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.

Our investments, results of operations and financial condition may also be adversely affected by developments in the global economy, orand in the U.S. economy (including as a result of actions by the Federal Reserve with respect to monetary policy, and adverse political ~~developments, including a failure to increase the federal debt ceiling)~~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.

Our exposure to interest rates ~~could adversely affect our investment returns and results of operations, including~~can manifest itself over years as in the ~~following respects:~~

~~Some~~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 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 reinvest~~must invest in lower-yielding instruments, potentially reducing net investment ~~income.~~income and constraining our ability to offer certain products. This risk is increased as more policyholders may retain their policies in a low rate environment. Since many of our policies and contracts have guaranteed minimum ~~interest~~ crediting rates or limit the resetting of ~~interest~~crediting rates, the spreads could decrease ~~and potentially become negative,~~ or go ~~further~~ negative. ~~When~~

Alternatively, when interest rates rise, we may not be able to replace the assets in our general account as quickly with the ~~higher yielding~~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~~It is possible that fewer policyholders may retain their policies and annuity contracts ~~may increase~~ as ~~policyholders seek~~they pursue higher crediting rates, which could expose the Company 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~~and liquidity stress.

Table of deferred acquisition costs (“DAC”), deferred sales inducements (“DSI”) and value of business acquired (“VOBA”). Also, an increase in interest rates accompanied by unexpected extensions of certain lower yielding investments could reduce our profitability.

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~~When interest rates rise, hedging activities associated with some of our products could subject us to increased collateral posting requirements or reduced amounts of collateral posted to us.~~

~~A decline in interest rates accompanied by unexpected prepayments of certain investments could require us to reinvest at lower rates and reduce our profitability.~~

~~A decline in interest rates could require Prudential Financial to contribute capital to subsidiaries to support our annuities business.~~

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

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

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, this estimate of the liability cash flow profile is complex 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.

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 and VOBA, 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. 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 a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the financial services industry, 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 may in turn cause rating agencies to reevaluate its ratings.

Disruptions in the capital markets could adversely affect our ability to access sources of liquidity, as well as threaten to reduce our capital below a level that is consistent with our existing ratings objectives. Therefore, we may need to take 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) 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.

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

~~Our profitability may decline if mortality experience, morbidity experience, persistency experience or utilization experience differ significantly from our pricing expectations.~~

We set prices for many of our insurance and annuity products based upon expected claims and payment patterns, using assumptions for mortality rates (the likelihood 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 of natural or man-made disasters, significant changes in mortality, or morbidity could emerge gradually over time, due to changes in the natural environment, the health habits of the insured population, treatment patterns and technologies for disease or disability, the economic environment, or other factors. Pricing of our insurance and deferred annuity products were based in part upon expected persistency of these products, which is the probability that a policy or contract will remain in force from one period to

the next. Persistency may be significantly impacted by the value of guaranteed minimum benefits contained in many of our variable annuity products being higher than current account values in light of 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 were 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 third-party investor strategies in the annuities business, could adversely affect the profitability of existing business.

Significant deviations in actual experience from our pricing assumptions could have an adverse effect on the profitability of our products. 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.

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

We establish reserves in accordance with U.S. GAAP for future policyholder benefits and expenses. While these reserves generally exceed our best estimate of the liability for future benefits 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 persistency experience. 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 where we are able to do so.

~~Updated assumptions may also require us to increase U.S. GAAP reserves for the guarantees in certain nontraditional 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 on returns on capital associated with these products. Our ability to efficiently manage capital and economic reserve levels may be impacted, thereby impacting profitability and returns on capital.

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

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 of our investment securities, if trading becomes less frequent 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 the current financial environment 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 values may not be ultimately realizable in a market transaction, and such values may change very rapidly as market conditions change and valuation assumptions are modified. Decreases in value may have a material adverse effect on our results of operations or financial condition.

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

~~Credit and Counterparty Risks~~

A downgrade or potential downgrade in our financial strength or Prudential Financial’s credit ratings could increase policy surrenders 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 increase Prudential Financial’s borrowing costs and potentially make it more difficult to borrow funds, adversely affect the availability of financial guarantees, such as letters of credit, cause additional collateral requirements or other required payments under certain agreements, allow Prudential Global Funding’s (“PGF”) counterparties to terminate derivative agreements, and/or hurt relationships with creditors, distributors or trading counterparties thereby potentially negatively affecting our profitability, liquidity and/or capital. In addition, we consider our own risk of non-performance in determining the fair value of certain of our liabilities, including insurance liabilities that are classified as embedded derivatives under U.S. GAAP. Changes in Prudential Financial’s credit rating or our financial strength ratings may therefore affect the fair value of our liabilities.

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

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

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

The Company and its reinsurance affiliate use derivative instruments to hedge various risks, including certain guaranteed minimum benefits contained in many of our variable annuity products. We and our reinsurance affiliate enter into a variety of derivative instruments, including options, forwards, interest rate, credit default and currency swaps with an affiliate. Amounts that we expect to collect under current and future contracts, including, but not limited to reinsurance contracts, are subject to counterparty risk. Our obligations under our products are not changed by our hedging activities 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.

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 result 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.

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 policyholders~~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 ~~affiliated reinsurance~~ hedging and risk management strategies, including product features, to mitigate these risks in ~~part.~~part and we may periodically change our strategies over time. These strategies may, however, not be fully effective. ~~We and our reinsurance affiliate~~In addition, we may ~~also~~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 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 ~~and our reinsurance affiliate sometimes~~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.~~GAAP and our statutory capital 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~~from of 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 ~~and our reinsurance affiliate’s~~ results of operations, financial condition or liquidity.

~~Regulatory~~

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 ~~Legal Risks~~

~~Our business is heavily regulated and changes~~a decrease in ~~regulation may~~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 ~~condition.~~position.

Liquidity Risk

As a financial services company, PALAC is exposed to liquidity risk, which is the risk that PALAC 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 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 PALAC's liquidity and sources and uses of liquidity see “Management’s Discussion and Analysis of Results of Operations and Financial Condition-Liquidity and Capital Resources-Liquidity.”

Table of Contents

Operational Risk

Our operations are exposed to 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 unable to continue operations during a business ~~is subject~~continuation event or if systems are compromised due to ~~comprehensive regulation and supervision. Many of~~malware or virus.

Regulatory fines or sanctions - When the Company fails to comply with applicable laws or regulations, regulatory fines or sanctions may be imposed. In addition, possible restrictions on business activities may result.

Legal actions - Failure to comply with 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 in the recent past 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 Board of Governors of 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. As a result, U.S. financial regulators are expected to enhance their regulation of Prudential Financial to achieve a number of regulatory objectives. This additional regulation is likely to increase 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.

The Company is subject to the rules and regulations of the SEC relating to public reporting and disclosure, accounting and financial reporting, and corporate governance matters. The Sarbanes-Oxley Act of 2002 and rules and regulations adopted in furtherance of that Act substantially increased the requirements in these and other areas for the Company and certain of our affiliates. Our internal controls over financial reporting may have gaps or other deficiencies and there is no assurance that significant deficiencies or material weaknesses in internal controls may not occur in the future. Any such gaps or deficiencies may require significant resources to remediate and may also ~~expose~~exposes the Company to litigation ~~regulatory fines or penalties or other losses.~~

Many insurance regulatory and other governmental or self-regulatory bodies have the authority to review our products and business practices and those of our agents and employees and to bring regulatory or other legal actions against us if, in their view, our practices, or those of our agents or employees, are improper. These actions canrisk. This may also 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.~~

~~Insurance regulators continue to develop a principles-based reserving approach for life insurance products. The timing and the effect of these changes are uncertain.~~

In February 2014, the NY DFS notified PALAC that it did not agree with its calculation of statutory reserves (including the applicable credit for reinsurance) for New York financial reporting purposes in respect of certain variable annuity products. During the fourth quarter of 2014, PALAC reached an agreement with the NY DFS on a reserving methodology for these products. As a result, for year-end 2014 PALAC will hold additional statutory reserves on a New York basis. As of year-end 2014, PALAC held sufficient statutory surplus on a New York basis to satisfy these additional New York reserves, but such additional reserves will reduce New York statutory surplus. PALAC is not domiciled in New York, and these

changes do not impact statutory reserves reported in Arizona, its state of domicile, or any states other than New York, and therefore do not impact PALAC’s Risk-Based Capital ratio. However, the agreed reserve methodologylosses.

Liabilities we may require PALAC to hold additional New York statutory reserves in the future, which would result in a further reduction of New York statutory surplus. If PALAC were required to establish material additional reserves on a New York statutory accounting basis or post material amounts of additional collateral with respect to its annuity products, PALAC’s ability to deploy capital for other purposes could be affected and it could be required to obtain additional funding from Prudential Financial or its affiliates. In determining the New York basis reserve, New York reserve standards apply to PALAC’s New York and non-New York business. PALAC is in discussions with the NY DFS about steps to limit the application of these standards to PALAC’s New York business. These steps may include PALAC holding assets in trust, ceding risks to an affiliate and providing other forms of security for the benefit of PALAC’s New York business.

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, includingincur as a result of ~~downgrades~~operational failures are described further under “Contingent Liabilities” in Note 12 to ~~our financial strength ratings.~~

~~Currently, there are several proposals to amend state insurance holding company laws to increase~~ the scope of the regulation of insurance holding companies (such as Prudential Financial). These proposals include imposing standards for insurer corporate governance, enterprise risk management, group-wide supervision of insurance holding companies, adjustments to risk-based capital calculations to account for group-wide risks, and additionalFinancial Statements. In addition, certain pending regulatory and disclosure requirements for insurance holding companies. In addition, state insurance regulators have focused attention on U.S. insurance solvency regulation pursuant to the NAIC’s “Solvency Modernization Initiative”, including regulatory review of companies’ risk management practices and analyses. This initiative has resulted in the recent adoption of the NAIC Risk Management and ORSA model act which, following enactment at the state level, will require larger insurers, beginning in 2015, to assess the adequacy of their and their group’s risk management and current and future solvency position. At this time, we cannot predict with any degree of certainty what additional capital requirements, compliance costs or other burdens these requirements may impose on Prudential Financial or its subsidiaries.

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.~~

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.

On September 19, 2013, the Council made a final determination that Prudential Financial should be subject to stricter prudential regulatory standards and supervision by the FRB as a “Designated Financial Company” pursuant to Dodd-Frank, thereby subjecting Prudential Financial 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 expected to continue over the next few years. We cannot predict with any certainty the requirements of the regulations recently or not yet adopted or how Dodd-Frank and such regulations will affect the financial markets generally, impact our business, Prudential Financial’s credit ratings or our financial strength ratings, results of operations, cash flows or financial condition or advise or require us to hold or raise additional capital or liquid assets. Key aspects of Dodd-Frank’s impact on us include:

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As a Designated Financial Company, Prudential Financial is now subject to supervision and examination by the FRB and to stricter prudential standards, which include or will include requirements and limitations (some of which are the subject of ongoing rule-making) relating to RBC, leverage, liquidity, risk management and credit concentration, and a requirement to prepare and submit an annual plan for rapid and orderly resolution in the event of severe financial distress. If the FRB and the FDIC jointly determine that Prudential Financials’ plan is deficient, they may impose more stringent capital, leverage, or liquidity requirements, or restrictions on our growth, activities, or operations. 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 to facilitate Prudential Financial’s orderly resolution. In addition, failure to meet defined measures of financial condition could result in substantial restrictions on our business and capital distributions. Prudential Financial will now also 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. As a Designated Financial Company, Prudential Financial must also seek pre-approval from the FRB for acquisition of certain companies engaged in financial activities.

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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.

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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.

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Dodd-Frank creates a new framework for regulation of the over-the-counter (“OTC”) derivatives markets which could impact various activities of PGF, Prudential Financial and 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 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, final rules regarding margin requirements for OTC derivatives have not been adopted, and any margin rules applicable to the Company or PGF may be more onerous than the collateral posting requirements under our existing OTC derivatives contracts.

