Table of a new product line by each of Pruco Life and PLNJ (which are affiliates of the Company). These initiatives were implemented to create operational and administrative efficiencies by offering a single product line of annuity products from a more limited group of legal entities. During 2012, the Company suspended additional customer deposits for variable annuities with certain living benefit guarantees. However, subject to applicable contract provisions and administrative rules, the Company continues to accept additional customer deposits on certain in force contracts.Contents

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

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

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

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

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

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



Underwriting and Pricing ~~We earn~~Our revenues primarily come in the form of: • Fee income from asset management fees, as well as service fees, representing administrative service and distribution fees from many of our proprietary and non-proprietary mutual funds. The asset management fees aredetermined as a percentage of the average assets of our proprietary mutual funds in our variable annuity products ~~net~~(net of sub-advisory expenses related to non-proprietary ~~sub-advisors. Additionally, we earn~~sub-advisors). • Policy charges and fee income representing mortality and expense and other fees for various insurance-related options and features based on the average daily net asset value of the annuity separate accounts, account value, premium, or guaranteed value, as applicable. • Investment income (which contributes to the net spread over interest credited on certain of our products and related expenses). Our profitability is substantially impacted by our ability to appropriately price our products. We ~~also receive administrative service and distribution fees from many of the proprietary and non-proprietary mutual funds.~~price our products based on: ~~We priced our variable annuities based on an~~ • An evaluation of the risks assumed and consideration of applicable risk management strategies, including hedging and reinsurance costs. ~~Our pricing was also influenced by competition~~ • Assumptions regarding investment returns and ~~assumptions regarding~~ contractholder behavior, including persistency (the probability that a contract will remain in force), benefit utilization and the timing and efficiency of withdrawals for contracts with living benefit features, as well as other assumptions. ~~Significant deviations in actual experience from our pricing assumptions~~	~~Table of Contents~~ could have an adverse or positive effect on the profitability of our products. To encourage persistency, most of our variable and fixed annuities have surrender or withdrawal charges for a specified number of years. In addition, the living benefit features of our variable annuity products encourage persistency because the potential value of the living benefit is fully realized only if the contract persists.Competition We ~~priced~~compete with other providers of retirement savings and accumulation products, including large, well-established insurance and financial services companies. We believe our ~~fixed annuities~~competitive advantage lies primarily in our innovative product features and ~~the fixed-rate accounts of~~ our ~~variable annuities based on assumed investment returns, expenses, competition and persistency,~~risk management strategies as well as ~~other assumptions. We seek to maintain a spread between~~brand recognition, financial strength, the ~~return on our general account invested assets and the interest we credit on our fixed annuities and the fixed-rate accounts~~breadth of our ~~variable annuities.~~ ~~Reserves~~ ~~We establish reserves for~~distribution platform and our annuity products in accordance with U.S. GAAP. We use current best estimate assumptions when establishing reserves for our guaranteed minimum death and income benefits, including assumptions such as interest rates, equity returns, persistency, withdrawal, mortality and annuitization rates. Certain of the guaranteed living benefit features on variable annuity contracts are accounted for as embedded derivatives and are carried at fair value. The fair values of these benefit features are calculated as the present value of future expected benefit payments to contractholders less the present value of future expected rider fees attributable to the embedded derivative feature, and are based on assumptions a market participant would use in valuing these embedded derivatives. These features are generally reinsured with an affiliated company, Prudential Insurance and with Pruco Re through March 31, 2016. For life contingent payout annuity contracts, we establish reserves using best estimate assumptions with provisions for adverse deviations as of inception or best estimate assumptions as of the most recent loss recognition event. We establish liabilities for contractholders’ account balances that represent cumulative deposits plus credited interest, less withdrawals, mortality and expense charges. Policyholders’ account balances also include provisions for non-life contingent payout annuity benefits. ~~Reinsurance~~ The Company uses reinsurance as part of its risk management and capital management strategies for certain of its optional living benefit features. For additional information regarding the living benefit hedging program and the reinsurance of certain optional living benefit features to Prudential Insurance, see Note 13 to the Financial Statements.customer service capabilities. ~~Regulation~~

Seasonality of Key Financial Items

Our business experiences seasonality with respect to its ongoing operations. The following chart summarizes the key areas of seasonality.

~~Overview~~



	First Quarter	Second Quarter	Third Quarter	Fourth Quarter
All Ongoing ~~Our businesses are subject~~Operations		Impact of annual assumption update (1)		Expenses tend to comprehensive regulation and supervision. The purpose of these regulations is primarily to protect our customers and the overall financial system. Many of the laws and regulations to which we are subject are regularly re-examined, and existing or future laws and regulations may become more restrictive or otherwise adversely affect our operations or profitability. Financial market dislocations have produced, and are expected to continue to produce, extensive changes in existing laws and regulations, and regulatory frameworks, applicable to our businesses, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) discussed below. In addition, we cannot predict how the Trump Administration will impact these existing laws and regulations, and regulatory frameworks, including Dodd-Frank, U.S. tax laws, the U.S. Department of Labor’s new fiduciary rules and the U.S.’s participation in international supervisory initiatives. State insurance laws regulate all aspects of our business. Insurance departments in the U.S. states, the District of Columbia and various U.S. territories and possessions monitor our insurance operations. The Company is domiciled in Arizona and its principal insurance regulatory authority is the Arizona Department of Insurance.be highest

(1) Impact of annual reviews and update of actuarial assumptions and other refinements.

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Reinsurance

We regularly enter into reinsurance agreements as either the ceding entity or the assuming entity. As a ceding entity, exposure to the risks reinsured is reduced by transferring certain rights and obligations of the underlying insurance product to a counterparty. As an assuming entity, exposure to the risks reinsured is increased by assuming certain rights and obligations of the underlying insurance products from a counterparty. We enter into reinsurance agreements as the ceding entity for a variety of reasons but primarily to reduce exposure to loss, reduce risk volatility, provide additional capacity for future growth and for capital management purposes for certain of our optional living benefit features. Under ceded reinsurance, we remain liable to the underlying policyholder if a third-party reinsurer is unable to meet its obligations. We evaluate the financial condition of reinsurers and monitor the concentration of counterparty risk to mitigate this exposure. We enter into reinsurance agreements as the assuming entity as part of our normal product offerings. For additional information regarding the living benefit hedging program and the reinsurance of certain optional living benefit features to Prudential Insurance, see Note 10 to the Financial Statements.

Regulation

Overview

Our business is subject to comprehensive regulation and supervision. The purpose of these regulations is primarily to protect our customers and the overall financial system. Many of the laws and regulations to which we are subject are regularly re-examined. Existing or future laws and regulations may become more restrictive or otherwise adversely affect our operations or profitability, increase compliance costs, or increase potential regulatory exposure. In recent years we have experienced, and expect to continue to experience, extensive changes in the laws and regulations, and regulatory frameworks, applicable to our businesses. In particular, in October 2018 the Financial Stability Oversight Council (the “Council”) rescinded Prudential Financial’s designation as a non-bank financial company (a “Designated Financial Company”) subject to supervision by the Board of Governors of the Federal Reserve System (“FRB”) under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) as discussed below. We cannot predict how current or future initiatives will further impact existing laws, regulations, and regulatory frameworks.

State insurance laws regulate all aspects of our business. Insurance departments in the District of Columbia, Guam and all states monitor our insurance operations. The Company is domiciled in Arizona and its principal insurance regulatory authority is the AZDOI. Generally, our insurance products must be approved by the insurance regulators in the state in which they are sold. Our insurance products are substantially affected by federal and state tax laws. In the fourth quarter of 2015, the Company surrendered its New York license. The Company recaptured the New York living benefits previously ceded to Pruco Re, and reinsured the majority of its New York business, both the living benefit and base contract, to an affiliate, Prudential Insurance.

The primary regulatory frameworks applicable to Prudential Financial and the Company are described further below under the following section headings:

Dodd-Frank Wall Street Reform and Consumer Protection Act


◦	Rescission of Designation


◦	Initiatives Regarding Dodd-Frank ~~subjects Prudential~~and Financial ~~to substantial federal regulation, primarily as a non-bank financial company (a “Designated Financial Company”) designated for supervision by the Board of Governors of the~~ Regulation

ERISA

Fiduciary Rules and other Standards of Care

State Insurance Holding Company Regulation

Insurance Operations


◦	State Insurance Regulation

◦

Federal Reserve System (“FRB”) as discussed below. We cannot predict the timing or requirements of the regulations not yet adopted under Dodd-Frank or how such regulations will impact our business, credit or financial strength ratings, results of operations, cash flows, financial condition or competitive position. Furthermore, we cannot predict whether such regulations will make it advisable or require us to hold or raise additional capital or liquid assets, potentially affecting capital deployment activities, including paying dividends.

In February 2017 President Trump issued an executive order directing the Secretary of the Treasury to consult with the heads of the member agencies of the Financial Stability Oversight Council (the "Council") and ~~report to the President on the extent to which existing laws and regulations promote certain core principles of regulation of the financial system that are outlined in the order.~~

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We cannot predict what impact the order will ultimately have on Dodd-Frank or the Company. In addition, during 2016 legislation was introduced to amend certain provisions of Dodd-Frank, including the authority of the Council to designate non-bank financial companies for FRB supervision, and it is expected that a revised version of the proposed legislation will be introduced again in 2017. We cannot predict whether this or other legislation impacting Dodd-Frank will ultimately be passed into law, or how such legislation will impact the Company.

State Securities Regulation ~~as a Designated Financial Company~~

Dodd-Frank established the Council which is authorized to subject non-bank financial companies such as Prudential Financial to stricter prudential standards and to supervision by the FRB if the Council determines that either (i) material financial distress at Prudential Financial, or (ii) the nature, scope, size, scale, concentration, interconnectedness, or mix of Prudential Financial’s activities could pose a threat to domestic financial stability. Prudential Financial has been a Designated Financial Company since September 2013 under the first criterion. Under Dodd-Frank the Council is required to reevaluate this designation annually. The Council last voted to maintain Prudential Financial’s designation in December 2015.

As a Designated Financial Company, Prudential Financial is subject to supervision and examination by the FRB and to stricter prudential standards. These standards include or may include requirements and limitations (many of which are the subject of ongoing rule-making as described below) relating to capital, leverage, liquidity, stress-testing, overall risk management, resolution and recovery plans, credit exposure reporting, early remediation, management interlocks and credit concentration. They may also include requirements regarding enhanced public disclosure, short-term debt limits, and other related subjects as may be deemed appropriate by the FRB acting on its own or pursuant to a recommendation of the Council. Thus far, the FRB has focused its general supervisory authority over Prudential Financial in several areas, including oversight of Prudential Financial's capital planning and risk management processes, model governance and validation, liquidity management, compliance, information and technology security and resolution and recovery planning.

~~Enhanced Prudential Standards~~

Dodd-Frank requires the FRB to establish for Designated Financial Companies and certain large bank holding companies stricter requirements and limitations relating to capital, leverage and liquidity. In June 2016, the FRB issued an advance notice of proposed rulemaking regarding approaches to minimum regulatory capital requirements for institutions supervised by the FRB that are significantly engaged in insurance activities, including insurance companies that own a bank or thrift institution and Designated Financial Companies. The advance notice invited comments on a “building block approach” and a “consolidated approach” for determining minimum regulatory capital requirements, including which approach is appropriate for Designated Financial Companies. The building block approach would aggregate capital resources and requirements across different legal entities using each entity's current regulatory regime to calculate combined qualifying and required capital for the group. The consolidated approach would categorize insurance liabilities, assets and certain other exposures into risk segments, determine consolidated required capital by applying risk factors to the amounts in each segment, define qualifying capital for the consolidated firm, and then compare consolidated qualifying capital to consolidated required capital. The building block approach and the consolidated approach as described in the advance notice of proposed rulemaking are high level concepts for capital standards, and will ultimately need to be defined in detail in any final standards. The comment period for the advance notice closed on September 16, 2016.

Also in June 2016, the FRB issued proposed enhanced prudential standards for Designated Financial Companies significantly engaged in insurance activities relating to corporate governance, risk management, and liquidity risk management. The proposed corporate governance standards would require Designated Financial Companies to establish and maintain a risk committee of the board of directors and appoint a chief risk officer and chief actuary. The proposed risk management standards would require Designated Financial Companies to establish a comprehensive risk management framework that includes policies, procedures, and systems for monitoring and managing risk enterprise-wide. The proposed liquidity risk management standards would require periodic cash-flow projections, liquidity stress testing and maintenance of a liquidity buffer. The comment period for this proposal closed on August 17, 2016.

~~Stress Tests~~

As a Designated Financial Company, Dodd Frank requires Prudential Financial to be subject to stress tests to be promulgated by the FRB to determine whether, on a consolidated basis, Prudential Financial has the capital necessary to absorb losses as a result of adverse economic conditions. Dodd-Frank requires Prudential Financial to submit to annual stress tests conducted by the FRB and to conduct internal annual and semi-annual stress tests to be provided to the FRB. Under FRB rules, Designated Financial Companies must comply with these requirements the calendar year after the year in which a company first becomes subject to the FRB’s minimum regulatory capital requirements discussed above, although the FRB has the discretion to accelerate or extend the effective date. The FRB has indicated that it may tailor the application of the stress test requirements to Designated Financial Companies on an individual basis or by category. Summary results of such stress tests would be required to be publicly disclosed.

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~~Early Remediation~~

The FRB is required under Dodd-Frank to prescribe regulations for the establishment of an “early remediation” regime for the financial distress of Designated Financial Companies, whereby failure to meet defined measures of financial condition (including regulatory capital, liquidity measures, and other forward-looking indicators) would result in remedial action by the FRB that increases in stringency as the financial condition of the Designated Financial Company declines. Depending on the degree of financial distress, such remedial action could result in capital-raising requirements, limits on transactions with affiliates, management changes and asset sales.

~~Resolution and Recovery Planning~~

~~Prudential Financial is required as a Designated Financial Company to submit to the FRB and Federal Deposit~~Affecting Insurance Corporation (“FDIC”), and periodically update in the event of material events, a plan for rapid and orderly resolution in the event of severe financial distress. Prudential Financial submitted its most recent resolution plan in December 2015, which is subject to review for credibility and completeness and has not yet received feedback from the FBR and FDIC on the plan. In August 2016, the FRB and the FDIC announced that for Designated Financial Companies, including Prudential Financial, and certain banking organizations required to file annual resolution plans, the next resolution plan filing deadline will be delayed from December 31, 2016 to December 31, 2017.

If the FRB and the FDIC were to jointly determine that Prudential Financial’s 2015 resolution plan, or any future resolution plan, is not credible or would not facilitate an orderly resolution of Prudential Financial under applicable law, and Prudential Financial is unable to remedy the identified deficiencies in a timely manner, the regulators may jointly impose more stringent capital, leverage or liquidity requirements on Prudential Financial or restrictions on growth, activities or operations. Any requirements or restrictions imposed by the FRB and FDIC would cease to apply on the date that the FRB and FDIC jointly determine that Prudential Financial has submitted a revised resolution plan that adequately remedies the deficiencies.

~~The FRB and the FDIC, in consultation with the Council, may also jointly order Prudential Financial to divest assets or operations identified by the FRB and FDIC in circumstances where:~~

the FRB and the FDIC jointly decide that Prudential Financial or a subsidiary of Prudential Financial shall be subject to the requirements or restrictions described above due to deficiencies identified in its resolution plan;

Prudential Financial has failed to submit a resolution plan that adequately addresses the deficiencies identified by the FRB and FDIC for the two year period following the imposition of such requirements or restrictions; and

the FRB and FDIC jointly determine that the divestiture of such assets or operations is necessary to facilitate an orderly resolution of Prudential Financial in the event that Prudential Financial was to fail.

In addition, in order to develop a resolution plan that the FRB and FDIC determine is credible or would facilitate the orderly resolution of Prudential Financial under applicable law, it may be necessary for Prudential Financial to take actions to restructure intercompany and external activities or other actions, which could result in increased funding or operational costs.

Prudential Financial is also required to submit to the FRB a recovery plan that describes the steps that Prudential Financial could take to reduce risk and conserve or restore liquidity and capital in the event of severe financial stress scenarios. Prudential Financial submitted its first recovery plan in 2016. We are scheduled to submit our next recovery plan in June 2018.

~~Other Dodd-Frank Regulation~~

Dodd-Frank requires the FRB to promulgate regulations that would prohibit Designated Financial Companies from having a credit exposure to any unaffiliated company in excess of 25% of the Designated Financial Company’s capital stock and surplus.

~~As a Designated Financial Company, Prudential Financial must seek pre-approval from the FRB for the acquisition of specified interests in certain companies engaged in financial activities.~~

The Council may recommend that state insurance regulators or other regulators apply new or heightened standards and safeguards for activities or practices Prudential Financial and other insurers or other financial services companies engage in.

As a Designated Financial Company, Prudential Financial could be subject to additional capital requirements for, and other restrictions on, proprietary trading and sponsorship of, and investment in, hedge, private equity and other covered funds.

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Operations

Derivatives Regulation

~~Prudential~~Privacy and Cybersecurity Regulation

Anti-Money Laundering and Anti-Bribery Laws

Unclaimed Property Laws

Taxation

International and Global Funding LLC (“PGF”), Prudential Financial and its subsidiaries use derivatives for various purposes, including hedging interest rate, foreign currency and equity market exposures. Dodd-Frank established a framework for regulation of the over-the-counter (“OTC”) derivatives markets. This framework sets out requirements regarding the clearing and reporting of derivatives transactions, as well as collateral posting requirements for uncleared swaps. Inter-affiliate swaps entered into between Prudential Financial's subsidiaries are generally exempt from most of these requirements.

Regulation of the derivatives markets continues to evolve, and we cannot predict the full effect of regulations yet to be adopted or fully implemented both in the U.S. and abroad. These regulations may significantly increase our hedging costs, and otherwise impact our hedging strategy or implementation thereof, or cause us to increase or change the composition of the risks we do not hedge. In particular, we continue to monitor the potential hedging cost impacts of new initial margin requirements that we will be required to comply with in 2020, and increased capital requirements for derivatives transactions that may be imposed on banks that are our counterparties. Additionally, the increased need to post cash collateral in connection with mandatorily cleared swaps may also require the liquidation of higher yielding assets for low yielding cash, resulting in a negative impact on investment income.

Under Dodd-Frank the SEC and the Commodity Futures Trading Commission are required to determine, but have not yet determined, whether, and if so, how “stable value contracts” should be treated as swaps under the applicable regulations and whether various other products offered by Prudential Financial's insurance subsidiaries should be treated as swaps. If regulated as swaps, we cannot predict how the rules would be applied to such products or the effect on their profitability or attractiveness to our clients.

~~Federal Insurance Office~~

Dodd-Frank established a Federal Insurance Office (“FIO”) within the Department of the Treasury headed by a director appointed by the Secretary of the Treasury. While the FIO does not have general supervisory or regulatory authority over the business of insurance, the FIO director performs various functions with respect to insurance, including serving as a non-voting member of the Council and coordinating with the FRB in the application of any stress tests required to be conducted with respect to an insurer.

~~Securities Laws~~

Dodd-Frank included various securities law reforms relevant to our business practices. In January 2011, the SEC staff issued a study that recommended that the SEC adopt a uniform federal fiduciary standard of conduct for registered broker-dealers and investment advisers that provide retail investors personalized investment advice about securities which the SEC continues to consider.

~~Other U.S. Federal Regulation~~

~~U.S. Tax Legislation~~

Prudential Financial and certain domestic subsidiaries, including the Company, file a consolidated federal income tax return that includes both life insurance companies and non-life insurance companies. Certain other domestic subsidiaries file separate individual corporate tax returns. Subsidiaries operating outside the U.S. are taxed, and income tax expense is recorded, based on applicable foreign statutes. The principal differences between the Company’s actual income tax expense and the 35% statutory federal income tax rate are generally deductions for non-taxable investment income, including the dividends received deduction (the "DRD") and certain tax credits. In addition, as discussed further below, the tax attributes of our products may impact both the Company’s taxable income and our customers’ tax positions. See “Income Taxes” in Note 2 to the Financial Statements and Note 9 to the Financial Statements for a description of the Company’s tax position. As discussed further below, there are several potential changes to the tax laws that may impact the Company’s tax position and the attractiveness of our products.

The 2016 Presidential and Congressional election results may make U.S. tax reform more likely in the near term. Tax reform proposals from the past several years, including the House Republicans Tax Reform Blueprint, may be the starting point for such legislative changes. Such proposals have a common theme of modifying the tax law by lowering tax rates and broadening the tax base, by reducing or eliminating deductions and other tax expenditures. Overall lower effective individual tax rates could make our products less attractive to customers. It is unclear whether or when Congress may take up overall tax reform and what impact tax reform will have on the Company and its products. However, even in the absence of overall tax reform, Congress could enact more piecemeal tax legislation that would change the Company’s tax profile, make our products less competitive and adversely impact our capital position.

Current U.S. federal income tax laws generally permit certain holders to defer taxation on the inside build-up of investment value of annuities and life insurance products until there are contract distributions and, in general, to exclude from taxation the death benefit paid under a life insurance contract. President Trump’s tax reform proposal published during the 2016 Presidential campaign makes reference to a possible limit on the inside build-up of life insurance for higher earners, although the provision was removedRegulatory Initiatives

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Several of Prudential Financial’s domestic and foreign regulators participate in an annual supervisory college facilitated by the New Jersey Department of Banking and Insurance ("NJDOBI"). The purpose of the supervisory college is to promote ongoing supervisory coordination, facilitate the sharing of information among regulators and enhance each regulator’s understanding of Prudential Financial’s risk profile. The most recent supervisory college was held in October 2018.

Dodd-Frank Wall Street Reform and Consumer Protection Act

Rescission of Designation

As a ~~later draft. Congress~~result of the Council’s rescission of Prudential Financial’s Designated Financial Company status, Prudential Financial is no longer subject to supervision and examination by the FRB or to the prudential standards applicable to Designated Financial Companies under Dodd-Frank. Accordingly, Prudential Financial will no longer incur FRB supervisory fees or certain consulting and other costs associated with FRB supervision.

The Council maintains the authority to designate entities, including Prudential Financial, for FRB supervision if it determines that either (i) material financial distress at the entity, or (ii) the nature, scope, size, scale, concentration, interconnectedness, or mix of the entity’s activities, could pose a threat to domestic financial stability. Prudential Financial continues to believe it does not meet the standards for designation.

Initiatives Regarding Dodd-Frank and Financial Regulation

In November 2017, the U.S. Department of the Treasury released a report titled “Financial Stability Oversight Council Designations,” with recommendations on the Council's standards and processes for the designation and continued designation of Designated Financial Companies. In addition, in October 2017, the U.S. Department of the Treasury released a report titled “A Financial System That Creates Economic Opportunities - Asset Management and Insurance” which recommended, among other things, that primary federal and state regulators should focus on potential systemic risks arising from products and activities, and on implementing regulations that strengthen the asset management and insurance industries as a whole, rather than focus on an entity-based regulatory regime. The report also ~~from~~affirmed the role of the U.S. state-based system of insurance regulation. From time to time ~~considers~~Congress has also introduced legislation ~~that could make our products less attractive to consumers, including legislation that would reduce or eliminate the benefit of this deferral on some annuities and insurance products.~~

Congress, as well as state and local governments, also consider from time to time legislation that could increase the amount of corporate taxes we pay, thereby reducing earnings. For example, changes in the law relating to tax reserving methodologies for term life or universal life insurance policies with secondary guarantees or other products could result in higher current taxes. As another example, the U.S. Treasury and the Internal Revenue Service intend to address through guidance the methodology to be followed in determining the DRD related to variable life insurance and annuity contracts. The DRD reduces the amount of dividend income subject to tax and is a major reason for the difference between our actual tax expense and the expected tax amount determined using the federal statutory tax rate of 35%. Furthermore, the President’s annual budget typically includes proposals which if enacted, would ~~affect~~amend certain provisions of Dodd-Frank, including by requiring the ~~taxation~~Council to prioritize the use of ~~life insurance companies~~an activities-based approach to mitigate identified systemic risks.

We cannot predict whether the Treasury reports, new legislation or other initiatives aimed at revising Dodd-Frank and ~~certain life insurance products. In recent years~~regulation of the ~~Obama Administration's proposals have included~~financial system will ultimately form the basis for changes to the taxation of corporate-owned life insurance policies (“COLI”), as well as changes to the DRD. If proposals of this type were enacted, the Company’s sale of COLI, variable annuities, and variable life insurance products could be adversely affected and the Company’s actual tax expense could increase, thereby reducing earnings.

There have also been various proposals from Congress and the prior Administration that would impact the way U.S. multinational corporations are taxed, including imposing a liability-based fee on financial services companies, changing how companies importing and exporting goodslaws or services are taxed, changing the deductibility of interest and modifying how net operating losses are used, among other proposals. It is unclear how these or other proposals would impact insurance companies.

~~The products we sell have different tax characteristics, in some cases generating tax deductions and credits for~~regulations impacting the Company. Changes in either the U.S. or foreign tax laws may negatively impact the deductions and credits available to the Company, including the ability of the Company to claim foreign tax credits with respect to taxes withheld on separate account products. These changes would increase the Company’s actual tax expense and reduce its consolidated net income.

The level of profitability of certain of our products is significantly dependent on these characteristics and our ability to continue to generate taxable income, which is taken into consideration when pricing products and is a component of our capital management strategies. Accordingly, changes in tax law, our ability to generate taxable income, or other factors impacting the availability or value of the tax characteristics generated by our products could impact product pricing and returns or require us to reduce our sales of these products or implement other actions that could be disruptive to our businesses. In addition, the adoption of a principles-based approach for statutory reserves may lead to significant changes to the way tax reserves are determined and thus reduce future tax deductions. See “-Insurance Operations-State Insurance Regulation-Financial Regulation-Insurance Reserves and Regulatory Capital” for information on principles-based reserves.

~~For additional discussion of possible tax legislative and regulatory risks that could affect our business, see “Risk Factors.”~~

ERISA

The Employee Retirement Income Security Act ~~(“ERISA”~~("ERISA") is a comprehensive federal statute that applies to U.S. employee benefit plans sponsored by private employers and labor unions. Plans subject to ERISA include pension and profit sharing plans and welfare plans, including health, life and disability plans. ERISA provisions include reporting and disclosure rules, standards of conduct that apply to plan fiduciaries and prohibitions on transactions known as “prohibited transactions,” such as conflict-of-interest transactions and certain transactions between a benefit plan and a party in interest. ERISA also provides for civil and criminal penalties and enforcement. Prudential Financial’s insurance, ~~asset~~investment management and retirement businesses provide services to employee benefit plans subject to ERISA, including services where Prudential Financial may act as an ERISA fiduciary. In addition to ERISA regulation of businesses providing products and services to ERISA plans, Prudential Financial becomes subject to ERISA’s prohibited transaction rules for transactions with those plans, which may affect Prudential Financial’s ability to enter transactions, or the terms on which transactions may be entered, with those plans, even in businesses unrelated to those giving rise to party in interest status.

~~DOL~~ Fiduciary ~~Rule~~Rules and Other Standards of Care

The Company and our distributors are subject to rules regarding the standard of care applicable to sales of our products and the provision of advice to our customers. In ~~April 2016,~~recent years, many of these rules have been revised or reexamined, as described below. We cannot predict whether any proposed or new amendments to the existing regulatory framework will ultimately become applicable to our businesses. Any new standards issued by the U.S. Department of Labor (“DOL”) issued a final regulation accompanied by new class exemptions and amendments to long-standing exemptions from the prohibited transaction provisions under ERISA (collectively, the “Rules”("DOL"), ~~with implementation beginning in April 2017,~~the Securities and ~~compliance with certain additional provisions required~~Exchange Commission (“SEC”), the National Association of Insurance Commissioners (“NAIC”) or state regulators may affect our businesses, results of operations, cash flows and financial condition.

DOL Fiduciary Rules

In June 2018, a Fifth Circuit Court of Appeals decision became effective that vacated rules issued by ~~January 2018. The Rules redefine~~the DOL that redefined who ~~will~~would be considered a “fiduciary” for purposes of transactions with qualified plans, plan participants and Individual Retirement Accounts ("IRAs"), and generally ~~provide~~provided that investment advice to a plan participant or IRA owner ~~will~~would be treated as a fiduciary activity. The rules adversely impacted sales in our individual annuities business and resulted in increased compliance costs prior to the rules being vacated. We ~~have analyzed the Rules’ impact on our operations and are implementing the adjustments that we believe are necessary to come into alignment with the Rules’ requirements.~~

~~In February 2017 President Trump directed~~cannot predict whether the DOL ~~to examine~~will issue any new fiduciary rules or what impact they would have on the Rules to determine whether they may adversely affect access to retirement information and advice, and if so, to issue a proposed rule rescinding or revising the Rules. In March 2017 the DOL proposed a 60-day delay of the applicability date of the Rules, pending a 15-day comment period, to allow for an examination ofCompany.

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SEC Best Interest Regulation

In April 2018, the ~~Rules as called for by President Trump. We cannot predict what impact~~SEC proposed a package of rulemakings and interpretative guidance that would, among other things, require broker-dealers to act in the ~~review will have on~~best interest of retail customers when recommending securities transactions or investment strategies to them. The proposals would also clarify the Rules or if their applicability date will be delayed. In addition, several financial services industry groups have initiated litigation challenging the Rules on both procedural and substantive grounds. The outcome of these litigations may alter whether and how some or allSEC’s views of the ~~Rules are applied~~fiduciary duty that investment advisers owe to ~~our businesses.~~

~~Overall, if the Rules are~~their clients. If enacted in their current form, ~~they will result in increased compliance costs and may create increased exposure to legal claims under certain circumstances, including class actions. We~~we believe the ~~Rules will~~primary impact of the proposals would be to our individual annuities ~~business. Sales of variable annuities by~~business and our ~~retail distributors, including~~ Prudential Advisors ~~will be subject~~distribution system.

State Standard of Care Regulation

The NAIC has formed an Annuity Suitability Working Group, which is developing proposed revisions to the ~~best "interest contract exemption" for investment advice concerning retirement plans and IRA's, including recommendations~~model suitability rule applicable to purchase products sold to IRA's, but certain fixed annuities can be subject to a separate exemption or to the best interest contract exemption. As a result of the Rules, certain distributors are announcing that they will restrict the sale of ~~certain types~~annuities. Amendments to the model rule could ultimately form the basis of ~~annuities.~~amendments to state insurance law suitability rules applicable to our business. In addition, ~~we may need~~certain state regulators and legislatures have adopted or are considering adopting best interest standards. For example, in July 2018, the NY DFS issued an amendment to ~~alter our product design, offerings or pricing~~its suitability regulations which, will impose a best-interest standard on the sale of annuity and life insurance products in New York. The amendments are scheduled to ~~meet~~become effective for annuity products on August 1, 2019 and for life insurance products on February 1, 2020. In addition, in October 2018 the ~~needs~~New Jersey Bureau of certain distributors who may request changes to support their compliance with the Rules. We will need to monitor and limit certain wholesaling and other sales support and customer service activities to continue not to be classified asSecurities issued a proposal that would impose a fiduciary ~~under the Rules.~~standard on all New Jersey investment professionals.

For additional risks associated with the Rules and other laws and regulations affecting our products and services, see “Risk Factors-Regulatory and Legal Risks-Changes in the legislation and regulation of retirement products and services, including the DOL’s new fiduciary Rules, could adversely affect our business, results of operations, cash flows and financial condition.”

