tables below present quantitative information on significant internally-priced Level 3 assets and liabilities (see narrative below for quantitative information for separate account assets).

	As of March 31, 2014
	Fair     Value		Primary Valuation     Techniques	Unobservable     Inputs	Minimum			Maximum			Weighted     Average			Impact of Increase in     Input on Fair     Value (1)
	(in thousands)
Assets:
Corporate securities	$	97,374	Discounted cash flow	Discount rate		3.66	%		11.00	%		3.96	%	Decrease
Reinsurance recoverables	$	1,344,587	Fair values are determined in the same manner as future policy benefits
Liabilities:
Future policy benefits (2)	$	1,402,029	Discounted cash flow	Lapse rate (3)		0	%		11	%				Decrease
				NPR spread (4)		0.05	%		1.01	%				Decrease
				Utilization rate (5)		70	%		94	%				Increase
				Withdrawal rate (6)		86	%		100	%				Increase
				Mortality rate (7)		0	%		13	%				Decrease
				Equity Volatility curve		15	%		28	%				Increase

20

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	As of December 31, 2013
	Fair     Value		Primary Valuation     Techniques	Unobservable     Inputs	Minimum			Maximum			Weighted     Average			Impact of Increase in     Input on Fair     Value (1)
	(in thousands)
Assets:
Corporate securities	$	94,730	Discounted cash flow	Discount rate		3.73	%		12.06	%		3.90	%	Decrease
Reinsurance recoverables	$	748,005	Fair values are determined in the same manner as future policy benefits
Liabilities:
Future policy benefits (2)	$	778,226	Discounted cash flow	Lapse rate (3)		0	%		11	%				Decrease
				NPR spread (4)		0.08	%		1.09	%				Decrease
				Utilization rate (5)		70	%		94	%				Increase
				Withdrawal rate (6)		86	%		100	%				Increase
				Mortality rate (7)		0	%		13	%				Decrease
				Equity Volatility curve		15	%		28	%				Increase

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

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

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

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

(5) The utilization rate assumption estimates the percentage of contracts that will utilize the benefit during the contract duration, and begin lifetime withdrawals at various time intervals from contract inception. The remaining contractholders are assumed to either begin lifetime withdrawals immediately or never utilize the benefit. These assumptions vary based on the product type, the age of the contractholder, and the age of the contract. The impact of changes in these assumptions is highly dependent on the contract type and age of the contractholder at the time of the sale and the timing of the first lifetime income withdrawal.

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

(7) Range reflects the mortality rate for the vast majority of business with living benefits, with policyholders ranging from 35 to 90 years old. While the majority of living benefits have a minimum age requirement, certain benefits do not have an age restriction. This results in contractholders for certain benefits with mortality rates approaching 0%. Based on historical experience, the Company applies a set of age and duration specific mortality rate adjustments compared to standard industry tables. A mortality improvement assumption is also incorporated into the overall mortality table.

Interrelationships Between Unobservable Inputs – In addition to the sensitivities of fair value measurements to changes in each unobservable input in isolation, as reflected in the table above, interrelationships between these inputs may also exist, such that a change in one unobservable input may give rise to a change in another, or multiple, inputs. Examples of such interrelationships for significant internally-priced Level 3 assets and liabilities are as follows:

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

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

Valuation Process for Fair Value Measurements Categorized within Level 3 – The Company has established an internal control infrastructure over the valuation of financial instruments that requires ongoing oversight by its various Business Groups. These management control functions are segregated from the trading and investing functions. For invested assets, the Company has established oversight teams, often in the form of Pricing Committees within each asset management group. The teams, which typically include representation from investment, accounting, operations, legal

21

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

and other disciplines are responsible for overseeing and monitoring the pricing of the Company’s investments and performing periodic due diligence reviews of independent pricing services. An actuarial valuation team oversees the valuation of optional living benefit features of the Company’s variable annuity contracts.

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

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

Changes in Level 3 assets and liabilities – The following tables provide summaries of the changes in fair values of Level 3 assets and liabilities as of the dates indicated, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at the end of their respective periods.

	Three Months Ended March 31, 2014
	Fixed Maturities Available-For-Sale
	Corporate Securities		Asset- Backed Securities		Commercial Mortgage- Backed Securities		Trading Account Assets - Equity Securities		Equity Securities Available-for - Sale
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	96,796	$	63,789	$	-	$	313	$	192
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		-		-		-		-		-
Asset management fees and other income		-		-		-		15		-
Included in other comprehensive income (loss)		247		178		(83)		-		-
Net investment income		1,224		44		-		-		-
Purchases		1,489		14,933		45,448		-		-
Sales		-		-		-		-		-
Issuances		-		-		-		-		-
Settlements		(501)		(3,882)		-		-		-
Transfers into Level 3 (1)		-		27,663		-		-		-
Transfers out of Level 3 (1)		-		-		-		-		-
Fair Value, end of period assets/(liabilities)	$	99,255	$	102,725	$	45,365	$	328	$	192
Unrealized gains (losses) for the period relating to those
Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	-	$	-	$	-	$	-	$	-
Asset management fees and other income	$	-	$	-	$	-	$	15	$	-
	Three Months Ended March 31, 2014
	Cash Equivalents		Other Long-term Investments		Reinsurance Recoverables		Receivables from parent and affiliates		Future Policy Benefits
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	-	$	486	$	748,005	$	6,347	$	(778,226)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		-		-		537,854		1		(562,219)
Asset management fees and other income		-		(9)		-		-		-
Included in other comprehensive income (loss)		-		-		-		11		-
Net investment income		-		-		-		-		-
Purchases		400		43		58,728		-		-
Sales		-		-		-		-		-