—

Title II of Dodd-Frank provides that a 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.

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

~~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.

On July 18, 2013, 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 (including basic capital requirements “BCR” applicable to all group activities and higher loss absorption capital standards), enhanced liquidity planning and management, and development of a risk reduction plan and recovery and resolution plans. In October 2014, the IAIS concluded the development of its initial BCR framework. Depending on the directions of domestic group wide supervisors, G-SIIs such as Prudential Financial will be required to report their BCR results beginning in 2015 on a confidential basis. The BCR will continue to be revised and refined by the IAIS once the confidential reporting period begins, and a final capital framework for G-SIIs is anticipated by 2019. Policy measures applicable to G-SIIs would need to be implemented by legislation or regulation in each applicable jurisdiction. We cannot predict the outcome of our identification as a G-SII on the regulation of our businesses.

At the direction of the FSB, the IAIS is developing ComFrame for the supervision of IAIGs that contemplates “group wide supervision” across national boundaries, including uniform standards for insurer corporate governance and enterprise risk management, a framework for group capital adequacy assessment that accounts for group-wide risks, and the establishment of ongoing supervisory colleges. Prudential Financial qualifies as an IAIG. In October 2013, the IAIS announced that it expects to develop a risk-based global insurance capital standard applicable to IAIGs with implementation scheduled to begin in 2019, and in December 2014, it published a proposed standard for public comment. At this time, we cannot predict what additional capital requirements, compliance costs or other burdens these requirements would impose on us, if adopted.

~~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 FASB and International Accounting Standards Board (“IASB”) have ongoing projects to revise accounting standards for insurance contracts. While the final resolution of changes to U.S. GAAP and International Financial Reporting Standards pursuant to these projects 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 in the U.S. in which we operate 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. Reducing or eliminating certain tax expenditures could make our products less attractive to customers. It is unclear whether or when Congress may take up overall tax reform and what would be the impact of reform on the Company and its products.

However even in the absence of overall tax reform, the large federal deficit, as well as the budget constraints faced by many states and localities, increases the likelihood that Congress and state and local governments will raise revenue by enacting legislation increasing the taxes paid by individuals and corporations. This can be accomplished either by raising rates or otherwise changing the tax rules.

Congress from time to time considers legislation that could make our products less attractive to consumers, Current U.S. federal income tax laws generally permit certain holders to defer taxation on the build-up of value of annuities and life insurance products until payments are actually made to the policyholder or other beneficiary and to exclude from taxation the death benefit paid under a life insurance contract. While higher tax rates increase the benefits of tax deferral on the build-up of value of annuities and life insurance, making our products more attractive to consumers, legislation that reduces or eliminates deferral would have a potential negative effect on our products.

Congress, as well as state and local governments, also considers from time to time legislation that could increase the amount of corporate taxes we pay, 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.

The Obama Administration’s Revenue Proposals include proposals which, if enacted, would affect the taxation of life insurance companies and certain life insurance products. The proposals would also change the method used to determine the amount of dividend income received by a life

insurance company on assets held in separate accounts used to support products, including variable life insurance and variable annuity contracts, that is eligible for the dividends received deduction, (“DRD”). The DRD reduces the amount of dividend income subject to tax and is a significant component of the difference between our actual tax expense and the expected tax amount determined using the federal statutory tax rate of 35%. If proposals of this type were enacted, the Company’s actual tax expense could increase, thereby reducing earnings.

Furthermore, the Administration’s Fiscal Year 2016 Revenue Proposals also include items that would change the way U.S. multinational corporations are taxed, as well as a liability-based fee on financial services companies, including insurance companies, with consolidated assets in excess of $50 billion. If these types of provisions are enacted into law, they could increase the amount of taxes Prudential Financial pays.

The products we have sold have different tax characteristics, in some cases generating tax deductions for the Company. 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 returns. In addition, the adoption of “principles based” approaches 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 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. Legal liability or adverse publicity in respect of these or future legal or regulatory actions could have an adverse affect on us or cause us reputational harm, which in turn could harm our business prospects.

~~Material pending~~ litigation ~~and regulatory~~ matters affecting us, and certain risks to our businesses presented by such matters, are discussed under “Litigation and Regulatory Matters” in Note 12 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 depending, in part, upon the results of operations or cash flow for such period. In light of the unpredictability of the Company’s litigation and regulatory matters, it is also possible that in certain cases an ultimate unfavorable resolution of one or more pending litigation or regulatory matters could have a material adverse effect on the Company’s financial position.

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

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.

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 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 automatic asset transfer 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 breaches in the security of 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, cyber 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. Risks related to cyber-attacks 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 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 or who may~~authorized to access the Company’s systems) remain and cannot be ~~linked to terrorist organizations or hostile foreign governments, as well as~~effectively mitigated using technology alone.

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.

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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.

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. As evidenced by the ~~Company has~~ability of criminal organizations and nation-states to successfully breach large financial institutions and the U.S. government, no organization is fully immune to cyber-attacks.

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 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.

~~Interruption in telecommunication, information technology and other operational systems, or a failure to maintain~~

We may not adequately ensure 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 the use of third parties to deliver contracted services in a broad range of 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.

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 ~~systems, whether due~~terms will remain acceptable to ~~actions by~~ us or ~~others,~~such third parties. An interruption in certain key relationships could ~~delay or disrupt~~materially affect our ability to ~~do business and service~~market our customers, harm our reputation, result in a violation of applicable privacy and other laws, subject us to substantial regulatory sanctions and other claims, lead to a loss of customers and revenues, or financial loss to our customers and otherwise adversely affect our business.

~~Other Risks~~

~~Our risk management policies and procedures may prove to be ineffective and leave us exposed to unidentified or unanticipated risk, which could adversely affect our businesses or result in losses.~~

We have developed an enterprise-wide risk management framework to mitigate risk and loss to the Company, and 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 lossesproducts and could ~~be materially~~have a material adverse effect on our business, operating results and financial condition. Distributors may elect to reduce or terminate their distribution relationships with us, including for such reasons as adverse developments in our business, adverse rating agency actions or concerns about market-related risks. We are also at risk that 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 distribution channels could emerge and adversely affected. As our businesses change and the markets in which we operate evolve, our risk management framework may not evolve at the same pace as those changes. In times of market stress, unanticipated market movements or unanticipated claims experience resulting from adverse mortality or morbidity,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 ~~be limited, resulting in losses~~also increase the likelihood that distributors will try to renegotiate the ~~Company.~~ terms of any existing selling agreements to terms less favorable to us.

In addition, ~~under difficult or less liquid market conditions,~~when our ~~risk management strategies~~products are distributed through unaffiliated firms, we may not be ~~effective because~~able to monitor or control the manner of their distribution despite our training and compliance programs. If our products are distributed in an inappropriate manner, or to customers for whom they are unsuitable, or distributors of our products otherwise engage in misconduct, we may suffer reputational and other ~~market participants may be using the same or similar strategies~~harm to ~~manage risk under the same challenging market conditions. In such circumstances, it may be difficult or more expensive for the Company to mitigate risk due~~our business. We also have a large captive distribution channel and we are subject to the ~~activity of such other market participants.~~

~~Many of our~~ risk management strategies or techniques are based 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~~monitoring and controls will not detect inappropriate sales practices or misconduct by our own agents.

As a financial services company, we are exposed to ~~record properly and verify a large number~~model risk, which is the risk of ~~transactions and events, and these policies, procedures and controls may not be fully effective.~~

financial loss or reputational damage or adverse regulatory impacts caused by model errors or limitations, incorrect implementation of models, or misuse of or overreliance upon 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~~a change in our 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 to change our sales goals, exit a certain business, and/or change our business model.

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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 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 following areas:

Prudential ~~Insurance’s employees or employees of our vendors could result in violations of law by us, regulatory sanctions and/or serious reputational or financial harm~~Financial's regulation as a Designated Financial Company and the ~~precautions we take to prevent and detect this activity may not be effective in all cases. There can be no assurance that controls and procedures that we employ,~~associated enhanced prudential standards, many of which are ~~designed~~subject to ~~monitor associates’~~ongoing rule-making.

Financial sector regulatory reform that may arise out of reports issued by the U.S. Treasury.

Changes in tax law.

The DOL fiduciary rules.

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.

Changes in accounting rules applicable to our 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 andmay also have ~~a material~~an adverse ~~effect~~impact on our results of operations or financial condition.

In For a discussion of accounting pronouncements and their potential impact on our ~~investments~~business, see Note 2 to the Financial Statements.

Technological changes may be unsettling to our business model. We believe there are three aspects of technological change that would significantly impact our business model as described below. 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 ~~prevent 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 favor online activity which would change the role of malls and retail properties.

Medical Advances. The Company is exposed to the impact of medical advances in two major ways. Genetic testing and 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 operations 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 our 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, such downgrades could lead to a downgrade of ~~operations~~Prudential Financial and its domestic insurance companies.

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London Inter-Bank Offered Rate ("LIBOR") reform 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 may be tied to LIBOR. Actions by regulators or law enforcement agencies, as well as ICE Benchmark Administration (the current administrator of LIBOR) may result in changes to the way LIBOR is determined or the establishment of alternative reference rates. For example, 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. 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 announced its plans to begin publishing, in mid-2018, a Secured Overnight Funding Rate ("SOFR") which is intended to replace U.S. dollar LIBOR. Plans for alternative reference rates for other currencies have also been announced. At this time, it is not possible to predict how markets will respond to these new rates, and the effect of any changes or reforms to LIBOR or discontinuation of LIBOR on new or existing financial ~~condition.~~

~~The occurrence~~instruments to which we have exposure. If LIBOR ceases to exist or if the methods of ~~natural disasters, including hurricanes, floods, earthquakes, tsunamis, tornadoes, fires, explosions, pandemic disease~~calculating LIBOR change from current methods for any reason, interest rates on certain derivatives and ~~man-made disasters, including acts~~floating rate securities we hold, and any other assets or liabilities whose value is tied to LIBOR, may be adversely affected. Further, any uncertainty regarding the continued use and reliability of ~~terrorism and military actions,~~LIBOR as a benchmark interest rate could adversely affect the value of such instruments.

The changing competitive landscape may adversely affect the Company. In each of our ~~operations, results of operations~~businesses 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 ~~financial condition, including~~other changes in the ~~following respects:~~

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

—

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

—

A terrorist attack affecting financial institutions in the United States or elsewhere could negatively impact the financial services industry in general and our business operations, investment portfolio and profitability in particular.

—

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 highly speculative, and would depend on numerous factors, including: the effectiveness of vaccines and the rate of contagion; the regions of the world most affected; the effectiveness of treatment for the infected population; the rates of mortality and morbidity among various segments of the insured population; the collectability of reinsurance; the possible macroeconomic effects of a pandemic on the Company’s asset portfolio; the effect on lapses and surrenders of existing policies, as well as sales of new policies; and many other variables.

~~The above risks are~~marketplace may present opportunities for new or smaller competitors without established products or distribution channels to meet consumers’ increased expectations more ~~pronounced in respect~~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 ~~geographic areas, including major metropolitan centers, where we have concentrations of customers, concentrations of employees~~calamities, 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.~~

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

~~Finally, climate~~investment portfolio. Climate change may increase the frequency and severity of weather related ~~disasters.~~disasters and pandemics. In addition, climate change regulation may affect the prospects of companies and other entities whose securities we hold, ~~and~~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 that we hold.~~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~~1B. Unresolved Staff Comments

~~None~~

None.

Item ~~2.Properties~~

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 1315 to the Financial Statements.

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Item ~~3.Legal~~3. Legal Proceedings

See Note 12 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~~4. Mine Safety Disclosures

Not ~~Applicable~~

Applicable.