~~USA Patriot Act~~

The USA Patriot Act of 2001 contains anti-money laundering and financial transparency laws applicable to broker-dealers and other financial services companies, including insurance companies. The Patriot Act seeks to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. Anti-money laundering laws outside of the U.S. contain provisions that may be different, conflicting or more rigorous. The increased obligations of financial institutions to identify their customers, watch for and report suspicious transactions, respond to requests for information by regulatory authorities and law enforcement agencies, and share information with other financial institutions require the implementation and maintenance of internal practices, procedures and controls.

State Insurance Holding Company Regulation

We are subject to the Arizona insurance holding company law which requires us to register with the insurance department and to furnish annually financial and other information about the operations of the Company. Generally, all transactions with affiliates that affect the Company must be fair and reasonable and, if material, require prior notice and approval or non-disapproval by the ~~Arizona insurance department.~~AZDOI.

Change of Control

Most states have insurance laws that require regulatory approval of a direct or indirect change of control of an insurer or an ~~insurer’s~~insurer's holding company. Laws such as these that apply to us prevent any person from acquiring control of Prudential Financial or of its insurance subsidiaries unless that person has filed a statement with specified information with the insurance regulators and has obtained their prior approval. Under most ~~states’~~states' statutes, acquiring 10% or more of the voting stock of an insurance company or its parent company is presumptively considered a change of control, although such presumption may be rebutted. Accordingly, any person who acquires 10% or more of the voting securities of Prudential Financial without the prior approval of the insurance regulators of the states in which its U.S. insurance companies are domiciled will be in violation of these ~~states’~~states' laws and may be subject to injunctive action requiring the disposition or seizure of those securities by the relevant insurance regulator or prohibiting the voting of those securities and to other actions determined by the relevant insurance regulator. In addition, many state insurance laws require prior notification to state insurance departments of a change in control of a non-domiciliary insurance company doing business in that state.

Several of Prudential Financial's domestic and foreign regulators, including the FRB, participate in an annual supervisory college. The purpose of the supervisory college is to promote ongoing supervisory coordination, facilitate the sharing of information among regulators and to enhance each regulator’s understanding of Prudential Financial's risk profile. The 2016 college was held in October.

Group-Wide Supervision

~~The New Jersey Department of Banking and Insurance (“NJDOBI”) has acted~~NJDOBI acts as the group-wide supervisor of Prudential Financial ~~since 2015~~ pursuant to New Jersey legislation that authorizes group-wide supervision of ~~internationally active insurance groups.~~Internationally Active Insurance Groups ("IAIGs"). The law, among other provisions, authorizes NJDOBI to examine Prudential Financial and its subsidiaries, including by ascertaining the financial condition of the insurance companies for purposes of assessing enterprise risk. ~~As group-wide supervisor,~~In accordance with this authority, NJDOBI ~~reviews the Company's~~receives information about Prudential Financial’s operations beyond those of its New Jersey domiciled insurance subsidiaries. ~~We cannot predict what additional requirements or costs may result from NJDOBI’s assertion of group-wide supervisor status with respect to Prudential Financial.~~

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The ~~National Association of Insurance Commissioners (“NAIC”),~~NAIC has promulgated model laws for adoption in the United States that would provide for “group-wide” supervision of certain insurance holding companies in addition to the current regulation of insurance subsidiaries. While the timing of their adoption and content will vary by jurisdiction, we have identified the following areas of focus in these model laws: (1) uniform standards for insurer corporate governance; (2) group-wide supervision of insurance holding companies; (3) adjustments to risk-based capital calculations to account for group-wide risks; and (4) additional regulatory and disclosure requirements for insurance holding companies.

Some laws which facilitate ~~group wide~~group-wide supervision have already been enacted in the jurisdictions in which Prudential Financial operates, such as Own Risk and Solvency Assessment ~~(“ORSA”~~("ORSA") reporting, which requires larger insurers to assess the adequacy of its and its ~~group’s~~group's risk management and current and future solvency position, and Corporate Governance Annual Disclosure reporting, which requires reporting on governance, policies and practices.

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Additional areas of focus regarding group-wide supervision of insurance holding companies include the following:

Group Capital Calculation. The NAIC has ~~also~~ formed a working group to develop a U.S. group capital calculation using ~~an RBC~~a risk-based capital ("RBC") aggregation methodology. In constructing the calculation the working group is considering group capital developments undertaken by the FRB and the International Association of Insurance Supervisors ~~(“IAIS”~~("IAIS"). ~~At this time, we cannot predict what, if any, additional capital requirements~~The working group plans to develop a proposed calculation and ~~compliance costs any~~begin field testing in 2019.

Macroprudential Framework. The NAIC has established a new ~~group-wide standards will impose on Prudential Financial.~~

~~State Insurance Regulation~~

~~State insurance authorities have broad administrative powers with respect~~initiative to all aspects of the insurance business including: licensing to transact business; licensing agents; admittance of assets to statutory surplus; regulating premium rates for certain insurance products; approving policy forms; regulating unfair trade and claims practices; establishing reserve requirements and solvency standards; fixing maximum interest rates on life insurance policy loans and minimum accumulation or surrender values; regulating the type, amounts and valuations of investments permitted; regulating reinsurance transactions; including the role of captive reinsurers; and other matters.

~~State insurance laws and regulations require the Company to file financial statements with~~develop a macroprudential framework intended to: (1) improve state insurance ~~departments everywhere it does business in accordance with accounting practices~~regulators’ ability to monitor and ~~procedures prescribed~~respond to the impact of external financial and economic risks on insurers; (2) better monitor and respond to risk emanating from or ~~permitted~~amplified by ~~these departments. The Company’s operations~~insurers that might be transmitted externally; and ~~accounts are subject to examination~~(3) increase public awareness of NAIC/state monitoring capabilities regarding macroprudential trends. As part of this initiative, the areas identified by ~~those departments at any time.~~the NAIC for potential enhancement include liquidity reporting and stress testing, resolution and recovery, capital stress testing, and counterparty exposure and concentration.

Examination.State insurance departments conduct periodic examinations of the books and records, financial reporting, policy filings and market conduct of insurance companies domiciled in their states, generally once every three to five years. Examinations are generally carried out in cooperation with the insurance departments of other states under guidelines promulgated by the NAIC. ~~During 2016, as part~~As group-wide supervisor, NJDOBI, along with our other insurance regulators, has expanded the periodic examinations to cover Prudential and all of ~~the normal five year examination,~~its subsidiaries. In June 2018, AZDOI and NJDOBI, along with the insurance regulators of ~~Arizona,~~ Connecticut, and Indiana, ~~commenced a coordinated risk focused financial~~completed their first global consolidated group-wide examination of Prudential Financial and its subsidiaries for the ~~five year~~five-year period ended December 31, 2016 ~~covering~~and had no reportable findings.

We cannot predict what, if any, additional requirements and compliance costs any new group-wide standards will impose on Prudential ~~Financial~~Financial.

Insurance Operations

State Insurance Regulation

State insurance authorities have broad administrative powers with respect to all aspects of the insurance business including: (1) licensing to transact business; (2) licensing agents; (3) admittance of assets to statutory surplus; (4) regulating premium rates for certain insurance products; (5) approving policy forms; (6) regulating unfair trade and ~~all~~claims practices; (7) establishing reserve requirements and solvency standards; (8) fixing maximum interest rates on life insurance policy loans and minimum accumulation or surrender values; (9) regulating the type, amounts and valuations of ~~its subsidiaries~~investments permitted; (10) regulating reinsurance transactions, including the role of captive reinsurers; and (11) other matters.

State insurance laws and regulations require the Company to file financial statements with state insurance departments everywhere it does business in ~~connection~~accordance with ~~NJDOBI’s role as group-wide supervisor.~~accounting practices and procedures prescribed or permitted by these departments. The Company’s operations and accounts are subject to examination by those departments at any time.

Financial Regulation

Dividend Payment Limitations. The Arizona insurance law regulates the amount of dividends that may be paid by the Company. See Note 813 to the Financial Statements for a discussion of dividend restrictions.

Risk-Based Capital. ~~In order~~We are subject to RBC requirements that are designed to enhance ~~the~~ regulation of insurers’ solvency, the NAIC adopted a model law to implement risk-based capital requirements for life, health and property and casualty insurance companies. All states have adopted the NAIC’s model law or a substantially similar law.solvency. The ~~risk-based capital (“RBC”)~~RBC calculation, which regulators use to assess the sufficiency of an insurer’s statutory capital, measures the risk characteristics of a company’s assets, liabilities and certain off-balance sheet items. In general, RBC is calculated by applying factors to various asset, premium, claim, expense and reserve items. Within a given risk category, these factors are higher for those items with greater underlying risk and lower for items with lower underlying risk. Insurers that have less statutory capital than ~~the RBC calculation requires~~required are considered to have inadequate capital and are subject to varying degrees of regulatory action depending upon the level of capital inadequacy.

Areas of the RBC framework that have been subject to reexamination or revision include the following:

Tax Act Changes. In June 2018, the NAIC’s Capital Adequacy Task Force approved revisions to the RBC framework in respect of the Tax Cuts and Jobs Act of 2017 (the “Tax Act of 2017”). The revisions apply to our RBC ratio as of December 31, 2018. For a discussion of the impact of the Tax Act of 2017 and these changes on our RBC ratio, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Capital-Insurance Regulatory Capital.”

Bond Factors. The NAIC’s Investment Risk-Based Capital Working Group ~~has outlined plans~~is developing updates to ~~update~~ the RBC factors ~~during 2017~~ for invested assets including expanding, for RBC purposes, the current ~~six~~ NAIC designations from six to twenty. ~~Additional adjustments~~

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Longevity/Mortality Risk. The NAIC’s Longevity Risk Subgroup of the Life Insurance and Annuities Committee and Financial Condition Committee is developing recommendations to recognize longevity risk in statutory reserves and/or risk-based capital related to annuities. The Company assumes this longevity risk primarily in its individual annuities business. The NAIC is also developing updates to the existing mortality risk factors in RBC.

Operational Risk. In 2018 the NAIC adopted operational risk charges that will be effective for year-end 2018 RBC formulas and is continuing to consider whether to add an explicit growth risk charge to the RBC ~~calculation~~formula. The operational risk charges are ~~also under consideration by~~not expected to materially impact our 2018 RBC ratio given that we expect to hold statutory capital consistent with or in excess of the ~~NAIC, including~~thresholds established through these new ~~charges for longevity risk and operational risk.~~ charges.

Due to the ongoing nature of the NAIC’s activities regarding RBC, we cannot determine the ultimate timing of ~~these~~the proposed changes or their impact on RBC or on our financial position.

Insurance Reserves and Regulatory Capital. State insurance laws require us to analyze the adequacy of our reserves annually. Our appointed actuary must submit an opinion that our reserves, when considered in light of the assets we hold with respect to those reserves, make adequate provision for our contractual obligations and related expenses.

~~Variable Annuities.~~ ~~In November 2015,~~The reserving framework for certain of our products has undergone reexamination and revision in recent years, including in the ~~NAIC adopted the~~ following areas:

Variable Annuities Framework for Change ~~which outlines~~. In 2018, the ~~NAIC’s commitment to change in concept the statutory~~NAIC adopted a framework ~~to address concerns that have led to the development and utilization of captive reinsurance transactions~~ for ~~variable annuity business in order to create more consistency across regulators~~

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and remove the impetus for insurers to cede risk to captives. The framework contemplates extensive changes to the guidance and rules governing variable annuities, including with regard to reserving, capital, accounting, derivative use limitations and disclosure.

~~In September 2015, the NAIC’s consultant issued a report with preliminary findings and conclusions covering several sets of ideas for improvements~~proposed revisions to the current Actuarial Guideline No. 43 ("(“AG ~~43"~~43”) and RBC ~~“C3~~“C-3 Phase II” ~~framework~~system applicable to variable annuities reserve and capital requirements. ~~The proposed improvements include~~Proposed changes include: (i) aligning economically-focused hedge assets with liability valuations, (ii) reforming standard scenarios for AG 43 and C3 Phase ~~II,~~II; (iii) revising asset admissibility for derivatives and deferred tax assets, and (iv) standardizing capital market assumptions and aligning total asset requirements and reserves. The NAIC will seek to implement the revised framework in 2019 with a January 1, 2020 targeted effective date and an optional three-year phase-in. The Company does not expect material impacts to target capital levels from the revised framework.

During 2016, ~~Prudential Financial participated~~we recaptured the risks related to our variable annuities living benefit riders and certain retirement products that were previously reinsured to our captive reinsurance company in a ~~quantitative impact study ("QIS") assessing the efficacy and potential impact~~series of ~~the initial proposal. Results of the QIS led~~transactions we collectively refer to the issuance of a second proposal on detailed recommendations for revising the current variable annuities reserve and capital framework. In 2017 a second QIS is expected to be conducted to test the latest set of framework revisions. Given the uncertainty of the ultimate outcome of these initiatives, at this time we are unable to estimate their expected effects on our future capital financial position and results of operations.

~~During 2016 the Company executed~~as the “Variable Annuities ~~Recapture.”~~Recapture”. While ~~the Company~~we completed the Variable Annuities Recapture in advance of definitive guidance from the NAIC's Variable ~~Annuities Framework for Change, the Company believes~~Annuity Issues Working Group, we believe the Variable Annuities Recapture is reasonably aligned with the key concept changes planned under the framework. For additional information on the Variable Annuities Recapture, see ~~“Business-Variable Annuities Recapture.”~~Item 1. “Business" above.

Market Conduct Regulation

State insurance laws and regulations include numerous provisions governing the marketplace activities of insurers, including provisions governing the form and content of disclosure to consumers, illustrations, advertising, sales practices and complaint handling. State regulatory authorities generally enforce these provisions through periodic market conduct examinations.

Insurance Guaranty Association Assessments

Each state has insurance guaranty association laws under which insurers doing business in the state are members and may be assessed by state insurance guaranty associations for certain obligations of insolvent insurance companies to ~~contractholders~~policyholders and claimants. Typically, states assess each member insurer in an amount related to the member ~~insurer’s~~insurer's proportionate share of the line of business written by all member insurers in the state. While we cannot predict the amount and timing of future assessments on the Company under these laws, ~~we have~~Prudential Financial has established estimated reserves for future assessments relating to insurance companies that are currently subject to insolvency proceedings.

Federal and State Securities Regulation Affecting Insurance Operations

Our ~~variable life insurance and~~ variable annuity products generally are “securities” within the meaning of federal securities laws and may be required to be registered under the federal securities laws and subject to regulation by the SEC and the Financial Industry Regulatory Authority (“FINRA”). Federal securities regulation ~~may affect~~affects investment advice, sales and related activities with respect to these products.

In certain states, our ~~variable life insurance and~~ variable annuity products are considered “securities” within the meaning of state securities laws. As securities, these products may be subject to filing and certain other requirements. Also, sales activities with respect to these products generally are subject to state securities regulation. Such regulation may affect investment advice, sales and related activities for these products.

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Federal Insurance Office

Dodd-Frank established a Federal Insurance Office (“FIO”) within the Department of the Treasury headed by a director appointed by the Secretary of the Treasury. While the FIO does not have general supervisory or regulatory authority over the business of insurance, the FIO director performs various functions with respect to insurance, including serving as a non-voting member of the Council, monitoring the insurance sector and representing the U.S. on prudential aspects of international insurance matters, including at the IAIS.

Derivatives Regulation

Prudential Financial and its subsidiaries use derivatives for various purposes, including hedging interest rate, foreign currency and equity market exposures. Dodd-Frank established a framework for regulation of the over-the-counter derivatives markets. This framework sets out requirements regarding the clearing and reporting of derivatives transactions, as well as collateral posting requirements for uncleared swaps. Affiliated swaps entered into between Prudential Financial subsidiaries are generally exempt from most of these requirements.

We continue to monitor the potential hedging cost impacts of new initial margin requirements that we will be required to comply with in 2020, and increased capital requirements for derivatives transactions that may be imposed on banks that are our counterparties. Additionally, the increased need to post cash collateral in connection with mandatorily cleared swaps may also require the liquidation of higher yielding assets for low yielding cash, resulting in a negative impact on investment income.

Privacy ~~Regulation~~ and Cybersecurity Regulation

We are subject to laws, regulations and directives that require financial institutions and other businesses to protect the security and confidentiality of personal information, including health-related and customer information, and to notify their customers and other individuals of their policies and practices relating to the collection and disclosure of health-related and customer information.

In addition, we must comply with international privacy laws, regulations, and directives concerning the cross border transfer or use of employee and customer personal information. These laws, regulations and directives also:

provide additional protections regarding the use and disclosure of certain information such as social security numbers;

require notice to affected individuals, regulators and others if there is a breach of the security of certain personal information;

require financial institutions and creditors to implement effective programs to detect, prevent, and mitigate identity theft;

regulate the process by which financial institutions make telemarketing calls and send e-mail or fax messages to consumers and customers; and

prescribe the permissible uses of certain personal information, including customer information and consumer report information.

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Financial regulators in the U.S. and international jurisdictions in which ~~we operate~~Prudential Financial operates continue to focus on cybersecurity, including in proposed rulemaking, and have communicated heightened expectations and have increased emphasis in this area in their examinations of regulated entities. For example, the European Union’s General Data Protection Regulation ("GDPR"), which became effective in May 2018, confers additional privacy rights on individuals in the European Union and establishes penalties for violations. In addition, ~~legislative~~in the United States the Federal government has proposed a number of laws similar to the GDPR and ~~regulatory bodies may consider additional or more detailed or restrictive laws and regulations regarding these subjects and~~California has enacted broad legislation effective in 2020 which is similar in many ways to the ~~privacy and security of personal information.~~GDPR.

In October 2017, the NAIC adopted the Insurance Data Security Model Law. The ~~NY DFS issued a proposed new cybersecurity regulation in September 2016 and a revised proposal in December 2016. The regulation would require financial institutions regulated by NY DFS, including our~~model law requires that insurance ~~subsidiaries licensed in New York, to~~companies establish a cybersecurity ~~program. The regulation~~program and includes specific technical safeguards as well as requirements regarding governance, incident planning, data management, system testing, vendor oversight and regulator notification. ~~The regulation went into effect on~~New York implemented a similar law in March ~~1, 2017. The Company is taking steps~~2017 and other states have either implemented the model law or are anticipated to ~~comply with~~implement it in the ~~regulation.~~

In addition, in October, 2016, the FRB, FDIC, and Office of the Comptroller of the Currency approved a joint advance notice of proposed rulemaking regarding enhanced cyber risk management standards for certain regulated financial institutions, including Prudential. The standards address governance, management, internal dependency management, external dependency management, incident response, cyber resilience, and situational awareness. The agencies are also considering proposing more stringent “Sector Critical Standards” that would apply to systems “deemed critical to the financial sector”.near future.

The Company is monitoring regulatory guidance and rulemaking in this area, and may be subject to increased compliance costs and regulatory ~~requirements~~requirements. In order to respond to the threat of security breaches and cyber-attacks, Prudential Financial has developed a program overseen by the Chief Information Security Officer and the Information Security Office that is designed to protect and preserve the confidentiality, integrity, and continued availability of all information owned by, or in the care of the Company. As part of this program, we also maintain an incident response plan. The program provides for the coordination of various corporate functions and governance groups, and serves as a ~~result~~framework for the execution of ~~any new requirements. For a discussion~~responsibilities across businesses and operational roles. The program establishes security standards for our technological resources, and includes training for employees, contractors and third parties. As part of the ~~Company’s privacy~~program, we conduct periodic exercises and a response readiness assessment with outside advisors to gain a third-party independent assessment of our technical program and our internal response preparedness. We regularly engage with the outside security community and monitor cyber threat information.

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Anti-Money Laundering and Anti-Bribery Laws

Our business is subject to various anti-money laundering and financial transparency laws and regulations that seek to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. In addition, under current U.S. law and regulations we may be prohibited from dealing with certain individuals or entities in certain circumstances and we may be required to monitor customer activities, which may affect our ability to attract and retain customers. We are also subject to various laws and regulations relating to corrupt and illegal payments to government officials and others, including the U.S. Foreign Corrupt Practices Act and the U.K.’s Anti-Bribery Law. The obligation of financial institutions, including the Company, to identify their clients, to monitor for and report suspicious transactions, to monitor dealings with government officials, to respond to requests for information ~~security policies,~~by regulatory authorities and law enforcement agencies, and to share information with other financial institutions, has required the implementation and maintenance of internal practices, procedures and ~~standards, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Risk Management-Risk Exposure and Monitoring-Operational Risk Management.”~~controls.

Unclaimed Property Laws

We are subject to the laws and regulations of states and other jurisdictions concerning the identification, reporting and escheatment of unclaimed or abandoned funds, and we are subject to audit and examination for compliance with these requirements. For additional discussion of these matters, see ~~“Litigation and Regulatory Matters” in~~ Note 1215 to the Financial Statements.

~~Segments~~Taxation

U.S. Taxation

Prudential Financial and certain domestic subsidiaries, including the Company, file a consolidated federal income tax return that includes both life insurance companies and non-life insurance companies. Certain other domestic subsidiaries file separate tax returns. The principal differences between the Company’s actual income tax expense and the applicable statutory federal income tax rate are generally deductions for non-taxable investment income, including the Dividends Received Deduction ("DRD"), foreign taxes applied at a different tax rate than the U.S. rate and certain tax credits. For tax years prior to 2018, the applicable statutory federal tax rate was 35%. For tax years starting in 2018, the applicable statutory federal income tax rate is 21%. In addition, as discussed further below, the tax attributes of our products may impact both the Company’s and our customers’ tax positions. See “Income Taxes” in Note 2 to the Financial Statements and Note 11 to the Financial Statements for a description of the Company’s tax position. As discussed further below, new tax legislation and other potential changes to the tax law may impact the Company’s tax position and the attractiveness of our products.

The ~~Company currently operates as one reporting segment. Revenues, net~~Tax Act of 2017, was enacted into law on December 22, 2017 and was generally effective starting in 2018. The Tax Act of 2017 changes the taxation of businesses and individuals by lowering tax rates and broadening the tax base through the acceleration of taxable income and ~~total assets can be found~~the deferral or elimination of certain deductions, as well as changing the system of taxation of earnings of foreign subsidiaries. The most significant changes for the Company are: (1) the reduction of the corporate tax rate from 35% to 21%; (2) revised methodologies for determining deductions for tax reserves and the DRD; and (3) an increased capitalization and amortization period for acquisition costs related to certain products.

During 2018 the Treasury Department and the Internal Revenue Service (“IRS”) promulgated Proposed Regulations on a number of provisions within or impacted by the Tax Act of 2017. The Treasury and IRS have requested comments on the Proposed Regulations. Our analysis of these Proposed Regulations is on-going and further guidance may be needed from the Treasury Department and the IRS to fully understand and implement several provisions. Other life insurance and financial services companies may benefit more or less from these tax law changes, which could impact the Company’s ~~Statements~~overall competitive position. Notwithstanding the enactment of ~~Financial Position~~the Tax Act of 2017, the President, Congress, as well as state and local governments, may continue to consider from time to time legislation that could increase the amount of ~~December 31, 2016~~corporate taxes we pay, thereby reducing earnings.

U.S. federal tax law generally permits tax deferral on the inside build-up of investment value of certain retirement savings, annuities and ~~2015~~life insurance products until there is a contract distribution and, ~~Statements~~in general, excludes from taxation the death benefit paid under a life insurance contract. The Tax Act of ~~Operations~~2017 did not change these rules, though it is possible that some individuals with overall lower effective tax rates could be less attracted to the tax deferral aspect of the Company’s products. The general reduction in individual tax rates and ~~Comprehensive Income (Loss)~~elimination of certain individual deductions may also impact the Company depending on whether current and potential customers have more or less after-tax income to save for retirement and manage their mortality and longevity risk through the purchase of the Company’s products. Congress from time to time may enact other changes to the tax law that could make our products less attractive to consumers, including legislation that would modify the tax favored treatment of retirement savings, life insurance and annuities products.

The products we sell have different tax characteristics and in some cases generate tax deductions and credits for the ~~years ended December 31, 2016, 2015~~Company. Changes in either the U.S. or foreign tax laws may negatively impact the deductions and ~~2014.~~credits available to the Company, including the ability of the Company to claim foreign tax credits with respect to taxes withheld on our investments supporting separate account products. These changes would increase the Company’s actual tax expense and reduce its consolidated net income.

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The profitability of certain products is significantly dependent on these characteristics and our ability to continue to generate taxable income, which is taken into consideration when pricing products and is a component of our capital management strategies. Accordingly, changes in tax law, our ability to generate taxable income, or other factors impacting the availability or value of the tax characteristics generated by our products, could impact product pricing and returns or require us to reduce our sales of these products or implement other actions that could be disruptive to our businesses.

International and Global Regulatory Initiatives

In addition to the adoption of Dodd-Frank in the United States, lawmakers around the world are actively exploring steps to avoid future financial crises. In many respects, this work is being led by the ~~Financial Stability Board (“FSB”), consisting~~FSB, which consists of representatives of national financial authorities of the G20 nations. The G20, the FSB and related bodies have developed proposals to address such issues as financial group supervision, capital and solvency standards, systemic economic risk, corporate governance including executive compensation, and a host of related issues.

In July 2013, Prudential Financial ~~has been identified~~along with eight other global insurers, was designated by the FSB as a global systemically important insurer (“G-SII”) ~~since July, 2013. The International Association~~through a quantitative methodology developed and implemented by the IAIS. Similar assessments were performed and subsequent G-SII designation lists were issued annually through November 2016. Prudential Financial remained designated as a G-SII throughout this period. In November 2017, the FSB announced that the list of G-SIIs identified in 2016 would stand until November 2018, at which point it would assess the progress made by the IAIS’ on the development of an Activities-Based Approach (“ABA”) to assessing and managing potential systemic risk in the insurance sector. Over the course of 2018, the IAIS’ work to develop an ABA evolved into the development of a Holistic Framework for Systemic Risk in the Insurance ~~Supervisors~~Sector (“~~IAIS”~~Holistic Framework”)~~, acting at the direction~~. Key elements of the ~~FSB, has released two group-wide capital standards applicable~~Holistic Framework include enhancements to ~~G-SIIs. The basic capital requirement (“BCR”), which was approved~~IAIS policy measures pertaining to macroprudential surveillance, enterprise risk management, liquidity management, crisis management and recovery planning as well as the continuation of annual data collection and monitoring by the IAIS. The IAIS will finalize the Holistic Framework in 2019 for implementation in 2020. In November 2018, the FSB announced that it would not engage in an identification of G-SIIs based on progress made on the development of the Holistic Framework and ~~G20~~that it will assess an IAIS recommendation to suspend G-SII identification from 2020 in November ~~2014, is a globally consistent and comparable baseline capital metric.~~2019. The ~~higher loss absorbency (“HLA”) standard, which was approved by~~FSB further announced that it will review the ~~FSB and G20~~need to either discontinue or re-establish the annual identification of G-SIIs in November ~~2015, establishes a capital buffer to be held in~~2022.

In addition to ~~the BCR. As a standard setting body,~~its work on assessing and managing potential systemic risk, the IAIS does not have direct authority to require G-SIIs to comply with the BCR and HLA standards; however, if they are adopted by group supervisory authorities in the U.S., Prudential Financial could become subject to these standards. The IAIS has stated its intention to revisit HLA design and calibration prior to the proposed implementation in 2019 to account for changes in related policy measures including the updated G-SII Assessment Methodology, which was published in 2016. Prudential Financial’s capital level is ~~expected to be above the initial calibration for both standards.~~

~~The IAIS is also~~ developing the Common Framework ~~(“ComFrame”)~~ for the ~~supervision~~Supervision of ~~firms that meet the IAIS’~~ Internationally Active Insurance ~~Group criteria, such as Prudential Financial.~~Groups ("ComFrame"). Through ComFrame, the IAIS seeks to promote effective and globally consistent supervision of the insurance industry ~~and contribute to global financial stability~~ through uniform standards for insurer corporate governance, enterprise risk management and other control functions, group-wide supervision and group capital adequacy. ~~In 2016~~The non-capital related components of ComFrame are being developed iteratively through a series of public consultations and are scheduled to be adopted by the IAIS ~~released a public consultation requesting comments on their Risk-based Global Insurance Capital Standard (“ICS”)~~in November 2019. The ICS, which is the capital adequacy component of ~~ComFrame. The IAIS has committed to conducting further~~ComFrame, is also being developed iteratively through both a series of public consultations and voluntary field tests. In November 2017, the IAIS announced an agreement among its members on the ~~various components~~development and implementation of ~~ComFrame prior to its~~the ICS. Terms of the agreement include: adoption ~~which would occur in 2019 at the earliest.~~

In addition to public consultations, the IAIS continues to conduct ongoing field tests of their capital standards, which are intended to help the IAIS refine the standards prior to their scheduled adoption. The 2016 field test focused on development of the ICS ~~and served as~~by the ~~vehicle for voluntary confidential reporting of BCR and HLA~~IAIS in November 2019; a five-year monitoring phase beginning in 2020 during which IAIGs are to report ICS results to ~~Prudential Financial’s group-wide supervisors.~~their group supervisory authorities; and implementation of the ICS at the jurisdictional level in 2025.

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~~At this time, we cannot predict what additional capital requirements,~~As a standard setting body, the IAIS does not have direct authority to require insurance companies to comply with the policy measures it develops, including the ICS and ~~compliance costs ComFrame,~~proposed policy measures within the ~~BCR or HLA would impose on us,~~Holistic Framework. However, if the policy measures were adopted by ~~U.S.~~either Prudential Financial's group ~~supervisory authorities.~~

~~The foregoing requirements and developments~~supervisor or supervisors of Prudential Financial's international operations or companies, Prudential Financial could become subject to these standards. Adoption of IAIS policy measures could impact the manner in which ~~we deploy our~~Prudential Financial deploys its capital, ~~structure~~structures and ~~manage our~~manages its businesses, and otherwise ~~operate~~operates both within the U.S. and abroad. The possibility of inconsistent and conflicting regulation of the Prudential Financial ~~“group” of companies~~at the group level and the subsidiary level also exists as law makers and regulators in multiple jurisdictions simultaneously pursue these initiatives.

Employees

The Company has no employees. Services to the Company are primarily provided by employees of Prudential Insurance as described under “Expense Charges and Allocations” in Note 1514 to the Financial Statements.

Item 1A. Risk Factors

You should carefully consider the following risks. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” above and the risks of our business described elsewhere in this Annual Report on Form 10-K. Many of these risks are interrelated and could occur under similar business and economic conditions, and the occurrence of certain of them may in turn cause the emergence or exacerbate the effect of others. Such a combination could materially increase the severity of the impact of these risks on our business, results of operations, financial condition and liquidity.

~~Risks Relating to Economic and Market Conditions~~

The Company is indirectly owned by Prudential Financial. It is possible that we may need to rely on Prudential Financial or our direct parent company, PAI, to meet our capital, liquidity and other needs in the future.

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

~~Our business and our results of operations may be materially adversely affected by conditions in the global financial markets and by economic conditions generally.~~

Even under relatively favorable market conditions, our insurance and annuity products, as well as our investment returns and our access to and cost of financing, are sensitive to fixed income, equity, real estate and other market fluctuations and general economic, market and political conditions. These fluctuations and conditions could adversely affect our results of operations, financial position and liquidity, including in the following respects:

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

A change in market conditions, such as high inflation and high interest rates, could cause a change in consumer sentiment and behavior adversely affecting persistency of our savings and protection products. Conversely, low inflation and low interest rates could cause persistency of these products to vary from that anticipated and adversely affect profitability (as further described below). Similarly, changing economic conditions and unfavorable public perception of financial institutions can influence customer behavior, including increasing claims or surrenders in certain product lines.