22

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	Three Months Ended March 31, 2014
	Cash Equivalents		Other Long-term Investments		Reinsurance Recoverables		Receivables from parent and affiliates		Future Policy Benefits
	(in thousands)
Issuances	$	-	$	-	$	-	$	-	$	(61,584)
Settlements		-		-		-		-		-
Transfers into Level 3 (1)		-		-		-		1,985		-
Transfers out of Level 3 (1)		-		-		-		-		-
Fair Value, end of period assets/(liabilities)	$	400	$	520	$	1,344,587	$	8,344	$	(1,402,029)
Unrealized gains (losses) for the period relating to those
Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	-	$	-	$	662,178	$	-	$	(692,458)
Asset management fees and other income	$	-	$	-	$	-	$	-	$	-
	Three Months Ended March 31, 2013
	Fixed Maturities Available-For-Sale
	Corporate Securities		Asset Backed Securities		Commercial Mortgage- Backed Securities		Trading Account Assets - Equity Securities		Other Long Term Investments
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	95,555	$	69,298	$	-	$	207	$	1,054
Total gains or (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		4		-		-		-		(624)
Asset management fees and other income		-		-		-		60		33
Included in other comprehensive income (loss)		(271)		162		-		-		-
Net investment income		1,154		135		17		-		-
Purchases		600		7,058		9,090		-		-
Sales		-		-		-		-		-
Issuances		-		-		-		-		-
Settlements		(1,467)		(3,913)		-		-		-
Transfers into Level 3 (1)		-		-		-		-		-
Transfers out of Level 3 (1)		-		-		-		-		-
Fair Value, end of period assets/(liabilities)	$	95,575	$	72,740	$	9,107	$	267	$	463
Unrealized gains (losses) for the period relating to those Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	-	$	-	$	-	$	-	$	(624)
Asset management fees and other income	$	-	$	-	$	-	$	61	$	33
	Three Months Ended March 31, 2013
	Reinsurance Recoverables		Other Assets		Future Policy Benefits
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	1,732,094	$	1,995	$	(1,793,136)
Total gains or (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		(598,821)		-		623,786
Asset management fees and other income		-		-		-
Included in other comprehensive income (loss)		-		5		-
Net investment income		-		-		-
Purchases		58,136		-		-
Sales		-		-		-
Issuances		-		-		(60,973)
Settlements		-		-		-
Transfers into Level 3 (1)				-		-
Transfers out of Level 3 (1)		-		-		-
Fair Value, end of period assets/(liabilities)	$	1,191,409	$	2,000	$	(1,230,323)

23

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	Three Months Ended March 31, 2013
	Reinsurance Recoverables		Other Assets		Future Policy Benefits
	(in thousands)
Unrealized gains (losses) for the period relating to those
Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	(588,859)	$	-	$	613,833
Asset management fees and other income	$	-	$	-	$	-

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

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

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

Fair Value of Financial Instruments

The table below presents the carrying amount and fair value by fair value hierarchy level of certain financial instruments that are not reported at fair value. However, in some cases, as described below, the carrying amount equals or approximates fair value.

	March 31, 2014										December 31, 2013
	Fair Value								Carrying Amount (1)		Fair Value		Carrying Amount
	Level 1		Level 2		Level 3		Total		Total		Total		Total
	(in thousands)
Assets:
Commercial mortgage and other loans	$	-	$	2,637	$	431,219	$	433,856	$	407,190	$	422,584	$	398,991
Policy loans		-		-		12,581		12,581		12,581		12,454		12,454
Other long term investments		-		-		1,923		1,923		1,639		1,623		1,440
Cash and cash equivalents		8,383		-		-		8,383		8,383		1,417		1,417
Accrued investment income		-		33,119		-		33,119		33,119		32,169		32,169
Receivables from parent and affiliates		-		12,878		-		12,878		12,878		10,177		10,177
Other assets		-		2,280		-		2,280		2,280		11,190		11,190
Total assets	$	8,383	$	50,914	$	445,723	$	505,020	$	478,070	$	491,614	$	467,838
Liabilities:
Policyholders’ Account Balances - Investment contracts	$	-	$	-	$	86,224	$	86,224	$	87,341	$	84,153	$	85,672
Cash collateral for loaned securities		-		24,806		-		24,806		24,806		47,896		47,896
Short-term debt		-		205,633		-		205,633		200,000		218,488		205,000
Payables to parent and affiliates		-		38,307		-		38,307		38,307		85,204		85,204
Other liabilities		-		147,963		-		147,963		147,963		101,656		101,656
Separate account liabilities - investment contracts		-		724		-		724		724		796		796
Total liabilities	$	-	$	417,433	$	86,224	$	503,657	$	499,141	$	538,193	$	526,224

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

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

Commercial Mortgage and Other Loans

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

Policy Loans

Policy Loans carrying value approximates fair value.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Other Long-term Investments

Other long-term investments include investments in joint ventures and limited partnerships. The estimated fair values of these cost method investments are generally based on the Company’s share of the net asset value (“NAV”) as provided in the financial statements of the investees. In certain circumstances, management may adjust the NAV by a premium or discount when it has sufficient evidence to support applying such adjustments. No such adjustments were made as of March 31, 2014 and December 31, 2013.

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

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

Policyholders’ Account Balances - Investment Contracts

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

Cash Collateral for Loaned Securities

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

Debt

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

Other Liabilities and Payables to Parent and Affiliates

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

Separate Account Liabilities - Investment Contracts

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

5.    DERIVATIVE INSTRUMENTS

Types of Derivative Instruments and Derivative Strategies

Interest Rate Contracts

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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Equity Contracts

Equity index options are contracts which will settle in cash based on differentials in the underlying indices at the time of exercise and the strike price. The Company uses combinations of purchases and sales of equity index options to hedge the effects of adverse changes in equity indices within a predetermined range.

Total return swaps are contracts whereby the Company agrees with other parties to exchange, at specified intervals, the difference between the return on an asset (or market index) and LIBOR based on a notional amount. The Company generally uses total return swaps to hedge the effect of adverse changes in equity indices.

Foreign Exchange Contracts

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

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

Credit Contracts

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

Embedded Derivatives

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

The fair value of the living benefit feature embedded derivatives included in “Future policy benefits” was a liability of $1,402 million and $778 million as of March 31, 2014 and December 31, 2013, respectively. The fair value of the embedded derivatives related to the reinsurance of certain of these benefits to Pruco Re and Prudential Insurance included in “Reinsurance recoverables” was an asset of $1,345 million and $748 million as of March 31, 2014 and December 31, 2013, respectively.