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PART II

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

The Company is a wholly owned subsidiary of ~~PAI.~~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~~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 ~~inforce~~in force block of variable life insurance ~~policies, but it no longer~~policies. The Company stopped actively ~~sells~~selling such ~~policies.~~

~~Beginning in~~products between March 2010 and December 2017.

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

in force contracts, subject to applicable contract provisions and administrative rules. The Company launched a new fixed indexed annuity in January 2018 and will launch a new deferred income annuity during 2018.

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

~~Regulatory Developments~~

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 ~~Financial is a “Designated Financial Company” under Dodd-Frank. As a Designated Financial~~Insurance Company of America (“Prudential ~~Financial is subject~~Insurance”). The license surrender relieves the Company of the requirement to ~~supervision and examination~~hold New York statutory reserves on its business in excess of the statutory reserves required by its domiciliary regulator, the AZDOI. For the small portion of New York business retained by the ~~Federal Reserve Bank of Boston and~~Company, a custodial account has been established to ~~prudential regulatory standards under the Dodd-Frank Act. The Financial Stability Board (the “FSB”), consisting of representatives of national financial authorities~~hold collateral assets in an amount equal to a percentage of the ~~G20 nations, has also identified Prudential Financial~~reserves associated with such business, as ~~a G-SII that is to be subject to enhanced regulation.~~

~~In December 2014, an amendment to the Collins Amendment was enacted to clarify that,~~calculated in establishing minimum capital requirements for insurance holding companies that the Board of Governors of the FRB supervises (including Designated Financial Companies such as Prudential Financial), the FRB is permitted to exclude certain insurance activities from such requirements. For a discussion of regulation under the Dodd-Frank Act, see “Business—Regulation—Dodd-Frank Wall Street Reform and Consumer Protection Act”.

~~During the fourth quarter of 2014, the Company reached an agreement~~accordance with ~~the NY DFS on reserving methodologies for~~PALAC's New York ~~financial reporting purposes in respect~~Regulation 109 Plan approved by the New York Department of ~~certain variable annuity products. For a discussion of the impact of the agreement, see “Business—Regulation—State Insurance Regulation—Insurance Reserves and Regulatory Capital”.~~

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

Financial Services.

Revenues and Expenses

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

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

of the Company, have decreased.

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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.

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.

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 or ("U.S. ~~GAAP,~~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 7 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.”~~Liabilities". As of December 31, ~~2014,~~2017, DAC and DSI were ~~$1,114~~$4,597 million and ~~$665~~$1,021 million, respectively.

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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, interest credited to policyholder balances and other credits. If significant negative gross profits ~~we consider mortality, persistency, and other elements~~are expected in any period, 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 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 13 to the Financial Statements. Incorporating all product-related profits and losses in gross profits, including those that are reported in affiliated legal entities, ~~produce~~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.”~~

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. ~~Results for all reported periods reflect performance of this review in the third quarter of each year. Beginning in 2015, we will perform our annual review of assumptions during the second quarter.~~ 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.

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~~ costs we incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts, as well as other sources of profit. Returns that are higher than our expectations for a given period produce higher than expected account balances, which increase the future fees we expect to earn and decrease the future costs we expect to incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts. The opposite occurs when returns are lower than our expectations. The changes in future expected gross profits are used to recognize a cumulative adjustment to all prior periods’ amortization.

The near-term future equity rate of return ~~assumptions~~assumption used in evaluating DAC and ~~DSI are~~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%, we use our maximum future rate of return. Historically, we have utilized a four year near-term period and a 13% maximum future rate of return in applying this methodology. Beginning in the third quarter of 2014, we adjust future projected equity returns over a five year near-term period and utilize a 15% maximum. As of December 31, ~~2014,~~2017, we assume an 8.0% long-term equity expected rate of return and a ~~3.5%~~3.3% 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~~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, which assumes~~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 ~~convergence~~result of our 2017 annual reviews and update of assumptions and other refinements, we reduced our long-term expectation of the 10-year U.S. Treasury rate by 25 basis points and now grade to ~~the long-term equity expected rates~~3.75% over ten years.

Table of ~~return.~~ Contents

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 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, 2014
Increase/(Decrease) in
DAC Increase/(Decrease) in
DSI
(in millions)
Increase in future rate of return by 100 basis points
$ 46 $ 27
Decrease in future rate of return by 100 basis points
$ (49 ) $ (29 )

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 2014, updates to lapse and utilization assumptions drove the most significant changes to amortization expense. For a discussion of DAC and DSI adjustments for the years ended December 31, 2014 and 2013, 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 ~~inforce~~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, ~~2014,~~2017, VOBA was ~~$39.7~~$35 million. ~~For additional information about VOBA including its bases 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. 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~~

—

~~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 such as our trading account assets supporting insurance liabilities, 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.

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 the Financial Statements.

~~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 certain reserves, such as our contracts with guaranteed minimum death benefits (“GMDB”), guaranteed minimum income benefits (“GMIB”) and no lapse guarantees, we utilize current best estimate assumptions in establishing reserves. The reserves are subject to adjustments based on annual reviews of assumptions and quarterly adjustments for experience, including market performance, and the reserves may be adjusted through a benefit or charge to current period earnings.

—

For certain product guarantees, primarily certain living benefit features of the variable annuity products, the benefits are accounted for as embedded derivatives, with fair values 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.

For most long-duration contracts, we utilize 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 gross premium required to provide for all benefits and expenses), is estimated using methods that include assumptions applicable at the time the insurance contracts are made with provisions for the risk of adverse deviation, as appropriate. Original assumptions continue to be used in subsequent accounting periods to determine changes in the 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 recognized in revenue in a constant relationship with insurance in force or with the amount of expected future benefit payments.

For certain contract features, such as those related to guaranteed minimum death benefits (“GMDB”), guaranteed minimum income benefits (“GMIB”), 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 utilizing current best estimate assumptions and is based on the ratio of the present value of total expected excess payments 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. These adjustments reflect the 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.

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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 using a fair 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.

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

~~Future~~reserves:

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.

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 ~~LIBOR~~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 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 10 to the Financial Statements.

~~Sensitivity~~

Sensitivities for ~~Future Policy Benefit Reserves~~

~~We expect the future benefit reserves that are based on current best estimate assumptions,~~Insurance Assets 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.~~ Liabilities

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 to variable annuity contracts~~listed financial statement balances relative to ~~our future rate of return~~changes in certain assumptions ~~by quantifying the adjustments~~that may be considered reasonably likely 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 only the hypothetical direct ~~effect~~impact on December 31, 2017 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~~combinations of assumptions. Changes in ~~our evaluation~~excess of those illustrated may occur in any period. A description of the ~~reserves, or any~~estimates and assumptions used in the preparation of each of these financial statement balances is provided further above. For traditional long duration contracts 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 cause a premium deficiency.

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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, 2017
	Increase (Decrease) in
	Deferred Policy Acquisition Costs, Deferred Sales Inducements and Value of Business Acquired			Future Policy Benefits and Policyholders’ Account Balances(1)(6)			Net Impact
				(in millions)
Assumptions:
Long-Term Equity Expected Rate of Return(2)
Increase by 50 basis points	$	95		$	(40	)	$	135
Decrease by 50 basis points	$	(190	)	$	55		$	(245	)
NPR Credit Spread(3)
Increase by 50 basis points	$	(325	)	$	(1,590	)	$	1,265
Decrease by 50 basis points	$	360		$	1,755		$	(1,395	)
Mortality(4)
Increase by 1%	$	(15	)	$	(115	)	$	100
Decrease by 1%	$	15		$	120		$	(105	)
Lapse(5)
Increase by 10%	$	(110	)	$	(605	)	$	495
Decrease by 10%	$	120		$	635		$	(515	)


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

	~~December 31, 2014~~
(2)	Represents the impact of an increase or decrease in the long-term equity expected rate of return.

	~~Increase/(Decrease) in~~ ~~GMDB/GMIB Reserves~~
(3)	Represents the impact of an increase or decrease in the NPR credit spread.

	~~(in millions)~~
~~Increase~~(4)	Represents the impact of an increase or decrease in ~~future rate of return by 100 basis points~~ mortality rates.

		$	~~(39)~~
~~Decrease~~(5)	Represents the impact of an increase or decrease in ~~future rate~~lapse rates.


(6)	Balances are gross of ~~return by 100 basis points~~		$	45	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 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.

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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” (“AOCI”), a separate component of equity. For our ~~future rate of return assumptions, other factors may also drive variability in~~investments classified as trading, 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~~fair value is recorded within “Asset administration fees and weother income”. In addition, investments classified as available-for-sale are ~~unable~~subject to ~~predict their movement or offsetting impact over time. In 2014, updates~~impairment reviews to ~~projected interest rate assumptions, partially offset by refinements to our methodology for applying reversion to the mean, drove the most significant changes to these reserves.~~identify when a decline in value is other-than-temporary. For a discussion of ~~adjustments~~our policies regarding other-than-temporary declines in investment value and the related methodology for recording OTTI of fixed maturity and equity securities, see Note 2 to the ~~reserves for GMDBs and GMIBs for the years ended December 31, 2014 and 2013, see “—Results of Operations”.~~

For certain 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 expectationsFinancial Statements.

Commercial mortgage and other ~~data. For additional information about the impacts~~loans are carried primarily at unpaid principal balances, net of ~~capital markets assumptions, including interest rates, NPR credit spreads~~unamortized deferred loan origination fees and ~~equity returns, refer to “Quantitative~~expenses and Qualitative Disclosures About Market Risk” below. In 2014, updates to lapse rate 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 offsettingunamortized premiums or discounts and ~~we are unable to predict their movement or offsetting impact over time.~~a valuation allowance for losses. For a discussion of our policies regarding the ~~drivers of~~valuation allowance for commercial mortgage and other loans, see Note 2 to the ~~changes in our optional living benefit features for the years ended December 31, 2014 and 2013, see “—Results of Operations.”~~

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.

Financial Statements.

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. The DRD is an estimate that incorporates the prior and current year 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 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 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 9 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.

An increase or decrease in our effective tax rate by one ~~percent of income (loss) from continuing operations before income taxes,~~percentage point would have resulted in an increase or decrease in our 2017 "Total income ~~from continuing operations in 2014~~tax expense (benefit)" of $3$11 million.

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 2012, 2013 and 2014 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.

~~Reserves for~~

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, ~~reserves~~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~~are no new critical accounting estimates resulting from new accounting pronouncements adopted during ~~2014 requiring the application of critical accounting estimates.~~2017. See Note 2 to the Financial Statements for a complete discussion of newly adopted accounting pronouncements and accounting pronouncements issued ~~accounting pronouncements.~~

but not yet adopted.

Changes in Financial Position

~~2014 versus 2013~~

2017 to 2016 Annual Comparison

Total assets ~~decreased~~increased by ~~$1.0~~$0.2 billion from ~~$53.5~~$59.8 billion at December 31, ~~2013~~2016 to ~~$52.5~~$60.0 billion at December 31, ~~2014. Separate account~~2017. Significant components were:

Total investments and cash and cash equivalents increased $0.3 billion due primarily to cash from insurance operations and unrealized gains on investments due to a decline in rates, partially offset by a return of capital to PAI and a decline in affiliated derivative assets ~~decreased $2.5~~due to favorable equity markets.

DAC and DSI increased $0.3 billion primarily driven by ~~net outflows on the runoff block~~positive unlocks and ~~policy charges,~~capitalization of new business, partially offset by ~~market appreciation and the impact~~base amortization.

Table of the asset transfer feature which moved contractholder account values from the general account to the separate account due to favorable markets in 2014. Total investments decreased $0.4 billion primarily due to asset sales associated with contractholder surrenders and the impact of the asset transfer feature which moved contractholder account values from the general account to the separate account due to favorable markets in 2014. DAC and DSI decreased $0.4 billion primarily resulting from base amortization. Partially offsetting the above decrease was an increase in reinsurance recoverables of $2.2 billion related to the reinsured liability for living benefit embedded derivatives primarily resulting from an increase in the present value of future expected benefit payments driven by decreases in interest rates and the impact of the annual assumption update.