Lapses and surrenders of certain insurance products may increase if a market downturn, increased market volatility or other market conditions result in customers becoming dissatisfied with their investments or products.

A market decline could further result in guaranteed minimum benefits contained in many of our variable annuity products being higher than current account values or our pricing assumptions would support, requiring us to materially increase reserves for such products and may cause customers to retain contracts in force in order to benefit from the guarantees, thereby increasing their cost to us. Any increased cost may or may not be offset by the favorable impact of greater persistency from prolonged fee streams. Our valuation of the liabilities for the minimum benefits contained in many of our variable annuity products requires us to consider the market perception of our risk of non-performance, and a decrease in our own credit spreads resulting from ratings upgrades or other events or market conditions could cause the recorded value of these liabilities to increase, which in turn could adversely affect our results of operations and financial position.

Market conditions determine the availability and cost of the reinsurance protection we purchase. Accordingly, we may be forced to incur additional expenses for reinsurance or may not be able to obtain sufficient reinsurance on acceptable terms which could adversely affect our ability to manage risk.

Derivative instruments we and our affiliates hold to hedge and manage interest rate and equity risks associated with our products and businesses might not perform as intended or expected resulting in higher realized losses and

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~~unforeseen stresses on liquidity. Market conditions~~Overview

The Company's risk management framework documents the definition, potential manifestation, and management of its risks. The Company has categorized its risks into tactical and strategic risks. Tactical risks may cause damage to the Company, and the Company seeks to manage and mitigate them through models, metrics and the overall risk framework. The Company’s tactical risks include investment, insurance, market, liquidity, and operational risk. Strategic risks can ~~limit availability of hedging instruments, require us~~cause the Company’s fundamental business model to ~~post additional collateral, and also further increase the cost of executing product related hedges and such costs may not be recovered~~change, either through a shift in the ~~pricing of the underlying products being hedged. We execute our hedges through an affiliate that,~~businesses in ~~turn, may execute hedges with unaffiliated counterparties. Accordingly, our derivative-based hedging strategies also rely on the performance of this affiliate~~which it is engaged or a change in execution. The Company’s strategic risks include regulatory, technological changes and ~~on the performance of its unaffiliated counterparties to such derivatives.~~other external factors. These ~~unaffiliated counterparties may fail to perform for various reasons resulting in losses on uncollateralized positions.~~

~~We have significant investment and derivative portfolios, including but not limited to corporate and asset-backed securities, equities and commercial real estate. Economic conditions~~risks, as well as the sub-risks that may impact the Company, are discussed below.

Investment Risk

Our investment portfolios are subject to the risk of loss due to default or deterioration in credit quality or value.

We are exposed to investment risk through our investments, which primarily consist of public and private fixed maturity securities, commercial mortgage and other loans, equity securities and alternative assets including private equity, hedge funds and real estate. We are also exposed to investment risk through a potential counterparty default.

Investment risk may result from: (1) economic conditions; (2) adverse capital market conditions, including disruptions in individual market sectors or a lack of buyers in the ~~marketplace, volatility,~~marketplace; (3) volatility; (4) credit spread ~~changes,~~changes; (5) benchmark interest rate ~~changes~~changes; and (6) declines in value of underlying ~~collateral~~collateral. These factors may impact the credit quality, liquidity and value of our investments and derivatives, potentially resulting in higher capital charges and unrealized or realized losses. ~~Valuations~~Also, certain investments we hold, regardless of market conditions, are relatively illiquid and our ability to promptly sell these assets for their full value may be limited. Additionally, our valuation of investments may include methodologies, inputs and assumptions ~~or estimates~~which are subject to change and different interpretation and could result in changes to investment valuations that may ~~have significant period to period changes which could have a material adverse effect on~~materially impact our results of operations or financial ~~condition and in certain cases under U.S. GAAP such period to period changes in~~condition. For information about the ~~value~~valuation of our investments, ~~are not recognized in our results of operations or statements of financial position.~~

~~Opportunities for investment of available funds at appropriate returns may be limited, including due~~see Note 3 to the ~~current low interest rate environment, a diminished securitization market~~Financial Statements.

Our investment portfolio is subject to credit risk, which is the risk that an obligor (or guarantor) is unable or unwilling to meet its contractual payment obligations on its fixed maturity security, loan or other ~~factors, with possible negative impacts on our overall results. Limited opportunities for attractive investments~~obligations. Credit risk may ~~lead~~manifest in an idiosyncratic manner (i.e., specific to ~~holding cash for long periods~~an individual borrower or industry) or through market-wide credit cycles. Financial deterioration of ~~time~~the obligor increases the risk of default and ~~increased use of derivatives for duration management and other portfolio management purposes. The increased use of derivatives~~ may increase the ~~volatility of~~capital charges required under such regimes as the NAIC RBC, or other constructs to hold the investment and in turn, potentially limit our ~~U.S. GAAP results~~overall capital flexibility. Credit defaults (as well as credit impairments, realized losses on credit-related sales, and increases in credit related reserves) may result in losses which adversely impact earnings, capital and our ~~statutory capital.~~ability to appropriately match our liabilities and meet future obligations.

~~Regardless~~Our Company is subject to counterparty risk, which is the risk that the counterparty to a transaction could default or deteriorate in creditworthiness before or at the final settlement of a transaction. In the normal course of business, we enter into financial contracts to manage risks (such as derivatives to manage market risk and reinsurance treaties to manage insurance risk), improve the return on investments (such as securities lending and repurchase transactions) and provide sources of liquidity or financing (such as credit agreements, securities lending agreements and repurchase agreements). These transactions expose the Company to counterparty risk. Counterparties include commercial banks, investment banks, broker-dealers and insurance and reinsurance companies. In the event of a counterparty deterioration or default, the magnitude of the losses will depend on then current market conditions ~~certain investments we hold, including private bonds, commercial mortgages~~and the length of time required to enter into a replacement transaction with a new counterparty. Losses are likely to be higher under stressed conditions.

Our investment portfolio is subject to equity risk, which is the risk of loss due to deterioration in market value of public equity or alternative assets. We include public equity and alternative ~~asset classes (such as~~assets (including private equity, hedge funds and real estate) in our portfolio constructions, as these asset classes can provide returns over longer periods of time, aligning with the long-term nature of certain of our liabilities. Public equity and alternative assets have varying degrees of price transparency. Equities traded on stock exchanges (public equities) have significant price transparency, as transactions are ~~relatively illiquid. If we needed~~often required to ~~sell~~be disclosed publicly. Assets for which price transparency is more opaque include private equity (joint ventures/limited partnerships) and direct real estate. As these investments ~~we may have difficulty doing so in a timely manner at a price that we could otherwise realize.~~

~~Certain features of our products and components of investment strategies depend~~typically do not trade on ~~active and liquid~~public markets and ifindications of realizable market ~~liquidity is strained or the capacity of the financial markets to absorb our transactions is inadequate, these products~~value may not ~~perform as intended.~~

~~Fluctuations~~be readily available, valuations can be infrequent and/or more volatile. A sustained decline in ~~our operating results as well as realized gains~~public equity and ~~losses on our investment and derivative portfolios~~alternative markets may ~~impact~~reduce the ~~Company’s tax profile and its ability to optimally utilize tax attributes.~~

~~Disruptions in individual market sectors within~~returns earned by our investment portfolio ~~could result~~through lower than expected dividend income, property operating income, and capital gains, thereby adversely impacting earnings, capital, and product pricing assumptions. These assets may also produce volatility in ~~significant realized and unrealized losses.~~

~~Our investments, results of operations and financial condition may be adversely affected by developments in the global economy, or in the U.S. economy (including~~earnings as a result of ~~actions by~~uneven distributions on the Federal Reserve with respect to monetary policy). Global or U.S. economic activity and financial markets may in turn be negatively affected by adverse developments or conditions in specific geographical regions.

Interest rate fluctuations or prolonged periods of low interest rates could adversely affect our business and profitability and require us to increase reserves or statutory capital and subject us to additional collateral posting requirements.

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

Some of our products expose us to the risk that changes in interest rates will reduce the spread between the amounts that we are required to pay under the contracts and the rate of return we are able to earn on our general account investments supporting the contracts. When interest rates decline or remain low, as they have in recent years, we have to invest in lower-yielding instruments, potentially reducing net investment income. Since many of our policies and contracts have guaranteed minimum interest crediting rates or limit the resetting of interest rates, the spreads could decrease or go negative. When interest rates rise, we may not be able to replace the assets in our general account as quickly with the higher-yielding assets needed to fund the higher crediting rates necessary to keep these products and contracts competitive. In addition, rising interest rates could cause a decline in the market value of fixed income assets of the mutual funds in our variable annuity products which in turn could result in lower asset management fees earned.

When interest rates rise, policy loans and surrenders and withdrawals of life insurance policies and annuity contracts may increase as policyholders seek to buy products with perceived higher returns, requiring us to sell investment assets potentially resulting in realized investment losses, or requiring us to accelerate the amortization of deferred acquisition costs (“DAC”), deferred sales inducements (“DSI”) or value of business acquired (“VOBA”). Also, an increase in interest rates accompanied by unexpected extensions of certain lower yielding investments could reduce our profitability.underlying investments.

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~~Changes in interest rates could~~Insurance Risk

We have significant liabilities for policyholders' benefits which are subject us to ~~increased collateral posting requirements related to hedging activities associated with some of~~insurance risk. Insurance risk is the risk that actual experience deviates adversely from our ~~products.~~

~~Changes in interest rates coupled with greater than expected client withdrawals for certain products can result in increased costs associated with our guarantees.~~

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

Our mitigation efforts with respect to interest rate risk are primarily focused on maintaining an investment portfolio with diversified maturities that has a key rate duration profile that is approximately equal to the key rate duration profile of our estimated liability cash flow profile; however, thisbest estimate ~~of the liability cash flow profile is complex~~insurance assumptions, including mortality and could turn out to be inaccurate, especially when markets are volatile. In addition, there are practical and capital market limitations on our ability to accomplish this matching. Due to these and other factors we may need to liquidate investments prior to maturity at a loss in order to satisfy liabilities or be forced to reinvest funds in a lower rate environment. Although we take measures to manage the economic risks of investing in a changing interest rate environment, we may not be able to effectively mitigate, and we may sometimes choose based on economic considerations and other factors not to fully mitigate, the interest rate risk of our assets relative to our liabilities.

For certain of the products we reinsure, a delay between the time the ceding companies make changes in interest rate and other assumptions used for product pricing and the time they are able to reflect these assumptions in products available-for-sale could negatively impact the long-term profitability of products sold during the intervening period.

Recent periods have been characterized by low interest rates. A prolonged period during which interest rates remain at levels lower than those anticipated in our pricing may result in greater costs associated with certain of our product features which guarantee death benefits or income streams for stated periods or for life; higher costs for derivative instruments used to hedge certain of our product risks; or shortfalls in investment income on assets supporting policy obligations, each of which may require us to record charges to increase reserves. In addition to compressing spreads and reducing net investment income, such an environment may cause policies to remain in force for longer periods than we anticipated in our pricing, potentially resulting in greater claims costs than we expected and resulting in lower overall returns on business in force. Reflecting these impacts in recoverability and loss recognition testing under U.S. GAAP may require us to accelerate the amortization of DAC, DSI or VOBA as noted above, as well as to increase required reserves for future policyholder benefits. In addition, certain statutory capital and reserve requirements are based on formulas or models that consider interest rates, and a period of declining or low interest rates may increase the statutory capital we are required to hold as well as the amount of assets we must maintain to support statutory reserves.

Adverse capital market conditions could significantly affect our ability to meet liquidity needs, our access to capital and our cost of capital and that of our ultimate parent company, Prudential Financial. Under such conditions, Prudential Financial may seek additional debt or equity capital but may be unable to obtain it.

Adverse capital market conditions could affect the availability and cost of borrowed funds and could impact our ability to refinance existing borrowings, thereby ultimately impacting our profitability and ability to support our businesses. behavior assumptions. We need liquidity to pay our operating expenses, interest and maturities on our debt. During times of market stress, our internal sources of liquidity may prove to be insufficient and some of our alternative sources of liquidity, such as commercial paper issuance, securities lending and repurchase arrangements and other forms of borrowings in the capital markets, may be unavailable to Prudential Financial.

Disruptions, uncertainty and volatility in the financial markets may force Prudential Financial to delay raising capital, issue shorter tenor securities than would be optimal, bear an unattractive cost of capital or be unable to raise capital at any price, which could decrease our profitability and significantly reduce our financial flexibility.

~~Prudential Financial may seek additional debt or equity financing to satisfy our needs; however, the availability of additional financing depends on~~provide a variety of ~~factors such as market conditions,~~insurance products that are designed to help customers protect against a variety of financial uncertainties. Our insurance products protect customers against their potential risk of loss by transferring those risks to the ~~availability~~Company, where those risks can be managed more efficiently through pooling and diversification over a larger number of credit, and Prudential Financial’s credit ratings and credit capacity. Prudential Financial may not be able to successfully obtain additional financing on favorable terms, or at all. Actions taken to access financing by Prudential Financial mayindependent exposures. During this transfer process, we assume the risk that actual losses experienced in ~~turn cause rating agencies to reevaluate its ratings.~~

~~Disruptions in~~our insurance products deviates significantly from what we expect. More specifically, insurance risk is concerned with the ~~capital markets could adversely affect~~deviations that impact our ability to access sources of liquidity, as well as threaten to reduce our capital below a level that is consistent with our existing ratings objectives. Therefore, we may need to take actions, which may include but are not limited to: (1) access contingent sources of capital and liquidity available through our Capital Protection Framework; (2) undertake capital management activities, including reinsurance transactions; (3) seek to limit or curtail assumption reinsurance of certain products and/or restructure existing products; (4) undertake further asset sales or internal asset transfers; (5) seek temporary or permanent changes to regulatory rules; and (6) maintain greater levels of cash balances or for longer periods thereby reducing investment returns. Certain of these actions may require regulatory approval and/or agreement of counterparties which are outside of our control or have economic costs associated with them.

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~~Risks Relating to Estimates, Assumptions and Valuations~~

future liabilities. Our profitability may decline if mortality ~~experience, morbidity~~ experience or policyholder behavior experience differ significantly from our ~~pricing expectations.~~expectations when we price our products. In addition, if we experience higher than expected claims our liquidity position may be adversely impacted, and we may incur losses on investments if we are required to sell assets in order to pay claims. If it is necessary to sell assets at a loss, our results of operations and financial condition could be adversely impacted. For a discussion of the impact of changes in insurance assumptions on our financial condition, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Accounting Policies and Pronouncements-Application of Critical Accounting Estimates-Insurance Liabilities.”

~~We set prices for many~~Certain of our insurance ~~and annuity~~ products ~~based upon assumptions for~~are subject to mortality risk, which is the risk that actual deaths experienced deviate adversely from our expectations. Mortality risk is a biometric risk that can manifest in the following ways:

Mortality calamity is the risk that mortality rates ~~(the likelihood~~in a single year deviate adversely from what is expected as the result of death or the likelihood of survival), morbidity rates (the likelihood of sickness or disability), and improvement trends in mortality and morbidity of our policyholders. In addition to the potential effect ofpandemics, natural or man-made disasters, military actions or terrorism. A mortality calamity event will reduce our earnings and capital and we may be forced to liquidate assets before maturity in order to pay the excess claims. Mortality calamity risk is more pronounced in respect of specific geographic areas (including major metropolitan centers, where we have concentrations of customers), concentrations of employees or significant ~~changes~~operations, and in respect of countries and regions in which we operate that are subject to a greater potential threat of military action or conflict. Ultimate losses would depend on several factors, including the rates of mortality orand morbidity ~~could emerge gradually over time, due to changes in the natural environment, the health habits~~among various segments of the insured population, ~~treatment patterns~~the collectability of reinsurance, the possible macroeconomic effects on our investment portfolio, the effect on lapses and ~~technologies for disease or disability,~~surrenders of existing policies, as well as sales of new policies and other variables.

Mortality trend is the ~~economic environment, or other factors. In addition, technological and medical advances may affect how consumers investigate and purchase products, and~~risk that mortality improvements in the future ~~consumers~~deviate adversely from what is expected. Mortality trend is a long-term risk in that can emerge gradually over time. Longevity products, such as annuities , experience adverse impacts due to higher-than-expected mortality improvement. Mortality products, such as life insurance, experience adverse impacts due to lower-than-expected improvement. If this risk were to emerge, the Company would update assumptions used to calculate reserves for in force business, which may ~~be informed by confidential genetic information~~result in additional assets needed to meet the higher expected annuity claims or earlier expected life claims. An increase in reserves due to revised assumptions has an immediate impact on our results of operations and financial condition; however, economically the impact is generally long-term as the excess outflow is paid over time.

Mortality base is the risk that actual base mortality ~~projections that are not available~~deviates adversely from what is expected in pricing and valuing our products. Base mortality risk can arise from a lack of credible data on which to ~~us.~~base the assumptions.

~~Pricing~~Certain of our insurance products are subject to policyholder behavior risk, which is the risk that actual policyholder behavior deviates adversely from what is expected. Policyholder behavior risk includes the following components:

Lapse calamity is the risk that lapse rates over the short-term deviate adversely from what is expected, for example, surrenders of certain insurance products may increase following a downgrade of our financial strength ratings or adverse publicity. Only certain products are exposed to this risk. Products that offer a cash surrender value that resides in the general account could pose a potential short-term lapse calamity risk. Surrender of these products can impact liquidity, and ~~annuity products~~ it may be necessary in certain market conditions to sell assets to meet surrender demands. Lapse calamity can also impact our earnings through its impact on estimated future profits.

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Policyholder behavior efficiency is ~~also based in part upon~~the risk that the behavior of our customers or policyholders deviates adversely from what is expected. Policyholder behavior efficiency risk arises through product features which provide some degree of choice or flexibility for the policyholder, ~~behavior.~~which can impact the amount and/or timing of claims. Such choices include surrender, lapse, partial withdrawal, policy loan, utilization, and premium payment rates for contracts with flexible premiums. While some behavior is driven by macro factors such as market movements, policyholder behavior at a fundamental level is driven primarily by policyholders’ individual needs, which may differ significantly from product to product depending on many factors including the features offered, the approach taken to market each product, and competitor pricing. For example, persistency (the probability that a ~~policy or~~ contract will remain in force) within our annuities business may be significantly impacted by the value of guaranteed minimum benefits contained in many of our variable annuity products being higher than current account values in light of poor ~~equity~~ market performance ~~or extended periods of low interest rates~~ as well as other factors. ~~Persistency could be adversely affected generally by developments affecting client perception of us, including perceptions arising from adverse publicity.~~ Many of our products also provide our customers with wide flexibility with respect to the amount and timing of premium deposits and the amount and timing of withdrawals from the policy’s value. Results may vary based on differences between actual and expected premium deposits and withdrawals for these products, especially if these product features are relatively new to the marketplace. The pricing of certain of our variable annuity products that contain certain living benefit guarantees is also based on assumptions about utilization rates, or the percentage of contracts that will utilize the benefit during the contract duration, including the timing of the first ~~lifetime income~~ withdrawal. Results may vary based on differences between actual and expected benefit utilization. ~~The development of a secondary market for life insurance, including life settlements or “viaticals” and investor owned life insurance, and~~We may also be impacted by customers seeking to sell their benefits. In particular, third-party investor strategies in ~~the~~our annuities business could adversely affect the profitability of existing business and our pricing assumptions for new business. Policyholder behavior efficiency is generally a long-term risk that emerges over time. An increase in reserves due to revised assumptions has an immediate impact on our results of operations and financial condition; however, from an economic or cash flow perspective, the impact is generally long-term as the excess outflow is paid over time.

Our ability to reprice products is limited, and may not compensate for deviations from our expected insurance assumptions.

Although some of our products permit us to increase premiums or adjust other charges and credits during the life of the policy or contract, the adjustments permitted under the terms of the policies or contracts may not be sufficient to maintain profitability or may cause the policies or contracts to lapse. Many of our products do not permit us to increase premiums or adjust other charges and credits or limit those adjustments during the life of the ~~policy or~~ contract. Even if permitted under the policy or contract, we may not be able or willing to raise premiums or adjust other charges sufficiently, or at ~~all, for regulatory or competitive reasons.~~all. Accordingly, significant deviations in actual experience from our pricing assumptions could have an adverse effect on the profitability of our products.

IfMarket Risk

The profitability of many of our ~~reserves~~insurance and annuity products are subject to market risk. Market risk is the risk of loss from changes in interest rates and equity prices.

Derivative instruments we use to hedge and manage interest rate and equity market risks associated with our products and businesses, and other risks might not perform as intended or expected resulting in higher than expected realized losses and stresses on liquidity. Market conditions can limit availability of hedging instruments, require us to post additional collateral, and further increase the cost of executing product related hedges and such costs may not be recovered in the pricing of the underlying products being hedged.

Market risk may limit opportunities for ~~future policyholder benefits~~investment of available funds at appropriate returns, including due to the current low interest rate environment, or other factors, with possible negative impacts on our overall results. Limited opportunities for attractive investments may lead to holding cash for long periods of time and ~~expenses are inadequate, we~~increased use of derivatives for duration management and other portfolio management purposes. The increased use of derivatives may ~~be required to~~ increase the volatility of our ~~reserves, which would adversely affect~~U.S. GAAP results and our statutory capital.

Our investments, results of operations and financial ~~condition.~~condition may also be adversely affected by developments in the global economy, and in the U.S. economy (including as a result of actions by the Federal Reserve with respect to monetary policy, and adverse political developments). Global or U.S. economic activity and financial markets may in turn be negatively affected by adverse developments or conditions in specific geographical regions.

~~We establish reserves in accordance with U.S. GAAP for future policyholder benefits and expenses. While these reserves generally exceed our best estimate~~For a discussion of the ~~liability for future benefits~~impact of changes in market conditions on our financial condition see “Quantitative and expenses, if we conclude based on updated assumptions that our reserves, together with future premiums, are insufficient to cover future policy benefits and expenses, including unamortized DAC, DSI or VOBA, we would need to accelerate the amortization of these DAC, DSI or VOBA balances and then increase our reserves and incur income statement charges, which would adversely affect our results of operations and financial condition. The determination of our best estimate of the liability is based on data and models that include many assumptions and projections which are inherently uncertain and involve the exercise of significant judgment, including the levels and timing of receipt or payment of premiums, benefits, expenses, interest credits and investment results (including equity market returns), which depend on mortality, morbidity and policyholder behavior. We cannot determine with precision the ultimate amounts that we will pay for, or the timing of payment of, actual benefits and expenses or whether the assets supporting our policy liabilities, together with future premiums, will be sufficient for payment of benefits and expenses. If we conclude that our reserves, together with future premiums, are insufficient to cover future policy benefits and expenses, we may seek to increase premiums or charges where we are able to do so. Updated assumptions may also require us to increase U.S. GAAP reserves for the guarantees in certain long-duration contracts.

For certain of our products, market performance and interest rates (as well as the regulatory environment, as discussed further below) impact the level of statutory reserves and statutory capital we are required to hold, and may have an adverse effect profitability and returns on capital associated with these products.

We may be required to accelerate the amortization of DAC, DSI or VOBA, or be required to establish a valuation allowance against deferred income tax assets, any of which could adversely affect our results of operations and financial condition.

DAC represents the costs that vary with and are directly related to the acquisition of new and renewal insurance and investment contracts, and we amortize these costs over the expected lives of the contracts. DSI represents amounts that are credited to a policyholder’s account balance as an inducement to purchase the contract, and we amortize these costs over the expected lives ofQualitative Disclosures About Market Risk".

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Our insurance and annuity products, and our investment returns, are subject to interest rate risk, which is the ~~contracts. VOBA~~risk of loss arising from asset/liability duration mismatches within our general account investments. The risk of mismatch in asset/liability duration is ~~an intangible asset~~mainly driven by the specific dynamics of product liabilities. Some product liabilities are expected to have only modest risk related to interest rates because cash flows can be matched by available assets in the investable space. The interest rate risk emerges primarily from their tail cash flows (30 years or more), which ~~represents an adjustment~~cannot be matched by assets for sale in the marketplace, exposing the Company to future reinvestment risk. Market-sensitive cash flows exist with other product liabilities including products whose cash flows can be linked to market performance through secondary guarantees, minimum crediting rates, and/or changes in insurance assumptions.

Our exposure to interest rates can manifest over years as in the case of earnings compression or in the short term by creating volatility in both earnings and capital. For example, some of our products expose us to the stated value of acquired in force insurance contract liabilities to present them at fair value, determined as of the acquisition date. Management, on an ongoing basis, tests the DAC, DSI and VOBA recorded on our balance sheet to determine if these amounts are recoverable under current assumptions. In addition, we regularly review the estimates and assumptions underlying DAC, DSI and VOBA for those products for which we amortize DAC, DSI and VOBA in proportion to gross profits. Given changes in facts and circumstances, these tests and reviews could lead to reductions in DAC, DSI and VOBArisk that could have an adverse effect on the results of our operations and our financial condition. Among other things, significant or sustained equity market declines as well as investment losses could result in acceleration of amortization of the DAC, DSI and VOBA, resulting in a charge to income. As discussed earlier, the amortization of DAC, DSI and VOBA is also sensitive to changes in interest ~~rates.~~

~~Deferred income tax represents~~rates will reduce the ~~tax effect of the differences~~spread between the ~~book~~amounts that we are required to pay under contracts and ~~tax basis~~the rate of ~~assets~~return we are able to earn on our general account investments supporting these contracts. When interest rates decline or remain low, as they have in recent years, we must invest in lower-yielding instruments, potentially reducing net investment income and ~~liabilities. Deferred tax assets are assessed periodically by management to determine if they are realizable. Factors in management’s determination include the performance of the business, the~~constraining our ability to ~~generate capital gains from~~offer certain products. This risk is increased as more policyholders may retain their policies in a variety of sources, and tax planning strategies. If based on available information, it is more likely than not that the deferred income tax asset will not be realized then a valuation allowance must be established with a corresponding charge to net income. Such charges could have a material adverse effect on our results of operations or financial position.

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

~~During periods of market disruption, it may be difficult to value certain~~low rate environment. Since many of our ~~investment securities, if trading becomes less frequent~~policies and contracts have guaranteed minimum crediting rates or ~~market data becomes less observable. There may be cases where certain assets in normally active markets with significant observable data become inactive with insufficient observable data due to~~limit the ~~current financial environment~~resetting of crediting rates, the spreads could decrease or market conditions. In addition, the fair value of certain securities may be based on one or more significant unobservable inputs even in ordinary market conditions. As a result, valuations may include inputs and assumptions that require greater estimation and judgment as well as valuation methods which are more complex. These valuesgo negative.

Alternatively, when interest rates rise, we may not be ultimately realizable in a market transaction, and such values may change very rapidly as market conditions change and valuation assumptions are modified. Decreases in value may have a material adverse effect on our results of operations or financial condition.

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

~~Credit and Counterparty Risks~~

~~A downgrade or potential downgrade~~assets in our ~~financial strength or Prudential Financial’s credit ratings could increase policy surrenders~~general account with the higher-yielding assets as quickly as needed to fund the higher crediting rates necessary to keep these products and ~~withdrawals, increase our borrowing costs and/or hurt our relationships with creditors, distributors or trading counterparties.~~

A downgrade in our financial strength ratings could potentially, among other things, increase the number or value of policy surrenders and withdrawals. In addition, a downgrade in Prudential Financial’s credit ratings could (1) increase Prudential Financial’s borrowing costs and potentially make it more difficult to borrow funds and adversely affect the availability of financial guarantees, such as letters of credit, (2) limit Prudential Financial’s ability to obtain collateralized loans from the Federal Home Loan Bank of New York that can be used as alternative sources of liquidity, (3) cause additional collateral requirements or other required payments under certain agreements, including derivatives, and allow “PGF's counterparties to terminate derivative agreements, and (4) hurt relationships with creditors, distributors, reinsurers or trading counterparties thereby potentially negatively affecting our profitability, liquidity and capital.

We cannot predict what additional actions rating agencies may take, or what actions we may take in response to the actions of rating agencies, which could adversely affect our business. Our ratings could be downgraded at any time and without advance notice by any rating agency. In addition, a sovereign downgrade could result in a downgrade of Prudential Financial’s subsidiaries operating in that jurisdiction, and ultimately of Prudential Financial and its other subsidiaries. For example, in September 2015, S&P downgraded Japan's sovereign rating to A+ with a 'Stable' outlook citing uncertainties around the strength of economic growth and weak fiscal positions. As a result, S&P subsequently lowered the ratings of a number of institutions in Japan, including Prudential Financial’s Japanese insurance subsidiaries.contracts competitive. It is possible that ~~Japan’s sovereign rating~~fewer policyholders may retain their policies and annuity contracts as they pursue higher crediting rates, which could expose the Company to losses and liquidity stress.

Our mitigation efforts with respect to interest rate risk are primarily focused on maintaining an investment portfolio with diversified maturities that has a key rate duration profile that is approximately equal to the key rate duration profile of our liability and surplus benchmarks; however, these benchmarks are based on estimates of the liability cash flow profiles which are complex and could turn out to be ~~subject~~inaccurate, especially when markets are volatile. In addition, there are practical and capital market limitations on our ability to ~~further downgrades, which would result in further downgrades of Prudential Financial’s insurance subsidiaries in Japan. Given the importance of Prudential Financial’s operations in Japan~~accomplish this matching. Due to ~~Prudential Financial’s overall results, such downgrades could lead to a downgrade of Prudential Financial and its domestic insurance companies.~~

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~~Losses due to defaults by others, including issuers of investment securities, reinsurers and derivatives counterparties, insolvencies of insurers in jurisdictions where we write business~~these and other factors ~~could adversely affect the value of our~~we may need to liquidate investments ~~the realization of amounts contractually owed~~prior to ~~us, result~~maturity at a loss in ~~assessments or additional statutory capital requirements or reduce our profitability or sources of liquidity.~~

Issuers and borrowers whose securities or loans we hold, customers, vendors, trading counterparties, counterparties under swaps and other derivative contracts, reinsurers, clearing agents, exchanges, clearing houses and other financial intermediaries and guarantors, including bond insurers, may default on their obligationsorder to ussatisfy liabilities or be ~~unable~~forced to perform service functions that are significant to our business due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions, operational failure, fraud or other reasons. Such defaults could have an adverse effect on our results of operations and financial condition.

We use derivative instruments to hedge various risks, including certain guaranteed minimum benefits contained in many of our variable annuity products. We enter into a variety of derivative instruments, including options, forwards, interest rate, credit default and currency swaps with an affiliate. We also enter into reinsurance arrangements as a risk mitigation strategy for our insurance and annuity products. Amounts that we expect to collect under current and future derivatives or reinsurance contracts are subject to counterparty risk. Our obligations under our products are not changed by our hedging activities or reinsurance arrangements and we are liable for our obligations even if our derivative counterparties or reinsurers do not pay us. Such defaults could have a material adverse effect on our financial condition and results of operations. In addition, ratings downgrades or financial difficulties of derivative counterparties or reinsurers may require us to utilize additional capital with respect to the impacted businesses.

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

Our investment portfolio is subject to risks that could diminish the value of our invested assets and the amount of our investment income, which could have an adverse effect on our results of operations or financial condition.