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

	March 31, 2014						December 31, 2013
	Notional		Gross Fair Value				Notional		Gross Fair Value
	Amount		Assets		Liabilities		Amount		Assets		Liabilities
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Currency/Interest Rate	$	77,247	$	1,616	$	(4,650)	$	72,747	$	940	$	(4,635)
Total Qualifying Hedges	$	77,247	$	1,616	$	(4,650)	$	72,747	$	940	$	(4,635)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Swaps	$	1,816,750	$	68,860	$	(59,593)	$	1,533,750	$	59,872	$	(80,601)
Interest Rate Options		100,000		7,743		-		100,000		6,534		-
Currency/Interest Rate
Foreign Currency Swaps		55,919		114		(726)		55,919		19		(1,349)

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

	March 31, 2014						December 31, 2013
	Notional		Gross Fair Value				Notional		Gross Fair Value
	Amount		Assets		Liabilities		Amount		Assets		Liabilities
	(in thousands)
Credit
Credit Default Swaps	$	6,050	$	-	$	(94)	$	6,050	$	-	$	(115)
Equity
Total Return Swaps		199,727		-		(1,463)		219,896		-		(4,712)
Equity Options		13,170,805		3,164		(1,414)		13,170,805		6,170		(3,168)
Total Non-Qualifying Hedges	$	15,349,251	$	79,881	$	(63,290)	$	15,086,420	$	72,595	$	(89,945)
Total Derivatives (1)	$	15,426,498	$	81,497	$	(67,940)	$	15,158,667	$	73,535	$	(94,580)

(1) Excludes embedded derivatives which contain multiple underlyings. The fair value of these embedded derivatives was a liability of $1,402 million and $778 million as of March 31, 2014 and December 31, 2013, respectively, included in “Future policy benefits.” The fair value of the embedded derivatives related to the reinsurance of certain of these benefits to Pruco Re and Prudential Insurance included in “Reinsurance recoverables” was an asset of $1,345 million and $748 million as of March 31, 2014 and December 31, 2013, respectively.

Offsetting Assets and Liabilities

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

	March 31, 2014
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statement of Financial Position		Net Amounts Presented in the Statement of Financial Position		Financial Instruments/ Collateral		Net Amount
	(in thousands)
Offsetting of Financial Assets:
Derivatives	$	81,497	$	(79,222)	$	2,275	$	(8,895)	$	(6,620)
Offsetting of Financial Liabilities:
Derivatives	$	67,940	$	(67,940)	$	-	$	-	$	-
	December 31, 2013
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statement of Financial Position		Net Amounts Presented in the Statement of Financial Position		Financial Instruments/ Collateral		Net Amount
	(in thousands)
Offsetting of Financial Assets:
Derivatives	$	73,535	$	(73,535)	$	-	$	-	$	-
Offsetting of Financial Liabilities:
Derivatives	$	94,580	$	(72,822)	$	21,758	$	(24,491)	$	(2,733)

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

Cash Flow Hedges

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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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

	Three Months Ended March 31, 2014
	Realized Investment Gains/(Losses)			Net Investment Income			Other Income			Accumulated Other Comprehensive Income (1)
	(in thousands)
Derivatives Designated as Hedging Instruments:
Cash flow hedges
Currency/Interest Rate	$	-		$	(12	)	$	(3	)	$	637
Total cash flow hedges		-			(12	)		(3	)		637
Derivatives Not Qualifying as Hedging Instruments:
Interest Rate		37,588			-			-			-
Currency		-			-			-			-
Currency/Interest Rate		824			-			18			-
Credit		(7	)		-			-			-
Equity		(4,648	)		-			-			-
Embedded Derivatives		(34,734	)		-			-			-
Total non-qualifying hedges		(977	)		-			18			-
Total	$	(977	)	$	(12	)	$	15		$	637

	Three Months Ended March 31, 2013
	Realized Investment Gains/(Losses)			Net Investment Income			Other Income			Accumulated Other Comprehensive Income (1)
	(in thousands)
Derivatives Designated as Hedging Instruments:
Cash flow hedges
Currency/Interest Rate	$	-		$	(34	)	$	5		$	1,746
Total cash flow hedges		-			(34	)		5			1,746
Derivatives Not Qualifying as Hedging Instruments:
Interest Rate		(25,836	)		-			-			-
Currency		-			-			-			-
Currency/Interest Rate		1,310			-			(5	)		-
Credit		(37	)		-			-			-
Equity		(30,451	)		-			-			-
Embedded Derivatives		14,189			-			-			-
Total non-qualifying hedges		(40,825	)		-			(5	)		-
Total	$	(40,825	)	$	(34	)	$	-		$	1,746

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

For the three months ended March 31, 2014 and 2013, the ineffective portion of derivatives accounted for using hedge accounting was not material to the Company’s results of operations and there were no material amounts reclassified into earnings relating to instances in which the Company discontinued cash flow hedge accounting because the forecasted transaction did not occur by the anticipated date or within the additional time period permitted by the authoritative guidance for the accounting for derivatives and hedging.

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

	(in thousands)
Balance, December 31, 2013	$	(3,653	)
Net deferred gains (losses) on cash flow hedges from January 1 to March 31, 2014		622
Amount reclassified into current period earnings		15
Balance, March 31, 2014	$	(3,016	)

As of March 31, 2014 and 2013, the Company did not have any qualifying cash flow hedges of forecasted transactions other than those related to the variability of the payment or receipt of interest or foreign currency amounts on existing financial instruments. The maximum length of time for which these variable cash flows are hedged is 19 years. Income amounts deferred in “Accumulated other comprehensive income (loss)” as a result of cash flow hedges are included in “Net unrealized investment gains (losses)” in the Unaudited Interim Statements of Equity.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Credit Derivatives Written

The Company no longer has exposure from credit derivatives where it has written credit protection as of March 31, 2014 and December 31, 2013.

The Company has purchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio. As of March 31, 2014 and December 31, 2013, the Company had $6 million of outstanding notional amounts, reported at fair value as a liability of less than $1 million for both periods.

Credit Risk

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

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

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

6.    COMMITMENTS, CONTINGENT LIABILITIES AND LITIGATION AND REGULATORY MATTERS

Commitments

The Company had made commitments to fund $8 million of commercial loans as of March 31, 2014. The Company also made commitments to purchase or fund investments, mostly private fixed maturities, of $20 million as of March 31, 2014.