~~Total liabilities decreased by $1.0 billion, from $51.8 billion at December 31, 2013 to $50.8 billion at December 31, 2014.~~ Contents

Separate account ~~liabilities decreased $2.5 billion offsetting the decrease in separate accounts~~ assets ~~above. Policyholders’ account balance decreased~~increased $0.6 billion primarily driven by ~~account value~~market appreciation, partially offset by net outflows from continued surrenders on runoff ~~due to contractholder surrenders~~block and the impact of the asset transfer feature which moved contractholder account values from the general account to the separate account, as discussed above. In addition, short-term debt decreased by $0.2 billion driven by a repayment of debt with Prudential Financial. contract charges.

Partially offsetting these increases in total assets were the ~~above decrease was an increase in~~ following items:

Income tax receivable decreased $0.9 billion primarily as a result of tax reform.

Total liabilities increased by $1.0 billion, from $52.7 billion at December 31, 2016 to $53.7 billion at December 31, 2017. Significant components were:

Future policy benefits ~~and other policyholder liabilities of $2.4~~increased $0.4 billion primarily driven by ~~the mark-to-market of the liability for~~credit spread tightening and living benefit ~~embedded derivatives, as discussed above.~~

~~Total equity was relatively unchanged from December 31, 2013 to December 31, 2014, reflecting dividends of $0.3 billion paid to our parent, Prudential Annuities, Inc.,~~reserve growth, partially offset by ~~net income~~favorable markets.

Policyholders' account balances increased $0.1 billion primarily due to transfers from the separate account.

Separate account liabilities increased $0.6 billion, offsetting the increase in separate account assets discussed above.

Total equity decreased by $0.8 billion from $7.1 billion at December 31, 2016 to $6.3 billion at December 31, 2017, primarily reflecting a $1.0 billion return of ~~$0.3 billion.~~

capital to PAI and a $0.9 billion loss resulting from tax reform, partially offset by a pre-tax gain of $1.1 billion for the twelve months ended December 31, 2017, which includes $0.2 billion of unrealized gains in the current year.

Results of Operations

~~2014 versus 2013~~

2017 to 2016 Annual Comparison

Income (Loss) from Operations before Income Taxes

Income from operations before income taxes ~~decreased $921 million~~increased $2.9 billion from ~~$1,180 million~~a loss of $1.8 billion for the year ended 2016, to income of $1.1 billion for the year ended 2017.

The increase in ~~2013~~income from operations before income taxes was primarily driven by a favorable variance of $2.0 billion for recapture and reinsurance losses for the year ended December 31, 2016, driven by the Variable Annuities Recapture. as well as a favorable variance from the annual review and update of assumptions and other refinements. Also contributing to ~~$259 million~~the increase was a favorable variance in ~~2014. Excluding~~fees driven by the Variable Annuities Recapture. See table below, for more information.

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

and the related amortization of DAC and other costs, ~~and on the reserves~~ for the ~~GMDB~~year ended December 31, 2017 and ~~GMIB features, due~~2016:



		2017			2016
		(1) in millions
Excluding impact of assumption updates and other refinements:
	Net hedging impact(2)(3)	$	547		$	(294	)
	Change in portions of U.S. GAAP liability, before NPR(4)	2,259			2,162
	Change in the NPR adjustment	(3,551		)	(4,044		)
	Net impact from changes in the U.S. GAAP embedded derivative and hedge positions	(745		)	(2,176		)
	Related benefit (charge) to amortization of DAC and other costs	148			803
Net impact of assumption updates and other refinements		(75		)	1,331
Recapture and reinsurance gains (losses)		0			(2,866		)
Other investment gains (losses)		0			0
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(3)		$	(671	)	$	(2,908	)


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


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


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


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

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For the ~~mark-to-market of~~twelve months ended December 31, 2017, the ~~reinsured liability for living benefit embedded derivatives and related hedge positions and of~~net impact from changes in the ~~estimated profitability~~U.S. GAAP embedded derivative and hedge positions, after the impacts of ~~the business, as discussed in more detail below, income from operations before income taxes increased $181~~NPR, DAC and other costs, was a charge of $671 million. The ~~increase was primarily related to the mark-to-market of our non-reinsured living benefit features and related hedge positions, primarily due to~~ net ~~hedge losses and increasing interest rates in 2013.~~

~~The~~ impact ~~on amortization due to the mark-to-market of the reinsured liability for living benefit embedded derivatives and related hedge positions and the~~from changes in the ~~estimated profitability of the business~~U.S. GAAP embedded derivative and hedge positions resulted in a net charge of ~~$138~~$745 million, predominantly as a result of tightening credit spreads used in ~~2014. The~~measuring our living benefit contracts.

For the twelve months ended December 31, 2016, the net impact from changes in the U.S. GAAP embedded derivative and hedge positions was a charge of $2.9 billion. This was primarily ~~reflects~~driven by a $2.9 billion loss resulting from the recapture of the living benefit guarantees from Pruco Re and subsequent reinsurance of the variable annuity business from Pruco Life, as described above within the Variable Annuities Recapture. Also contributing to the loss was a $4.0 billion loss relating to the change in the NPR adjustment, primarily driven by tightening of credit spreads. Partially offsetting these losses was 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 from our annual review and update of actuarial assumptions, driven by modifications to both actuarial assumptions, including updates to expected withdrawal rates, and economic assumptions.

Revenues, Benefits and Expenses

Revenues increased $2.5 billion from a loss of $0.2 billion for the twelve months ended December 31, 2016 to income of $2.3 billion for the twelve months ended December 31, 2017, primarily driven by an increase of $2.6 billion in realized investment gains / (losses), as well as an increase of $0.5 billion in ~~2014~~policy charges and fee income and asset administration fees and other income, due to ~~declining interest rates, partially offset~~the Variable Annuities Recapture. Partially offsetting these increases was a decline of $0.8 billion in premiums mainly due to the consideration received for the Variable Annuities Recapture in 2016.

Benefits and expenses decreased $0.4 billion from $1.6 billion for the twelve months ended December 31, 2016 to $1.2 billion for the twelve months ended December 31, 2017, primarily driven by a Policyholders' benefits decrease of $0.5 billion primarily due to the Variable Annuities Recapture offset in premiums discussed above, as well as a $0.1 billion decline in the amortization of deferred policy acquisition costs net ~~benefit driven by an~~of favorable variance related to the annual review and update of assumptions and other refinements.

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 ~~discussed above. The net benefit of $964 million in 2013 primarily reflects NPR losses due to increasing~~equity market returns, interest rates and ~~an annual review~~market volatility, along with actuarial assumptions such as contractholder mortality, the timing and ~~update~~amount of annuitization and withdrawals, and contract lapses. For these risk exposures, achievement of our expected returns and profitability is subject to the risk that actual experience will differ from the assumptions ~~as discussed above.~~

~~Revenues, Benefits and Expenses~~

~~Revenues increased $130 million, primarily~~used in the original pricing of these products. We currently manage our exposure to certain risks driven by fluctuations in capital markets primarily through a ~~favorable variance in realized gains~~combination of Product Design Features, an Asset Liability Management Strategy and ~~losses of $192 million primarily due to differences between the mark-to-market of the non-reinsured~~a capital hedge program.

Product Design Features

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

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

Under 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.

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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. The Company expects 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 capital markets movements.

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

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

As of December 31, 2017, our fixed income instruments and derivative assets exceed the economic liability.

Under 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 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).

• 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 ~~as discussed above. Offsetting this~~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 and 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.

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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.

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 ~~was~~payable in the event of death. Our base GMDB is generally equal to a ~~decrease in net investment income~~return of ~~$54 million primarily as~~cumulative purchase payments adjusted for any partial withdrawals. Certain products include an optional enhanced GMDB based on the greater of a ~~result~~minimum return on the contract value or an enhanced value. We have retained the risk that the total amount of ~~lower portfolio yields due~~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 ~~lower reinvestment rates and lower average~~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.

During 2018, we launched PruSecure^SM, a single premium fixed index annuity, which allows the policyholder to allocate all or a portion of their account balance into an index account, such as the S&P 500. The index account provides interest or an interest component linked to, but not an investment in, the ~~general account.~~

~~Benefits~~selected index, and ~~expenses increased $1,051 million. Excluding~~its performance over the ~~$1,102 million impacts~~elected term (i.e., 1, 3 or 5 years), subject to certain participation rates and contractual minimums and maximums. We also anticipate the launch of ~~the amortization of DAC and other costs and to the reserves~~Guaranteed Income for ~~the GMDB and GMIB features as discussed above, benefits and expenses decreased $51 million, primarily driven by lower interest credited due to lower average~~Tomorrow (“GIFT^SM”), a deferred income annuity, ~~account values in the general account, and lower interest expense due to a pay-down of debt as discussed above.~~

which initially will be distributed through direct response solicitation through Prudential Insurance's Group Insurance business.

Income Taxes

~~Shown below is our~~

The differences between income ~~tax provision for~~taxes expected at the years ended December 31, 2014 and 2013, separately reflecting the impact of certain significant items. Also presented below is the income tax provision that would have resulted from application of theU.S. federal statutory ~~35% federal~~ income tax rate ~~in each~~ of ~~these periods.~~

   2014    2013




   (in millions)
Tax provision
   $    9    $    332
Impact of:

Non taxable investment income
   69    70
Tax credits
   13    11
Other
   -    1




Tax provision at statutory rate
   $            91    $            413

~~Our~~35% and the reported income tax ~~provision amounted to an~~(benefit) expense are provided in the following table:



	Year Ended December 31,
	2017			2016			2015
	(in millions)
Expected federal income tax expense (benefit) at federal statutory rate	$	391		$	(620	)	$	57
Non-taxable investment income	(47		)	(50		)	(56		)
Tax credits	(10		)	(10		)	(9		)
Changes in tax law	882			0			0
Other	(15		)	0			0
Reported income tax expense (benefit)	$	1,201		$	(680	)	$	(8	)
Effective tax rate	107.5		%	38.4		%	(5.0		)%

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 2017, 2016 and 2015 was 107.5%, 38.4% and (5.0)%, respectively. For a detailed description of ~~$9 million and $332 million in 2014 and 2013, respectively. The decrease in income tax expense primarily reflects~~ the ~~decrease in pre-tax income from continuing operations for the year ended December 31, 2014.~~

~~We employ various tax strategies, including strategies to minimize the amount~~nature of ~~taxes resulting from realized capital gains.~~

~~For additional information regarding income taxes,~~each significant reconciling item, see Note 9 to the Financial Statements.

The increase in income tax benefit corresponding to the change in the effective tax rate from (5.0)% in 2015 to 38.4% in 2016 was primarily driven by a decrease in pre-tax net income. 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 impacts of the Tax Act of 2017 on the date of enactment. Going forward, we generally expect a lower future effective tax rate. This reduction is primarily due to applying the lower corporate tax rate under the Tax Act of 2017 to our business earnings.

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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, 2017, 2016 and 2015. 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 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 include tax installments made for the current year as well as tax payments and refunds related to prior periods.

For additional information on income tax related items, see “Business—Regulation” and Note 9 to the Financial Statements.

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 ~~quarterly~~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, and~~uses. Prudential Financial ~~forecasts capital sources~~ and ~~uses on a quarterly basis. We~~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~~Designated Financial ~~Company”~~Company under ~~the Dodd-Frank Act.~~Dodd-Frank. As a Designated Financial Company, Prudential Financial is subject to supervision and examination by the Federal Reserve Bank of Boston and to stricter prudential regulatory standards, which include or will include requirements and limitations ~~(some~~(many of which are the subject of ongoing rule-making) relating to ~~risk-based~~ capital, leverage, liquidity, stress-testing, overall risk management, resolution and recovery plans, credit exposure reporting, early remediation, management interlocks and ~~early remediation; and~~credit concentration. They may also include additional standards regarding ~~capital,~~enhanced public disclosure, short-term debt limits and other related subjects. ~~In addition, the FSB has identified Prudential Financial as a G-SII.~~Emerging state and international standards may also impose additional capital and other requirements. For information on these ~~recent actions~~regulatory initiatives and their potential impact on ~~Prudential Financial,~~us, see ~~“Business—Regulation”~~“Business-Regulation” and “Risk Factors”.