We record unrealized gains or losses on securities classified as “available-for-sale” in other comprehensive income (loss), and in turn recognize gains or losses in earnings when the gain or loss is realized upon the sale of the security or in the event that the decline in estimated fair value is determined to be other-than-temporary.

The occurrence of a major economic downturn, acts of corporate malfeasance, widening credit spreads, or other events that adversely affect the issuers or guarantors of securities or the underlying collateral of structured securities could cause (i) the market price of fixed maturity securities in our investment portfolio to decline, which could cause us to record gross unrealized losses, (ii) earnings on those securities to decline, which could result in lower earnings, and (iii) ultimately defaults, which could resultreinvest funds in a charge to earnings. A ratings downgrade affecting issuers or guarantors of particular securities, or similar trends that could worsen the credit quality of our investments could also have a similar effect. In addition, a ratings downgrade affecting a security we hold could indicate the credit quality of that security has deteriorated and could increase the capital we must hold to maintain our RBC levels.lower rate environment.

Our non-coupon investment portfolio is subject to additional risks. We invest a portion of our investments in hedge funds and private equity funds. The amount and timing of net investment income from such funds tends to be uneven as a result of the performance of the underlying investments.

The timing of distributions from such funds, which depends on particular events relating to the underlying investments, as well as the funds’ schedules for making distributions and their needs for cash, can be difficult to predict. As a result, the amount of net investment income from these investments can vary substantially from quarter to quarter. Significant volatility could adversely impact returns and net investment income on these investments. In addition, the estimated fair value of such investments may be impacted by downturns or volatility in equity markets. In our real estate portfolio, we are subject to declining prices or cash flows as a result of changes in the supply and demand of leasable space, creditworthiness of tenants and partners and other factors.

~~Certain Product Related Risks~~

Guarantees within certain of our products, ~~that protect contractholders~~in particular our variable annuities, are market sensitive and may decrease our earnings or increase the volatility of our results of operations or financial position under U.S. ~~GAAP if our hedging or risk management strategies prove ineffective or insufficient.~~

GAAP.Certain of our products, particularly our variable annuity products, include guarantees of minimum surrender values or income streams for stated periods or for life, which may be in excess of account values. Downturns in equity markets, increased equity volatility, increased credit spreads, or (as discussed above) reduced interest rates could result in an increase in the valuation of liabilities associated with such guarantees, resulting in increases in reserves and reductions in net income. We use a variety of hedging and risk management strategies, including product features, ~~and external reinsurance,~~ to mitigate these risks in part and we may periodically change our strategies over time. These strategies may, however, not be fully effective. In addition, we may be unable or may choose not to fully hedge these risks. Hedging instruments may not effectively offset the costs of guarantees or may otherwise be insufficient

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in relation to our obligations. Hedging instruments also may not change in value correspondingly with associated liabilities due to equity market or interest rate conditions, non-performance risk or other reasons. We may choose to hedge these risks on a basis that does not correspond to their anticipated or actual impact upon our results of operations or financial position under U.S. GAAP. Changes from period to period in the valuation of these policy benefits, and in the amount of our obligations effectively hedged, will result in volatility in our results of operations and financial position under U.S. GAAP and our statutory capital ~~level.~~levels. Estimates and assumptions we make in connection with hedging activities may fail to reflect or correspond to our actual long-term exposure ~~in respect of~~from our guarantees. Further, the risk of increases in the costs of our guarantees not covered by our hedging and other capital and risk management strategies may become more significant due to changes in policyholder behavior driven by market conditions or other factors. The above factors, individually or collectively, may have a material adverse effect on our results of operations, financial condition or liquidity.

~~In addition,~~Our valuation of the ~~NAIC has outlined a framework~~liabilities for ~~changing~~ the ~~guidance and rules governing variable annuities, including with regard to reserving, capital, accounting, derivative use limitations and disclosure, which may ultimately impact how we hedge~~minimum benefits contained in many of our variable annuity ~~risks~~products requires us to consider the market perception of our risk of non-performance, and ~~adversely affect~~a decrease in our ~~capital, financial position and results~~own credit spreads resulting from ratings upgrades or other events or market conditions could cause the recorded value of ~~operations. See “Business-Regulation-Insurance Operations-State Insurance Regulation-Financial Regulation-Variable Annuities.”~~

~~Regulatory and Legal Risks~~

~~Our business is heavily regulated and changes~~these liabilities to increase, which in ~~regulation may~~turn could adversely affect our results of operations and financial ~~condition.~~

Our business is subject to comprehensive regulation and supervision. Many of the laws and regulations to which we are subject are regularly re-examined, and existing or future laws and regulations may become more restrictive or otherwise adversely affect our operations. The financial market dislocations we have experienced have produced, and are expected to continue to produce, extensive changes in existing laws and regulations, and regulatory frameworks, applicable to our business.

Prudential Financial, the holding company for all of our operations, is subject to supervision by the FRB as a “Designated Financial Company” pursuant to Dodd-Frank. As a Designated Financial Company, Prudential Financial is and will be subject to substantial additional regulation as discussed further herein. In addition, the FSB identified Prudential Financial as a G-SII. U.S. financial regulators have also enhanced their regulation of Prudential Financial to achieve a number of regulatory objectives. This additional regulation has increased our operational, compliance and risk management costs, and could have an adverse effect on our business, results of operations or financial condition, including potentially increasing our capital levels and requiring us to hold additional liquid assets and therefore reducing our return on capital.

In 2015 NJDOBI became Prudential Financial’s group-wide supervisor pursuant to legislation adopted by the state. We cannot predict what additional standards, including capital requirements or other costs any new group-wide standards will impose on Prudential Financial. See “Business-Regulation-Insurance Holding Company Regulation-Group-Wide Supervision."

In November 2015, the NAIC adopted the Variable Annuities Framework for Change, which outlines the NAIC’s commitment to change in concept the statutory framework to address concerns that have led to the development and utilization of captive reinsurance transactions for variable annuity business in order to create more consistency across regulators and remove the impetus for insurers to cede risk to captives.

We cannot predict what, if any, changes may result from the Variable Annuities Framework for Change, and if applicable insurance laws are changed in a way that impairs our ability to write variable annuities and efficiently manage their associated risks. See “Business-Regulatory Regulation-Insurance Operations-State Insurance Regulation-Financial Regulation-Variable Annuities” for information on the Variable Annuities Framework for Change.

Other NAIC or state insurance regulatory actions, such as changes to RBC calculations, may adversely impact our business from time to time. See “Business-Regulatory Regulation-Insurance Operations-State Insurance Regulation-Financial Regulation-Risk Based Capital” for information on potential changes to RBC calculations.

The failure of the Company to meet applicable RBC requirements or minimum statutory capital and surplus requirements could subject the Company to further examination or corrective action by state insurance regulators. The failure to maintain the RBC ratios of the Company at desired levels could also adversely impact our competitive position, including as a result of downgrades to our financial strength ratings.

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

~~See “Business-Regulation” for discussion of regulation of our business.~~position.

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The Dodd-Frank Wall Street Reform and Consumer Protection Act subjects the Company, our parent and our affiliates to substantial additional federal regulation and we cannot predict the effect on our business, results of operations, cash flows or financial condition.Liquidity Risk

As a ~~“Designated~~financial services company, we are exposed to liquidity risk, which is the risk that the Company is unable to meet near-term obligations as they come due.

Liquidity risk is a manifestation of events that are driven by other risk types (market, insurance, investment, operational). A liquidity shortfall may arise in the event of insufficient funding sources or an immediate and significant need for cash or collateral. In addition, it is possible that expected liquidity sources may be unavailable or inadequate to satisfy the liquidity demands described below.

The Company has four primary sources of liquidity exposure and associated drivers that trigger material liquidity demand. Those sources are:

Derivative collateral market exposure: Abrupt changes to interest rate, equity, and/or currency markets may increase collateral requirements to counterparties and create liquidity risk for the Company.

Asset liability mismatch: There are liquidity risks associated with liabilities coming due prior to the matching asset cash flows. Structural maturities mismatch can occur in activities such as securities lending, where the liabilities are effectively overnight open transactions used to fund longer term assets.

Wholesale funding: We depend upon the financial markets for funding. These sources might not be available during times of stress, or may only be available on unfavorable terms, which can result in a decrease in our profitability and a significant reduction in our financial flexibility.

Insurance cash flows: We face potential liquidity risks from unexpected cash demands due to severe mortality calamity, customer withdrawals or lapse events. If such events were to occur, the Company may face unexpectedly high levels of claim payments to policyholders.

For a discussion of the Company's liquidity and sources and uses of liquidity see “Management’s Discussion and Analysis of Financial ~~Company” pursuant~~Condition and Results of Operations-Liquidity and Capital Resources-Liquidity".

Operational Risk

Our operations are exposed to ~~Dodd-Frank, Prudential~~ the risk of loss resulting from inadequate or failed processes or systems, human error or misconduct, and as a result of external events.

An operational risk failure may result in one or more actual or potential impacts to the Company.

Operational Risk Types

Processes - Processing failure; failure to safeguard or retain documents/records; errors in valuation/pricing models and processes; project management or execution failures; improper sales practices.

Systems - Failures during the development and implementation of new systems; systems failures.

People - Internal fraud, breaches of employment law, unauthorized activities; loss or lack of key personnel, inadequate training; inadequate supervision.

External Events - External crime; outsourcing risk; vendor risk; natural and other disasters; changes in laws/regulations.

Legal - Legal and regulatory compliance failures.

Potential Impacts

Financial losses - The Company experiences a financial loss. This loss may originate from various causes including, but not limited to, transaction processing errors and fraud.

Customer impacts - The Company may not be able to service customers. This may result if the Company is subject to substantial federal regulation, much of it pursuant to regulations not yet promulgated. Dodd-Frank directs existing and newly-created government agencies and bodies to promulgate regulations implementing the law, a process that is underway and expectedunable to continue ~~over the next few years. We cannot predict the timing~~operations during a business continuation event or ~~requirements of the regulations not yet adopted under Dodd-Frank~~if systems are compromised due to malware or ~~how such regulations will impact our business, Prudential Financial’s credit ratings~~virus.

Regulatory fines or our financial strength ratings, results of operations, cash flows, financial condition or competitive position. Furthermore, we cannot predict whether such regulations will make it advisable or require us to hold or raise additional capital or liquid assets, potentially affecting capital deployment activities, including paying dividends. Finally, we cannot predict how President Trump’s February 2017 executive order outlining the Administration’s core principles for regulation of the financial system, or future legislation, will impact Dodd-Frank or the Company. Key aspects of Dodd-Frank’s impact on us include:

As a Designated Financial Company, Prudential Financial is subject to supervision and examination by the FRB and to stricter prudential standards, which include or may include requirements and limitations (many of which are the subject of ongoing rule-making) relating to capital, leverage, liquidity, stress-testing, overall risk management, credit exposure reporting, early remediation, managing interlocks, credit concentration, and resolution and recovery planning. If the FRB and the FDIC jointly determine that Prudential Financial's resolution plan is deficient, they may impose more stringent capital, leverage, or liquidity requirements, or restrictions on our growth, activities, or operations. Any continuing failure to adequately remedy the deficiencies could result in the FRB and the FDIC jointly, in consultation with the Council, ordering divestiture of certain operations or assets. In addition, failure to meet defined measures of financial condition could result in substantial restrictions on our business and capital distributions. Dodd-Frank also requires Prudential Financial to be subject to stress tests to be promulgated by the FRB which could cause Prudential Financial to alter our business practices or affect the perceptions of regulators, rating agencies, customers, counterparties or investors of our financial strength. We cannot predict the requirements of the regulations not yet adopted or how the FRB will apply these prudential standards to Prudential Financial. As a Designated Financial Company, Prudential Financial must also seek pre-approval from the FRB for acquisition of certain companies engaged in financial activities.

As a Designated Financial Company, Prudential Financial could also be subject to additional capital requirements for, and other restrictions on, proprietary trading and sponsorship of, and investment in, hedge, private equity and other covered funds.

The Council could recommend new or heightened standards and safeguards for activities or practices in which Prudential Financial and other financial services companies engage. We cannot predict whether any such recommendations will be made or their effect on our business, results of operations, cash flows or financial condition.

~~Dodd-Frank created a new framework for regulation of the OTC derivatives markets which could impact various activities of PGF, Prudential Financial and~~sanctions - When the Company which use derivatives for various purposes (including hedging interest rate, foreign currency and equity market exposures). While many of the regulations required to be promulgated under Dodd-Frank or internationally with respect to derivatives markets have been adopted by the applicable regulatory agencies, the regulations that remain to be adopted or that have not been fully implemented could substantially increase the cost of hedging and related operations, affect the profitability of our products or their attractiveness to our clients or cause us to alter our hedging strategy or implementation thereof or increase and/or change the composition of the risks we do not hedge. In particular, we continue to monitor the potential hedging cost impacts of new initial margin requirements that we will be requiredfails to comply with ~~in 2020, and increased capital requirements for derivatives transactions that~~applicable laws or regulations, regulatory fines or sanctions may be ~~imposed~~imposed. In addition, possible restrictions on ~~banks that are our counterparties.~~business activities may result.

~~Title II of Dodd-Frank provides that a~~

Legal actions - Failure to comply with laws and regulations also exposes the Company to litigation risk. This may also result in financial company such as Prudential Financial may be subject to a special orderly liquidation process outside the federal bankruptcy code, administered by the FDIC as receiver, upon a determination that Prudential Financial is in default or in danger of default and presents a systemic risk to U.S. financial stability, Prudential Financial and its U.S. insurance subsidiaries would be subject to rehabilitation and liquidation proceedings under state insurance law. We cannot predict how creditors of Prudential Financial or its insurance and non-insurance subsidiaries, including the holders of Prudential Financial debt, will evaluate this potential or whether it will impact our financing or hedging costs.losses.

~~See “Business-Regulation” for further discussion of the impact of Dodd-Frank on our business.~~

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~~Changes in the laws and regulations relating to retirement products and services~~Liabilities we may incur as a result of ~~the DOL’s new fiduciary Rules could adversely affect our business, results of operations, cash flows and financial condition.~~

In April 2016, the DOL issued new Rules that redefine who will be considered a “fiduciary” for purposes of transactions with qualified plans, plan participants and IRAs. The Rules generally provide that advice to a plan participant or IRA owner will be treated as a fiduciary activity. We cannot predict how President Trump’s February 2017 directionoperational failures are described further under “Contingent Liabilities” in Note 15 to the DOL to review the Rules or the DOL's proposal to delay the implementation date will impact the Rules or their implementation date. Overall, if enacted in their current form, the Rules will result in increased compliance costs and may create increased exposure to legal claims under certain circumstances, including class actions. See “Business-Regulation-Other U.S. Federal Regulation-DOL Fiduciary Rule” for a discussion of the expected impacts of the Rules on our business.Financial Statements. In addition, ~~to these impacts, our compliance with the Rules could lead to a loss of customers and revenues, and otherwise adversely affect our business, results of operations, cash flows and financial condition.~~

~~Foreign governmental actions could subject us to substantial additional regulation.~~

In addition to the adoption of Dodd-Frank in the United States, the FSB, has issued a series of proposals intended to produce significant changes in how financial companies, particularly companies that are members of large and complex financial groups, should be regulated.

The FSB identified Prudential Financial as a G-SII. The framework policy measures for G-SIIs published by the IAIS include enhanced group-wide supervision, enhanced capital standards, enhanced liquidity planning and management, and development of a risk reduction plan and recovery and resolution plans. The IAIS has released BCR and HLA standards that have been approved by the FSB and G20 with implementation in 2019. The IAIS is also developing ComFrame for the supervision of Internationally Active Insurance Groups that seeks to promote effective and globally-consistent supervision of the insurance industry and contribute to global financial stability through uniform standards for insurer corporate governance, enterprise risk management and other control functions, group wide supervision and group capital adequacy which also may be adopted by the IAIS as early as 2019. Policy measures applicable to G-SIIs would need to be implemented by legislation or regulation in each applicable jurisdiction. We cannot predict the impact of BCR, HLA or ComFrame on our business, or the outcome of our identification as a G-SII on the regulation of our businesses.

~~Changes in accounting requirements could negatively impact our reported results of operations and our reported financial position.~~

Accounting standards are continuously evolving and subject to change. For example, the Financial Accounting Standards Board ("FASB") has an ongoing project to revise accounting standards for long duration insurance contracts. While the final resolution of changes to U.S. GAAP pursuant to this project is unclear, changes to the manner in which we account for insurance products, or other changes in accounting standards, could have a material effect on our reported results of operations and financial condition. Further, changes in accounting standards may impose special demands on issuers in areas such as corporate governance, internal controls and disclosure, and may result in substantial conversion costs to implement.

Changes in U.S. federal income tax law or in the income tax laws of other jurisdictions that impact our tax profile could make some of our products less attractive to consumers and also increase our tax costs.

There is uncertainty regarding U.S. taxes both for individuals and corporations. Discussions in Washington continue concerning the need to reform the tax code, primarily by lowering tax rates and broadening the base by reducing or eliminating certain tax expenditures. Overall lower effective individual tax rates could make our products less attractive to customers. It is unclear whether or when Congress may take up overall tax reform and what impact tax reform will have on the Company and its products. However, even in the absence of overall tax reform, Congress could enact more piecemeal tax legislation that would change the company’s tax profile, make our products less competitive and adversely impact our capital position.

Current U.S. federal income tax laws generally permit certain holders to defer taxation on the inside build-up of investment value of annuities until there are contract distributions. Congress from time to time considers legislation that could make our products less attractive to consumers, including legislation that would reduce or eliminate the benefit of this deferral on some annuities. Congress, as well as state and local governments, also considers from time to time legislation that could increase the amount of corporate taxes we pay, thereby reducing earnings. See “Business-Regulation-Other U.S. Federal Regulation-U.S. Tax Legislation” for examples of proposed changes that could increase our actual tax expense and reduce our consolidated net income.

The products we sell have different tax characteristics, in some cases generating tax deductions and credits for the Company. Changes in tax laws may negatively impact the deductions and credits available to the Company, including the ability of the Company to claim foreign tax credits with respect to taxes withheld on separate account products. These changes would increase the Company’s actual tax expense and reduce its consolidated net income.

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value of the tax characteristics generated by our products, could impact product pricing and returns or require us to reduce our sales of these products or implement other actions that could be disruptive to our businesses. In addition, the adoption of a principles- based approach for statutory reserves may lead to significant changes to the way tax reserves are determined and thus reduce future tax deductions.

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

We are, and in the future may be, subject to legal and regulatory actions in the ordinary course of our business. Some of these actions relate to aspects of the Company’s business and operations that are specific to us, while others are typical of the business in which we operate. We face or may face lawsuits alleging, among other things, issues relating to unclaimed property procedures, the settlement of death benefit claims, breaches of fiduciary duties, violations of securities laws and employment matters. Some of these proceedings have been brought on behalf of various alleged classes of complainants. In certain of these matters, the plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary damages.

~~In addition, many insurance~~pending regulatory and other governmental or self-regulatory bodies have the authority to review our products and business practices and those of our agents and employees and to bring regulatory or other legal actions against us if, in their view, our practices, or those of our agents or employees, are improper. These actions can result in substantial fines, penalties or prohibitions or restrictions on our business activities and could adversely affect our business, reputation, results of operations, financial condition or liquidity. Further, the financial services industry in general has faced increased regulatory scrutiny from governmental and self-regulatory bodies conducting inquiries and investigations into various products and business practices. This regulatory scrutiny has in some cases led to proposed or final legislation and regulation that could significantly affect the financial services industry, and may ultimately result in an increased risk of regulatory penalties, settlements and litigation.

Legal liability or adverse publicity in respect of current or future legal or regulatory actions, whether or not involving us, could have an adverse effect on us or cause us reputational harm, which in turn could harm our business prospects. As a participant in the insurance and financial services industries, we may continue to experience a high level of legal and regulatory actions related to our businesses and operations.

~~Material pending~~ litigation ~~and regulatory~~ matters affecting us, and certain risks to our businesses presented by such matters, are discussed ~~under “Litigation and Regulatory Matters”~~ in Note 1215 to the Financial Statements. ~~Our litigation~~We may become subject to additional regulatory and ~~regulatory matters~~legal actions in the future.

Key Enterprise Operational Risks - Key enterprise operational risks include the following:

We are subject to ~~many uncertainties, and given their complexity and scope, their outcome cannot be predicted. Our reserves for litigation and regulatory matters may prove to be inadequate. It~~business continuation risk, which is ~~possible~~the risk that our ~~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~~systems and regulatory matters. In light of the unpredictability of the Company’s litigation and regulatory matters, it is also possible that in certain cases an ultimate unfavorable resolution of one or more pending litigation or regulatory matters could have a material adverse effect on the Company’s financial position.

~~We may not be able to protect our intellectual property and~~data may be ~~subject to infringement claims.~~

We rely on a combination of contractual rights with Prudential Insurance’s employees and third parties and on copyright, trademark, patent and trade secret laws to establish and protect our intellectual property. Although we endeavor to protect our rights, third parties may infringe or misappropriate our intellectual property. We may have to litigate to enforce and protect our copyrights, trademarks, patents, trade secrets and know-how or to determine their scope, validity or enforceability. This would represent a diversion of resources that may be significant and our efforts may not prove successful. The inability to secure or protect our intellectual property assets could have a material adverse effect on our business and our ability to compete.

We may be subject to claims by third parties for (i) patent, trademark or copyright infringement; (ii) breach of copyright, trademark or license usage rights; or (iii) misappropriation of trade secrets. Any such claims and any resulting litigation could result in significant expense and liability for damages. If we were found to have infringed or misappropriated a third-party patent or other intellectual property right, we could in some circumstances be enjoined from providing certain products or services to our customers or from utilizing and benefiting from certain methods, processes, copyrights, trademarks, trade secrets or licenses. Alternatively, we could be required to enter into costly licensing arrangements with third-parties or implement a costly work around. Any of these scenarios could have a material adverse effect on our business and results of operations.

~~Operational Risks~~

Interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or privacy of sensitive data residing on such systems, could harm our business.

disrupted.We depend heavily on our telecommunication, information technology and other operational systems and on the integrity and timeliness of data we use to run our businesses and service our customers. These systems may fail to operate properly or become disabled as a result of events or circumstances wholly or partly beyond our control. Further, we face the risk of operational and technology failures by others, including clearing agents, exchanges and other financial intermediaries and of vendors and parties

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to which we outsource the provision of services or business operations. ~~If these parties do not perform as anticipated, we~~We may experience ~~operational difficulties, increased costs~~a business continuation event as a result of:

Severe pandemic, either naturally occurring or intentionally manipulated pathogens.

Geo-political risks, including armed conflict and ~~other adverse effects on our business. These risks~~civil unrest.

Terrorist events.

A significant natural or accidental disaster.

We are heightened by our offering of increasingly complex products, such as those that feature an asset transfer feature or re-allocation strategies, and by our employment of complex investment, trading and hedging programs.

~~Despite our implementation of a variety of security measures, our information technology and other systems could be~~ subject to ~~physical or electronic break-ins, unauthorized tampering or other security breaches, resulting in a failure to maintain~~ the security, confidentiality or privacy of sensitive data, including personal information relating to customers or in the misappropriation of our intellectual property or proprietary information. Many financial services institutions and companies engaged in data processing have reported security breaches and service disruptions related to their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage, often through the introduction of computer viruses or malware, denial-of-service attacks and other means.

~~Despite our efforts to ensure the integrity of our systems, it is possible~~risk that we may not adequately maintain information security. There continues to be ~~able~~significant and organized cyber-attack activity against western organizations, including but not limited to ~~anticipate~~the financial services sector and no organization is fully immune to cyber-attacks. Risks related to cyber-attack arise in the following areas:

Protecting both “structured” and “unstructured” sensitive information is a constant need. However, some risks associated with trusted insiders (i.e., employees, consultants, or to implement effective preventive measures against all security breaches and disruptions of these types, especially because the techniques used change frequently or are not recognized until launched, and because cyber attacks can originate from a wide variety of sources, including third parties outside of Prudential Financial such as personsvendors who are ~~involved with organized crime~~authorized to access the Company’s systems) cannot be fully mitigated using technology or ~~who may be linked to terrorist organizations or hostile foreign governments, as well as~~otherwise.

Unsuspecting employees represent a primary avenue for external ~~service providers. Those~~ parties ~~may also attempt to fraudulently induce employees, customers or other users of Prudential Financial’s systems to disclose sensitive information in order~~ to gain access to our network and systems. Many attacks, even from sophisticated actors, include rudimentary techniques such as coaxing an internal user to click on a malicious attachment or link to introduce malware or steal their username and password.

In the past, hackers went after credit and debit card data, which is easy to monetize. As credit card security improves, the hackers will look to other sources of monetization, specifically personally identifiable information or ~~that~~using cyber-attacks or the threat of ~~our customers~~cyber-attacks to extort money from companies. Insurance and retirement services companies are increasingly being targeted by hackers.

Nation-state sponsored organizations are engaged in cyber-attacks but not necessarily for monetization purposes. Nation states appear to be motivated by the desire to gain information about foreign citizens and governments or ~~clients. In addition, while~~to influence or cause disruptions in commerce or political affairs.

We have also seen an increase in non-technical attempts to commit fraud or solicit information via call centers and interactive voice response systems, and we anticipate the ~~Company has~~attempts will become more common.

We rely on third parties to provide services as described further below. While we have certain standards for all vendors that provide us services, our vendors, and in turn, their own service providers, may become subject to a security breach, including as a result of their failure to perform in accordance with contractual arrangements.

~~Security breaches or other technological failures may also result in regulatory inquiries, regulatory proceedings, regulatory and litigation costs, and reputational damage.~~ We may ~~incur reimbursement and other expenses, including~~not adequately ensure the costs of litigation and litigation settlements and additional compliance costs. We may also incur considerable expenses in enhancing and upgrading computer systems and systems security following such a failure.

~~Interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or~~ privacy of sensitive ~~data residing~~data. In the course of our ordinary business we collect, store and share with various third-parties (e.g., service providers, reinsurers, etc.) substantial amounts of private and confidential policyholder information, including in some instances sensitive health-related information. We are subject to the risk that the privacy of this information may be compromised, including as a result of an information security breach described above.

Third parties (outsourcing providers, vendors and suppliers) present added operational risk to our enterprise. The Company's business model relies heavily on ~~such systems, whether due~~the use of third parties to ~~actions by us or others, could delay or disrupt our ability to do business and service our customers, harm our reputation, result~~deliver contracted services in a ~~violation~~broad range of ~~applicable privacy~~areas. This presents the risk that the Company is unable to meet legal, regulatory, financial or customer obligations because third parties fail to deliver contracted services, or that the Company is exposed to reputational damage because third parties operate in a poorly controlled manner. We use affiliates and third-party vendors located outside the U.S. to provide certain services and functions, which also exposes us to business disruptions and political risks as a result of risks inherent in conducting business outside of the U.S.

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Affiliate and third-party distributors of our products present added regulatory, competitive and other ~~laws, subject us to substantial regulatory sanctions and other claims, lead to a loss of customers and revenues or financial loss~~risks to our ~~customers~~enterprise. Our products are sold primarily through our captive/affiliated distribution system and ~~otherwise~~third-party distributing firms. Our captive/affiliated distribution system is made up of large numbers of decentralized sales personnel who are compensated based on commissions. The third-party distributing firms generally are not dedicated to us exclusively and may frequently recommend and/or market products of our competitors. Accordingly, we must compete intensely for their services. Our sales could be adversely ~~affect~~affected if we are unable to attract, retain or motivate third-party distributing firms or if we do not adequately provide support, training, compensation, and education to this sales network regarding our ~~business. See “Business-Regulation-Privacy Regulation~~products, or if our products are not competitive and ~~Cybersecurity” for a discussion of privacy and cybersecurity regulation and~~not appropriately aligned with consumer needs. While third-party distributing firms have an independent regulatory ~~proposals impacting our business.~~accountability, some regulators have been clear with expectations that product manufacturers retain significant sales risk accountability.

We face risks arising from acquisitions, divestitures and restructurings, including client losses, surrenders and withdrawals, difficulties in executing, integrating and realizing the projected results of acquisitions and contingent liabilities with respect to dispositions.

~~We face~~In addition, there have been a number of ~~risks arising from acquisition transactions, including~~investigations regarding the ~~risk that, following~~marketing practices of brokers and agents selling annuity and insurance products and the ~~acquisition~~ payments they receive. These investigations have resulted in enforcement actions against companies in our industry and brokers and agents marketing and selling those companies’ products. These investigations and enforcement actions could result in penalties and the imposition of corrective action plans and/or reorganization of a business, we could experience client losses, surrenders or withdrawals or other results materially different from those we anticipate. We may also experience difficulties in executing previously-announced transactions, and integrating and realizing the projected results of acquisitions and restructurings and managing the litigation and regulatory matterschanges to which acquired entities are party. We may retain insurance or reinsurance obligations and other contingent liabilities in connection with our divestiture or winding down of various businesses, and our reserves for these obligations and liabilities may prove to be inadequate. Furthermore, transactions we enter into may alter the risks of our business. These risks may adversely affect our results of operations or financial condition.

~~Other Risks~~

~~Our risk management policies and procedures may prove to be ineffective and leave us exposed to unidentified or unanticipated risk,~~industry practices, which could adversely affect our ~~businesses~~ability to market our products. Furthermore, if our products are distributed in an inappropriate manner, or ~~result~~to customers for whom they are unsuitable, or distributors of our products otherwise engage in ~~losses.~~

~~We have developed an enterprise-wide risk management framework to mitigate risk and loss to the Company, and~~misconduct, we ~~maintain policies, procedures and controls intended to identify, measure, monitor, report and analyze the risks to which the Company is exposed.~~

There are, however, inherent limitations to risk management strategies because there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, the Company may suffer ~~unexpected losses~~reputational and other harm to our business and be subject to regulatory action.

Although we distribute our products through a wide variety of distribution channels, we do maintain relationships with certain key distributors. We periodically negotiate the terms of these relationships, and there can be no assurance that such terms will remain acceptable to us or such third parties. An interruption in certain key relationships could materially affect our ability to market our products and could ~~be materially adversely affected. As~~have a material adverse effect on our ~~businesses change~~business, operating results and ~~the markets~~financial condition. Distributors may elect to reduce or terminate their distribution relationships with us, including for such reasons as adverse developments in ~~which we operate evolve,~~ our ~~risk management framework may not evolve~~business, adverse rating agency actions or concerns about market-related risks. We are also at ~~the same pace as those changes. As a result, there is a~~ risk that ~~new~~

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key distribution partners may merge, change their business models in ways that affect how our products are sold, or terminate their distribution contracts with us, or that new business strategies may present risks that are not appropriately identified, monitored or managed. In times of market stress, unanticipated market movements or unanticipated claims experience resulting from adverse mortality, morbidity or policyholder behaviordistribution channels could emerge and adversely impact the effectiveness of our ~~risk management strategies~~distribution efforts. An increase in bank and broker-dealer consolidation activity could increase competition for access to distributors, result in greater distribution expenses and impair our ability to market products through these channels. Consolidation of distributors and/or other industry changes may also increase the likelihood that distributors will try to renegotiate the terms of any existing selling agreements to terms less favorable to us. Finally, we also may be ~~limited, resulting in losses~~challenged by new technologies and marketplace entrants that could interfere with our existing relationships.