Contingent Liabilities

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

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

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

Litigation and Regulatory Matters

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

The Company establishes accruals for litigation and regulatory matters when it is probable that a loss has been incurred and the amount of that loss can be reasonably estimated. For litigation and regulatory matters where a loss may be reasonably possible, but not probable, or is probable but not

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

reasonably estimable, no accrual is established, but the matter, if material, is disclosed, including matters discussed below. The Company estimates that as of March 31, 2014, the aggregate range of reasonably possible losses in excess of accruals established for those litigation and regulatory matters for which such an estimate currently can be made is $0 to approximately $5 million. This estimate is not an indication of expected loss, if any, or the Company’s maximum possible loss exposure on such matters. The Company reviews relevant information with respect to its litigation and regulatory matters on a quarterly and annual basis and updates its accruals, disclosures and estimates of reasonably possible loss based on such reviews.

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

In January 2012, a Global Resolution Agreement entered into by the Company and a third party auditor became effective upon its acceptance by the unclaimed property departments of 20 states and jurisdictions. Under the terms of the Global Resolution Agreement, the third party auditor acting on behalf of the signatory states will compare expanded matching criteria to the Social Security Master Death File (“SSMDF”) to identify deceased insureds and contract holders where a valid claim has not been made. In February 2012, a Regulatory Settlement Agreement entered into by the Company to resolve a multi-state market conduct examination regarding its adherence to state claim settlement practices became effective upon its acceptance by the insurance departments of 20 states and jurisdictions. The Regulatory Settlement Agreement applies prospectively and requires the Company to adopt and implement additional procedures comparing its records to the SSMDF to identify unclaimed death benefits and prescribes procedures for identifying and locating beneficiaries once deaths are identified. Substantially all other jurisdictions that are not signatories to the Global Resolution Agreement or the Regulatory Settlement Agreement have entered into similar agreements with the Company.

The Company is one of several companies subpoenaed by the New York Attorney General regarding its unclaimed property procedures. Additionally, the New York State Department of Financial Services (“NYDFS”) has requested that 172 life insurers (including the Company) provide data to the NYDFS regarding use of the SSMDF. The New York Office of Unclaimed Funds is conducting an audit of the Company’s compliance with New York’s unclaimed property laws. In February 2012, the Massachusetts Office of the Attorney General requested information regarding the Company’s unclaimed property procedures. In December 2013, this matter was closed without prejudice.

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

7.    RELATED PARTY TRANSACTIONS

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

Expense Charges and Allocations

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

The Company’s general and administrative expenses are charged to the Company using allocation methodologies based on business production processes. Management believes that the methodology is reasonable and reflects costs incurred by Prudential Insurance to process transactions on behalf of the Company. The Company operates under service and lease agreements whereby services of officers and employees, supplies, use of equipment and office space are provided by Prudential Insurance. The Company reviews its allocation methodology periodically which it may adjust accordingly. General and administrative expenses also include allocations of stock compensation expenses related to a stock option program and a deferred compensation program issued by Prudential Financial. The expense charged to the Company for the stock option program and deferred compensation program was less than $1 million for the three months ended March 31, 2014 and 2013.

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 less than $1 million for the three months ended March 31, 2014 and 2013.

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Prudential Annuities Life Assurance Corporation

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Prudential Insurance sponsors voluntary savings plans for the Company’s employees (“401(k) plans”). The 401(k) plans provide for salary reduction contributions by employees and matching contributions by the Company of up to 4% of annual salary. The expense charged to the Company for the matching contribution to the 401(k) plans was less than $1 million for the three months ended March 31, 2014 and 2013.

Affiliated Asset Administration Fee Income

In accordance with a revenue sharing agreement with AST Investment Services, Inc., the Company receives fee income calculated on contractholder separate account balances invested in the Advanced Series Trust, formerly known as American Skandia Trust. Income received from AST Investment Services, Inc. related to this agreement was $55 million and $58 million for the three months ended March 31, 2014 and 2013, respectively. These revenues are recorded as “Asset administration fees and other income” in the Unaudited Interim Statements of Operations and Comprehensive Income.

Affiliated Investment Management Expenses

In accordance with an agreement with Prudential Investment Management, Inc. (“PIMI”), the Company pays investment management expenses to PIMI who acts as investment manager to certain Company general account and separate account assets. Investment management expenses paid to PIMI related to this agreement was $1 million and $2 million for the three months ended March 31, 2014 and 2013, respectively. These expenses are recorded as “Net investment income” in the Unaudited Interim Statements of Operations and Comprehensive Income.

Cost Allocation Agreements with Affiliates

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

Allocated lease expense was less than $1 million for the three months ended March 31, 2014 and 2013. Allocated sub-lease rental income, recorded as a reduction to lease expense was less than $1 million for the three months ended March 31, 2014 and 2013.

The Company pays commissions and certain other fees to PAD in consideration for PAD’s marketing and underwriting of the Company’s products. Commissions and fees are paid by PAD to broker-dealers who sold and service the Company’s products. Commissions and fees paid by the Company to PAD were $45 million and $42 million for the three months ended March 31, 2014 and 2013, respectively.

Debt Agreements

Short-term Debt

The Company is authorized to borrow funds up to $2 billion from Prudential Financial and its affiliates to meet its capital and other funding needs. The Company had debt of $0 million and $5 million outstanding with Prudential Funding, LLC as of March 31, 2014 and December 31, 2013, respectively. Total interest expense on debt with Prudential Funding, LLC was less than $1 million for the three months ended March 31, 2014 and 2013.

The Company had debt of $200 million outstanding with Prudential Financial as of March 31, 2014 and December 31, 2013. This loan has a fixed interest rate of 4.49% and matures on December 29, 2014. In December 2013, a $200 million partial pay down was made on this outstanding debt. Total interest expense on debt with Prudential Financial was $2 million and $5 million for the three months ended March 31, 2014 and 2013, respectively.

Reinsurance Agreements

The Company uses reinsurance as part of its risk management and capital management strategies for certain of its optional living benefit features. Fees ceded under these agreements are included in “Realized investment gains (losses), net” on the Unaudited Interim Statement of Operations and Comprehensive Income. The Company ceded fees of $69 million to Pruco Re for the three months ended March 31, 2014 and 2013. The Company ceded fees of less than $1 million to Prudential Insurance for the three months ended March 31, 2014 and 2013. The Company’s reinsurance payables related to affiliated reinsurance were $25 million as of March 31, 2014 and December 31, 2013.