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

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Capital

Our capital management framework is primarily based on statutory ~~risk based capital (“RBC”)~~RBC measures. The RBC ratio is a primary measure of the capital adequacy of the Company. RBC is calculated based on statutory financial statements and risk formulas consistent with the practices of the ~~NAIC.~~National Association of Insurance Commissioners (“NAIC”). RBC considers, among other things, risks related to the type and quality of the invested assets, insurance-related risks associated with an insurer’s products and liabilities, interest rate risks and general business risks. RBC ratio calculations are intended to assist insurance regulators in measuring an insurer’s solvency and ability to pay future claims. The reporting of RBC measures is not intended for the purpose of ranking any insurance company or for use in connection with any marketing, advertising or promotional activities, but is available to the public. ~~The RBC ratio is an annual calculation. As~~We expect that the Tax Act of 2017 will adversely affect the statutory capital position of Prudential Financial's domestic insurance companies as of December 31, ~~2014~~2017, due to the reduction in the corporate tax rate from 35% to 21% and the resulting reduction in the value of statutory deferred tax assets and increase in certain statutory reserves. Nevertheless, we expect the Company’s RBC ~~ratio exceeds~~ratios to be greater than 400% as of December 31, 2017, even after giving effect to impacts from the ~~minimum level required by applicable insurance regulations.~~

Tax Act of 2017.

In addition, the NAIC is expected to revise the RBC requirements for future periods to reflect the Tax Act of 2017, which may further adversely affect the statutory capital position of the Company in future periods. While the impact of the NAIC rules will not be fully known until the final updated RBC requirements are formally issued and adopted, the updated requirements may cause the regulatory capital levels of the Company to be below our “AA” ratings targets, in which case we would expect to fund any additional capital necessary to get back to our target levels using available capital and/or funding obtained through the capital markets.

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

In addition, the NAIC recently finalized new guidance regarding the calculation of Total Adjusted Capital (“TAC”) that directly affects the calculation of the RBC ratio. The new guidance, which is effective for December 31, 2014, limits the portion of an insurer’s asset valuation reserve that can be counted as TAC to the amount not utilized in asset adequacy testing. This guidance did not have a material impact on the Company’s RBC ratio.

The Company’s regulatory capital level is also affected by statutory accounting rules, which are subject to change by each applicable insurance regulator. ~~As discussed in “Business—Regulation,” during~~

On June 7, 2017, September 6, 2017 and November 24, 2017, the ~~fourth quarter~~Company returned capital of ~~2014, we reached an agreement with the NY DFS on reserving methodologies for New York financial reporting purposes in respect of certain variable annuity products. The Company evaluates~~$100 million, $200 million and $650 million, respectively, to its ~~regulatory capital under reasonably foreseeable stress scenarios and believes we have adequate resources to maintain our capital levels comfortably above regulatory requirements under these scenarios.~~

parent, PAI. On December ~~19, 2014~~21, 2016, the Company returned capital of $1,140 million to PAI. On December 22, 2015 and June ~~27, 2014,~~29, 2015, the Company paid dividends of ~~$75~~$180 million and ~~$267~~$270 million, respectively, to ~~its parent, Prudential Annuities, Inc. On December 16, 2013 and~~PAI.

In June ~~26, 2013,~~of 2016, the Company ~~paid dividends~~received a capital contribution in the amount of ~~$100~~$8,422 million ~~and $184 million, respectively,~~from PAI, related to ~~our parent, Prudential~~the Variable Annuities ~~Inc. On December 11, 2012 and June 29, 2012, the Company paid dividends of $160 million and $248 million, respectively, to Prudential Annuities, Inc.~~

Recapture.

Capital Protection Framework

~~We employ~~

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

The Framework accommodates periodic volatility within ranges that are deemed acceptable, while also providing for additional potential sources of capital, ~~include~~including on-balance sheet capital, derivatives, and contingent sources of capital. ~~Although we continue to enhance our 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~~

Prudential Financial and the Company uses captive reinsurance companies to more effectively manage our reserves and capital on an economic basis and to enable the aggregation and transfer of risks. Pruco Re assumes business from affiliates only. To support the risks Pruco Re assumes, the captives are capitalized to a level we believe is consistent with the “AA” financial strength rating targets of Prudential Financial’s insurance subsidiaries. Pruco Re is a wholly-owned subsidiary of Prudential Financial, domiciled in Arizona, which is the state of domicile of PALAC. In addition to state insurance regulation, Pruco Re is subject to internal policies governing its activities. In the normal course of business Prudential Financial contributes capital to the captives to support business growth and other needs. Prudential Financial has also entered into support agreements with captives in connection with financing arrangements.

We reinsure variable annuity living benefit guarantees to an affiliated captive reinsurance company, Pruco Re. This enables Prudential Financial to aggregate these risks within Pruco Re and manage them more efficiently through a hedging program. On August 31, 2013, the Company redomesticated from Connecticut to Arizona, and, as a result, PALAC is able to claim reinsurance reserve credit for business ceded to Pruco Re without the need for Pruco Re to post collateral.

Liquidity

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

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

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Cash Flow

The principal sources of the Company’s liquidity are certain annuity considerations, investment and fee income, investment maturities ~~as well as~~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. ~~We use a projection process for cash flows from operations to ensure sufficient liquidity is available to meet projected cash outflows, including claims. 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. Therefore, the Company expects to continue to see the overall level of cash flows decrease going forward as the book of business runs off.~~

affiliates, but has launched a new fixed indexed annuity in January 2018 and will launch a new deferred income annuity during 2018.

We believe that the cash flows from our operations are adequate to satisfy our current liquidity ~~requirements.~~requirements, including considering the impacts of the Tax Act of 2017. 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 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.

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, ~~2014~~2017 and ~~2013,~~2016, the Company had liquid assets of ~~$2.9~~$12.6 billion and ~~$3.4~~$12.3 billion, respectively. The portion of liquid assets comprised of cash and cash equivalents and short-term investments was ~~$0.1~~$2.4 billion and $2.8 billion as of December 31, ~~2014~~2017 and ~~2013,~~2016, respectively. As of December 31, ~~2014, $2.6~~2017, $9.6 billion, or ~~91%~~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 $0.2 billion, or 9%, of these fixed maturity investments were rated other than high or highest quality.~~

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 ~~affecting results of operations.~~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.

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.

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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~~7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk

Market risk is defined as the risk of loss ~~resulting~~ from ~~change in the value of assets, liabilities or derivative instruments as a result of absolute or relative changes in factors affecting financial markets, such as~~ changes in interest rates, equity prices, and foreign currency exchange rates ~~and credit spreads.~~

~~To varying degrees,~~resulting from asset/liability mismatches where the ~~investment activities supporting all~~change in the value of our ~~products and services generate exposure to market risk. The primary source~~liabilities is not offset by the change in value of our ~~exposure~~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, ~~is “other than trading” activities conducted in our annuity operations. The~~which we consider to be a combination of both investment risk and market risk ~~incurred and our strategies for managing this risk vary by product. The market risk associated with “trading” activities is immaterial.~~

~~Market Risk Management~~

~~Risk management~~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 ~~its parent. 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 subject to ongoing review.~~

Financial.

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, credit spreads);~~

—

~~Asset/liability management analytics;~~

—

~~Stress scenario testing;~~

—

~~Hedging programs; and~~

—

~~Risk management governance, including policies, limits and a market risk oversight committee.~~

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

Asset/liability management;

Stress scenario testing;

Hedging programs; and

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

Market Risk Mitigation

Risk mitigation takes three primary forms:

Managing assets to liability-based limits on net exposure. 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.

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

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 liquidity strain.

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 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.

Market Risk Related to Interest Rates

~~Assets that subject us to interest rate risk primarily include fixed maturity securities, commercial mortgage~~

We perform liability-driven investing and ~~other loans and policy loans. Liabilities that subject us to interest rate risk primarily include fixed immediate annuities and policyholder account balances relating to fixed rate annuities and~~engage in careful asset/liability management. Asset/liability mismatches create the fixed investment option offered in our variable life insurance and annuity contracts, certain guaranteed benefit features accounted for as embedded derivatives, and outstanding short-term and long-term debt. Changes in interest rates create risk that ~~the resulting~~ changes in ~~asset~~liability values will differ from the changes in the value of the ~~liabilities relating to the underlying or hedged products. Derivatives that subject us to interest rate risk primarily include interest rate swaps and options.~~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.~~

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;

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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 interest rate environment has on our net interest margins, we employ a proactive ~~asset-liability~~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~~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 controlling “duration mismatch” of assets and ~~liabilities. We have~~liability duration ~~mismatch constraints. As of December 31, 2014 and 2013, 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.

The Company also mitigates interest rate risk through a market value adjusted (“MVA”) provision on certain of the Company’s 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.

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, ~~2014~~2017 and ~~2013.~~2016. 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.~~

   December 31, 2014    December 31, 2013
       Notional            Fair Value     Hypothetical
Change in
Fair Value        Notional            Fair Value

Hypothetical
Change in Fair
Value
   (in millions)
Financial assets with interest rate risk:

Financial Assets:

Fixed maturities, available for sale
      $                   2,801 $    (123)          $                 3,264    $                      (129)
Policy loans
      13 -       12    -
Commercial loans
      423 (17)          399    (18)
Derivatives (1):

Swaps
   $ 2,265    85 (74)       $             1,888    (31)       (85)
Options
               6,942    12 (4)       13,271    10    (3)
Financial liabilities with interest rate risk:

Investment Contracts
      (91)    3       (84)       3




Total estimated potential loss
      $                        (215)             $    (232)

assets or living benefit embedded derivatives, which are hedged by the derivatives included in the table below.

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	December 31, 2017								December 31, 2016
	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			$	10,277		$	(1,265	)			$	9,363		$	(1,137	)
Policy loans			13			0					13			0
Commercial mortgage and other loans			1,396			(75		)			1,236			(63		)
Derivatives:
Swaps	$	102,609	2,942			(2,916		)	$	95,260	3,116			(3,822		)
Futures	2,636		11			(479		)	3,743		19			(620		)
Options	47,477		157			146			15,435		127			211
Forwards	988		20			1			500		(25		)	0
Variable annuity and other living benefit feature embedded derivatives(1)			(8,147		)	5,318					(7,707		)	4,505
Financial liabilities with interest rate risk(2):
Policyholders' account balances-investment contracts			(282		)	3					(248		)	3
Net estimated potential gain (loss)						$	733							$	(923	)


(1)	Excludes ~~variable annuity optional living benefits accounted for~~any offsetting impact of derivative instruments purchased to hedge changes in the embedded derivatives. Amounts reported gross of reinsurance.

(2)

Excludes $13.7 billion and $13.2 billion as ~~embedded derivatives.~~of December 31, 2017 and 2016, 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.

The tables above do not include approximately $6.1 billion of insurance reserve and deposit liabilities as of December 31, 2014 and $4.2 billion as of December 31, 2013 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 which are set forth in these tables. The tables above also exclude variable annuity optional living benefits accounted for as embedded derivatives as the Company generally reinsures the risks associated with these benefits to an affiliated reinsurance company, Pruco Re, as part of its risk management strategy. See “Item 1. Business—Products—Individual Annuities” for information regarding the reinsurance to Pruco Re and the living benefit hedging program, which is primarily executed within Pruco Re.