As a financial services company, we are exposed to model risk, which is the ~~Company. In addition, under difficult~~risk of financial loss or ~~less liquid market conditions, our risk management strategies may not be effective because other market participants may be using the same~~reputational damage or ~~similar strategies to manage risk under the same challenging market conditions. In such circumstances, it may be difficult~~adverse regulatory impacts caused by model errors or ~~more expensive for the Company to mitigate risk due to the activity~~limitations, incorrect implementation of ~~such other market participants.~~

~~Many~~models, or misuse of ~~our risk management strategies~~ or ~~techniques are based~~overreliance upon historical customer and market behavior and all such strategies and techniques are based to some degree on management’s subjective judgment. We cannot provide assurance that our risk management framework, including the underlying assumptions or strategies, will be accurate and effective.

Management of operational, legal and regulatory risks requires, among other things, policies, procedures and controls to record properly and verify a large number of transactions and events, and these policies, procedures and controls may not be fully effective.

models.Models are utilized by our businesses and corporate areas primarily to project future cash flows associated with pricing products, calculating reserves and valuing assets, as well as in evaluating risk and determining capital requirements, among other uses. These models may not operate properly and may rely on assumptions and projections that are inherently uncertain. As our businesses continue to grow and evolve, the number and complexity of models we utilize expands, increasing our exposure to error in the design, implementation or use of models, including the associated input data and assumptions.

~~Past~~Strategic Risk

We are subject to the risk of events that can cause our fundamental business model to change, either through a shift in the businesses in which we are engaged or ~~future misconduct by Prudential Insurance’s employees or employees of~~a change in our ~~vendors could result in violations of law by~~execution. In addition, tactical risks may become strategic risks. For example, interest rates remaining low for a long time may, at some point, cause us ~~regulatory sanctions~~to change our sales goals, exit a certain business, and/or ~~serious reputational~~change our business model.

Changes in the regulatory landscapemay be unsettling to our business model. New laws and regulations are being considered in the U.S. and our other countries of operation at an increasing pace, as there has been greater scrutiny on financial regulation over the past several years. Proposed or ~~financial harm~~unforeseen changes in law or regulation may adversely impact our business. See “Business-Regulation” for a discussion of certain recently enacted and pending proposals by international, federal and state regulatory authorities and their potential impact on our business, including in the ~~precautions we take~~following areas:

Financial sector regulatory reform.

Tax laws (including U.S. federal, state, and non-U.S.).

Fiduciary rules and other standards of care.

Our regulation under U.S. state insurance laws and developments regarding group-wide supervision and capital standards, RBC factors for invested assets and reserves for variable annuities and other products.

Privacy and cybersecurity regulation.

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Changes in accounting rules applicable to ~~prevent and detect this activity~~our business may not be effective in all cases. There can be no assurance that controls and procedures that we employ, which are designed to monitor associates’ business decisions and prevent us from taking excessive or inappropriate risks, will be effective. We review our compensation policies and practices as part of our overall risk management program, but it is possible that our compensation policies and practices could inadvertently incentivize excessive or inappropriate risk taking. If our associates take excessive or inappropriate risks, those risks could harm our reputation andalso have ~~a material~~an adverse ~~effect~~impact on our results of operations or financial condition. For a discussion of accounting pronouncements and their potential impact on our business, including Accounting Standards Update (“ASU”) 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, see Note 2 to the Financial Statements.

InTechnological changes may be unsettling to our ~~investments~~business model. We believe the following aspects of technological change would significantly impact our business model. There may be other unforeseen changes in technology which may have a significant impact on our business model.

Interaction with customers. Technology is moving rapidly and as it does, it puts pressure on existing business models. Some of the changes we can anticipate are increased choices about how customers want to interact with the Company or how they want the Company to interact with them. Evolving customer preferences may drive a need to redesign products. Our distribution channels may change to become more automated, at the place and time of the customer’s choosing. Such changes clearly have the potential to disrupt our business model over the next 10 years.

Investment Portfolio. Technology may have a significant impact on the companies in which ~~we hold a minority interest, or that are managed by third parties, we lack management and operational control over operations,~~the Company invests. For example, environmental concerns spur scientific inquiry which may ~~subject us~~re-position the relative attractiveness of wind or sun power over oil and gas. The transportation industry may favor alternative modes of conveyance of goods which may shift trucking or air transport out of favor. Consumers may change their purchasing behavior to ~~additional operational, compliance~~favor online activity which would change the role of malls and ~~legal risks~~retail properties.

Medical Advances. The Company is exposed to the impact of medical advances in two major ways. Genetic testing and ~~prevent us~~the availability of that information unequally to consumers and insurers can bring anti-selection risks. Specifically, data from ~~taking~~genetic testing can give our prospective customers a clearer view into their future, allowing them to select products protecting them against likelihoods of mortality or ~~causing~~longevity with more precision. Also, technologies that extend lives will challenge our actuarial assumptions especially in the annuity-based businesses.

Other factors may be unsettling to ~~be taken actions to protect or increase the value~~our business model. The following items are examples of those ~~investments. In those jurisdictions where we are constrained by law from owning~~which, among others, could have a ~~majority interest~~meaningful impact on our business.

A downgrade in ~~jointly owned~~our financial strength or credit ratings could potentially, among other things, adversely impact our business prospects, results of operations, financial condition and liquidity. For a discussion of our ~~remedies in~~ratings and the ~~event~~potential impact of a ~~breach by a joint venture partner~~ratings downgrade on our business, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Capital.” We cannot predict what additional actions rating agencies may ~~be limited (e.g.,~~take, or what actions we may ~~have no ability~~take in response to ~~exercise a “call” option).~~

~~The occurrence~~the actions of ~~natural or man-made disasters~~rating agencies, which could adversely affect our business. Our ratings could be downgraded at any time and without notice by any rating agency. In addition, a sovereign downgrade could result in a downgrade of our subsidiaries operating in that jurisdiction, and ultimately of Prudential Financial and its other subsidiaries. For example, in September 2015, S&P downgraded Japan's sovereign rating to A+ with a 'Stable' outlook citing uncertainties around the strength of economic growth and weak fiscal positions. As a result, S&P subsequently lowered the ratings of a number of institutions in Japan, including Prudential Financial's Japanese insurance subsidiaries. It is possible that Japan’s sovereign rating could be subject to further downgrades, which would result in further downgrades of Prudential Financial’s insurance subsidiaries in Japan. Given the importance of Prudential Financial’s operations in Japan to its overall results, ~~of operations and financial condition.~~

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

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

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

~~A terrorist attack affecting financial institutions in the U.S. or elsewhere could negatively impact the financial services industry in general~~Prudential Financial and ~~our business operations, investment portfolio and profitability in particular.~~

Pandemic disease could have a severe adverse effect on our business. The potential impact of such a pandemic on our results of operations and financial position is variable, and would depend on numerous factors, including: the effectiveness of vaccines and the rate of contagion; the regions of the world most affected and the effectiveness of treatment for the infected population.

The above risks are more pronounced in respect of geographic areas, including major metropolitan centers, where we have concentrations of customers, concentrations of employees or significant operations, and in respect of countries and regions in which we operate subject to a greater potential threat of military action or conflict. Ultimate losses would depend on the rates of mortality and morbidity among various segments of the insured population, the collectability of reinsurance, the possible macroeconomic effects on our asset portfolio, the effect on lapses and surrenders of existing policies, as well as sales of new policies and other variables.

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

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~~Finally, climate~~

The elimination of London Inter-Bank Offered Rate ("LIBOR") may adversely affect the interest rates on and value of certain derivatives and floating rate securities we hold, and any other assets or liabilities whose value is tied to LIBOR. Actions by regulators have resulted in the establishment of alternative reference rates to LIBOR in most major currencies. On July 27, 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. However, it remains unclear if, how and in what form, LIBOR will continue to exist. The U.S. Federal Reserve, based on the recommendations of the New York Federal Reserve’s Alternative Reference Rate Committee (constituted of major derivative market participants and their regulators), has begun publishing a Secured Overnight Funding Rate ("SOFR") which is intended to replace U.S. dollar LIBOR, and SOFR-based investment products have been issued in the U.S. Proposals for alternative reference rates for other currencies have also been announced or have already begun publication. Markets are slowly developing in response to these new rates and questions around liquidity in these rates and how to appropriately adjust these rates to eliminate any economic value transfer at the time of transition remain a significant concern for us and others in the marketplace. The effect of any changes or reforms to LIBOR or discontinuation of LIBOR on new or existing financial instruments to which we have exposure or the activities in our businesses will vary depending on (1) existing fallback provisions in individual contracts and (2) whether, how, and when industry participants develop and widely adopt new reference rates and fallbacks for both legacy and new products or instruments. Accordingly, it is difficult to predict the full impact of the transition away from LIBOR on certain derivatives and floating rate securities we hold, and any other assets or liabilities, as well as contractual rights and obligations, whose value is tied to LIBOR. The value or profitability of these products and instruments may be adversely affected.

The changing competitive landscape may adversely affect the Company. In our business we face intense competition from insurance companies and diversified financial institutions, both for the ultimate customers for our products and, in many businesses, for distribution through non-affiliated distribution channels. Technological advances, changing customer expectations, including related to digital offerings, or other changes in the marketplace may present opportunities for new or smaller competitors without established products or distribution channels to meet consumers’ increased expectations more efficiently than us. Fintech and insurtech companies have the potential to disrupt industries globally, and many participants have been partially funded by industry players.

Climate change may increase the severity and frequency of calamities, or adversely affect our investment portfolio. Climate change may increase the frequency and severity of ~~weather related~~weather-related disasters and pandemics. In addition, climate change regulation may affect the prospects of companies and other entities whose securities we hold, or our willingness to continue to hold their securities. It may also impact other counterparties, including reinsurers, and affect the value of ~~investments, including real estate investments we hold or manage for others.~~investments. We cannot predict the ~~long term~~long-term impacts on us from climate change or related regulation.

Market conditions and other factors may adversely impact product sales or increase expenses. Examples include:

◦

A change in market conditions, such as high inflation and high interest rates, could cause a change in consumer sentiment and behavior adversely affecting sales and persistency of our savings and protection products. Conversely, low inflation and low interest rates could cause persistency of these products to vary from that anticipated and adversely affect profitability. Similarly, changing economic conditions and unfavorable public perception of financial institutions can influence customer behavior, including increasing claims or surrenders in certain products.


◦	Lapses and surrenders of certain insurance products may increase if a market downturn, increased market volatility or other market conditions result in customers becoming dissatisfied with their investments or products.

Our reputation may be adversely impacted if any of the risks described in this section are realized. Reputational riskcould manifest from any of the risks as identified in the Company’s risk identification process. Failure to effectively manage risks across a broad range of risk issues exposes the Company to reputational harm. If the Company were to suffer a significant loss in reputation, both policyholders and counterparties could seek to exit existing relationships. Additionally, large changes in credit worthiness, especially credit ratings, could impact access to funding markets while creating additional collateral requirements for existing relationships. The mismanagement of any such risks may potentially damage our reputational asset. Our business is anchored in the strength of our brand, our alignment to our values, and our proven commitment to keep our promises to our customers. Any negative public perception, founded or otherwise, can be widely and rapidly shared over social media or other means, and could cause damage to our reputation.

Item 1B. Unresolved Staff Comments

~~None~~None.

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Item 2. Properties

The Company occupies office space in Shelton, Connecticut, which is leased from an affiliate, Prudential Annuities Information Services and Technology Corporation, as described under “Expense Charges and Allocations” in Note 1514 to the Financial Statements.

Item 3. Legal Proceedings

See Note 1215 to the Financial Statements under ~~“—Litigation~~“Litigation and Regulatory Matters” for a description of ~~material~~certain pending litigation and regulatory matters affecting us, and certain risks to our businesses presented by such matters.

Item 4. Mine Safety Disclosures

Not ~~Applicable~~Applicable.

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PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company is a ~~wholly owned~~wholly-owned subsidiary of Prudential Annuities, Inc. (“PAI”). There is no public market for the Company’s common stock.

Item 6. Selected Financial Data

Omitted pursuant to General Instruction I(2)(a) of Form 10-K.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following analysis of our financial condition and results of operations in conjunction with the Forward-Looking Statements included below the Table of Contents, “Risk Factors,” and the Financial Statements included in this Annual Report on Form 10-K.

Overview

The Company has sold a wide array of annuities, including deferred and immediate variable annuities with (1) fixed interest rate allocation options, subject to a market value adjustment, that are registered with the United States Securities and Exchange Commission (the “SEC”), and (2) fixed-rate allocation options not subject to a market value adjustment and not registered with the SEC. In addition, the Company has a relatively small in force block of variable life insurance policies. The Company ~~no longer~~stopped actively ~~sells such products.~~selling annuity products between March 2010 and December 2017.

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

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

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

Services.

Variable Annuities Recapture

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

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

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~~Regulatory Developments~~

~~For additional information on the potential impacts of regulation on the Company, see “Business—Regulation” and “Risk Factors”.~~

Revenues and Expenses

The Company earns revenues principally from ~~policy~~contract charges, ~~fee income,~~mortality and expense fees, asset administration fees from ~~insurance~~annuity and investment products and from net investment income on the investment of general account and other funds. The Company earns contract fees, mortality and expense fees and asset administration fees primarily from the sale and servicing of annuity products. The Company’s operating expenses principally consist of ~~insurance benefits~~annuity benefit guarantees provided and reserves established for anticipated future ~~insurance benefits,~~annuity benefit guarantees and costs of managing risk related to these products, interest credited to ~~policyholders'~~contractholders' account balances, general business expenses, reinsurance premiums, commissions and other costs of selling and servicing the various products it sold.

Effective February 25, 2013, the Advanced Series Trust (“AST”) adopted a Rule 12b-1 Plan under the Investment Company Act of 1940 with respect to most of the AST portfolios that are offered through the Company’s variable annuity and variable life insurance products. Under the Rule 12b-1 Plan, AST pays an affiliate of the Company for distribution and administrative services. In June 2015, AST received shareholder approval to amend the Rule 12b-1 Plan. Effective July 1, 2015, there was an increase in the amount AST pays the Company's affiliate for distribution and administrative services. However, there was also a reduction in management fees. In addition, due to the revised Rule 12b-1 Plan, the asset administration fees received by the Company from AST Investment Services, Inc., and related distribution expenses of the Company, have decreased.

Profitability

The Company’s profitability depends principally on its ability to ~~manage risk on insurance~~price our annuity products at a level that enables us to earn a margin over the costs associated with providing benefits and ~~annuity~~administering those products. Profitability also depends on, among other items, our actuarial and ~~policyholder~~contractholder behavior experience on ~~insurance and~~ annuity products, our ability to attract and retain customer assets, generate and maintain favorable investment results, effectively deploy capital and toutilize our tax capacity, and manage expenses.

See “Risk Factors” 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~~forward-looking statements made by or on behalf of the Company.

Industry Trends

Our business is impacted by financial markets, economic conditions, regulatory oversight, and a variety of trends that affect the industries where we compete.

Financial and Economic Environment. Interest rates in the U.S. remain lower than historical levels, which may continue to negatively impact our portfolio income yields and our net investment spread results. See “Impact of a Low Interest Rate Environment” below. In addition, we are subject to financial impacts associated with movements in equity markets and the evolution of the credit cycle as discussed in “Risk Factors”.

Demographics. Customer demographics continue to evolve and new opportunities present themselves in different consumer segments such as the millennial and multicultural markets. Consumer expectations and preferences are changing. We believe existing customers and potential customers are increasingly looking for cost-effective solutions that they can easily understand and access through technology-enabled devices. At the same time, income protection, wealth accumulation and the needs of retiring baby boomers are continuing to shape the insurance industry. A persistent retirement security gap exists in terms of both savings and protection. Despite the ongoing phenomenon of the risk and responsibility of retirement savings shifting from employers to employees, employers are becoming increasingly focused on the financial wellness of the individuals they employ.

Regulatory Environment. See “Business—Regulation” for a discussion of regulatory developments that may impact the Company and the associated risks.

Competitive Environment. See “Business” for a discussion of the competitive environment and the basis on which we compete.

Impact of a Low Interest Rate Environment

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

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

new money rates, mortgage loan prepayments and bond redemptions;

insurance reserve levels, amortization of deferred policy acquisition costs ("DAC")/value of business acquired (“VOBA”)

and market experience true-ups/deferred sales inducements ("DSI");

customer account values, including their impact on fee income;

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

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

policyholder behavior, including surrender or withdrawal activity.

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Accounting Policies ~~and~~& Pronouncements

Application of Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("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 Financial Statements could change significantly.

The following sections discuss the accounting policies applied in preparing our financial statements that management believes are most dependent on the application of estimates and assumptions and require management’s most difficult, subjective or complex judgments.

Insurance Assets

Deferred Policy Acquisition Costs and ~~Other Costs~~Deferred Sales Inducements

We capitalize costs that are directly related to the acquisition of annuity contracts. These costs primarily include commissions, as well as costs of policy issuance and underwriting and certain other expenses that are directly related to successfully negotiated contracts. We have also deferred costs associated with sales inducements offered in the past related to our variable and fixed annuity contracts. Sales inducements are amounts that are credited to the ~~policyholder’s~~policyholders' account ~~balance~~balances mainly as an inducement to purchase the contract. For additional information about sales inducements, see Note 79 to the Financial Statements. We generally amortize ~~these deferred policy acquisition costs (“DAC”)~~DAC and ~~deferred sales inducements (“DSI”)~~DSI over the expected lives of the contracts, based on our estimates of the level and timing of gross profits. As described in more detail below, in calculating DAC and DSI amortization we are required to make assumptions about investment returns, mortality, persistency, and other items that impact our estimates of the level and timing of gross profits. We also periodically evaluate the recoverability of our DAC and DSI. For certain contracts, this evaluation is performed as part of our premium deficiency testing, as discussed further below in ~~“—Policyholder Liabilities"~~“Insurance Liabilities—Future Policy Benefits". As of December 31, ~~2016,~~2018, DAC and DSI were ~~$4,344~~$4,448 million and ~~$979~~$890 million, respectively.

Amortization methodologies

We generally amortize DAC and other costs over the expected life of the contracts in proportion to total gross profits. Total gross profits include both actual gross profits and estimates of gross profits for future periods. ~~In calculating~~Gross profits are defined as i) amounts assessed for mortality, contract administration, surrender charges, and other assessments plus amounts earned from investment of policyholder balances less ii) benefit claims in excess of policyholder balances, costs incurred for contract administration, the net cost of reinsurance for certain businesses, interest credited to policyholder balances and other credits. If significant negative gross profits ~~we consider mortality, persistency, and other elements~~are expected in any periods, the amount of insurance in force is generally substituted as ~~well as rates of return on investments associated with these contracts, and~~ the ~~cost related to our guaranteed minimum death and guaranteed minimum income benefits. Gross~~base for computing amortization. For variable annuities, U.S. GAAP, gross profits and amortization rates also include the impacts of the embedded derivatives associated with certain of the optional living benefit features of our variable annuity contracts and

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related hedging activities. In calculating amortization expense, we estimate the amounts of gross profits that will be included in our U.S. GAAP results, and utilize these estimates to calculate distinct amortization rates and expense amounts. In addition, in calculating gross profits, we include the profits and losses related to contracts previously issued by the Company that are reported in affiliated legal entities other than the Company as a result of, for example, reinsurance agreements with those affiliated ~~entities, as discussed below.~~entities. The Company is an indirect subsidiary of Prudential Financial (an SEC registrant) and has extensive transactions and relationships with other subsidiaries of Prudential Financial, including reinsurance agreements, as discussed in Note 1310 to the Financial Statements. Incorporating all product-related profits and losses in gross profits, including those that are reported in affiliated legal entities, produces a DAC amortization pattern representative of the total economics of the products. For a further discussion of the amortization of DAC and other costs, see “—Results of Operations”.

We also regularly evaluate and adjust the related DAC and DSI balances with a corresponding charge or credit to current period earnings for the impact of actual gross profits and changes in our projections of estimated future gross profits on our DAC and DSI amortization rates. Adjustments to the DAC and DSI balances include the impact to our estimate of total gross profits of the annual review of assumptions, our quarterly adjustments for current period experience, and our quarterly adjustments for market performance. Each of these adjustments is further discussed below in ~~“Annual~~“—Annual assumptions review and quarterly adjustments”.

Annual assumptions review and quarterly adjustments

Annually, we perform a comprehensive review of the assumptions used in estimating gross profits for future periods. Over the last several years, the Company’s most significant assumption updates resulting in a change to expected future gross profits and the amortization of DAC and DSI have been related to lapse ~~experience~~ and other contractholder behavior assumptions, mortality, and revisions to expected future rates of returns on investments. These assumptions may also cause potential significant variability in amortization expense in the future. The impact on our results of operations of changes in these assumptions can be offsetting and we are unable to predict their movement or offsetting impact over time.

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The quarterly adjustments for current period experience referred to above reflect the impact of differences between actual gross profits for a given period and the previously estimated expected gross profits for that period. To the extent each period’s actual experience differs from the previous estimate for that period, the assumed level of total gross profits may change. In these cases, we recognize a cumulative adjustment to all previous periods’ amortization, also referred to as an experience true-up adjustment.

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

The near-term future equity rate of return assumption used in evaluating DAC and other costs is derived using a reversion to the mean approach, a common industry practice. Under this approach, we consider historical equity returns and adjust projected equity returns over an initial future period of five years (the “near-term”) so that equity returns converge to the long-term expected rate of return. If the near-term projected future rate of return is greater than our near-term maximum future rate of return of ~~15%~~15.0%, we use our maximum future rate of return. As of December 31, ~~2016,~~2018, we assume an 8.0% long-term equity expected rate of return and a ~~5.6%~~7.6% near-term mean reversion equity expected 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 ~~rates~~rate of return and our estimate of total gross profits each quarter to reflect the result of the reversion to the mean approach. We generally update the future interest rates used to project fixed income returns annually and in any quarter when interest rates vary significantly from these assumptions. As a result of our 2018 annual reviews and update of assumptions and other refinements, we kept our long-term expectation of the 10-year U.S. Treasury rate unchanged from last year and continue to grade to 3.75% over ten years.

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.

~~DAC and DSI Sensitivities~~

For variable annuity contracts, DAC and DSI are sensitive to changes in our future rate of return assumptions due primarily to the significant portion of gross profits that is dependent upon the total rate of return on assets held in separate account investment options.

The following table provides a demonstration of the sensitivity of each of these balances relative to our future rate of return assumptions by quantifying the adjustments to each balance that would be required assuming both an increase and decrease in our future rate of return by 100 basis points. The sensitivity includes both an increase and decrease of 100 basis points to the future rate of return assumptions in all years. The information below is for illustrative purposes only and considers only the direct effect

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of changes in our future rate of return on the DAC and DSI balances and not changes in any other assumptions such as persistency, mortality or expenses included in our evaluation of DAC and DSI. Further, this information does not reflect changes in reserves, such as the reserves for the guaranteed minimum death and optional living benefit features of our variable annuity products, or the impact that changes in such reserves may have on the DAC and DSI balances.

December 31, 2016

Increase/(Decrease) in
DAC

Increase/(Decrease) in
DSI
(in millions)
Increase in future rate of return by 100 basis points $ 319
$ 116
Decrease in future rate of return by 100 basis points $ (344 ) $ (116 )

In addition to the impact of market performance relative to our future rate of return assumptions, other factors may also drive variability in amortization expense, particularly when our annual assumption updates are performed. As noted above, however, the impact on our results of operations of changes in these assumptions can be offsetting and we are unable to predict their movement or offsetting impact over time. In 2016, updates to fund mapping and mortality drove the most significant changes to amortization expense. For a discussion of DAC and DSI adjustments for the years ended December 31, 2016 and 2015, see “Results of Operations”.

Value of Business Acquired

In addition to DAC and DSI, we also recognize an asset for value of business acquired, or VOBA. VOBA is an intangible asset which represents an adjustment to the stated value of acquired in force insurance contract liabilities to present them at fair value, determined as of the acquisition date. VOBA is amortized over the expected life of the acquired contracts ~~in proportion~~using the same methodology and assumptions used to ~~estimated gross profits, depending on the type of contract.~~amortize DAC and DSI (see “—Deferred Policy Acquisition Costs and Deferred Sales Inducements” above for additional information). VOBA is also subject to recoverability testing. As of December 31, ~~2016,~~2018, VOBA was ~~$30~~$33 million. ~~For additional information about VOBA including its basis for amortization, see Note 5 of the Financial Statements.~~

~~Valuation of Investments, Including Derivatives, and the Recognition of Other-than-Temporary Impairments~~

Our investment portfolio consists of public and private fixed maturity securities, commercial mortgage and other loans, equity securities, other invested assets and derivative financial instruments. Derivatives are financial instruments whose values are derived from interest rates, foreign currency exchange rates, financial indices or the values of securities. Derivative financial instruments we generally use include swaps and options and may be exchange-traded or contracted in the OTC market. We are also party to financial instruments that contain derivative instruments that are “embedded” in the financial instruments. Management believes the following accounting policies related to investments, including derivatives, are most dependent on the application of estimates and assumptions. Each of these policies is discussed further within other relevant disclosures related to the investments and derivatives, as referenced below:

~~Valuation of investments, including derivatives;~~

~~Recognition of other-than-temporary impairments; and~~

~~Determination of the valuation allowance for losses on commercial mortgage and other loans.~~

We present at fair value in the statements of financial position our investments classified as available-for-sale (including fixed maturity and equity securities), investments classified as trading, derivatives, and embedded derivatives. For additional information regarding the key estimates and assumptions surrounding the determination of fair value of fixed maturity and equity securities, as well as derivative instruments, embedded derivatives and other investments, see Note 10 to the Financial Statements.

For our investments classified as available-for-sale, the impact of changes in fair value is recorded as an unrealized gain or loss in “Accumulated other comprehensive income” (“AOCI”), a separate component of equity. For our investments classified as trading, the impact of changes in fair value is recorded within “Asset administration fees and other income”. In addition, investments classified as available-for-sale are subject to impairment reviews to identify when a decline in value is other-than-temporary. For a discussion of our policies regarding other-than-temporary declines in investment value and the related methodology for recording other-than-temporary impairments of fixed maturity and equity securities, see Note 2 to the Financial Statements.

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~~Policyholder~~Insurance Liabilities

Future Policy Benefits

Future Policy Benefit Reserves

We establish reserves for future policy benefits to, or on behalf of, policyholders, ~~in the same period in which the policy is issued or acquired,~~ using methodologies prescribed by U.S. GAAP. The reserving methodologies used ~~for our business~~ include the following:

For ~~most long-duration contracts,~~life contingent payout annuities, we utilize ~~best estimate assumptions as~~a net premium valuation methodology in measuring the liability for future policy benefits. Under this methodology, a liability for future policy benefits is accrued when premium revenue is recognized. The liability, which represents the present value of future benefits to be paid to or on behalf of policyholders and related expenses less the present value of future net premiums (portion of the ~~date~~gross premium required to provide for all benefits and expenses), is estimated using methods that include assumptions applicable at the ~~policy is issued or acquired~~time the insurance contracts are made with provisions for the risk of adverse deviation, as appropriate. ~~After~~Original assumptions continue to be used in subsequent accounting periods to determine changes in the ~~liabilities are initially established, we~~liability for future policy benefits (often referred to as the “lock-in concept”) unless a premium deficiency exists. The result of the net premium valuation methodology is that the liability at any point in time represents an accumulation of the portion of premiums received to date expected to be needed to fund future benefits (i.e., net premiums received to date), less any benefits and expenses already paid. The liability does not necessarily reflect the full policyholder obligation the Company expects to pay at the conclusion of the contract since a portion of that obligation would be funded by net premiums received in the future and would be recognized in the liability at that time. We perform premium deficiency tests using best estimate assumptions as of the testing date without provisions for adverse deviation. If the liabilities determined based on these best estimate assumptions are greater than the net reserves (i.e., GAAP reserves net of any DAC, DSI or VOBA asset), the existing net reserves are adjusted by first reducing these assets by the amount of the deficiency or to zero through a charge to current period earnings. If the deficiency is more than these asset balances for insurance contracts, we then increase the net reserves by the excess, again through a charge to current period earnings. If a premium deficiency is recognized, the assumptions as of the premium deficiency test date are locked in and used in subsequent valuations and the net reserves continue to be subject to premium deficiency testing. In addition, for limited-payment contracts, future policy benefit reserves also include a deferred profit liability representing gross premiums received in excess of net premiums. The deferred profits are generally recognized in revenue in a constant relationship with insurance in force or with the amount of expected future benefit payments.

For certain ~~reserves,~~contract features, such as those related to guaranteed minimum death benefits (“GMDB”) ~~and~~, guaranteed minimum income benefits (“GMIB”), ~~we utilize~~a liability is established when associated assessments (which include all policy charges including charges for administration, mortality, expense, surrender, and other, regardless of how characterized) are recognized. This liability is established using current best estimate assumptions and is based on the ratio of the present value of total expected excess payments (i.e., payments in ~~establishing reserves.~~excess of account value) over the life of the contract divided by the present value of total expected assessments (i.e., benefit ratio). The liability equals the current benefit ratio multiplied by cumulative assessments recognized to date, plus interest, less cumulative excess payments to date. Similar to as described above for DAC, the reserves are subject to adjustments based on annual reviews of assumptions and quarterly adjustments for experience, including market ~~performance, and~~performance. These adjustments reflect the ~~reserves may be adjusted~~impact on the benefit ratio of using actual historical experience from the issuance date to the balance sheet date plus updated estimates of future experience. The updated benefit ratio is then applied to all prior periods’ assessments to derive an adjustment to the reserve recognized through a benefit or charge to current period earnings.

For certain product guarantees, primarily certain optional living benefit features of the variable annuity products including guaranteed minimum accumulation benefits (“GMAB”), guaranteed minimum withdrawal benefits (“GMWB”) and guaranteed minimum income and withdrawal benefits (“GMIWB”), the benefits are accounted for as embedded derivatives ~~with~~using a fair ~~values~~value accounting framework. The fair value of these contracts is calculated as the present value of expected future benefit payments to contractholders less the present value of assessed rider fees attributable to the embedded derivative feature. Under U.S. GAAP, the fair values of these benefit features are based on assumptions a market participant would use in valuing these embedded derivatives. Changes in the fair value of the embedded derivatives are recorded quarterly through a benefit or charge to current period earnings.

The assumptions used in establishing reserves are generally based on the Company’s experience, industry experience and/or other factors, as applicable. We typically update our actuarial assumptions, such as mortality, morbidity and policyholder behavior assumptions annually, unless a material change is observed in an interim period that we feel is indicative of a long-term trend. Generally, we do not expect trends to change significantly in the short-term and, to the extent these trends may change, we expect such changes to be gradual over the long-term. In a sustained low interest rate environment, there is an increased likelihood that the reserves determined based on best estimate assumptions may be greater than the net liabilities.

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The following paragraphs provide additional details about our ~~reserves.~~reserves:

~~Future~~The reserves for future policy benefits ~~also include~~of our business relate to reserves for the GMDB and GMIB features of our variable annuities, and for the optional living benefit features that are accounted for as embedded derivatives. As discussed above, in establishing reserves for GMDBs and GMIBs, we utilize current best estimate assumptions. The primary assumptions used in establishing these reserves generally include annuitization, lapse, withdrawal and mortality assumptions, as well as interest rate and equity market return assumptions. Lapse rates are adjusted at the contract level based on the in-the-moneyness of the living benefit and reflect other factors, such as the applicability of any surrender charges. Lapse rates are reduced when contracts are more in-the-money. Lapse rates are also generally assumed to be lower for the period where surrender charges apply. For life contingent payout annuity contracts, we establish reserves using best estimate assumptions with provisions for adverse deviations as of inception or best estimate assumptions as of the most recent loss recognition event.