The Company’s reinsurance recoverables related to affiliated reinsurance were $1.3 billion and $0.7 billion as of March 31, 2014 and December 31, 2013, respectively. The assets are reflected in “Reinsurance recoverables” in the Company’s Unaudited Interim Statements of Financial Position. Realized gains (losses) were $0.5 billion and $(0.6) billion for the three months ended March 31, 2014 and 2013, respectively. Changes in realized gains (losses) for the three months ended March 31, 2014 and 2013 periods were primarily due to changes in market conditions in each respective period.

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Prudential Annuities Life Assurance Corporation

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Derivative Trades

In its ordinary course of business, the Company enters into OTC derivative contracts with an affiliate, PGF.

Purchase/sale of fixed maturities from/to an affiliate

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

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) addresses the financial condition of Prudential Annuities Life Assurance Corporation (“PALAC” or the “Company”) as of March 31, 2014, compared with December 31, 2013, and its results of operations for the three months ended March 31, 2014 and 2013. You should read the following analysis of our financial condition and results of operations in conjunction with the MD&A, the “Risk Factors” section, and the audited Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as well as the statements under “Forward-Looking Statements” and the Unaudited Interim Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Overview

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

The Company has sold a wide array of annuities, including deferred and immediate variable annuities with (1) fixed interest rate allocation options, subject to a market value adjustment, that are registered with the United States Securities and Exchange Commission (the “SEC”), and (2) fixed-rate allocation options not subject to a market value adjustment and not registered with the SEC. In addition, the Company has a relatively small inforce block of variable life insurance policies, but it no longer actively sells such policies.

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

On August 30, 2013, the Company received approval from the Arizona and Connecticut Departments of Insurance to redomesticate the Company from Connecticut to Arizona effective August 31, 2013. As a result of the redomestication, the Company is now an Arizona insurance company and its principal insurance regulatory authority is the Arizona Department of Insurance. See Note 1 to the Unaudited Interim Financial Statements for additional information.

Regulatory Developments

Prudential Financial is a “Designated Financial Company” under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). As a “Designated Financial Company,” Prudential Financial is subject to supervision and examination by the Federal Reserve Bank of Boston and to prudential regulatory standards under the Dodd-Frank Act. The Financial Stability Board (the “FSB”), consisting of representatives of national financial authorities of the G20 nations, has also identified Prudential Financial as a global systemically important insurer that is to be subject to enhanced regulation.

At the direction of the FSB, the International Association of Insurance Supervisors (the “IAIS”) is currently developing a model framework (“ComFrame”) for the supervision of internationally active insurance groups (“IAIGs”) that contemplates “group wide supervision” across national boundaries. Prudential Financial qualifies as an IAIG. In March 2014, Prudential Financial began participating in field testing to assist the IAIS in its development of ComFrame. Initial field testing will focus on gathering data to inform the development of the first step of ComFrame’s risk-based global insurance capital standard, known as the “Basic Capital Requirement”.

We are a licensed insurance company in New York, but are not domiciled in New York. In February 2014, the New York Department of Financial Services (“NY DFS”) notified us that it does not agree with our calculation of statutory reserves (including the applicable credit for reinsurance) for New York purposes in respect of certain variable annuity products. The Company is continuing discussions with the NY DFS regarding the proper level of statutory reserves (including the applicable credit for reinsurance) for these products. If we are ultimately required to establish material additional reserves on a New York statutory accounting basis with respect to such variable annuity products, our ability to deploy capital for other purposes could be affected.

The National Association of Insurance Commissioners (“NAIC”), the NY DFS and other regulators continue to review life insurers’ use of captive reinsurance companies. In addition, in March 2014, a committee of the NAIC proposed changes to the NAIC accreditation standards that would regulate captive reinsurance companies that assume business directly written in more than one state as “multi-state reinsurers” and apply accreditation standards to those captives that historically were applicable only to traditional insurers. For information on our use of captive reinsurance companies and the potential effects of these proposals on us, see “—Liquidity and Capital Resources—Capital—Captive Reinsurance Companies” below.

For additional information on the potential impacts of regulation on the Company, including the topics described above, see “Business—Regulation” and “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2013.

Revenues and Expenses

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

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Effective February 25, 2013, the Advanced Series Trust (“AST”) adopted a Rule 12b-1 Plan under the Investment Company Act of 1940 with respect to most of the AST portfolios that are offered through the Company’s variable annuity and variable life investment products. Under the Rule 12b-1 Plan, AST pays an affiliate of the Company for distribution and administrative services. Prior to the adoption of the 12b-1 Plan, the Company received an administrative service fee from AST and incurred expenses associated with administration services provided.

Profitability

The Company’s profitability depends principally on its ability to manage risk on insurance and annuity products. Profitability also depends on, among other items, our actuarial and policyholder behavior experience on insurance and annuity products, our ability to retain customer assets, generate and maintain favorable investment results, and to manage expenses. See “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for a discussion of risks that have materially affected and may affect in the future the Company’s business, results of operations or financial condition, or cause the Company’s actual results to differ materially from those expected or those expressed in any forward looking statements made by or on behalf of the Company.

Products

The Company’s inforce variable annuities provide its contractholders with tax-deferred asset accumulation together with a base death benefit and a suite of optional guaranteed living benefits (including versions with guaranteed death benefits) and annuitization options. Certain optional living benefit guarantees include, among other features, the ability to make withdrawals based on the highest daily contract value plus a minimum return, credited for a period of time. This guaranteed contract value is a notional amount that forms the basis for determining periodic withdrawals for the life of the contractholder, and cannot be accessed as a lump-sum surrender value. Most contracts also guarantee the contractholder a return of total deposits made to the contract less any partial withdrawals upon death. Our variable annuities generally provide our contractholders with the opportunity to allocate purchase payments to sub-accounts that invest in underlying proprietary and non-proprietary mutual funds, frequently under asset allocation programs, and fixed-rate accounts. The fixed-rate accounts, which are within the general account, are credited with interest at rates we determine, subject to certain minimums. Certain investments made in the fixed-rate accounts of our variable annuities impose a market value adjustment if the contract is not held to maturity.