Market Risk Related to Equity Prices

We have exposure to equity ~~price~~ 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, ~~our variable annuity optional living benefits accounted for as embedded derivatives are generally reinsured to an affiliate~~ as part of our risk management ~~strategy.~~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.~~program. In addition to the impact on our capital hedges, 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;~~

—

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

—

~~Net exposure to the guarantees provided under certain products.~~

Asset-based fees earned on assets under management or contractholder account 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 ~~investment~~ equity ~~price~~ 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. For equity investments within the separate accounts, the investment risk is borne ~~primarily~~ by the separate account contractholder rather than by the Company.

~~Our capital hedging program is managed at the Prudential Financial parent company level. The program broadly addresses~~

We estimate our 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. Our estimated equity price risk associated with these capital hedges as of December 31, 2014 and 2013 was a $1 million and a $2 million benefit, respectively, estimated based on 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, 2017 and 2016. While these scenarios are for illustrative purposes only and do not reflect our expectations regarding future performance of equity markets or of our equity portfolio, they do represent near-term, reasonably possible hypothetical changes that illustrate the potential impact of such events. These scenarios consider only the direct impact on fair value of declines in equity benchmark market levels ~~which would partially offset an overall decline~~and not changes in asset-based fees recognized as revenue, changes in our ~~capital position related~~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 ~~market decline.~~

securities.

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As of December 31, 2017 As of December 31, 2016
Notional
Fair
Value

Hypothetical
Change in
Fair Value
Notional
Fair
Value

Hypothetical
Change in
Fair Value

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


(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") market. See Note 11 to the Financial Statements for ~~a description of derivative activities as of December 31, 2014 and 2013.~~

more information.

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 ~~markets~~market assumptions, such as equity market returns, interest rates and market volatility and actuarial assumptions. For our capital ~~markets~~market assumptions, we ~~hedge or limit~~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.~~program and affiliated and external reinsurance. Certain variable annuity optional living benefit features are accounted for as an embedded ~~derivative~~derivatives and recorded at fair value.

Item ~~8.Financial~~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 Index elsewhere in this Annual Report on Form 10-K.

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

None.

Item ~~9A.Controls~~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, ~~2014 are~~2017 is included in Part ~~IV,~~II, Item 158 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) ~~and 15d-15(e)~~, as of December 31, ~~2014.~~2017. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, ~~2014,~~2017, our disclosure controls and procedures were effective. No change in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f) ~~and 15d-15(f)~~, occurred during the ~~year~~quarter ended December 31, ~~2014~~2017 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting. As

Item 9B. Other Information

None.

Table of ~~December 31, 2014, we have adopted Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).~~

Contents~~Item 9B.Other Information~~

~~None.~~

PART III

Item ~~10.Directors,~~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.”~~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 ~~12, 2015~~8, 2018 to be filed by Prudential Financial with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after December 31, ~~2014~~2017 (the “Proxy Statement”).

Item ~~14.Principal~~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.

Table of Contents

PART IV

Item 15. Exhibits and Financial Statement Schedules



(a) (1)		~~Financial Statements~~ Financial Statements of the Company are listed in the accompanying ~~“Index to Financial Statements” on page 36~~“Financial Statements Index” hereof and are filed as part of this Report.

(2)		Financial Statement Schedules None.*

(3)		Exhibits



2. 3. (i)(a)		~~None.~~

~~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)
    ~~(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.~~10-K, Registration No 33-44202, filed March 15, 2011.
(i)(d)
    ~~(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)
    ~~(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)
    ~~(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)
    ~~(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.
9. ~~None.~~
~~10.~~ ~~None.~~
~~11.~~ ~~Not applicable.~~
~~12.~~ ~~Not applicable.~~
~~13.~~ ~~Not applicable.~~
~~16.~~ ~~None.~~
~~18.~~ ~~None.~~
~~21.~~ ~~Not applicable.~~
~~22.~~ ~~None.~~
~~23.~~ ~~Not applicable.~~
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.

Table of Contents

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~~City of Shelton, and State of Connecticut on the 12^th8th day of March ~~2015.~~

2018.



PRUDENTIAL ANNUITIES LIFE ASSURANCE CORPORATION (Registrant)

By:		~~/s/ Robert F. O’Donnell~~ /s/ Kent D. Sluyter
		~~Robert F. O’Donnell~~Kent D. Sluyter
		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 ~~12, 2015.~~

8, 2018.



Name		Title

~~/s/ Robert F. O’Donnell~~ ~~Robert F. O’Donnell~~
/s/ Kent D. Sluyter		President,
Kent D. Sluyter		Chief Executive Officer and Director

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

* ~~Bernard J. Jacob~~ ~~Bernard J. Jacob~~ Lori D Fouché		Director
Lori D Fouché

* ~~George M. Gannon~~ ~~George M. Gannon~~ Kenneth Y. Tanji		Director

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

* Arthur W. Wallace		Director

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

* Candace J. Woods		Director
Candace J. Woods

* Richard F. Lambert

~~Richard F. Lambert~~

~~Director~~



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

Table of Contents

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FINANCIAL STATEMENTS

INDEX



	Page
~~Page~~ ~~Number~~

Management’s Annual Report on Internal Control Over Financial Reporting		37	47

Report of Independent Registered Public Accounting Firm		38	48

Statements of Financial Position as of December 31, ~~2014~~2017 and ~~2013~~2016		39	49

Statements of Operations and Comprehensive Income for the ~~Years~~ years ended December 31, ~~2014, 2013~~2017, 2016 and ~~2012~~2015		40	50

Statements of Equity for the ~~Years~~ years ended December 31, ~~2014, 2013~~2017, 2016 and ~~2012~~2015		41	51

Statements of Cash Flows for the ~~Years~~ years ended December 31, ~~2014, 2013~~2017, 2016 and ~~2012~~2015		42	52

Notes to Financial Statements:	54
1 Business and Basis of Presentation	54
2 Significant Accounting Policies and Pronouncements	43 57
3 Investments	70
4 Deferred Policy Acquisition Costs	80
5 Value of Business Acquired	80
6 Policyholders’ Liabilities	81
7 Certain Long-duration Contracts With Guarantees	82
8 Statutory Net Income and Surplus and Dividend Restriction	85
9 Income Taxes	86
10 Fair Value of Assets and Liabilities	89
11 Derivative Instruments	105
12 Commitments, Contingent Liabilities and Litigation and Regulatory Matters	111
13 Reinsurance	113
14 Equity	115
15 Related Party Transactions	118
16 Contract Withdrawal Provisions	121
17 Quarterly Results of Operations (Unaudited)	121

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, ~~2014,~~2017, of the Company’s internal control over financial reporting, based on the framework established inInternal 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, ~~2014.~~2017.

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 ~~12, 2015~~

8, 2018

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 as of December 31, 2017 and 2016, 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, 2017, including the related notes (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, ~~2014~~2017 and ~~December 31, 2013,~~2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, ~~2014~~2017 in conformity with accounting principles generally accepted in the United States of America.

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 ~~13 of~~15 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 ~~12, 2015~~

8, 2018

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, ~~2014~~2017 and ~~December 31, 2013~~2016 (in thousands, except share amounts)

   December 31,
2014    December 31,
2013
ASSETS

Fixed maturities, available-for-sale, at fair value (amortized cost, 2014: $2,609,253; 2013: $3,079,002)
   $ 2,800,593    $ 3,264,216
Trading account assets, at fair value
   6,131    6,677
Equity securities, available-for-sale, at fair value (cost, 2014: $14; 2013: $206)
   17    208
Commercial mortgage and other loans, net of valuation allowance
   422,563    398,991
Policy loans
   13,355    12,454
Short-term investments
   57,185    118,188
Other long-term investments
   162,783    60,585




Total investments
   3,462,627    3,861,319




Cash and cash equivalents
   594    1,417
Deferred policy acquisition costs
   1,114,431    1,345,504
Accrued investment income
   25,008    32,169
Reinsurance recoverables
   2,996,845    748,690
Value of business acquired
   39,738    43,500
Deferred sales inducements
   665,207    809,247
Receivables from parent and affiliates
   60,490    44,643
Other assets
   6,193    16,994
Separate account assets
   44,101,699    46,626,828




TOTAL ASSETS
   $ 52,472,832    $ 53,530,311




LIABILITIES AND EQUITY

LIABILITIES

Policyholders’ account balances
   $ 2,633,085    $ 3,191,215
Future policy benefits and other policyholder liabilities
   3,539,521    1,127,342
Payables to parent and affiliates
   71,675    120,452
Cash collateral for loaned securities
   5,285    47,896
Income taxes
   299,084    358,818
Short-term debt
   54,354    205,000
Other liabilities
   105,972    113,125
Separate account liabilities
   44,101,699    46,626,828




Total Liabilities
   50,810,675    51,790,676




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
   901,422    901,422
Retained earnings
   673,613    764,846
Accumulated other comprehensive income
   84,622    70,867




Total Equity
   1,662,157    1,739,635




TOTAL LIABILITIES AND EQUITY
   $       52,472,832    $       53,530,311



	December 31, 2017			December 31, 2016
ASSETS
Fixed maturities, available-for-sale, at fair value (amortized cost, 2017: $10,145,266; 2016: $9,818,298)	$	10,110,786		$	9,362,763
Trading account assets, at fair value	181,717			149,871
Equity securities, available-for-sale, at fair value (cost, 2017: $14; 2016: $365)	18			18
Commercial mortgage and other loans	1,387,012			1,231,893
Policy loans	12,558			12,719
Short-term investments	711,071			947,150
Other long-term investments	335,811			551,931
Total investments	12,738,973			12,256,345
Cash and cash equivalents	1,639,939			1,848,039
Deferred policy acquisition costs	4,596,565			4,344,361
Accrued investment income	88,331			86,004
Reinsurance recoverables	563,428			588,608
Income taxes	1,116,735			1,978,607
Value of business acquired	35,109			30,287
Deferred sales inducements	1,020,786			978,823
Receivables from parent and affiliates	49,351			111,703
Other assets	121,086			169,649
Separate account assets	37,990,547			37,429,739
TOTAL ASSETS	$	59,960,850		$	59,822,165
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits	$	9,132,569		$	8,686,196
Policyholders’ account balances	4,846,152			4,736,889
Payables to parent and affiliates	36,026			91,432
Cash collateral for loaned securities	17,383			23,350
Long-term debt	928,165			971,899
Short-term debt	43,734			28,101
Reinsurance payables	262,588			275,822
Other liabilities	422,636			489,007
Separate account liabilities	37,990,547			37,429,739
Total liabilities	53,679,800			52,732,435
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	7,145,436			8,095,436
Retained earnings/(accumulated deficit)	(776,762		)	(693,258		)
Accumulated other comprehensive income (loss)	(90,124		)	(314,948		)
Total equity	6,281,050			7,089,730
TOTAL LIABILITIES AND EQUITY	$	59,960,850		$	59,822,165

See Notes to Financial Statements

Table of Contents

Prudential Annuities Life Assurance Corporation

Statements of Operations and Comprehensive Income

Years Ended December 31, ~~2014, 2013~~2017, 2016 and ~~2012~~2015 (in thousands)

   2014    2013    2012
REVENUES

Premiums
   $ 34,903    $ 28,019    $ 21,824
Policy charges and fee income
   806,327    809,242    796,995
Net investment income
   164,011    217,883    277,651
Asset administration fees and other income
   227,619    239,489    266,321
Realized investment gains (losses), net:

Other-than-temporary impairments on fixed maturity securities
   (10)       -    (6,852)
Other-than-temporary impairments on fixed maturity securities transferred to other comprehensive income
   10    -    6,594
Other realized investment gains (losses), net
   7,368    (184,351)       (82,972)






Total realized investment gains (losses), net
   7,368    (184,351)       (83,230)






  Total revenues
   1,240,228    1,110,282    1,279,561






BENEFITS AND EXPENSES

Policyholders’ benefits
   137,135    29,727    124,316
Interest credited to policyholders’ account balances
   211,058    (117,027)       60,830
Amortization of deferred policy acquisition costs
   238,416    (385,561)       (188,042)
General, administrative and other expenses
   394,248    402,679    424,764