The reserves for certain optional living benefit features, including ~~guaranteed minimum accumulation benefits (“GMAB”), guaranteed minimum withdrawal benefits (“GMWB”)~~GMAB, GMWB and ~~guaranteed minimum income and withdrawal benefits (“GMIWB”),~~GMIWB are accounted for as embedded derivatives ~~with~~at fair ~~values calculated~~value, as ~~the present value of expected future benefit payments to contractholders less the present value of assessed rider fees attributable to the embedded derivative feature.~~described above. 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 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 (“NPR”), as well as actuarially determined assumptions, including mortality rates and contractholder behavior, such as lapse rates, benefit utilization rates ~~withdrawal rates~~ and ~~mortality~~withdrawal rates. Capital market inputs and actual contractholders’ account values are updated each quarter based on capital market conditions as of the end of the quarter, including interest rates, equity markets and volatility. In the risk neutral valuation, the initial swap curve drives the total returns used to grow the contractholders’ account values. The Company’s discount rate assumption is based on the London Inter-Bank Offered Rate (“LIBOR”) swap curve adjusted for an additional spread, ~~relative to LIBOR to reflect~~which includes an estimate of NPR. Actuarial assumptions, including contractholder behavior and mortality, are

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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 or market transactions such as acquisitions and reinsurance transactions. For additional information regarding the valuation of these optional living benefit features, see Note 105 to the Financial Statements.

~~Sensitivity~~

Sensitivities for ~~Future Policy Benefit Reserves~~Insurance Assets and Liabilities

We expect the future benefit reserves that are based on current best estimate assumptions, and those that represent embedded derivatives recorded at fair value, to be the ones most likely to drive variability in earnings from period to period.

~~For the GMDB and GMIB features of our variable annuities, the reserves for these contracts are significantly influenced by the future rate of return assumptions.~~ The following table ~~provides a demonstration~~summarizes the impact that could result on each of the ~~sensitivity of the reserves for GMDBs and GMIBs related~~listed financial statement balances from changes in certain assumptions that may be considered reasonably likely to variable annuity contracts relative to our future rate of return assumptions by quantifying the adjustments to these reserves that would be required assuming both a 100 basis point increase and decrease in our future rate of return.occur. The information below is for illustrative purposes ~~only~~ and ~~considers~~includes only the hypothetical direct ~~effect~~impact on December 31, 2018 balances of changes in ~~our future rate of return on operating results due to the change in the reserve balance~~a single assumption and not changes in any ~~other assumptions such as persistency or mortality included~~combination of assumptions. Changes in ~~our evaluation~~excess of the ~~reserves, or~~amounts illustrated may occur in future periods. A description of the estimates and assumptions used in the preparation of each of these financial statement balances is provided further above. For traditional long-duration and limited payment contracts, U.S. GAAP requires the original assumptions used when the contracts are issued to be locked-in and that those assumptions be used in all future liability calculations as long as the resulting liabilities are adequate to provide for the future benefits and expenses (i.e., there is no premium deficiency). Therefore, these products are not reflected in the sensitivity table below unless the hypothetical change in assumption would result in an adverse impact that would cause a premium deficiency. Similarly, the impact of any favorable change in assumptions for traditional long duration and limited payment contracts is not reflected in the table below given that the current assumption is required to remain locked-in and instead the positive impacts would be recognized into net income over the life of the policies in force.

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The impacts presented within this table do not reflect the related impacts of our asset liability management strategy which seeks to offset the changes in the balances presented within this table and is primarily comprised of investments and derivatives. See further below for a discussion of the estimates and assumptions involved with the application of U.S. GAAP accounting policies for these instruments and “Quantitative and Qualitative Disclosures about Market Risk” for hypothetical impacts on ~~DAC or other~~related balances ~~discussed above~~as a result of changes in ~~“—Deferred Policy Acquisition and Other Costs”.~~certain significant assumptions.

December 31, 2016
Increase/(Decrease) in GMDB/GMIB Reserves
(in millions)
Increase in future rate of return by 100 basis points $ (127 )
Decrease in future rate of return by 100 basis points $ 163



	December 31, 2018
	Increase (Decrease) in
	Deferred Policy Acquisition Costs, Deferred Sales Inducements and Value of Business Acquired			Reinsurance Recoverables			Future Policy Benefits and Policyholders’ Account Balances(1)(6)			Net Impact
							(in millions)
Hypothetical change in current
Long-Term Equity Expected Rate of Return(2)
Increase by 50 basis points	$	165		$	0		$	(50	)	$	215
Decrease by 50 basis points	$	(170	)	$	0		$	50		$	(220	)
NPR Credit Spread(3)
Increase by 50 basis points	$	(285	)	$	(30	)	$	(1,405	)	$	1,090
Decrease by 50 basis points	$	315		$	30		$	1,530		$	(1,185	)
Mortality(4)
Increase by 1%	$	(10	)	$	0		$	(100	)	$	90
Decrease by 1%	$	10		$	0		$	100		$	(90	)
Lapse(5)
Increase by 10%	$	(90	)	$	(10	)	$	(475	)	$	375
Decrease by 10%	$	95		$	10		$	500		$	(395	)


(1)	Includes GMDB/GMIB reserves, embedded derivative liabilities for certain living benefit guaranteed features.


(2)	Represents the impact of an increase or decrease in the long-term equity expected rate of return.


(3)	Represents the impact of an increase or decrease in the NPR credit spread.


(4)	Represents the impact of an increase or decrease in mortality rates.


(5)	Represents the impact of an increase or decrease in lapse rates.


(6)	Balances are gross of reinsurance.

~~In addition~~Valuation of Investments, Including Derivatives, and the Recognition of Other-than-Temporary Impairments

Our investment portfolio consists of public and private fixed maturity securities, commercial mortgage and other loans, equity securities, other invested assets and derivative financial instruments. Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices or the values of securities. Derivative financial instruments we generally use include swaps, futures, forwards and options and may be exchange-traded or contracted in the over-the-counter (“OTC”) market. We are also party to financial instruments that contain derivative instruments that are “embedded” in the financial instruments. Management believes the following accounting policies related to investments, including derivatives, are most dependent on the application of estimates and assumptions. Each of these policies is discussed further within other relevant disclosures related to the investments and derivatives, as referenced below:

Valuation of investments, including derivatives;

Recognition of other-than-temporary impairments ("OTTI"); and

Determination of the valuation allowance for losses on commercial mortgage and other loans.

We present at fair value in the statements of financial position our debt security investments classified as available-for-sale, investments classified as trading, and certain fixed maturities, equity securities, and certain investments within “Other invested assets,” such as derivatives. For additional information regarding the key estimates and assumptions surrounding the determination of fair value of fixed maturity and equity securities, as well as derivative instruments, embedded derivatives and other investments, see Note 5 to the Financial Statements.

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For our investments classified as available-for-sale, the impact of ~~market performance relative to~~changes in fair value is recorded as an unrealized gain or loss in “Accumulated other comprehensive income (loss)” (“AOCI”), a separate component of equity. For our ~~future rate of return assumptions, other factors may also drive variability in~~investments classified as trading, equity securities, and derivatives, the ~~change in reserves, particularly when our annual assumption updates are performed. As noted above, however, the~~ impact ~~on our results of operations~~ of changes in these assumptions can be offsetting and we are unable to predict their movement or offsetting impact over time. In 2016, updates to lapse, mortality and utilization rate assumptions, partially offset by updates to projected interest rate assumptions, drove the most significant changes to these reserves.

For certain optional living benefit features of the variable annuities that are accounted for as embedded derivatives, the changes in reserves are significantly impacted by changes in both the capital markets assumptions and actuarial assumptions. Capital market inputs and actual contractholders’ account values are updated each quarter based on capital market conditions as of the end of the quarter, while actuarial assumptions are reviewed at least annually and updated based upon emerging experience, future expectationsfair value is recorded within “Asset administration fees and other ~~data.~~income”. In ~~2016, updates~~addition, investments classified as available-for-sale are subject to ~~excess withdrawal assumptions~~impairment reviews to identify when a decline in value is other-than-temporary. For a discussion of our policies regarding other-than-temporary declines in investment value and ~~mapping~~the related methodology for recording OTTI of ~~funds~~fixed maturity securities, see Note 2 to ~~related indices, partially offset by updates~~the Financial Statements.

Commercial mortgage and other loans are carried primarily at unpaid principal balances, net of unamortized deferred loan origination fees and expenses and unamortized premiums or discounts and a valuation allowance for losses. For a discussion of our policies regarding the valuation allowance for commercial mortgage and other loans, see Note 2 to ~~utilization efficiency assumptions drove~~ the most significant changes to these reserves. Other factors may also drive variability in the change in reserves, particularly when our annual assumption updates are performed. As noted above, however, the impact on our results of operations of changes in these assumptions can be offsetting and we are unable to predict their movement or offsetting impact over time.Financial Statements.

The Company’s liability for future policy benefits also includes reserves based on the present value of estimated future payments to or on behalf of contractholders, where the timing and amount of payment depends on policyholder mortality. Expected mortality is generally based on Company experience, industry data and/or other factors. Interest rate assumptions are based on factors such as market conditions and expected investment returns. Although mortality and interest rate assumptions are “locked-in” upon the issuance of new insurance or annuity business with fixed and guaranteed terms, significant changes in experience or assumptions may require the Company to provide for expected future losses on a product by establishing premium deficiency reserves. Premium deficiency reserves are established, if necessary, when the liability for future policy benefits plus the present value of expected future gross premiums are determined to be insufficient to provide for expected future policy benefits and expenses.

Taxes on Income

Our effective tax rate is based on income, non-taxable and non-deductible items, statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate. Inherent in determining our annual tax rate are judgments regarding business plans, planning opportunities and expectations about future outcomes. The dividend received deduction (“DRD”) is a major reason for the difference between the Company’s effective tax rate and the federal statutory ~~rate of 35%.~~rate. The DRD is an estimate that incorporates the prior and current year ~~results~~information, as well as the current year’s equity market performance. Both the current estimate of the DRD and the DRD in future periods can vary 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 underlying ~~mutual~~ fund investments, changes in the account balances of variable life and annuity contracts, and the Company’s taxable income before the DRD. In addition, the Tax Cuts and Jobs Act of 2017 (the “Tax Act of 2017") modified the methodology for determining the DRD that will likely reduce this tax benefit in future periods.

In December 2017, SEC staff issued “SAB 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”), which allows the registrants to record provisional amounts during a ‘measurement period’ not to extend beyond one year. Under the relief provided by SAB 118, a company can recognize provisional amounts when it does not have the necessary information available, prepared or analyzed in reasonable detail to complete its accounting for the change in tax law. See Note 11 to the Financial Statements for a discussion of provisional amounts related to the Tax Act of 2017 included in “Total income tax expense (benefit)” in 2017 and adjustments to provisional amounts recorded in 2018.

An increase or decrease in our effective tax rate by one ~~percent of income (loss) from operations before income taxes,~~percentage point would have resulted in an increase or decrease in our 2018 "Total income ~~from operations in 2016~~tax expense (benefit)" of $18 million.

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The Company’s liability for income taxes includes the liability for unrecognized tax benefits and interest that relate to tax years still subject to review by the Internal Revenue Service (“IRS”) or other taxing authorities. See Note 9 to the Financial Statements for a discussion of the impact in 2014, 2015 and 2016 of changes to our total unrecognized tax benefits. We do not anticipate any significant changes within the next 12 months to our total unrecognized tax benefits related to tax years for which the statute of limitations has not expired.

Contingencies

A contingency is an existing condition that involves a degree of uncertainty that will ultimately be resolved upon the occurrence of future events. Under U.S. GAAP, accruals for contingencies are required to be established when the future event is probable and its impact can be reasonably estimated, such as in connection with an unresolved legal matter. The initial reserve reflects management’s best estimate of the probable cost of ultimate resolution of the matter and is revised accordingly as facts and circumstances change and, ultimately, when the matter is brought to closure.

Adoption of New Accounting Pronouncements

~~There were no new~~On August 15, 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, which is expected to have a significant impact on the Company’s Financial Statements and Notes to the Financial Statements. The ASU is effective January 1, 2021 (with early adoption permitted), and will impact, at least to some extent, the accounting ~~pronouncements adopted during 2016 requiring~~and disclosure requirements for all long-duration insurance and investment contracts issued by the ~~application of critical accounting estimates.~~Company. See Note 2 to the Financial Statements for a ~~complete~~more detailed discussion of ASU 2018-12, as well as other accounting pronouncements issued but not yet adopted and newly ~~issued~~adopted accounting pronouncements.

Changes in Financial Position

~~2016~~2018 to ~~2015~~2017 Annual Comparison

Total assets ~~increased~~decreased by ~~$12.5~~$5.3 billion from ~~$47.3~~$60.0 billion at December 31, ~~2015~~2017 to ~~$59.8~~$54.7 billion at December 31, ~~2016.~~2018. Significant components were:

Separate account assets decreased $6.8 billion primarily driven by net outflows, unfavorable market performance and policy charges.

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DAC and DSI decreased $0.3 billion primarily driven by base amortization and impacts from gains in our living benefit results partially offset by capitalization of new business.

Income tax receivable decreased $0.2 billion consistent with the increase in net income.

Partially offsetting these decreases to total assets was the following:

Total investments and cash and cash equivalents increased $10.8 billion due primarily to $14.7 billion of consideration and capital contribution received related to the Variable Annuities Recapture, partially offset by change in collateral due to the increase in rates.

DAC and DSI increased $4.1 billion mainly due to the establishment of the assets as a result of the Variable Annuities Recapture and changes in our estimate of total gross profits as a result of the implementation of the new Asset Liability Management Strategy ("ALM") Strategy.

~~Income tax receivable increased~~ $2.0 ~~billion primarily due to the tax asset transferred from Pruco Re in relation to the Variable Annuities Recapture.~~

~~Partially offsetting these increases in total assets were the following items:~~

~~Reinsurance recoverables declined $2.5~~ billion primarily driven by ~~the recapture of the living benefit guarantees as part of the Variable Annuities Recapture.~~

~~Separate account assets declined $1.8 billion primarily driven by net outflows and continued surrenders on runoff block and contract charges,~~cash from insurance operations partially offset by ~~favorable fund performance.~~a return of capital to Prudential Annuities Inc. ("PAI") and unrealized losses on investments due to an increase in rates.

Total liabilities ~~increased~~decreased by ~~$6.8~~$5.8 billion, from ~~$45.9~~$53.7 billion at December 31, ~~2015~~2017 to ~~$52.7~~$47.9 billion at December 31, ~~2016.~~2018. Significant components were:

Future policy benefits increased $5.1 billion primarily driven by the recapture and reinsurance related to the Variable Annuities Recapture, partially offset by the annual review and update of actuarial assumptions in the second quarter of 2016.

~~Policyholders' account balances increased $2.3 billion primarily due to the Variable Annuities Recapture.~~

~~Long-term and short-term debt increased $1.0 billion primarily due to the reassignment of debt from Pruco Life as part of the Variable Annuities Recapture.~~

~~Other liabilities increased $0.4 billion primarily due to the deferred reinsurance gain recognized from the Variable Annuities Recapture.~~

~~Partially offsetting these increases in total liabilities was the following item:~~

Separate account liabilities ~~declined of $1.8~~decreased $6.8 billion, ~~offsetting~~corresponding with the decrease in separate account assets discussed above.

Partially offsetting the decrease to total liabilities were the following:

~~Table~~


•	Policyholders' account balances increased $0.5 billion primarily driven by sales of PruSecure^SM and HDI 3.0.

Other liabilities increased $0.4 billion primarily driven by investment payable on open trades as a result of ~~Contents~~settlement timing.

Future policy benefits increased $0.2 billion primarily driven by unfavorable equity markets and living benefit reserve growth, partially offset by credit spread widening and rising rates.

Total equity increased by ~~$5.8~~$0.4 billion from ~~$1.3~~$6.3 billion at December 31, ~~2015~~2017 to ~~$7.1~~$6.7 billion at December 31, ~~2016,~~2018, primarily reflecting ~~capital contributions~~after-tax gain of ~~$8.4 billion relating to the Variable Annuities Recapture, partially offset by a comprehensive loss of $1.5~~$1.7 billion for the twelve months ended December 31, ~~2016, and~~2018, partially offset by a $1.0 billion return of capital to PAI and $0.2 billion of ~~$1.1 billion.~~accumulated other comprehensive income/(loss) primarily driven by unrealized losses in the current year, as discussed above.

Results of Operations

~~2016 to 2015 Annual Comparison~~

Income (Loss) from Operations before Income Taxes

~~Loss~~2018 to 2017 Annual Comparison.

Income from operations before income taxes increased ~~$2.0~~$0.7 billion from ~~income of $0.2~~$1.1 billion for the year ended ~~2015,~~2017, to ~~a loss of~~ $1.8 billion for the year ended ~~2016.~~2018.

The increase in ~~loss~~income from operations before income taxes was primarily driven by favorable realized investment gains in the current year due to an unfavorable impact from living benefit results in the prior year as a result of significant NPR losses ~~of $2.9 billion for~~due to spread tightening in comparison to a favorable impact from spread widening in the current year, ~~ended December 31, 2016, driven by the Variable Annuities Recapture. See table below, for more information. This was~~ partially offset by ana less favorable year over year impact from rates and equity markets. Also contributing to the increase was the favorable impact of realized gains related to our capital hedge program in ~~policy charges and fee income of $1.0 billion~~2018, primarily driven by equity market declines in the ~~Variable Annuities Recapture.~~fourth quarter of 2018. Capital hedge impacts are excluded from the table below. Partially offsetting these increases is a less favorable market unlocking impact in 2Q18 compared to 2Q17.

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

and the related amortization of DAC and other costs, for the year ended December 31, ~~2016:~~

2018 and 2017:


		Year Ended
		December 31, 2016				2018			2017
		(1) in millions				in millions (1)
Excluding impact of assumption updates and other refinements:	Excluding impact of assumption updates and other refinements:				Excluding impact of assumption updates and other refinements:
	Net hedging impact(2)(3)	$	(294	)	Net hedging impact(2)	$	(208	)	$	547
	Change in portions of U.S. GAAP liability, before NPR(4)	2,162			Change in portions of U.S. GAAP liability, before NPR(3)	(865		)	2,259
	Change in the NPR adjustment	(4,044		)	Change in the NPR adjustment	1,325			(3,551		)
	Net impact from changes in the U.S. GAAP embedded derivative and hedge positions	(2,176		)	Net impact from changes in the U.S. GAAP embedded derivative and hedge positions	252			(745		)
	Related benefit (charge) to amortization of DAC and other costs	803			Related benefit (charge) to amortization of DAC and other costs	(173		)	148
Net impact of assumption updates and other refinements	Net impact of assumption updates and other refinements	1,331			Net impact of assumption updates and other refinements	(159		)	(75		)
Recapture and reinsurance gains (losses)		(2,866		)
Net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs		$	(2,908	)
Net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs—reported in Individual Annuities					Net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs—reported in Individual Annuities	$	(80	)	$	(671	)

~~(1)~~


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


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


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

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

~~the derivatives utilized with respect to that risk.~~

~~(3) Excludes $(389) million for~~For the twelve months ended December 31, ~~2016, representing~~2018, the net impact ~~of managing interest rate risk through capital management strategies other than hedging of particular exposures.~~

~~(4) Represents risk margins and valuation methodology differences between the economic liability managed by the ALM strategy and the U.S. GAAP liability,~~

~~as well as the portion of the economic liability managed with fixed income instruments.~~

~~In the table above, net losses related to the impact of~~from changes in the U.S. GAAP embedded derivative and hedge positions, ~~were $2.9 billion for~~after the ~~year ended December 31, 2016. This was primarily driven by a $2.9 billion loss resulting from the recapture~~impact of ~~the living benefit guarantees from Pruco Re~~NPR, DAC and ~~subsequent reinsurance of the variable annuity business from Pruco Life, as described above within the Variable Annuities Recapture. Also contributing to the loss~~other costs, was a ~~$4.0 billion loss relating to the change in the NPR adjustment, primarily driven by tightening~~charge of ~~credit spreads. Partially offsetting these losses was~~$80 million which includes a ~~benefit for the changes in the portions of the U.S. GAAP liability before NPR that are excluded from our hedge target, as well as a benefit~~$159 million net charge from our annual ~~review~~reviews and update of ~~actuarial~~ assumptions ~~driven by modifications to both actuarial assumptions,~~and other refinements, including updates to expected withdrawal rates ~~and~~as well as economic assumptions. These charges were largely offset by changes in the U.S. GAAP embedded derivative and hedge positions as a result of credit spreads widening, partially offset by less favorable impacts from rates and equity markets.

For the twelve months ended December 31, 2017, the net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impacts of NPR, DAC and other costs, was a charge of $671 million. The net impact from changes in the U.S. GAAP embedded derivative and hedge positions resulted in a net charge of $745 million, predominantly as a result of tightening credit spreads used in measuring our living benefit contracts. Partially offsetting this is a $148 million net benefit to amortization of DAC and other costs.

Revenues, Benefits and Expenses

2018 to 2017 Annual Comparison.

Revenues ~~decreased $1.3~~increased $1.6 billion from ~~$1.1~~$2.3 billion for the twelve months ended December 31, ~~2015~~2017 to ~~$(0.2)~~$3.9 billion for the twelve months ended December 31, ~~2016,~~2018, primarily driven by ~~$3.4 billion of realized investment losses, which includes the $2.9 billion loss for derivative and hedge positions, as discussed above. Partially offsetting this decrease was~~ an increase of ~~$0.9~~$1.7 billion in

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~~premiums mainly due to the consideration received for the reinsurance of the variable annuities business from Pruco Life,~~ realized investment gains (losses), as ~~described~~discussed above. ~~Policy charges and fee income increased $1.0 billion driven by the fees assumed resulting from the reinsurance from Pruco Life.~~

Benefits and expenses increased ~~$0.7~~$0.9 billion from ~~$0.9~~$1.2 billion for the twelve months ended December 31, ~~2015~~2017 to ~~$1.6~~$2.1 billion for the twelve months ended December 31, ~~2016,~~2018, primarily driven by an increase ~~in general, administrative and other expenses~~ of $0.8 billion primarily consisting of $0.5 billion driven by the trail commissions and commission and expense allowance assumed and $0.3 billion for the establishment of the deferred reinsurance gain, as part of the Variable Annuities Recapture. The results also reflect an increase of $0.5 billion in Policyholders' benefits, due to the Variable Annuities Recapture. Partially offsetting these increases were favorable adjustments of $0.7 billionrelated to the amortization of ~~deferred policy acquisition~~DAC and other costs ~~and interest credited to policyholders' account balances primarily~~ due to changes in ~~our estimate of total gross profits~~the living benefit reserves as a result of credit spread tightening in the ~~implementation of~~prior year and a favorable impact from spread widening in the ~~new ALM strategy.~~current year, as discussed above.

Variable Annuity Risks and Risk Mitigants

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

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Product Design Features

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

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

Under ~~the Company's~~Prudential Financial's historical hedging program to manage certain capital market risks associated with certain variable annuity living benefit guarantees, the Company utilized the U.S. GAAP valuation, with certain modifications, to derive a hedge target that was more reflective of the Company's best estimate of future benefit payments, net of fees collected. Derivative positions were entered into that sought to offset the change in value of the hedge target.

During the third quarter of 2016, the Company implemented a new ALM strategy that utilizes a combination of both traditional fixed income instruments and derivatives to help defray potential claims associated with the variable annuity living benefit guarantees. Under the revised strategy, expected living benefit claims under less severe market conditions are managed through the accumulation of fixed income instruments and potential living benefit claims resulting from more severe market conditions are hedged using derivative instruments. For the portion of our ALM strategy executed with derivatives, we enter into a range of exchange-traded, cleared, and OTC equity and interest rate derivatives, including, but not limited to: equity and treasury futures; total return and interest rate swaps; and options, including equity options, swaptions, and floors and caps. The ~~Company expects~~intent of this strategy is to more efficiently manage the ~~revised strategy to result in more efficient management of its~~ capital and liquidity associated with these products while continuing to mitigate fluctuations in net income due to movements in capital ~~markets movements.~~

markets.

The change in hedge strategy had no impact on how we value or account for the living benefit guarantees under U.S. GAAP.

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The following table provides a reconciliation between the liability reported under U.S. GAAP and the economic liability the Company intends to manage through the ALM strategy.


	As of December 31, 2016			As of December 31, 2018			As of December 31, 2017
	(in millions)			(in millions)
U.S. GAAP liability (including non-performance risk)	$	7,707		$	8,332		$	8,152
Non-performance risk adjustment	6,643			4,275			2,998
Subtotal	14,350			12,608			11,150
Adjustments including risk margins and valuation methodology differences	(5,309		)	(3,831		)	(2,603		)
Economic liability managed by ALM strategy	$	9,041
Economic liability managed through the ALM strategy				$	8,777		$	8,546

As of December 31, ~~2016, the Company has sufficient assets including~~2018, our fixed income instruments and derivative assets ~~supporting~~exceed the economic liability.

Under ~~the new~~our ALM strategy, the Company expects differences in the U.S. GAAP net income impact between the changes in value of the fixed income instruments and derivatives as compared to the changes in the embedded derivative liability these assets support. These differences can be primarily attributed to three distinct areas:

• Different valuation methodologies in measuring the liability the Company intends to cover with fixed income instruments and derivatives versus the liability reported under U.S. GAAP—The valuation methodology utilized in estimating the economic liability the Company intends to defray with fixed income instruments and derivatives is different from that required to be utilized to measure the liability under U.S. GAAP. The valuation of the economic liability excludes certain items that are included within the U.S. GAAP liability, such as ~~non-performance risk (“NPR”)~~NPR (in order to maximize protection irrespective of the possibility of our own default), as well as risk margins (required by U.S. GAAP but different from our best estimate).

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• Different accounting treatment between liabilities and assets supporting those liabilities—Under U.S. GAAP, changes in value of the embedded derivative liability and derivative instruments used to hedge a portion of the economic liability are immediately reflected in net income. In contrast, changes in fair value of fixed income instruments that support a portion of the economic liability are designated as available for sale and are not recorded in net income but rather are recorded as unrealized gains (losses) in other comprehensive income.

• General hedge results—For the derivative portion of the ALM strategy, the net hedging impact (the extent to which the changes in value of the hedging instruments offset the change in value of the portion of the economic liability we are hedging) may be impacted by a number of factors including: cash flow timing differences between our hedging instruments and the corresponding portion of the economic liability we are hedging, basis differences attributable to actual underlying contractholder funds to be hedged versus hedgeable indices, rebalancing costs related to dynamic rebalancing of hedging instruments as markets move, certain elements of the economic liability that may not be hedged (including certain actuarial assumptions), and implied and realized market volatility on the hedge positions relative to the portion of the economic liability we seek to hedge.

For the portion of our ALM strategy executed with derivatives, we enter into a range of exchange-traded, cleared and over-the- counter (“OTC”) equity and interest rate derivatives including, but not limited to: equity and treasury futures; total return and interest rate swaps; and options including equity options, swaptions, and floors and caps.

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

Capital Hedge Program

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

Product Specific Risks and Risk Mitigants

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

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

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

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Income Taxes

~~Shown below is our~~The differences between income taxes expected at the U.S. federal statutory income tax ~~provision~~rate of 21% applicable for 2018 and 35% applicable for the periods prior to 2018, and the reported income tax (benefit) expense are provided in the following table:



	Year Ended December 31,
	2018			2017			2016
	(in millions)
Expected federal income tax expense (benefit) at federal statutory rate	$	387		$	391		$	(620	)
Non-taxable investment income	(19		)	(47		)	(50		)
Tax credits	(14		)	(10		)	(10		)
Changes in tax law	(193		)	882			0
Other	0			(15		)	0
Reported income tax expense (benefit)	$	161		$	1,201		$	(680	)
Effective tax rate	8.8		%	107.5		%	38.4		%

Effective Tax Rate

The effective tax rate is the ratio of “Total income tax expense (benefit)” divided by “Income (loss) from operations before income taxes”. Our effective tax rate for fiscal years ~~ended December 31,~~2018, 2017 and 2016 was 8.8%, 107.5% and ~~2015, separately reflecting~~38.4%, respectively. For a detailed description of the nature of each significant reconciling item, see Note 11 to the Financial Statements. The increase in the effective tax rate from 38.4% in 2016 to 107.5% in 2017 was primarily driven by an increase in pre-tax net income and the impact of ~~certain significant items.~~

2016 2015

(in millions)
Tax provision $ (680 ) $ (8 )
Impact of:
Non-taxable investment income 50
57
Tax credits 10
9
Other 0
0
Tax provision at statutory rate $ (620 ) $ 58

~~Our income~~deferred tax ~~provision amounted to an income~~revaluation from tax ~~benefit~~law change under the Tax Act of ~~$680 million and $8 million in 2016 and 2015, respectively.~~2017. The ~~increase in income tax benefit primarily reflects the~~ decrease in ~~pre-tax~~the effective tax rate from 107.5% in 2017 to 8.8% in 2018 was primarily driven by the impact of deferred tax revaluation from tax law change under the Tax Act of 2017.

Unrecognized Tax Benefits

The Company’s liability for income taxes includes the liability for unrecognized tax benefits and interest that relate to tax years still subject to review by the Internal Revenue Service (“IRS”) or other taxing authorities. The completion of review or the expiration of the Federal statute of limitations for a given audit period could result in an adjustment to the liability for income taxes. The Company had no unrecognized benefit as of December 31, 2018, 2017 and 2016. We do not anticipate any significant changes within the next 12 months to our total unrecognized tax benefits related to tax years for which the statute of limitations has not expired.

Income Tax Expense vs. Income Tax Paid in Cash

Income tax expense recorded under U.S. GAAP routinely differs from ~~operations~~the income taxes paid in cash in any given year. Income tax expense recorded under U.S. GAAP is based on income reported in our Statements of Operations for the current period and it includes both current and deferred taxes. Income taxes paid during the year ~~ended December 31, 2016.~~

~~We employ various~~include tax ~~strategies, including strategies~~installments made for the current year as well as tax payments and refunds related to ~~minimize the amount of taxes resulting from realized capital gains.~~prior periods.

For additional information ~~regarding~~on income ~~taxes,~~tax related items, see “Business—Regulation” and Note 911 to the Financial Statements.

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Liquidity and Capital Resources

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

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

~~Prudential Financial is a Designated Financial Company under Dodd-Frank. As a Designated Financial Company, Prudential Financial is~~Our businesses are subject to comprehensive regulation and supervision by domestic and ~~examination by the Federal Reserve Bank of Boston and to stricter prudential regulatory~~

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~~standards, which~~international regulators. These regulations currently include, or ~~will~~may include in the future, requirements and limitations (many of which are the subject of ongoing rule-making) relating to capital, leverage, liquidity, stress-testing, overall risk management, ~~resolution and recovery plans,~~ credit exposure reporting ~~early remediation, management interlocks~~ and credit concentration. They may also include additional standards regarding enhanced public disclosure, short-term debt limits and other related subjects. Emerging state and international standards may also impose additional capital and other requirements. For information on these regulatory initiatives and their potential impact on us, see ~~“Business-Regulation” and “Risk Factors”.~~"Business—Regulation”

Capital

Our capital management framework is primarily based on statutory RBC measures. The RBC ratio is a primary measure of the capital adequacy of the Company. RBC is calculated based on statutory financial statements and risk formulas consistent with the practices of the ~~National Association of Insurance Commissioners (“NAIC”).~~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. ~~As of December 31, 2016 the~~The Company’s ~~RBC ratio exceeds~~capital levels substantially exceed the minimum level required by applicable insurance regulations. Our regulatory capital levels may be affected in the future by changes to the applicable regulations, proposals for which are currently under consideration by both domestic and international insurance regulators.