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

Our risk management strategy helps to limit our exposure to certain of these risks primarily through a combination of product design elements, our living benefits hedging program and affiliated reinsurance arrangements. The product design elements we utilize for certain products include, among others, asset allocation restrictions, minimum issuance age requirements, certain limitations on the amount of subsequent contractholder deposits and an asset transfer feature. The objective of the asset transfer feature is to help mitigate our exposure to equity market risk and market volatility by transferring assets between certain variable investment sub-accounts selected by the annuity contractholder, and investments that are expected to be more stable (e.g., a bond fund sub-account within the separate account or a fixed-rate account within the general account). The transfers are based on the static mathematical formula used with the particular optional benefit which considers a number of factors, including, but not limited to, the impact of investment performance on the contractholder’s total account value. This occurs at the contractholder level, rather than at the fund level, which we believe enhances our risk mitigation. As of March 31, 2014 approximately $40.1 billion or 83% of total variable annuity account values contain a living benefit feature, compared to approximately $40.7 billion or 83% as of December 31, 2013. As of March 31, 2014 approximately $31.7 billion or 79% of variable annuity account values with living benefit features included an asset transfer feature in the product design, compared to approximately $32.1 billion or 79% as of December 31, 2013.

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

Application of Critical Accounting Estimates

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

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

— Deferred policy acquisition costs (“DAC”) and other costs, including deferred sales inducements (“DSI”) and value of business acquired (“VOBA”);

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

— Policyholder liabilities;

— Taxes on income; and

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

DAC and Other Costs

The near-term future rate of return assumptions used in evaluating DAC and deferred sales inducements for our domestic variable annuity and variable life insurance products are derived using a reversion to the mean approach, a common industry practice. Under this approach, we consider historical equity returns over a period of time and initially adjust future projected equity returns over the next four years (the “near-term”) so that the assets are projected to grow at the long-term expected rate of return for the entire period. If the near-term projected future rate of return is greater than our near-term maximum future rate of return of 13%, we use our maximum future rate of return. As of March 31, 2014, we assume an 8.0% long-term equity expected rate of return and a 4.2% near-term mean reversion equity rate of return.

The weighted average rate of return assumptions consider many factors, including asset durations, asset allocations and other factors. We generally update the near term equity rate of return and our estimate of total gross profits each quarter to reflect the result of the reversion to the mean approach, which assumes a convergence to the long-term equity expected rate of return. These market performance related adjustments to our estimate of total gross profits result in cumulative adjustments to prior amortization, reflecting the application of the new required rate of amortization to all prior periods’ gross profits.

For additional information on our policies for DAC and other costs and for the remaining critical accounting estimates listed above, see our Annual Report on Form 10-K for the year ended December 31, 2013, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Application of Critical Accounting Estimates.”

Adoption of New Accounting Pronouncements

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

Changes in Financial Position

March 31, 2014 versus December 31, 2013

Total assets remained relatively flat from December 31, 2013 to March 31, 2014 at $53.5 billion. Separate account assets decreased $605 million primarily driven by net outflows on the runoff block and policy charges, partially offset by market appreciation and the impact of the asset transfer feature which moved customer account values from the general account to the separate account due to favorable markets in the first three months of 2014. Partially offsetting the above decrease was an increase in Reinsurance recoverables of $597 million related to the reinsured liability for living benefit embedded derivatives primarily resulting from an increase in the present value of future expected benefit payments driven by decreases in interest rates.

Total liabilities decreased by $0.2 billion, from $51.8 billion at December 31, 2013 to $51.6 billion at March 31, 2014. Separate account liabilities decreased $605 million offsetting the decrease in separate accounts assets above. Policyholders’ account balance decreased $155 million driven by account value runoff due to contractholder surrenders and the impact of the asset transfer feature which moved customer account values from the general account to the separate account, as discussed above. Future policy benefits and other policyholder liabilities increased $639 million primarily driven by an increase in the liability for living benefit embedded derivatives, as discussed above.

Total equity increased by $0.1 billion from $1.7 billion at December 31, 2013 to $1.8 billion at March 31, 2014, primarily driven by net income for the first quarter of 2014.

Results of Operations

2014 versus 2013 Three Month Comparison

Income (Loss) from Operations before Income Taxes

Income from operations before income taxes decreased $103 million from an income of $197 million in the first quarter of 2013 to $94 million in the first quarter of 2014. The decrease was primarily driven by the impact on the amortization of DAC and other costs, and on the reserves for the guaranteed minimum death benefit (“GMDB”) and guaranteed minimum income benefit (“GMIB”) features, of the mark-to-market of the liability for living benefit embedded derivatives and related hedge positions and of changes in the estimated profitability of the business, as discussed in more detail below. Partially offsetting the charge from these items was a favorable variance in realized gains and losses primarily driven by differences between the mark-to-market of the non-reinsured portion of the living benefit embedded derivative liability and related hedge positions.

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

	Three Months Ended March 31,
	2014		2013
	($ in millions)
	(1)
Impact of the mark-to-market of the liability for living benefit embedded derivatives and related hedge positions	$	3	$	121
Impacts of changes in the estimated profitability of the business		(7)		10
Total	$	(4)	$	131

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

The impact of the mark-to-market of the liability for living benefit embedded derivatives and related hedge positions resulted in an unfavorable variance of $118 million, which was primarily driven by changes in the valuation of the reinsured living benefit liabilities related to NPR which we believe to be noneconomic, and choose not to hedge. The impact of changes in the estimated profitability of the business include adjustments to the amortization of DAC and other costs and to GMDB and GMIB reserves for the impact of market performance and current period experience resulted in an unfavorable variance of $17 million, which primarily reflects the impact of changes in interest rates on expected rates of return on fixed income investments within contractholder accounts.

Revenues, Benefits and Expenses

Revenues increased $21 million, primarily driven by a favorable variance in realized gains and losses of $34 million primarily driven by differences between the mark-to-market of the non-reinsured portion of the living benefit embedded derivative liability and related hedge positions. Offsetting this benefit was a decrease in net investment income of $14 million as a result of lower average annuity account values in the general account, as discussed above.