  Total benefits and expenses
   980,857    (70,182)       421,868






INCOME FROM OPERATIONS BEFORE INCOME TAXES
   259,371    1,180,464    857,693






  Total income tax expense
   8,604    332,372    223,634






NET INCOME
   250,767    848,092    634,059






Other comprehensive income (loss), before tax:

Foreign currency translation adjustments
   (63)       5    10
Net unrealized investment gains (losses):

Unrealized investment gains (losses) for the period
   35,931    (108,769)       2,734
Reclassification adjustment for (gains) losses included in net income
   (14,706)       (8,805)       (23,387)






Net unrealized investment gains (losses)
   21,225    (117,574)       (20,653)






Other comprehensive income (loss), before tax:
   21,162    (117,569)       (20,643)
Less: Income tax expense (benefit) related to other comprehensive income (loss)

Foreign currency translation adjustments
   (23)       2    4
Net unrealized income (losses)
   7,430    (41,151)       (7,222)






Total
   7,407    (41,149)       (7,218)






Other comprehensive income (loss), net of taxes
   13,755    (76,420)       (13,425)






COMPREHENSIVE INCOME
   $             264,522    $ 771,672    $             620,634



	2017			2016			2015
REVENUES
Premiums	$	63,573		$	896,839		$	9,787
Policy charges and fee income	2,209,579			1,755,224			740,823
Net investment income	422,809			338,370			139,430
Asset administration fees and other income	413,375			299,384			177,479
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities	(8,576		)	(7,853		)	(44		)
Other-than-temporary impairments on fixed maturity securities transferred to other comprehensive income (loss)	(546		)	1,354			24
Other realized investment gains (losses), net	(796,278		)	(3,436,261		)	6,072
Total realized investment gains (losses), net	(805,400		)	(3,442,760		)	6,052
Total revenues	2,303,936			(152,943		)	1,073,571
BENEFITS AND EXPENSES
Policyholders’ benefits	114,068			604,057			60,461
Interest credited to policyholders’ account balances	30,280			68,889			225,555
Amortization of deferred policy acquisition costs	(13,946		)	(179,816		)	309,152
Commission expense	1,135,000			919,859			215,749
General, administrative and other expenses	(79,061		)	204,649			97,722
Total benefits and expenses	1,186,341			1,617,638			908,639
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES	1,117,595			(1,770,581		)	164,932
Total income tax expense (benefit)	1,201,099			(680,493		)	(8,285		)
NET INCOME (LOSS)	$	(83,504	)	$	(1,090,088	)	$	173,217
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments	109			(20		)	(54		)
Net unrealized investment gains (losses):
Unrealized investment gains (losses) for the period	320,182			(469,356		)	(54,279		)
Reclassification adjustment for gains included in net income	3,177			(86,184		)	(4,831		)
Net unrealized investment gains (losses)	323,359			(555,540		)	(59,110		)
Other comprehensive income (loss), before tax:	323,468			(555,560		)	(59,164		)
Less: Income tax expense (benefit) related to other comprehensive income (loss)
Foreign currency translation adjustments	38			(7		)	(19		)
Net unrealized investment gains (losses)	98,606			(194,439		)	(20,689		)
Total	98,644			(194,446		)	(20,708		)
Other comprehensive income (loss), net of taxes	224,824			(361,114		)	(38,456		)
Comprehensive income (loss)	$	141,320		$	(1,451,202	)	$	134,761

See Notes to Financial Statements

Table of Contents

Prudential Annuities Life Assurance Corporation

Statements of Equity

Years Ended December 31, ~~2014, 2013,~~2017, 2016 and ~~2012~~2015 (in thousands)

     Common
stock      Additional
paid-in
capital    Retained
earnings
  (Accumulated
deficit)    Accumulated
other
  comprehensive
income (loss)      Total equity
Balance, December 31, 2011
   $ 2,500    $ 882,670    $ (25,305)       $ 160,712    $ 1,020,577
Contributed capital
   -       10,666    -       -       10,666
Distribution to parent
   -       -       (408,000)       -       (408,000)
Comprehensive income:

Net income
   -       -       634,059    -       634,059
Other comprehensive income (loss), net of taxes
   -       -       -       (13,425)       (13,425)


Total comprehensive income
               620,634










Balance, December 31, 2012
   $ 2,500    $ 893,336    $ 200,754    $ 147,287    $ 1,243,877
Contributed capital
   -       8,086    -       -       8,086
Distribution to parent
   -       -       (284,000)       -       (284,000)
Comprehensive income:

Net income
   -       -       848,092    -       848,092
Other comprehensive income (loss), net of taxes
   -       -       -       (76,420)       (76,420)


Total comprehensive income
               771,672










Balance, December 31, 2013
   $ 2,500    $ 901,422    $ 764,846    $ 70,867    $ 1,739,635
Distribution to parent
   -       -       (342,000)       -       (342,000)
Comprehensive income:

Net income
   -       -       250,767    -       250,767
Other comprehensive income, net of taxes
   -       -       -       13,755    13,755


Total comprehensive income
               264,522










Balance, December 31, 2014
   $     2,500    $     901,422    $             673,613    $             84,622    $     1,662,157



	Common Stock		Additional Paid-In Capital			Retained Earnings/ (Accumulated Deficit)			Accumulated Other Comprehensive Income			Total Equity
Balance, December 31, 2014	$	2,500	$	901,422		$	673,613		$	84,622		$	1,662,157
Contributed capital			0									0
Return of capital			0									0
Dividend to parent						(450,000		)				(450,000		)
Assets purchased/transferred from/to affiliates			0									0
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
Contributed capital			8,421,955									8,421,955
Return of capital			(1,140,000		)							(1,140,000		)
Dividend to parent						0						0
Assets purchased/transferred from/to affiliates			(72,179		)							(72,179		)
Impact of Pruco Re and PALAC merger			(15,762		)							(15,762		)
Comprehensive income:
Net income (loss)						(1,090,088		)				(1,090,088		)
Other comprehensive income (loss), net of tax									(361,114		)	(361,114		)
Total comprehensive income (loss)												(1,451,202		)
Balance, December 31, 2016	2,500		8,095,436			(693,258		)	(314,948		)	7,089,730
Contributed capital			0									0
Return of capital			(950,000		)							(950,000		)
Dividend to parent						0						0
Assets purchased/transferred from/to affiliates			0									0
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

See Notes to Financial Statements

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Prudential Annuities Life Assurance Corporation

Statements of Cash Flows

Years Ended December 31, ~~2014, 2013~~2017, 2016 and ~~2012~~2015 (in thousands)

   2014    2013    2012
CASH FLOWS FROM OPERATING ACTIVITIES:

Net Income
   $ 250,767    $ 848,092    $ 634,059
Adjustments to reconcile net income to net cash provided by operating activities:

Policy charges and fee income
   3,491    10,678    13,324
Realized investment (gains) losses, net
   (7,368)       184,351    83,230
Depreciation and amortization
   1,402    11,032    (7,481)
Interest credited to policyholders’ account balances
   211,058    (117,027)       60,830
Change in:

Future policy benefit reserves
   324,284    218,861    300,246
Accrued investment income
   7,161    12,487    14,377
Net (payable) receivable to affiliates
   (26,936)       (40,051)       43,958
Deferred sales inducements
   (11,515)       (31,370)       (59,269)
Deferred policy acquisition costs
   235,612    (389,611)       (213,122)
Income taxes
   (67,163)       330,049    169,736
Reinsurance recoverables
   (273,480)       (275,321)       (268,576)
Bonus reserve
   (115,700)       (27,593)       (13,318)
Other, net
   (2,219)       (55,281)       (19,523)






Cash flows from operating activities
   $ 529,394    $ 679,296    $ 738,471






CASH FLOWS FROM INVESTING ACTIVITIES:

Proceeds from the sale/maturity/prepayment of:

Fixed maturities, available-for-sale
   $ 996,083    $ 1,484,339    $ 1,365,513
Commercial mortgage and other loans
   20,988    109,242    71,216
Trading account assets
   4,900    7,690    36,063
Policy loans
   753    752    3,501
Other long-term investments
   (1,650)       1,973    4,120
Short-term investments
   2,637,788    3,220,082    3,513,151
Payments for the purchase/origination of:

Fixed maturities, available-for-sale
   (494,947)       (743,854)       (352,285)
Commercial mortgage and other loans
   (43,859)       (80,319)       (47,795)
Trading account assets
   (4,312)       (5,469)       (4,931)
Policy loans
   (943)       (538)       (472)
Other long-term investments
   (14,691)       (12,969)       (28,894)
Short-term investments
   (2,576,786)       (3,234,508)       (3,379,308)
Notes (payable) receivable from parent and affiliates, net
   (12,524)       (2,224)       2,125
Other, net
   8    (190)       2,544






Cash flows from investing activities
   $ 510,808    $ 744,007    $ 1,184,548






CASH FLOWS USED IN FINANCING ACTIVITIES:

Cash collateral for loaned securities
   (42,612)       8,920    (86,908)
Repayments of debt (maturities longer than 90 days)
   (200,000)       (200,000)       (200,000)
Net increase (decrease) in short-term borrowing
   49,354    5,000    (27,803)
Drafts outstanding
   (6,410)       1,577    2,430
Distribution to parent
   (342,000)       (284,000)       (408,000)
Contributed capital
   -       12,439    16,396
Policyholders’ account balances

Deposits
   1,375,761    1,102,020    1,013,638
Withdrawals
   (1,875,118)       (2,068,108)       (2,241,367)






Cash flows used in financing activities
   $         (1,041,025)       $         (1,422,152)       $         (1,931,614)






NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
   (823)       1,151    (8,595)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
   1,417    266    8,861






CASH AND CASH EQUIVALENTS, END OF PERIOD
   $ 594    $ 1,417    $ 266






SUPPLEMENTAL CASH FLOW INFORMATION

Income taxes paid, net of refunds
   $ 75,745    $ 2,325    $ 53,901
Interest paid
   $ 8,657    $ 16,955    $ 27,114



	2017			2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(83,504	)	$	(1,090,088	)	$	173,217
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Policy charges and fee income	(766		)	(245		)	907
Realized investment (gains) losses, net	805,400			3,442,760			(6,052		)
Depreciation and amortization	32,812			10,737			37,530
Interest credited to policyholders’ account balances	30,280			68,889			225,555
Change in:
Future policy benefits	982,792			759,604			238,052
Accrued investment income	(2,327		)	(63,389		)	2,393
Net receivables from/payables to parent and affiliates	4,165			(55,984		)	61,252
Deferred sales inducements	(1,551		)	(1,805		)	38,380
Deferred policy acquisition costs	(291,532		)	(449,496		)	381,480
Income taxes	763,227			(712,423		)	(3,426		)
Reinsurance recoverables, net	2,708			199,107			(270,868		)
Bonus reserve	0			0			(38,768		)
Derivatives, net	(1,364,754		)	2,605,415			21,581
Deferred (gain)/loss on reinsurance	4,564			305,464			(118,028		)
Other, net	87,036			(54,819		)	(3,508		)
Cash flows from (used in) operating activities	968,550			4,963,727			739,697
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale	1,145,369			4,072,242			486,648
Commercial mortgage and other loans	198,584			122,086			89,344
Trading account assets	5,045			7,489			3,765
Policy loans	1,276			1,833			1,257
Other long-term investments	72,667			9,587			3,764
Short-term investments	1,949,758			1,799,219			2,318,219
Payments for the purchase/origination of:
Fixed maturities, available-for-sale	(1,528,065		)	(5,535,732		)	(336,954		)
Equity securities, available-for-sale	0			(351		)	0
Commercial mortgage and other loans	(348,520		)	(353,692		)	(106,185		)
Trading account assets	(19,012		)	(7,810		)	(3,681		)
Policy loans	(366		)	(442		)	(644		)
Other long-term investments	(7,668		)	(111,838		)	(3,994		)
Short-term investments	(1,713,877		)	(2,561,044		)	(2,419,261		)
Notes receivable from parent and affiliates, net	2,717			(4,923		)	3,110
Derivatives, net	4,948			(6,305		)	(6,528		)
Other, net	254			(2,911		)	1,070
Cash flows from (used in) investing activities	(236,890		)	(2,572,592		)	29,930
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash collateral for loaned securities	(5,967		)	12,782			5,283
Proceeds from the issuance of debt (maturities longer than 90 days)	0			125,000			0
Repayments of debt (maturities longer than 90 days)	0			(268,000		)	0
Net increase/(decrease) in short-term borrowing	(28,101		)	(1,000		)	(53,354		)
Drafts outstanding	10,624			5,777			(1,663		)