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

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

In December 2018, the Company returned capital of $225 million to its parent, PAI. In June 2018 and September 2018, the Company returned capital of $250 million to PAI. In March 2018, the Company returned capital of $300 million to PAI. On June 7, 2017, September 6, 2017 and December 21, 2017, the Company returned capital of $100 million, $200 million and $650 million, respectively, to PAI. On December 21, 2016, the Company returned capital of $1,140 million to its parent, Prudential Annuities, Inc. On December 22, 2015 and June 29, 2015, the Company paid dividends of $180 million and $270 million, respectively, to its parent, Prudential Annuities, Inc. On December 19, 2014 and June 27, 2014, the Company paid dividends of $75 million and $267 million, respectively, to its parent, Prudential Annuities, Inc.

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

Capital Protection Framework

Prudential Financial employs a ~~“Capital~~Capital Protection ~~Framework”~~Framework (the "Framework”) to ensure that sufficient capital resources are available to maintain adequate capitalization and competitive RBC ~~ratios~~ratio and solvency margins under various stress scenarios. The Framework incorporates the potential impacts from market related stresses, including equity markets, real estate, interest rates, and credit ~~losses. The Framework addresses the potential capital consequences, under stress scenarios, of certain of these net risks~~losses and ~~the strategies we use to mitigate them, including the following:~~

Equity market exposure affecting the statutory capital of the Company and Prudential Financial as a whole, which is managed through Prudential Financial's equity hedge program and on-balance sheet and contingent sources of capital; and

Prudential Financial's decision to manage a portion of its interest rate risk internally, on a net basis, at an enterprise level. In implementing this strategy, Prudential Financial executed intercompany derivative transactions between its Corporate and Other operations and certain business segments. Prudential Financial limits its exposure to the resulting net interest rate risk at the enterprise level through options embedded in our hedging strategy that may be exercised if interest rates decline below certain thresholds. During 2016, primarily as a result of the change in the risk management strategy associated with the living benefit guarantees, Prudential Financial replaced a portion of these intercompany derivatives with external derivatives and expects to manage most of this interest rate risk within the Company and Prudential Insurance in the future.foreign currency exchange rates.

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~~The hedging strategy is periodically recalibrated in response to changing market conditions.~~ The Framework accommodates periodic volatility within ranges that ~~are deemed~~we deem acceptable, while also providing for additional potential sources of capital, including on-balance sheet capital ~~derivatives~~capacity and contingent sources of capital. ~~Although Prudential Financial continues to enhance its approach, we~~We believe we currently have access to sufficient resources, either directly, or indirectly through Prudential Financial, to maintain adequate capitalization and a competitive RBC ratio under a range of potential stress scenarios.

~~Affiliated Captive Reinsurance Companies~~

Liquidity

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

wholly-owned subsidiary of Prudential Insurance, financing capacity on liquidity (as described below) is considered in the internal liquidity measures of the Company.

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

Cash Flow

The principal sources of the Company’s liquidity are certain annuity considerations, investment and fee income, investment maturities and internal borrowings. The principal uses of that liquidity include benefits, claims, and payments to policyholders and contractholders in connection with surrenders, withdrawals and net policy loan activity. Other uses of liquidity include commissions, general and administrative expenses, purchases of investments, the payment of dividends and return of capital to the parent company, hedging activity and payments in connection with financing activities. ~~As discussed above, in~~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.~~affiliates, but has launched a new fixed indexed annuity in January 2018 and a new deferred income annuity in March 2018.

We believe that the cash flows from our operations are adequate to satisfy our current liquidity requirements. The continued adequacy of this liquidity will depend upon factors such as future securities market conditions, changes in interest rate levels, contractholder perceptions of our financial strength, customer behavior, catastrophic events and the relative safety and attractiveness of competing products, each of which could lead to reduced cash inflows or increased cash outflows. Our cash flows from investment activities result from repayments of principal, proceeds from maturities and sales of invested assets and investment income, net of amounts reinvested. The primary liquidity risks with respect to these cash flows are the risk of default by debtors or bond insurers, our counterparties’ willingness to extend repurchase and/or securities lending arrangements, commitments to invest and market volatility. We closely manage these risks through our credit risk management process and regular monitoring of our liquidity position.

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

Liquid Assets

Liquid assets include cash and cash equivalents, short-term investments, U.S. Treasury fixed maturities, fixed maturities that are not designated as held-to-maturity and public equity securities. As of December 31, ~~2016~~2018 and ~~2015,~~2017, the Company had liquid assets of ~~$12.3~~$14.6 billion and ~~$2.7~~$12.6 billion, respectively. The portion of liquid assets comprised of cash and cash equivalents and short-term investments was ~~$2.8~~$4.5 billion and ~~$0.2~~$2.4 billion as of December 31, ~~2016~~2018 and ~~2015,~~2017, respectively. As of December 31, ~~2016, $8.9~~2018, $9.3 billion, or 95%, of the fixed maturity investments in company general account portfolios were rated high or highest quality based on NAIC or equivalent rating. ~~The remaining $0.4 billion, or 5%, of these fixed maturity investments were rated other than high or highest quality.~~

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Given the size and liquidity profile of our investment portfolios, we believe that claim experience, including contractholder withdrawals and surrenders, varying from our projections does not constitute a significant liquidity risk. Our asset/liability management process takes into account the expected maturity of investments and expected claim payments as well as the specific nature and risk profile of the liabilities. To the extent we need to pay claims in excess of projections, we may borrow temporarily or sell investments sooner than anticipated to pay these claims, which may result in increased borrowing costs or realized investment gains or losses including from changes in interest rates or credit spreads. The payment of claims and sale of investments earlier than anticipated would have an impact on the reported level of cash flow from operating and investing activities, respectively, in our financial statements. Historically, there has been no significant variation between the expected maturities of our investments and the payment of claims.

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Financing Activities

Prudential Funding, LLC

Prudential Financial and Prudential Funding ~~LLC (“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.

Hedging activities associated with living benefit guarantees

As noted above, effective April 1, 2016, the hedging portion of our risk management strategy associated with the living benefit guarantees recaptured from Pruco Re and Prudential Insurance, as well as the living benefit guarantees reinsured from Pruco Life, is being managed within the Company. For the portion of the risk management strategy executed through hedging, we enter into a range of exchange-traded, cleared and other OTC equity and interest rate derivatives in order to hedge certain living benefit guarantees accounted for as embedded derivatives against changes in certain capital market risks above a designated threshold. The portion of the risk management strategy comprising the hedging portion requires access to liquidity to meet the Company's payment obligations relating to these derivatives, such as payments for periodic settlements, purchases, maturities and terminations. These liquidity needs can vary materially due to, among other items, changes in interest rates, equity markets, mortality and policyholder behavior.

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk

Market risk is defined as the risk of loss from changes in interest rates, equity prices, and foreign currency exchange rates resulting from asset/liability mismatches where the change in the value of our liabilities is not offset by the change in value of our assets. See Item 1A, “Risk Factors” above for a discussion of how difficult conditions in the financial markets and the economy generally may materially adversely affect our business and results of our operations.

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

Market Risk Management

Management of market risk, which we consider to be a combination of both investment risk and market risk exposures, includes the identification and measurement of various forms of risk, the establishment of risk thresholds and the creation of processes intended to maintain risks within these thresholds while optimizing returns on the underlying assets or liabilities. As an indirect wholly-owned subsidiary of Prudential Financial, the Company benefits from the risk management strategies implemented by

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Prudential Financial. ~~Risk range limits are established for each type of market risk, and are approved by the Investment Committee of the Prudential Financial Board of Directors and are subject to ongoing review.~~

Our risk management process utilizes a variety of tools and techniques, including:

Measures of price sensitivity to market changes (e.g., interest rates, equity index prices, foreign exchange);

Asset/liability ~~mismatch analytics;~~management;

Stress scenario testing;

Hedging programs; and

Risk management governance, including policies, limits and a committee that oversees investment and market ~~risks.~~risk.

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Market Risk Mitigation

Risk mitigation takes three primary forms:


1.	Asset/Liability Management: Managing assets to liability-based measures. For example, investment policies identify target durations for assets based on liability characteristics and asset portfolios are managed to ranges around them. This mitigates potential unanticipated economic losses from interest rate movements.


2.	Hedging non-strategic exposures: For example, our investment policies for our general account portfolios generally require hedging currency risk for all cash flows not offset by similarly denominated liabilities.


3.	Management of portfolio concentration risk: For example, ongoing monitoring and management at the enterprise level of key rate, currency and other concentration risks support diversification efforts to mitigate exposure to individual markets and sources of risk.

Asset/Liability Management: Managing assets to liability-based measures. For example, investment policies identify target durations for assets based on liability characteristics and asset portfolios are managed to within ranges around them. This mitigates potential unanticipated economic losses from interest rate movements.

Hedging: Using derivatives to offset risk exposures. For example, for our variable annuities, potential living benefit claims resulting from more severe market conditions are hedged using derivative instruments.

Management of portfolio concentration risk: For example, ongoing monitoring and management of key rate, currency and other concentration risks support diversification efforts to mitigate exposure to individual markets and sources of risk.

Market Risk Related to Interest Rates

We perform liability-driven investing and engage in careful asset/liability management. Asset/liability mismatches create the risk that changes in liability values will differ from the changes in the value of the related assets. Additionally, changes in interest rates may impact other items including, but not limited to, the following:

Net investment spread between the amounts that we are required to pay and the rate of return we are able to earn on investments for certain products supported by general account investments;

Asset-based fees earned on assets under management or contractholder account values;

Estimated total gross profits and the amortization of deferred policy acquisition and other costs;

Net exposure to the guarantees provided under certain products; and

Our capital levels.

In order to mitigate the ~~unfavorable~~ impact that ~~the current~~an unfavorable interest rate environment has on our net interest margins, we employ a proactive asset/liability management program, which includes strategic asset allocation and derivative strategies within a disciplined risk management framework. These strategies seek to match the characteristics of our products, and to approximate the interest rate sensitivity of the assets with the estimated interest rate sensitivity of the product liabilities. Our ~~asset/liability management~~ALM program also helps manage duration gaps, currency and other risks between assets and liabilities through the use of derivatives. We adjust this dynamic process as products change, as customer behavior changes and as changes in the market environment occur. As a result, our asset/liability management process has permitted us to manage interest rate risk successfully through several market cycles.

We use duration and convexity analyses to measure price sensitivity to interest rate changes. Duration measures the relative sensitivity of the fair value of a financial instrument to changes in interest rates. Convexity measures the rate of change of duration with respect to changes in interest rates. We use ~~asset/liability management~~ALM and derivative strategies to manage our interest rate exposure by matching the relative sensitivity of asset and liability values to interest rate changes, or by controlling “duration mismatch” of assets and ~~liabilities. We have~~liability duration ~~mismatch constraints. As of December 31, 2016 and 2015, the difference between~~targets. In certain markets, capital market limitations that hinder our ability to acquire assets that approximate the duration of ~~assets and the target~~some of our liabilities are considered in setting duration ~~of liabilities in our duration managed portfolios was within our policy limits.~~targets. We consider risk-based capital and tax implications as well as current market conditions in our ~~asset/liability management~~ALM strategies.

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The Company also mitigates interest rate risk through a market value adjusted (“MVA”) provision on certain of the Company’s annuity products' fixed investment options. This MVA provision limits interest rate risk by subjecting the contractholder to an MVA when funds are withdrawn or transferred to variable investment options before the end of the guarantee period. In the event of rising interest rates, which generally make the fixed maturity securities underlying the guarantee less valuable, the MVA could be negative. In the event of declining interest rates, which generally make the fixed maturity securities underlying the guarantee more valuable, the MVA could be positive. The resulting increase or decrease in the value of the fixed option, from calculation of the MVA, is designed to offset the decrease or increase in the market value of the securities underlying the guarantee.

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We assess the impact of interest rate movements on the value of our financial assets, financial liabilities and derivatives using hypothetical test scenarios that assume either upward or downward 100 basis point parallel shifts in the yield curve from prevailing interest rates, reflecting changes in either credit spreads or the risk-free rate. The following table sets forth the net estimated potential loss in fair value on these financial instruments from a hypothetical 100 basis point upward shift at December 31, ~~2016~~2018 and ~~2015.~~2017. This table is presented on a gross basis and excludes offsetting impacts to insurance liabilities that are not considered financial liabilities under U.S. GAAP. This scenario results in the greatest net exposure to interest rate risk of the hypothetical scenarios tested at those dates. While the test scenario is for illustrative purposes only and does not reflect our expectations regarding future interest rates or the performance of fixed income markets, it is a near-term, reasonably possible hypothetical change that illustrates the potential impact of such events. These test scenarios do not measure the changes in value that could result from non-parallel shifts in the yield curve, which we would expect to produce different changes in discount rates for different maturities. As a result, the actual loss in fair value from a 100 basis point change in interest rates could be different from that indicated by these calculations. The estimated changes in fair values do not include separate account ~~assets or living benefit embedded derivatives, which are hedged by the derivatives included in the table below.~~assets.

December 31, 2016 December 31, 2015
Notional Fair Value
Hypothetical
Change in
Fair Value
Notional Fair Value
Hypothetical
Change in Fair
Value

(in millions)
Financial assets with interest rate risk:
Fixed maturities, available-for-sale $ 9,363
$ (1,137 ) $ 2,524
$ (111 )
Policy loans 13
0
13
0
Commercial mortgage and other loans 1,236
(63 ) 438
(20 )
Derivatives:
Swaps $ 95,260
3,116
(3,822 ) $ 2,284
95
(76 )
Futures 3,743
19
(620 ) 0
0
0
Options 15,435
127
211
18,387
16
(4 )
Forwards(1) 500
(25 ) 0
3
0
0
Variable annuity and other living benefit feature embedded derivatives(2)

(7,707 ) 4,505
(3,134 ) 1,487
Financial liabilities with interest rate risk(3):
Policyholders' account balances-Investment Contracts (248 ) 3
(102 ) 3
Total estimated potential gain (loss) $ (923 ) $ 1,279

~~__________~~



	December 31, 2018								December 31, 2017
	Notional		Fair Value			Hypothetical Change in Fair Value			Notional		Fair Value			Hypothetical Change in Fair Value

	(in millions)
Financial assets with interest rate risk:
Fixed maturities(1)			$	10,062		$	(1,238	)			$	10,277		$	(1,265	)
Policy loans			13			0					13			0
Commercial mortgage and other loans			1,340			(67		)			1,396			(75		)
Derivatives:
Swaps	$	97,629	2,902			(3,415		)	$	102,609	2,942			(2,916		)
Futures	1,769		(3		)	(173		)	2,636		11			(479		)
Options	46,117		(247		)	300			47,477		157			146
Forwards	1,733		55			(204		)	988		20			1
Variable annuity and other living benefit feature embedded derivatives(2)			(8,321		)	4,684					(8,147		)	5,318
Financial liabilities with interest rate risk(3):
Policyholders' account balances-investment contracts			(561		)	3					(282		)	3
Net estimated potential gain (loss)						$	(110	)						$	733


(1)	~~Notional~~Includes assets classified as "Fixed maturities, available-for-sale, at fair value" and "Fixed maturities, trading, at fair ~~value amounts for derivative forwards as of December 31, 2015, have been revised to correct the previously reported amounts of $2,752 million and $23 million, respectively.~~value."


(2)	Excludes any offsetting impact of derivative instruments purchased to hedge changes in the embedded derivatives. Amounts reported gross of reinsurance.

(3)

Excludes ~~$13.2~~$14.2 billion and ~~$5.9~~$13.7 billion as of December 31, ~~2016~~2018 and ~~2015,~~2017, respectively, of insurance reserve and deposit liabilities which are not considered financial liabilities. We believe that the interest rate sensitivities of these insurance liabilities would serve as an offset to the net interest rate risk of the financial assets and financial liabilities, including investment contracts.

Our net estimated potential loss in fair value as of December 31, 2016 increased from December 31, 2015, primarily reflecting the impact of the recapture of the risks related to variable annuity living benefit guarantees that were previously reinsured to Pruco Re, as discussed above.

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Market Risk Related to Equity Prices

We have exposure to equity risk primarily through asset/liability mismatches, including our equity-based derivatives and certain variable annuity and other living benefit feature embedded derivatives. As discussed above, as part of our risk management strategy, the Company recaptured the risks related to its variable annuity living benefit guarantees that were previously reinsured. Our ~~equity based derivatives are primarily held as part of our~~ capital hedging program ~~discussed below.~~primarily holds equity derivatives. In addition to the impact on our ~~capital hedges,~~equity derivatives, changes in equity prices may impact other items including, but not limited to, the following:

Asset-based fees earned on assets under management or contractholder account ~~values;~~value;

Estimated total gross profits and the amortization of deferred policy acquisition and other costs; and

Net exposure to the guarantees provided under certain products.

We manage equity risk against benchmarks in respective markets. We benchmark our return on equity holdings against a blend of market indices, mainly the S&P 500 and Russell 2000 for U.S. equities. We benchmark foreign equities against the Tokyo Price Index, and the MSCI EAFE, a market index of European, Australian and Far Eastern equities. We target price sensitivities that approximate those of the benchmark indices. For equity investments within the separate accounts, the investment risk is borne by the separate account contractholder rather than by the Company.

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Our capital hedging program is managed at the Prudential Financial parent company level. The program broadly addresses equity market exposure of the overall statutory capital of Prudential Financial as a whole, under stress scenarios. The Company owns a portion of the derivatives related to the program. The program focuses on tail risk in order to protect statutory capital in a cost-effective manner under stress scenarios. Prudential Financial assesses the composition of the hedging program on an ongoing basis and may change it from time to time based on an evaluation of its risk position or other factors.

We estimate our equity risk from a hypothetical 10% decline in equity benchmark levels. The following table sets forth the net estimated potential loss in fair value from such a decline as of December 31, ~~2016,~~2018 and excludes comparisons to December 31, 2015, as our exposure to equity risk was immaterial prior to the recapture of the risks related to our variable annuity living benefit guarantees, as discussed above.2017. While ~~this scenario is~~these scenarios are for illustrative purposes only and ~~does~~do not reflect our expectations regarding future performance of equity markets or of our equity portfolio, ~~it does~~they do represent a near-term, reasonably possible hypothetical ~~change~~changes that ~~illustrates~~illustrate the potential impact of such events. ~~This scenario considers~~These scenarios consider only the direct impact on fair value of declines in equity benchmark market levels and not changes in asset-based fees recognized as revenue, changes in our estimates of total gross profits used as a basis for amortizing deferred policy acquisition and other costs, or changes in any other assumptions such as market volatility or mortality, utilization or persistency rates in our variable annuity contracts that could also impact the fair value of our living benefit features. In addition, these scenarios do not reflect the impact of basis risk, such as potential differences in the performance of the investment funds underlying the variable annuity products relative to the market indices we use as a basis for developing our hedging strategy. The impact of basis risk could result in larger differences between the change in fair value of the equity-based derivatives and the related living benefit features in comparison to these scenarios. In calculating these amounts, we exclude separate account equity securities.


	As of December 31, 2016								As of December 31, 2018								As of December 31, 2017
	Notional		Fair Value			Hypothetical Change in Fair Value			Notional		Fair Value			Hypothetical Change in Fair Value			Notional		Fair Value			Hypothetical Change in Fair Value

	(in millions)								(in millions)
Equity securities(1)			$	10		$	(1	)			$	11		$	0				$	15		$	(2	)
Equity-based derivatives(2)	$	18,663	(232		)	999			$	42,179	785			1,376			$	46,216	(189		)	1,302
Variable annuity living benefit feature embedded derivatives(3)			(7,707		)	(1,234		)			(8,321		)	(1,396		)			(8,147		)	(1,332		)
Net estimated potential loss						$	(236	)						$	(20	)						$	(32	)

~~__________~~


(1)	Includes equity securities classified as trading securities under U.S. GAAP that are held for "other than trading" activities.


(2)	Both the notional amount and fair value of equity-based derivatives are also reflected in amounts under “Market Risk Related to Interest Rates” above and are not cumulative.


(3)	Excludes any offsetting impact of derivative instruments purchased to hedge changes in the embedded derivatives. Amounts reported gross of reinsurance.

Derivatives

We use derivative financial instruments primarily to reduce market risk from changes in interest rates and equity prices, including their use to alter interest rate exposures arising from mismatches between assets and liabilities. Our derivatives primarily include swaps, futures, options and forward contracts that are exchange-traded or contracted in the ~~over-the-counter ("OTC")~~OTC market. See Note 114 to the Financial Statements for more information.

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Market Risk Related to Certain Variable Annuity Products

The primary risk exposures of our variable annuity contracts relate to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including capital market assumptions, such as equity market returns, interest rates, ~~and~~ market volatility and actuarial assumptions. For our capital market assumptions, we manage our exposure to the risk created by capital markets fluctuations through a combination of product design elements, such as an asset transfer feature and inclusion of certain optional living benefits in our living benefits hedging program and affiliated and external reinsurance. Certain variable annuity optional living benefit features are accounted for as embedded derivatives and recorded at fair value.

~~Item 8. Financial Statements and Supplementary Data~~

Information required with respect to this Item 8 regarding Financial Statements and Supplementary Data is set forth within the Index to Financial Statements elsewhere in this Annual Report on Form 10-K.

~~Item 9. Changes in and Disagreements with Independent Accountants on Accounting and Financial Disclosure~~

~~None.~~

~~Item 9A. Controls and Procedures~~

Management’s Annual Report on Internal Control Over Financial Reporting on the effectiveness of internal control over financial reporting as of December 31, 2016 is included in Part II, Item 8 of this Annual Report on Form 10-K.

In order to ensure that the information we must disclose in our filings with the SEC is recorded, processed, summarized, and reported on a timely basis, the Company’s management, including our Chief Executive Officer and Chief Financial Officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in the Securities Exchange Act of 1934, as amended (“Exchange Act”) Rules 13a-15(e), as of December 31, 2016. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2016, our disclosure controls and procedures were effective. No change in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), occurred during the quarter ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

~~Item 9B. Other Information~~

~~None.~~

~~PART III~~

~~Item 10. Directors, Executive Officers and Corporate Governance~~

~~We have adopted Prudential Financial’s code of business conduct and ethics known as “Making the Right Choices”. Making the Right Choices is posted at www.investor.prudential.com.~~

In addition, we have adopted Prudential Financial’s Corporate Governance Guidelines, which we refer to herein as the “Corporate Governance Principles and Practices”. Prudential Financial’s Corporate Governance Principles and Practices are available free of charge at www.investor.prudential.com.

Certain of the information called for by this item is hereby incorporated herein by reference to the relevant portions of Prudential Financial’s definitive proxy statement for the Annual Meeting of Shareholders to be held on May 7, 2017 to be filed by Prudential Financial with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after December 31, 2016 (the “Proxy Statement”).

~~Item 14. Principal Accountant Fees and Services~~

~~The information called for by this item is hereby incorporated herein by reference to the relevant portions of the Proxy Statement.~~

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~~PART IV~~

~~Item 15. Exhibits and Financial Statement Schedules~~



~~(a) (1)~~	~~Financial Statements of the Company are listed in the accompanying “Index to Financial Statements” hereof and are filed as part of this Report.~~
~~(2)~~	Financial Statement Schedules None.*
~~(3)~~	~~Exhibits~~



~~3. (i)(a)~~	Certificate Restating the Certificate of Incorporation of American Skandia Life Assurance Corporation, dated February 8, 1988 is incorporated by reference to the Company’s Form 10-K, Registration No. 33-44202, filed March 27, 2004.
~~(i)(b)~~	Certificate of Amendment to the Restated Certificate of Incorporation of American Skandia Life Assurance Corporation, dated December 17, 1999 is incorporated by reference to the Company’s Form 10-K, Registration No. 33-44202, filed March 27, 2004.
~~(i)(c)~~	Certificate of Amendment changing the name from American Skandia Life Assurance Corporation to Prudential Annuities Life Assurance Corporation, effective as of January 1, 2008, is incorporated by reference to the Company’s Form 10-K, Registration No 33-44202, filed March 15, 2011.
~~(i)(d)~~	Articles of Domestication of Prudential Annuities Life Assurance Corporation, effective August 31, 2013, are incorporated by reference to the Company’s Form 8-K, Registration No. 33-44202, filed August 30, 2013.
~~(ii)(a)~~	~~By-Laws of American Skandia Life Assurance Corporation, as amended June 17, 1998, are incorporated by reference to the Company’s Form 10-K, Registration No. 33-44202, filed March 27, 2004.~~
~~(ii)(b)~~	By-Laws of Prudential Annuities Life Assurance Corporation, as amended and restated effective January 1, 2008, are incorporated by reference to the Company’s Form 10-K, Registration No 33-44202, filed March 15, 2011.
~~(ii)(c)~~	Amended and Restated By-Laws of Prudential Annuities Life Assurance Corporation, effective August 31, 2013, are incorporated by reference to the Company’s Form 8-K, Registration No. 33-44202, filed August 30, 2013.
~~24.~~	~~Powers of Attorney are filed herewith.~~
~~31.1~~	~~Section 302 Certification of the Chief Executive Officer.~~
~~31.2~~	~~Section 302 Certification of the Chief Financial Officer.~~
~~32.1~~	~~Section 906 Certification of the Chief Executive Officer.~~
~~32.2~~	~~Section 906 Certification of the Chief Financial Officer.~~



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

* Schedules are omitted because they are either not applicable or because the information required therein is included in the Notes to Financial Statements.

~~Item 16. Form 10-K Summary~~

~~None.~~

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~~SIGNATURES~~

Pursuant to the requirements of Section 13 and 15 (d) 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, in the city of Shelton, and State of Connecticut on the 23rd day of March 2017.



~~PRUDENTIAL ANNUITIES LIFE ASSURANCE CORPORATION~~ ~~(Registrant)~~
~~By:~~		~~/s/ Lori D. Fouché~~
		~~Lori D. Fouché~~
		~~President and Chief Executive Officer~~

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 23, 2017.



~~Name~~		~~Title~~

~~/s/ Lori D. Fouché~~		~~President,~~
~~Lori D. Fouché~~		~~Chief Executive Officer and Director~~

~~/s/ John Chieffo~~		~~Executive Vice President,~~
~~John Chieffo~~		~~Chief Financial Officer, Principal Accounting Officer and Director~~

* Bernard J. Jacob		~~Director~~
~~Bernard J. Jacob~~

* George M. Gannon		~~Director~~
~~George M. Gannon~~

* Kenneth Y. Tanji		~~Director~~
~~Kenneth Y. Tanji~~

* Arthur W. Wallace		~~Director~~
~~Arthur W. Wallace~~

* Richard F. Lambert		~~Director~~
~~Richard F. Lambert~~



* By:		~~/s/ Lynn K. Stone~~
		~~Lynn K. Stone~~
		~~(Attorney-in-Fact)~~

~~Table of Contents~~

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PRUDENTIAL ANNUITIES LIFE ASSURANCE CORPORATION

FINANCIAL STATEMENTS INDEX



	Page ~~Number~~

Management’s Annual Report on Internal Control Over Financial Reporting	4945
Report of Independent Registered Public Accounting Firm	5046
Statements of Financial Position as of December 31, ~~2016~~2018 and ~~2015~~2017	5147
Statements of Operations and Comprehensive Income for the years ended December 31, ~~2016, 2015~~2018, 2017 and ~~2014~~2016	5248
Statements of Equity for the years ended December 31, ~~2016, 2015~~2018, 2017 and ~~2014~~2016	5349
Statements of Cash Flows for the years ended December 31, ~~2016, 2015~~2018, 2017 and ~~2014~~2016	5450
Notes to Financial Statements:	5652
1 Business and Basis of Presentation	5652
2 Significant Accounting Policies and Pronouncements	6154
3 Investments	7270
4 Derivative Instruments	78
5 Fair Value of Assets and Liabilities	84
6 Deferred Policy Acquisition Costs	8296
57 Value of Business Acquired	8297
68 Policyholders’ Liabilities	8397
79 Certain Long-duration Contracts With Guarantees	8498
810 Reinsurance	102
11 Income Taxes	104
12 Equity	107
13 Statutory Net Income and Surplus and Dividend Restriction	88111
~~9 Income Taxes~~14 Related Party Transactions	88111
~~10 Fair Value of Assets and Liabilities~~	90
~~11 Derivative Instruments~~	~~108~~
1215 Commitments, Contingent Liabilities and Litigation and Regulatory Matters	~~114~~
~~13 Reinsurance~~	115
~~14 Equity~~	~~118~~
~~15 Related Party Transactions~~	~~120~~
16 Contract Withdrawal Provisions	~~125~~116
17 Quarterly Results of Operations (Unaudited)	~~125~~116

Table of Contents

Management’s Annual Report on Internal Control Over Financial Reporting

Management of Prudential Annuities Life Assurance Corporation (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. Management conducted an assessment of the effectiveness, as of December 31, ~~2016,~~2018, of the Company’s internal control over financial reporting, based on the framework established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment under that framework, management concluded that the Company’s internal control over financial reporting was effective as of December 31, ~~2016.~~2018.

Our internal control over financial reporting is a process designed by or under the supervision of our principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on our financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

This Annual Report does not include an attestation report of the Company’s registered public accounting firm, PricewaterhouseCoopers LLP, regarding the internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.

March ~~23, 2017~~7, 2019

Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholder of

Prudential Annuities Life Assurance Corporation:

~~In our opinion,~~Opinion on the Financial Statements

We have audited the accompanying statements of financial position of Prudential Annuities Life Assurance Corporation (the "Company") as of December 31, 2018 and 2017, and the related statements of operations and comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31, 2018, including the related notes and financial statement schedules listed in the index appearing under Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of ~~Prudential Annuities Life Assurance Corporation (an indirect, wholly-owned subsidiary~~the Company as of ~~Prudential Financial, Inc.) at~~ December 31, ~~2016~~2018 and ~~2015,~~2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, ~~2016~~2018 in conformity with accounting principles generally accepted in the United States of America.

Changes in Accounting Principles

As discussed in Note 2 to the financial statements, the Company changed the manner in which it accounts for certain financial assets and liabilities and the manner in which it accounts for certain tax effects originally recognized in accumulated other comprehensive income in 2018.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on ~~these~~the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these financial statements in accordance with the standards of the ~~Public Company Accounting Oversight Board (United States).~~PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material ~~misstatement. An~~misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit ~~includes~~of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence ~~supporting~~regarding the amounts and disclosures in the financial ~~statements, assessing~~statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, ~~and~~as well as evaluating the overall presentation of the financial ~~statement presentation.~~statements. We believe that our audits provide a reasonable basis for our opinion.

Significant Transactions with Related Parties

As described in Note ~~15 of~~14 to the financial statements, the Company has entered into ~~extensive~~significant transactions with ~~affiliated entities.~~The Prudential Insurance Company of America, and other affiliates.

/~~S/ PRICEWATERHOUSECOOPERS~~s/ PricewaterhouseCoopers LLP

New York, New York

March ~~23, 2017~~7, 2019

We have served as the Company's auditor since 2003.