Benefits and expenses increased $124 million, primarily driven by an increase of $113 million in DAC amortization and interest credited to policyholders’ account balances, which includes DSI amortization. Changes in DAC and DSI amortization were related to the impact of the mark-to-market of the reinsured liability for living benefit embedded derivatives and related hedge positions and the impact of changes in the estimated profitability of the business, as discussed above. Policyholders’ benefits increased $10 million primarily reflecting a charge in GMDB/GMIB reserves as a result of the changes in the estimated profitability of the business.

Income Taxes

The income tax provision amounted to an expense of $17 million and $50 million for the three months ended March 31, 2014 and 2013, respectively. The decrease in income tax expense was primarily driven by the decrease in pre-tax income.

The Company’s liability for income taxes includes the liability for unrecognized tax benefits, interest and penalties which relate to tax years still subject to review by the Internal Revenue Service (“IRS”) or other taxing authorities. Audit periods remain open for review until the statute of limitations has passed. Generally, for tax years which produce net operating losses, capital losses or tax credit carryforwards (“tax attributes”), the statute of limitations does not close, to the extent of these tax attributes, until the expiration of the statute of limitations for the tax year in which they are fully utilized. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the liability for income taxes.

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

At March 31, 2014, the Company remains subject to examination in the U.S. for tax years 2009 through 2013.

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 2013 and current year results, and was adjusted to take into account the current year’s equity market performance and expected business results. The actual current year DRD can vary from the estimate based on factors such as, but not limited to, changes in the amount of dividends received that are eligible for the DRD, changes in the amount of distributions received from mutual fund investments, changes in the account balances of variable life and annuity contracts, and the Company’s taxable income before the DRD.

In August 2007, the IRS released Revenue Ruling 2007-54, which included, among other items, guidance on the methodology to be followed in calculating the DRD related to variable life insurance and annuity contracts. In September 2007, the IRS released Revenue Ruling 2007-61. Revenue Ruling 2007-61 suspended Revenue Ruling 2007-54 and informed taxpayers that the U.S. Treasury Department and the IRS intend to address through new guidance the issues considered in Revenue Ruling 2007-54, including the methodology to be followed in determining the DRD related to variable life insurance and annuity contracts. In May 2010, the IRS issued an Industry Director Directive (“IDD”) confirming that the methodology for calculating the DRD set forth in Revenue Ruling 2007-54 should not be followed. The IDD also confirmed that the IRS guidance issued before Revenue Ruling 2007-54, which guidance the Company relied upon in calculating its DRD, should be used to determine the DRD. In February 2014, the IRS released Revenue Ruling 2014-7, which modified and superseded Revenue Ruling 2007-54, by removing the provisions of

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Revenue Ruling 2007-54 related to the methodology to be followed in calculating the DRD and obsoleting Revenue Ruling 2007-61. However, there remains the possibility that the IRS and the U.S. Treasury will address, through subsequent guidance, the issues related to the calculation of the DRD. For the last several years, the revenue proposals included in the Obama Administration’s budgets included a proposal that would change the method used to determine the amount of the DRD. A change in the DRD, including the possible retroactive or prospective elimination of this deduction through guidance or legislation, could increase actual tax expense and reduce the Company’s consolidated net income. These activities had no impact on the Company’s results for 2013 or for the three months ended March 31, 2014.

In 2009, the Company joined in filing the consolidated federal tax return with its parent, Prudential Financial. For tax years 2009 through 2014, the Company is participating in the IRS’s Compliance Assurance Program (“CAP”). Under CAP, the IRS assigns an examination team to review completed transactions contemporaneously during these tax years in order to reach agreement with the Company on how they should be reported in the tax returns. If disagreements arise, accelerated resolutions programs are available to resolve the disagreements in a timely manner before the tax returns are filed. It is management’s expectation this program will shorten the time period between the filing of the Company’s federal income tax returns and the IRS’s completion of its examination of the returns.

Liquidity and Capital Resources

This section supplements and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” included in our Annual Report on Form 10-K for the year ended December 31, 2013.

Overview

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

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

Prudential Financial is a “Designated Financial Company” under the Dodd-Frank Act. As a Designated Financial Company, Prudential Financial is subject to supervision and examination by the Federal Reserve Bank of Boston and to prudential regulatory standards, which include or will include requirements and limitations (some of which are the subject of ongoing rule-making) relating to risk-based capital, leverage, liquidity, stress-testing, overall risk management, resolution plans, early remediation; and may also include additional standards regarding capital, public disclosure, short-term debt limits, and other related subjects. In addition, the Financial Stability Board, consisting of representatives of national financial authorities of the G20 nations, has identified Prudential Financial as a global systemically important insurer. For information on these recent actions and their potential impact on use, see “—Regulatory Developments” above, as well as “Business—Regulation” and “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2013.

On December 16, 2013 and June 26, 2013, the Company paid dividends of $100 million and $184 million, respectively, to our parent, Prudential Annuities, Inc.

Capital

The Risk Based Capital, or RBC, ratio is a primary measure of the capital adequacy of the Company. RBC is calculated based on statutory financial statements and risk formulas consistent with the practices of the NAIC. RBC considers, among other things, risks related to the type and quality of the invested assets, insurance-related risks associated with an insurer’s products and liabilities, interest rate risks and general business risks. RBC ratio calculations are intended to assist insurance regulators in measuring an insurer’s solvency and ability to pay future claims. The reporting of RBC measures is not intended for the purpose of ranking any insurance company or for use in connection with any marketing, advertising or promotional activities, but is available to the public. The RBC ratio is an annual calculation, however, as of March 31, 2014 we estimate that the Company’s RBC ratio exceeds the minimum level required by applicable insurance regulations.

The regulatory capital level of the Company can be materially impacted by interest rate and equity market fluctuations, changes in the values of derivatives, the level of impairments recorded, and credit quality migration of the investment portfolio, among other items. Further, the recapture of business subject to third-party reinsurance arrangements due to defaults by, or credit quality migration affecting, the third-party reinsurers or for other reasons could negatively impact regulatory capital.

Our regulatory capital levels are also affected by statutory accounting rules, which are subject to change by each applicable insurance regulator. As discussed above in “—Regulatory Developments,” the NY DFS has notified us that it does not agree with our calculation of statutory reserves (including the applicable credit for reinsurance) for New York purposes in respect of certain variable annuity products. If we are ultimately required to establish material additional reserves on a New York statutory accounting basis with respect to such variable annuity products, our ability to deploy capital for other purposes could be affected.

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In addition the NAIC recently proposed new guidance regarding the calculation of “total adjusted capital”, or TAC, that will directly affect the calculation of the RBC ratio. The new guidance, which is expected to be effective for December 31, 2014, would limit the portion of an insurer’s asset valuation reserve that can be counted as TAC to the amount not utilized in asset adequacy testing. We are currently assessing the impact of this guidance on the Company’s RBC ratio.

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

Affiliated Captive Reinsurance Companies

Prudential Financial and the Company use captive reinsurance companies to more effectively manage its reserves and capital on an economic basis and to enable the aggregation and transfer of risks. The captive reinsurance companies assume business from affiliates only. To support the risks they assume, the captives are capitalized to a level we believe is consistent with the “AA” financial strength rating targets of Prudential Financial’s insurance subsidiaries. All of the captive reinsurance companies are wholly-owned subsidiaries of Prudential Financial and are located domestically, typically in the state of domicile of the direct writing insurance subsidiary that cedes the majority of business to the captive. In addition to state insurance regulation, our captives are subject to internal policies governing their activities. Prudential Financial provides support to these captives, typically through net worth maintenance agreements, and in the normal course of business will contribute capital to the captives to support business growth and other needs. In addition, in connection with financing arrangements, Prudential Financial may guarantee certain of the captives’ obligations.

We also manage certain risks associated with our variable annuity products through arrangements with an affiliated captive reinsurance company. We reinsure variable annuity living benefit guarantees to Pruco Re. This enables Prudential Financial to aggregate these risks within Pruco Re and manage them more efficiently through a hedging program. We believe Pruco Re currently maintains an adequate level of capital and access to liquidity to support this hedging program. However, Pruco Re’s capital and liquidity needs can vary significantly due to, among other things, changes in equity markets, interest rates, mortality and policyholder behavior. Through our Capital Protection Framework, Prudential Financial holds on-balance sheet capital and maintains access to committed sources of capital that are available to meet these needs as they arise.

The NAIC, the NY DFS and other regulators continue to review life insurers’ use of captive reinsurance companies. In addition, in March 2014, a committee of the NAIC proposed changes to the NAIC accreditation standards that would regulate captive reinsurance companies that assume business directly written in more than one state as “multi-state reinsurers” and apply accreditation standards to those captives that historically were applicable only to traditional insurers. We cannot predict what, if any, changes may result from these reviews. If insurance laws are changed in a way that restricts our use of captive reinsurance companies in the future, our ability to write certain products and efficiently manage their associated risks could be adversely affected and we may need to increase prices on certain products, modify certain products or find alternate financing sources, any of which could adversely affect our competitiveness, capital and financial position and results of operations. Given the uncertainty of the ultimate outcome of these reviews, at this time we are unable to estimate their expected effects on our future capital and financial position and results of operations.

Effective August 31, 2013, the Company re-domesticated from Connecticut to Arizona, and, as a result, PALAC is able to claim reinsurance reserve credit for business ceded to Pruco Re without the need for Pruco Re to post collateral.

Liquidity

There have been no material changes to the liquidity position of the Company since December 31, 2013. We continue to believe that cash generated by ongoing operations and the liquidity profile of our assets provide sufficient liquidity under reasonably foreseeable stress scenarios for the Company.

The principal sources of the Company’s liquidity are certain annuity considerations, investment and fee income, investment maturities, as well as internal borrowings. The principal uses of that liquidity include benefits, claims, and payments to policyholders and contractholders in connection with surrenders, withdrawals and net policy loan activity. Other uses of liquidity include commissions, general and administrative expenses, purchases of investments, and payments in connection with financing activities. As discussed above, in March 2010, the Company ceased offering its existing variable annuity products to new investors upon the launch of a new product line by certain affiliates. Therefore, the Company expects to continue to see the overall level of cash flows decrease going forward as the book of business runs off.

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

Liquid assets include cash and cash equivalents, short-term investments and fixed maturities that are not designated as held-to-maturity and public equity securities. As of March 31, 2014 and December 31, 2013, the Company had liquid assets of $3.4 billion and $3.4 billion, respectively. The portion of liquid assets comprised of cash and cash equivalents and short-term investments was $0.2 billion and $0.1 billion as of March 31, 2014 and December 31, 2013, respectively. As of March 31, 2014, $3.0 billion, or 92%, of the fixed maturity investments in company general account portfolios were rated high or highest quality based on NAIC or equivalent rating. The remaining $0.2 billion, or 8%, of these fixed maturity investments were rated other than high or highest quality.

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

Item 4. Controls and Procedures

In order to ensure that the information we must disclose in our filings with the SEC is recorded, processed, summarized and reported on a timely basis, the Company’s management, including our Principal Executive Officer and Chief Financial Officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the “Exchange Act”, as amended, as of March 31, 2014. Based on such evaluation, the Principal Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2014, 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, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II OTHER INFORMATION

Item 1. Legal Proceedings

See Note 6 to the Unaudited Interim Financial Statements under “—Litigation and Regulatory Matters” for a description of material pending litigation and regulatory matters affecting us, and certain risks to our businesses presented by such matters, which is incorporated herein by reference.

Item 1A. Risk Factors

You should carefully consider the risks described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013. These risks could materially affect our business, results of operations or financial condition, or cause our actual results to differ materially from those expected or those expressed in any forward looking statements made by or on behalf of the Company. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” above and the risks of our businesses described elsewhere in this Quarterly Report on Form 10-Q.

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Item 6. Exhibits

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

101.INS	-XBRL Instance Document.
101.SCH	-XBRL Taxonomy Extension Schema Document.
101.CAL	-XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB	-XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	-XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF	-XBRL Taxonomy Extension Definition Linkbase Document.

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SIGNATURES

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

PRUDENTIAL ANNUITIES LIFE ASSURANCE CORPORATION
By:	/s/ Yanela C. Frias
	Yanela C. Frias
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

Date: May 14, 2014

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Exhibit Index

Exhibit Number and Description

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

101.INS	-XBRL Instance Document.
101.SCH	-XBRL Taxonomy Extension Schema Document.
101.CAL	-XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB	-XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	-XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF	-XBRL Taxonomy Extension Definition Linkbase Document.

43