Table of Contents

Prudential Annuities Life Assurance Corporation

Statements of Financial Position

As of December 31, ~~2016~~2018 and ~~2015~~2017 (in thousands, except share amounts)

December 31, 2016 December 31, 2015
ASSETS
Fixed maturities, available-for-sale, at fair value (amortized cost, 2016: $9,818,298; 2015: $2,433,626) $ 9,362,763
$ 2,524,272
Trading account assets, at fair value 149,871
5,653
Equity securities, available-for-sale, at fair value (cost, 2016: $365; 2015: $14) 18
17
Commercial mortgage and other loans 1,231,893
438,172
Policy loans 12,719
13,054
Short-term investments 947,150
158,227
Other long-term investments 551,931
182,157
Total investments 12,256,345
3,321,552
Cash and cash equivalents 1,848,039
536
Deferred policy acquisition costs 4,344,361
749,302
Accrued investment income 86,004
22,615
Reinsurance recoverables 588,608
3,088,328
Income taxes 1,978,607
0
Value of business acquired 30,287
33,640
Deferred sales inducements 978,823
452,752
Receivables from parent and affiliates 111,703
212,696
Other assets 169,649
123,158
Separate account assets 37,429,739
39,250,159
TOTAL ASSETS $ 59,822,165
$ 47,254,738
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits $ 8,686,196
$ 3,578,662
Policyholders’ account balances 4,736,889
2,416,125
Payables to parent and affiliates 91,432
25,677
Cash collateral for loaned securities 23,350
10,568
Income taxes 0
274,951
Long-term debt 971,899
0
Short-term debt 28,101
1,000
Reinsurance payable 275,822
250,277
Other liabilities 489,007
100,401
Separate account liabilities 37,429,739
39,250,159
Total Liabilities 52,732,435
45,907,820
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 12)

EQUITY
Common stock, $100 par value; 25,000 shares authorized, issued and outstanding 2,500
2,500
Additional paid-in capital 8,095,436
901,422
Retained earnings/(accumulated deficit) (693,258 ) 396,830
Accumulated other comprehensive income (314,948 ) 46,166
Total Equity 7,089,730
1,346,918
TOTAL LIABILITIES AND EQUITY $ 59,822,165
$ 47,254,738



	December 31, 2018			December 31, 2017
ASSETS
Fixed Maturities, available-for-sale, at fair value (amortized cost, 2018: $10,186,465; 2017: $10,145,266)(1)	$	9,771,673		$	10,110,786
Fixed Maturities, trading, at fair value (amortized cost, 2018: $294,549 ; 2017: $161,393)(1)	289,752			166,360
Equity securities, at fair value (cost, 2018: $18,765; 2017: $11,614)(1)	20,613			15,375
Commercial mortgage and other loans	1,353,478			1,387,012
Policy loans	12,805			12,558
Short-term investments	37,568			711,071
Other invested assets (includes $50,945 and $151,481 measured at fair value at December 31, 2018 and December 31, 2017, respectively)(1)	348,541			335,811
Total investments	11,834,430			12,738,973
Cash and cash equivalents	4,503,534			1,639,939
Deferred policy acquisition costs	4,447,505			4,596,565
Accrued investment income	90,895			88,331
Reinsurance recoverables	572,102			563,428
Income taxes	964,521			1,116,735
Value of business acquired	33,222			35,109
Deferred sales inducements	889,598			1,020,786
Receivables from parent and affiliates	46,381			49,351
Other assets	85,310			121,086
Separate account assets	31,210,346			37,990,547
TOTAL ASSETS	$	54,677,844		$	59,960,850
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits	$	9,368,986		$	9,132,569
Policyholders’ account balances	5,353,596			4,846,152
Payables to parent and affiliates	30,846			36,026
Cash collateral for loaned securities	384			17,383
Short-term debt	140,569			43,734
Long-term debt	787,596			928,165
Reinsurance payables	232,937			262,588
Other liabilities	811,016			422,636
Separate account liabilities	31,210,346			37,990,547
Total liabilities	47,936,276			53,679,800
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 15)
EQUITY
Common stock, $100 par value; 25,000 shares authorized, issued and outstanding	2,500			2,500
Additional paid-in capital	6,120,436			7,145,436
Retained earnings/(accumulated deficit)	943,005			(776,762		)
Accumulated other comprehensive income (loss)	(324,373		)	(90,124		)
Total equity	6,741,568			6,281,050
TOTAL LIABILITIES AND EQUITY	$	54,677,844		$	59,960,850

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

See Notes to Financial Statements

Table of Contents

Prudential Annuities Life Assurance Corporation

Statements of Operations and Comprehensive Income

Years Ended December 31, ~~2016, 2015~~2018, 2017 and ~~2014~~2016 (in thousands)


	2016			2015			2014			2018			2017			2016
REVENUES
Premiums	$	896,839		$	9,787		$	34,903		$	67,265		$	63,573		$	896,839
Policy charges and fee income	1,755,224			740,823			806,327			2,171,278			2,209,579			1,755,224
Net investment income	338,370			139,430			164,011			402,808			422,809			338,370
Asset administration fees and other income	299,384			177,479			227,619			389,156			413,375			299,384
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities	(7,853		)	(44		)	(10		)	(6,813		)	(8,576		)	(7,853		)
Other-than-temporary impairments on fixed maturity securities transferred to other comprehensive income	1,354			24			10
Other-than-temporary impairments on fixed maturity securities transferred to other comprehensive income (loss)										0			(546		)	1,354
Other realized investment gains (losses), net	(3,436,261		)	6,072			7,368			890,886			(796,278		)	(3,436,261		)
Total realized investment gains (losses), net	(3,442,760		)	6,052			7,368			884,073			(805,400		)	(3,442,760		)
Total revenues	(152,943		)	1,073,571			1,240,228			3,914,580			2,303,936			(152,943		)
BENEFITS AND EXPENSES
Policyholders’ benefits	604,057			60,461			137,135			187,088			114,068			604,057
Interest credited to policyholders’ account balances	68,889			225,555			211,058			249,175			30,280			68,889
Amortization of deferred policy acquisition costs	(179,816		)	309,152			238,416			589,795			(13,946		)	(179,816		)
General, administrative and other expenses	1,124,508			313,471			394,248
Commission expense(1)										862,338			861,303			653,906
General, administrative and other expenses(1)										181,964			194,636			470,602
Total benefits and expenses	1,617,638			908,639			980,857			2,070,360			1,186,341			1,617,638
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES	(1,770,581		)	164,932			259,371			1,844,220			1,117,595			(1,770,581		)
Total income tax expense (benefit)	(680,493		)	(8,285		)	8,604			161,504			1,201,099			(680,493		)
NET INCOME (LOSS)	$	(1,090,088	)	$	173,217		$	250,767		$	1,682,716		$	(83,504	)	$	(1,090,088	)
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments	(20		)	(54		)	(63		)	(1,354		)	109			(20		)
Net unrealized investment gains (losses):
Unrealized investment gains (losses) for the period	(469,356		)	(54,279		)	35,931
Reclassification adjustment for gains included in net income	(86,184		)	(4,831		)	(14,706		)
Net unrealized investment gains (losses)	(555,540		)	(59,110		)	21,225
Other comprehensive income (loss), before tax:	(555,560		)	(59,164		)	21,162
Less: Income tax expense (benefit) related to other comprehensive income (loss)
Foreign currency translation adjustments	(7		)	(19		)	(23		)
Net unrealized investment gains (losses)	(194,439		)	(20,689		)	7,430			(248,688		)	323,359			(555,540		)
Total	(194,446		)	(20,708		)	7,407			(250,042		)	323,468			(555,560		)
Less: Income tax expense (benefit) related to other comprehensive income (loss)										(52,510		)	98,644			(194,446		)
Other comprehensive income (loss), net of taxes	(361,114		)	(38,456		)	13,755			(197,532		)	224,824			(361,114		)
COMPREHENSIVE INCOME (LOSS)	$	(1,451,202	)	$	134,761		$	264,522
Comprehensive income (loss)										$	1,485,184		$	141,320		$	(1,451,202	)



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


	Common Stock		Additional Paid-In Capital			Retained Earnings/ (Accumulated Deficit)			Accumulated Other Comprehensive Income			Total Equity			Common Stock		Additional Paid-In Capital			Retained Earnings/ (Accumulated Deficit)			Accumulated Other Comprehensive Income (loss)			Total Equity
Balance, December 31, 2013	$	2,500	$	901,422		$	764,846		$	70,867		$	1,739,635
Contributed capital			0									0
Dividend to parent						(342,000		)				(342,000		)
Comprehensive income:
Net income (loss)						250,767						250,767
Other comprehensive income (loss), net of tax									13,755			13,755
Total comprehensive income (loss)												264,522
Balance, December 31, 2014	2,500		901,422			673,613			84,622			1,662,157
Contributed capital			0									0
Dividend to parent						(450,000		)				(450,000		)
Comprehensive income:
Net income (loss)						173,217						173,217
Other comprehensive income (loss), net of tax									(38,456		)	(38,456		)
Total comprehensive income (loss)												134,761
Balance, December 31, 2015	2,500		901,422			396,830			46,166			1,346,918			$	2,500	$	901,422		$	396,830		$	46,166		$	1,346,918
Contributed capital			8,421,955									8,421,955					8,421,955									8,421,955
Return of capital			(1,140,000		)							(1,140,000		)			(1,140,000		)							(1,140,000		)
Dividend to parent						0						0
Assets purchased/transferred from/to affiliates			(72,179		)							(72,179		)			(72,179		)							(72,179		)
Impact of Pruco Re and PALAC merger			(15,762		)							(15,762		)			(15,762		)							(15,762		)
Comprehensive income:
Net income (loss)						(1,090,088		)				(1,090,088		)						(1,090,088		)				(1,090,088		)
Other comprehensive income (loss), net of tax									(361,114		)	(361,114		)									(361,114		)	(361,114		)
Total comprehensive income (loss)												(1,451,202		)												(1,451,202		)
Balance, December 31, 2016	$	2,500	$	8,095,436		$	(693,258	)	$	(314,948	)	$	7,089,730		2,500		8,095,436			(693,258		)	(314,948		)	7,089,730
Contributed capital
Return of capital																	(950,000		)							(950,000		)
Comprehensive income:
Net income (loss)																				(83,504		)				(83,504		)
Other comprehensive income (loss), net of tax																							224,824			224,824
Total comprehensive income (loss)																										141,320
Balance, December 31, 2017															2,500		7,145,436			(776,762		)	(90,124		)	6,281,050
Cumulative effect of adoption of ASU 2016-01																				337			(3		)	334
Cumulative effect of adoption of ASU 2018-02																				36,714			(36,714		)	0
Contributed capital
Return of capital																	(1,025,000		)							(1,025,000		)
Comprehensive income:
Net income (loss)																				1,682,716						1,682,716
Other comprehensive income (loss), net of tax																							(197,532		)	(197,532		)
Total comprehensive income (loss)																										1,485,184
Balance, December 31, 2018															$	2,500	$	6,120,436		$	943,005		$	(324,373	)	$	6,741,568


	2016			2015			2014			2018			2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(1,090,088	)	$	173,217		$	250,767		$	1,682,716		$	(83,504	)	$	(1,090,088	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Policy charges and fee income	(245		)	907			3,491			(2,686		)	(766		)	(245		)
Realized investment (gains) losses, net	3,442,760			(6,052		)	(7,368		)	(884,073		)	805,400			3,442,760
Depreciation and amortization	10,737			37,530			1,402			7,905			32,812			10,737
Interest credited to policyholders’ account balances	68,889			225,555			211,058			249,175			30,280			68,889
Change in:
Future policy benefits	759,604			238,052			324,284			1,095,204			982,792			759,604
Accrued investment income	(63,389		)	2,393			7,161			(2,564		)	(2,327		)	(63,389		)
Net payable to/receivable from parent and affiliates	(55,984		)	61,252			(26,936		)
Net receivables from/payables to parent and affiliates										(3,163		)	4,165			(55,984		)
Deferred sales inducements	(1,805		)	38,380			(11,515		)	(2,885		)	(1,551		)	(1,805		)
Deferred policy acquisition costs	(449,496		)	381,480			235,612			216,799			(291,532		)	(449,496		)
Income taxes	(712,423		)	(3,426		)	(67,163		)	204,634			763,227			(712,423		)
Reinsurance recoverables	199,107			(270,868		)	(273,480		)
Bonus reserve	0			(38,768		)	(115,700		)
Reinsurance recoverables, net										(33,703		)	2,708			199,107
Derivatives, net	2,605,415			21,581			(415		)	131,874			(1,364,754		)	2,605,415
Deferred loss on reinsurance	305,464			(118,028		)	0
Deferred (gain)/loss on reinsurance										(22,723		)	4,564			305,464
Other, net	(54,819		)	(3,508		)	(1,804		)	190,662			87,036			(54,819		)
Cash flows from (used in) operating activities	4,963,727			739,697			529,394			2,827,172			968,550			4,963,727
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale	4,072,242			486,648			996,083			2,534,470			1,145,369			4,072,242
Fixed maturities, trading(1)										99,656			1,739			2,666
Equity securities(1)										7,896			3,306			4,823
Commercial mortgage and other loans	122,086			89,344			20,988			143,331			198,584			122,086
Trading account assets	7,489			3,765			4,900
Policy loans	1,833			1,257			753			675			1,276			1,833
Other long-term investments	9,587			3,764			(1,650		)
Other invested assets(1)										29,103			72,667			9,587
Short-term investments	1,799,219			2,318,219			2,637,788			984,409			1,949,758			1,799,219
Payments for the purchase/origination of:
Fixed maturities, available-for-sale	(5,535,732		)	(336,954		)	(494,947		)	(2,230,936		)	(1,528,065		)	(5,535,732		)
Equity securities, available-for-sale	(351		)	0			0
Fixed maturities, trading(1)										(231,316		)	(15,964		)	(3,170		)
Equity securities(1)										(14,221		)	(3,048		)	(4,991		)
Commercial mortgage and other loans	(353,692		)	(106,185		)	(43,859		)	(125,007		)	(348,520		)	(353,692		)
Trading account assets	(7,810		)	(3,681		)	(4,312		)
Policy loans	(442		)	(644		)	(943		)	(187		)	(366		)	(442		)
Other long-term investments	(111,838		)	(3,994		)	(14,691		)
Other invested assets(1)										(167,930		)	(7,668		)	(111,838		)
Short-term investments	(2,561,044		)	(2,419,261		)	(2,576,786		)	(311,277		)	(1,713,877		)	(2,561,044		)
Notes receivable from parent and affiliates, net	(4,923		)	3,110			(12,524		)	3,518			2,717			(4,923		)
Derivatives, net	(6,305		)	(6,528		)	1,682			1,073			4,948			(6,305		)
Other, net	(2,911		)	1,070			(1,674		)	(69		)	254			(2,911		)
Cash flows from (used in) investing activities	(2,572,592		)	29,930			510,808			723,188			(236,890		)	(2,572,592		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash collateral for loaned securities	12,782			5,283			(42,612		)	(16,999		)	(5,967		)	12,782
Proceeds from the issuance of debt (maturities longer than 90 days)	125,000			0			0			0			0			125,000
Repayments of debt (maturities longer than 90 days)	(268,000		)	0			(200,000		)	(43,734		)	0			(268,000		)
Net increase (decrease) in short-term borrowing	(1,000		)	(53,354		)	49,354
Net increase/(decrease) in short-term borrowing										0			(28,101		)	(1,000		)
Drafts outstanding	5,777			(1,663		)	(6,410		)	(7,026		)	10,624			5,777


Distribution to parent	(1,140,000		)	(450,000		)	(342,000		)	(1,025,000		)	(950,000		)	(1,140,000		)
Contributed capital	860,573			0			0			0			0			860,573
Policyholders’ account deposits	2,116,567			1,295,546			1,375,761			3,150,952			2,623,534			2,116,567
Ceded policyholders’ account deposits	(23,890		)	(54,027		)	0			(47,449		)	(24,191		)	(23,890		)
Policyholders’ account withdrawals	(2,259,445		)	(1,511,470		)	(1,875,118		)	(2,727,850		)	(2,589,770		)	(2,259,445		)
Ceded policyholders' account withdrawals	28,004			0			0			30,341			24,111			28,004
Cash flows from (used in) financing activities	(543,632		)	(769,685		)	(1,041,025		)	(686,765		)	(939,760		)	(543,632		)
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS	1,847,503			(58		)	(823		)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS										2,863,595			(208,100		)	1,847,503
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	536			594			1,417			1,639,939			1,848,039			536
CASH AND CASH EQUIVALENTS, END OF YEAR	$	1,848,039		$	536		$	594		$	4,503,534		$	1,639,939		$	1,848,039
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid/(received)	$	31,931		$	(4,858	)	$	75,745
Income taxes paid (refund)										$	(43,130	)	$	437,872		$	31,931
Interest paid	$	23,392		$	68		$	8,657		$	33,901		$	34,217		$	23,392



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



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




			Page ~~Number~~
PART I	Item 1.	Business	4
	Item 1A.	Risk Factors	1514
	Item 1B1B.	Unresolved Staff Comments	2723
	Item 2.	Properties	2724
	Item 3.	Legal Proceedings	2724
	Item 4.	Mine Safety Disclosures	2724
PART II	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	2825
	Item 6.	Selected Financial Data	2825
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2825
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	4140
	Item 8.	Financial Statements and Supplementary Data	4544
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	45117
	Item 9A.	Controls and Procedures	45117
	Item 9B.	Other Information	45117
PART III	Item 10.	Directors, Executive Officers and Corporate Governance	45118
	Item 14.	Principal Accountant Fees and Services	45118
PART IV	Item 15.	Exhibits and Financial Statement Schedules	46119
	Item 16.	Form 10-K Summary	46120
SIGNATURES			47121



Products The Company has sold a wide array of annuities, including deferred and immediate variable annuities with (1) fixed interest rate allocation options, subject to a market value adjustment, that are registered with the United States Securities and Exchange Commission (the “SEC”), and (2) fixed-rate allocation options not subject to a market value adjustment and not registered with the SEC. In addition, the Company has a relatively small in force block of variable life insurance policies. The Company stopped actively selling such products between March 2010 and December 2017. The Company has resumed offering annuity products to new investors (except in New York). It launched a new fixed indexed annuity in January 2018 and a new deferred income annuity in March 2018. Fixed Annuities: • In January 2018, the Company launched PruSecure^SM,a single premium fixed indexed annuity, which allows the contractholder to allocate all or a portion of their account balance into an index-based strategy, such as the S&P 500. The index-based strategy provides interest or an interest component linked to, but not an investment in, the selected index, and its performance over the elected term (i.e., 1, 3 or 5 years), subject to certain contractual minimums and maximums. • In March 2018, the Company also launched Guaranteed Income For Tomorrow (GIFT)^R, a deferred income annuity. Each contribution purchases increments of guaranteed lifetime income that starts on a future date chosen at issue by the owner and continues for life.	Marketing and Distribution Our distribution efforts, which are supported by a network of internal and external wholesalers, are executed through a diverse group of distributors including: • Third-party broker-dealers • Banks and wirehouses • Independent financial planners • Financial professionals, including those associated with Prudential Advisors, Prudential's proprietary nationwide sales organization • Direct response solicitation through Prudential Insurance's Group Insurance business and online (specifically for our GIFT product)



	December 31, 2016
	Increase/(Decrease) in DAC			Increase/(Decrease) in DSI
	(in millions)
Increase in future rate of return by 100 basis points	$	319		$	116
Decrease in future rate of return by 100 basis points	$	(344	)	$	(116	)



	December 31, 2016
	Increase/(Decrease) in GMDB/GMIB Reserves
	(in millions)
Increase in future rate of return by 100 basis points	$	(127	)
Decrease in future rate of return by 100 basis points	$	163



	December 31, 2016								December 31, 2015
	Notional		Fair Value			Hypothetical Change in Fair Value			Notional		Fair Value			Hypothetical Change in Fair Value

	(in millions)
Financial assets with interest rate risk:
Fixed maturities, available-for-sale			$	9,363		$	(1,137	)			$	2,524		$	(111	)
Policy loans			13			0					13			0
Commercial mortgage and other loans			1,236			(63		)			438			(20		)
Derivatives:
Swaps	$	95,260	3,116			(3,822		)	$	2,284	95			(76		)
Futures	3,743		19			(620		)	0		0			0
Options	15,435		127			211			18,387		16			(4		)
Forwards(1)	500		(25		)	0			3		0			0
Variable annuity and other living benefit feature embedded derivatives(2)			(7,707		)	4,505					(3,134		)	1,487
Financial liabilities with interest rate risk(3):
Policyholders' account balances-Investment Contracts			(248		)	3					(102		)	3
Total estimated potential gain (loss)						$	(923	)						$	1,279


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



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



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



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



	(UNAUDITED)
	Three Months Ended March 31, 2016
	As Previously Reported			Revision			As Revised
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Reinsurance recoverables	$	(69,025	)	$	5,261		$	(63,764	)
Cash flows from (used in) operating activities	35,727			5,261			40,988
CASH FLOWS FROM FINANCING ACTIVITIES:
Ceded policyholders’ account deposits	0			(16,249		)	(16,249		)
Ceded policyholders’ account withdrawals	0			10,988			10,988
Cash flows from (used in) financing activities	(5,823		)	(5,261		)	(11,084		)



	(UNAUDITED)
	Six Months Ended June 30, 2016
	As Previously Reported			Revision			As Revised
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Policy charges and fee income	$	248		$	(355	)	$	(107	)
Future policy benefits	122,101			193,147			315,248
Reinsurance recoverables	(15,315		)	279,718			264,403
Derivatives, net	10,192,618			(233,295		)	9,959,323
Other, net	84,739			(279,768		)	(195,029		)
Cash flows from (used in) operating activities	10,936,664			(40,553		)	10,896,111
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders’ account deposits	637,886			497,834			1,135,720
Ceded policyholders’ account deposits	0			(19,498		)	(19,498		)
Policyholders’ account withdrawals	(736,708		)	(454,971		)	(1,191,679		)
Ceded policyholders’ account withdrawals	0			17,188			17,188
Cash flows from (used in) financing activities	534,651			40,553			575,204



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



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


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


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


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



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



Standard	Description	Effective date and method of adoption	Effect on the financial statements or other significant matters
ASU 2014-09 , Revenue from Contracts with Customers (Topic 606)	The ASU is based on the core principle that revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The standard also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, and assets recognized from the costs to obtain or fulfill a contract with a customer. Revenue recognition for insurance contracts and financial instruments ~~are~~is explicitly scoped out of the standard.	~~January 1, 2018 using one of two retrospective application methods (early adoption permitted beginning January 1, 2017).~~ ~~The Company plans to adopt the standard on~~ January 1, 2018 using the modified retrospective ~~application.~~method which included a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption.	Adoption of the ASU did not have an impact on the Company’s Financial Statements and Notes to the Financial Statements.
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a Consensus of the Emerging Issues Task Force)	~~Given~~This ASU addresses diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard provides clarity on the treatment of eight specifically defined types of cash inflows and outflows.	January 1, 2018 using the retrospective method (with early adoption permitted provided that ~~insurance contracts and financial instruments~~all amendments are ~~explicitly scoped out of~~adopted in the ~~standard, the Company does not expect the adoption~~same period).	Adoption of the ASU todid not have a significant impact on the Company’s Financial Statements and Notes to the Financial Statements.
ASU ~~2016-01,~~ 2016-18 ~~Financial~~ ~~Instruments -~~ ~~Overall (Subtopic 825-10):~~ ~~Recognition and Measurement~~, Statement of ~~Financial Assets and Liabilities~~Cash Flows (Topic 230): Restricted Cash	In November 2016, the FASB issued this ASU to address diversity in practice from entities classifying and presenting transfers between cash and restricted cash as operating, investing, or financing activities, or as a combination of those activities in the Statement of Cash Flows. The ASU ~~revises an entity’s accounting related~~requires entities to show the ~~classification~~changes in the total of cash, cash equivalents, restricted cash, and ~~measurement~~restricted cash equivalents in the Statement of ~~certain equity investments and~~Cash Flows. As a result, transfers between such categories will no longer be presented in the ~~presentation~~Statement of ~~certain fair value changes for financial liabilities measured at fair value. The standard also amends certain disclosure requirements associated with the fair value of financial instruments.~~Cash Flows.	January 1, 2018 using the ~~modified retrospective method. The amendments are to be applied prospectively as they relate to equity investments without readily determinable fair value.~~	The Company’s equity investments, except for those accounted for using the equity method, will generally be carried on the Statements of Financial Position at fair value with changes in fair value reported in current earnings. The Company is continuing to assess additional impacts of the ASU on the Company’s Financial Statements and Notes to the Financial Statements.
~~ASU 2016-02~~, ~~Leases (Topic 842)~~	This ASU ensures that assets and liabilities from all outstanding lease contracts are recognized on the balance sheet (with limited exception). The ASU substantially changes a Lessee’s accounting for leases and requires the recording on balance sheet of a right-of-use asset and liability to make lease payments for most leases. A Lessee will continue to recognize expense in its income statement in a manner similar to the requirements under the current lease accounting standard. For Lessors, the standard modifies classification criteria and accounting for sales-type and direct financing leases and requires a Lessor to derecognize the carrying value of the leased asset that is considered to have been transferred to a Lessee and record a lease receivable and residual asset (receivable and residual approach). The standard also eliminates the real estate specific provisions of the current standard (i.e., sale-leaseback).	~~January 1, 2019 using the modified~~ retrospective method (with early adoption permitted).	~~The Company is currently assessing the impact~~Adoption of the ASU did not have a significant impact on the Company’s Financial Statements and Notes to the Financial Statements.



ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Loss)	In February 2018, this ASU was issued following the enactment of the Tax Act of 2017. This ASU allows an entity to elect a reclassification from AOCI to retained earnings for stranded effects resulting from the Tax Act of 2017.	January 1, 2019 with early adoption permitted. The ASU should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act of 2017 is recognized.	The Company early adopted the ASU effective January 1, 2018 and elected to apply the ASU in the period of adoption subsequent to recording the adoption impacts of ASU 2016-01 as described above. As a result, the Company reclassified stranded effects resulting from the Tax Act of 2017 by decreasing AOCI and increasing retained earnings, each by$36.7 million. Stranded effects unrelated to the Tax Act of 2017 are generally released from AOCI when an entire portfolio of the type of item related to the stranded effect is liquidated, sold or extinguished (i.e., portfolio approach).



ASU 2018-12 Amended Topic	Description	Method of adoption	Effect on the financial statements or other significant matters
Cash flow assumptions used to measure the liability for future policy benefits for non-participating traditional and limited-pay insurance products	Requires an entity to review, and if necessary, update the cash flow assumptions used to measure the liability for future policy benefits, for both changes in future assumptions and actual experience, at least annually using a retrospective update method with a cumulative catch-up adjustment recorded in a separate line item in the Statements of Operations.	An entity may choose one of two adoption methods for the liability for future policy benefits: (1) a modified retrospective transition method whereby the entity will apply the amendments to contracts in force as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or (2) a full retrospective transition method.	The options for method of adoption and the impacts of such methods are under assessment.
Discount rate assumption used to measure the liability for future policy benefits for non-participating traditional and limited-pay insurance products	Requires discount rate assumptions to be based on an upper-medium grade fixed income instrument yield and will be required to be updated each quarter with the impact recorded through OCI.	As noted above, an entity may choose either a modified retrospective transition method or full retrospective transition method for the liability for future policy benefits. Under either method, for balance sheet remeasurement purposes, the liability for future policy benefits will be remeasured using current discount rates as of the beginning of the earliest period presented with the impact recorded as a cumulative effect adjustment to AOCI.	Upon adoption, under either transition method, there will be an adjustment to AOCI as a result of remeasuring in force contract liabilities using current upper-medium grade fixed income instrument yields. The adjustment upon adoption will largely reflect the difference between the discount rate locked-in at contract inception versus current discount rates at transition. The magnitude of such adjustment is currently being assessed.



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


(1)	Includes credit-tranched securities collateralized by loan obligations, sub-prime mortgages, auto loans, ~~credit cards,~~equipment leases, education loans and other asset types.


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


(3)	Represents the amount of ~~OTTI~~unrealized losses remaining in AOCI, ~~which were not included in earnings.~~from the impairment measurement date. Amount excludes ~~$0.2~~$3.3 million of net unrealized ~~gains~~losses on impaired available-for-sale securities relating to changes in the value of such securities subsequent to the impairment measurement date.



	December 31, 2017(4)
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI(3)
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	5,059,168	$	9,109	$	236,627	$	4,831,650	$	0
Obligations of U.S. states and their political subdivisions	102,709		2,089		158		104,640		0
Foreign government bonds	133,859		6,878		432		140,305		0
U.S. corporate public securities	1,721,186		90,953		3,689		1,808,450		0
U.S. corporate private securities	1,166,682		46,267		5,005		1,207,944		0
Foreign corporate public securities	223,907		6,291		977		229,221		0
Foreign corporate private securities	730,449		44,917		3,806		771,560		0
Asset-backed securities(1)	341,277		4,438		128		345,587		(17		)
Commercial mortgage-backed securities	502,695		7,334		4,345		505,684		0
Residential mortgage-backed securities(2)	163,334		2,950		539		165,745		(4		)
Total fixed maturities, available-for-sale	$	10,145,266	$	221,226	$	255,706	$	10,110,786	$	(21	)


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



	December 31, 2018
	Less Than Twelve Months				Twelve Months or More				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	367,796	$	4,844	$	3,304,663	$	371,649	$	3,672,459	$	376,493
Obligations of U.S. states and their political subdivisions	25,764		322		83,950		2,805		109,714		3,127
Foreign government bonds	98,437		2,346		58,975		1,810		157,412		4,156
U.S. corporate public securities	627,589		28,474		386,599		22,108		1,014,188		50,582
U.S. corporate private securities	269,545		7,755		422,498		15,122		692,043		22,877
Foreign corporate public securities	97,367		2,521		107,286		4,310		204,653		6,831
Foreign corporate private securities	373,891		19,217		116,743		8,554		490,634		27,771
Asset-backed securities	358,668		3,501		24,529		264		383,197		3,765
Commercial mortgage-backed securities	45,432		355		159,638		5,136		205,070		5,491
Residential mortgage-backed securities	34		1		13,775		497		13,809		498
Total fixed maturities, available-for-sale	$	2,264,523	$	69,336	$	4,678,656	$	432,255	$	6,943,179	$	501,591



	December 31, 2017(1)
	Less Than Twelve Months				Twelve Months or More				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	13,174	$	23	$	4,550,472	$	236,604	$	4,563,646	$	236,627
Obligations of U.S. states and their political subdivisions	6,669		26		13,311		132		19,980		158
Foreign government bonds	37,466		428		143		4		37,609		432
U.S. corporate public securities	234,798		1,181		126,339		2,508		361,137		3,689
U.S. corporate private securities	278,203		3,383		83,365		1,622		361,568		5,005
Foreign corporate public securities	76,526		637		23,186		340		99,712		977
Foreign corporate private securities	78,200		536		103,758		3,270		181,958		3,806
Asset-backed securities	30,234		128		0		0		30,234		128
Commercial mortgage-backed securities	113,423		1,225		129,458		3,120		242,881		4,345
Residential mortgage-backed securities	26,916		166		24,833		373		51,749		539
Total fixed maturities, available-for-sale	$	895,609	$	7,733	$	5,054,865	$	247,973	$	5,950,474	$	255,706

~~Large accelerated filer~~

~~Accelerated filer~~

~~Non-accelerated filer~~

~~Smaller reporting company~~