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Prudential Annuities Life Assurance Corporation



Distribution to parent	(950,000		)	(1,140,000		)	(450,000		)
Contributed capital	0			860,573			0
Policyholders’ account deposits	2,623,534			2,116,567			1,295,546
Ceded policyholders’ account deposits	(24,191		)	(23,890		)	(54,027		)
Policyholders’ account withdrawals	(2,589,770		)	(2,259,445		)	(1,511,470		)
Ceded policyholders' account withdrawals	24,111			28,004			0
Cash flows from (used in) financing activities	(939,760		)	(543,632		)	(769,685		)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	(208,100		)	1,847,503			(58		)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	1,848,039			536			594
CASH AND CASH EQUIVALENTS, END OF YEAR	$	1,639,939		$	1,848,039		$	536
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid, net of refunds	$	437,872		$	31,931		$	(4,858	)
Interest paid	$	34,217		$	23,392		$	68

Significant Non-Cash Transactions

Cash flows from investing and financing activities for the year ended December 31, 2016 excludes certain non-cash transactions related to the Variable Annuities Recapture. See Note 1 for additional information.

See Notes to Financial Statements

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Prudential Annuities Life Assurance Corporation

Notes to Financial Statements

1. BUSINESS AND BASIS OF PRESENTATION

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

Financial, Inc. ("Prudential Financial"), a New Jersey corporation.

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

~~Beginning in~~products between March 2010 and December 2017.

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

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

On August 31, 2013, the Company redomesticated from Connecticut to Arizona. As a result of the redomestication, the Company is now an Arizona based insurance company and its principal insurance regulatory authority is the Arizona Department of ~~Insurance. Additionally,~~Insurance ("AZDOI"). The redomestication also resulted in the Company ~~is now~~being domiciled in the same jurisdiction as the then primary reinsurer of the Company’s living ~~benefits,~~benefit guarantees, Pruco Reinsurance, Ltd. (“Pruco Re”), which ~~is also regulated by the Arizona Department of Insurance. This change enables~~enabled the Company to claim statutory reserve credit for business ceded to Pruco Re without the need for Pruco Re to collateralize its obligations under the reinsurance agreement.

As of April 1, 2016, the Company no longer reinsures its living benefit guarantees to Pruco Re.

As disclosed in Note 1 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015, the Company surrendered its New York license effective December 31, 2015, and reinsured the majority of its New York business to an affiliate, The Prudential 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 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.

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The financial statement impacts of these transactions were as follows:

Affected Financial Statement Lines Only

Interim Statement of Financial Position



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

Significant Non-Cash Transactions

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

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

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

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

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Statement of Operations and Comprehensive Income (Loss)

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

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

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

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

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

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

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

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Basis of Presentation

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Use of Estimates

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

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

Reclassifications

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

2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS

ASSETS

~~Investments and Investment Related Liabilities~~

The Company’s principal investments are fixed maturities, equity securities, commercial mortgage and other loans, policy loans, other long-term investments, including joint ventures (other than operating joint ventures), limited partnerships, and real estate, and short-term investments. Investments and investment-related liabilities also include securities repurchase and resale agreements and securities lending transactions. The accounting policies related to each are as follows:

Fixed maturities, available-for-sale, at fair value are comprised of bonds, notes and redeemable preferred stock. Fixed maturities classified as “available-for-sale” are carried at fair value. See Note 10 for additional information regarding the determination of fair value. The associated unrealized gains and losses, net of tax, and the effect on DAC, VOBA, DSI, future policy benefits, policyholders’ account balances that would result from the realization of unrealized gains and losses, are included in “Accumulated other comprehensive income (loss)” (“AOCI”). The purchased cost of fixed maturities is adjusted for amortization of premiums and accretion of discounts to maturity or, if applicable, call date.

Interest income, ~~as well as the related~~and amortization of premium and accretion of discount isare included in “Net investment income” under the effective yield method. Additionally, prepayment premiums are also included in “Net investment income”. For mortgage-backed and asset-backed securities, the effective yield is based on estimated cash flows, including interest rate and prepayment assumptions based on data from widely accepted third-party data sources or internal estimates. In addition to interest rate and prepayment assumptions, cash flow estimates also vary based on other assumptions regarding the underlying collateral including default rates and changes in value. These assumptions can significantly impact income recognition and the amount of ~~other-than-temporary impairments~~OTTI recognized in earnings

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Financial Statements—(Continued)~~

and other comprehensive income. For high credit quality mortgage-backed and asset-backed securities (those rated AA or above), cash flows are provided quarterly, and the amortized cost and effective yield of the ~~security~~securities are adjusted as necessary to reflect historical prepayment experience and changes in estimated future prepayments. The adjustments to amortized cost are recorded as a charge or credit to ~~net~~"Net investment ~~income~~income" in accordance with the retrospective method. For mortgage-backed and asset-backed securities rated below AA or those for which an ~~other than temporary impairment~~OTTI has been recorded, the effective yield is adjusted prospectively for any changes in estimated cash flows. See the discussion below on realized investment gains and losses for a description of the accounting for impairments. Unrealized gains and losses on fixed maturities classified as “available-for-sale,” net of tax, and the effect on deferred policy acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”), and future policy benefits that would result from the realization of unrealized gains and losses, are included in “Accumulated other comprehensive income (loss)” (“AOCI”).

Trading account assets,at fair value, represents equity securities and other fixed maturity securities carried at fair value. Realized and unrealized gains and losses for these investments are reported in “Asset administration fees and other income.” Interest and dividend income from these investments is reported in “Net investment ~~income.”~~income”.

Equity securities, available-for-sale, at fair value~~are~~ is comprised of mutual fund shares and are carried at fair value. The associated unrealized gains and losses, net of tax, and the effect on DAC, VOBA, DSI, and future policy benefits that would result from the realization of unrealized gains and losses, are included in AOCI. The cost of equity securities is written down to fair value when a decline in value is considered to be other-than-temporary. See the discussion below on realized investment gains and losses for a description of the accounting for impairments. Dividends from these investments are generally recognized in “Net investment income” ~~when earned.~~on the ex-dividend date.

Commercial mortgage and other loansconsist of commercial mortgage loans and agricultural ~~loans and uncollateralized~~property loans. Commercial mortgage and other loans held for investment are generally carried at unpaid principal balance, net of unamortized deferred loan origination fees and expenses and net of an allowance for losses. Commercial mortgage and other loans acquired, including those related to the acquisition of a business, are recorded at fair value when purchased, reflecting any premiums or discounts to unpaid principal balances.

Interest income, ~~as well as prepayment fees~~ and the amortization of the related premiums or discounts, ~~related to commercial mortgage and other loans,~~ are included in “Net investment ~~income.”~~

income” under the effective yield method. Prepayment fees are also included in "Net investment income".

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Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

Impaired loans include those loans for which it is probable that amounts due will not all be collected according to the contractual terms of the loan agreement. The Company defines “past due” as principal or interest not collected at least 30 days past the scheduled contractual due date. Interest received on loans that are past due, including impaired and non-impaired loans, as well as, loans that were previously modified in a troubled debt restructuring, is either applied against the principal or reported as net investment income based on the Company’s assessment as to the collectability of the principal. See Note 3 for additional information about the Company’s past due loans.

The Company discontinues accruing interest on loans after the loans become 90 days delinquent as to principal or interest payments, or earlier when the Company has doubts about collectability. When the Company discontinues accruing interest on a loan, any accrued but uncollectible interest on the loan and other loans backed by the same collateral, if any, is charged to interest income in the same period. Generally, a loan is restored to accrual status only after all delinquent interest and principal are brought current and, in the case of loans where the payment of interest has been interrupted for a substantial period, or the loan has been modified, a regular payment performance has been established.

The Company reviews the performance and credit quality of the commercial mortgage and other loan portfolio on an on-going basis. Loans are placed on watch list status based on a predefined set of criteria and are assigned one of ~~three~~two categories. Loans are placed on “early warning” status in cases where, based on the Company’s analysis of the loan’s collateral, the financial situation of the borrower or tenants or other market factors, it is believed a loss of principal or interest could occur. Loans are classified as “closely monitored” when it is determined that there is a collateral deficiency or other credit events that may lead to a potential loss of principal or interest. Loans “not in good standing” are those loans where the Company has concluded that there is a high probability of loss of principal, such as when the loan is delinquent or in the process of foreclosure. As described below, in determining the allowance for losses, the Company evaluates each loan on the watch list to determine if it is probable that amounts due will not be collected according to the contractual terms of the loan agreement.

Loan-to-value and debt service coverage ratios are measures commonly used to assess the quality of commercial mortgage loans. The loan-to-value ratio compares the amount of the loan to the fair value of the underlying property collateralizing the loan, and is commonly expressed as a percentage. Loan-to-value ratios greater than 100% indicate that the loan amount exceeds the collateral value. A ~~smaller~~ loan-to-value ratio less than 100% indicates ~~a greater~~an excess of collateral value over the loan amount. The debt service coverage ratio compares a property’s net operating income to its debt service payments. Debt service coverage ratios less than 1.0 times indicate that property operations do not generate enough income to cover the loan’s current debt payments. A ~~larger~~ debt service coverage ratio greater than 1.0 times indicates ~~a greater~~an excess of net operating income over the debt service payments. The values utilized in calculating these ratios are developed as part of the Company’s periodic review of the commercial mortgage loan and agricultural property loan ~~portfolio,~~portfolios, which includes an internal appraisal of the underlying collateral value. The Company’s periodic review also includes a quality re-rating process, whereby the internal quality rating originally assigned at underwriting is updated based on current loan, property and market information using a proprietary quality rating system. The loan-to-value ratio is the most significant of several inputs used to establish the internal credit rating of a loan which in turn drives the allowance for losses. Other key factors considered in determining the internal credit rating include debt service coverage ratios, amortization, loan term, estimated market value growth rate and volatility for the property type and region. See Note 3 for additional information related to the loan-to-value ratios and debt service coverage ratios related to the Company’s commercial mortgage and agricultural loan portfolios.

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Financial Statements—(Continued)~~

The allowance for losses includes a loan specific reserve for each impaired loan that has a specifically identified loss and a portfolio reserve for probable incurred but not specifically identified losses. For impaired commercial mortgage and other loans the allowances for losses are determined based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or based upon the fair value of the collateral if the loan is collateral dependent. The portfolio reserves for probable incurred but not specifically identified losses in the commercial mortgage and agricultural loan portfolios considers the current credit composition of the portfolio based on an internal quality rating (as described above). The portfolio reserves are determined using past loan experience, including historical credit migration, loss probability and loss severity factors by property type. These factors are reviewed ~~each quarter~~ and updated as appropriate.

The allowance for losses on commercial mortgage and other loans can increase or decrease from period to period based on the factors noted above. “Realized investment gains (losses), net” includes changes in the allowance for losses. “Realized investment gains (losses), net” also includes gains and losses on sales, certain restructurings, and foreclosures.

When a commercial mortgage or other loan is deemed to be uncollectible, any specific valuation allowance associated with the loan is reversed and a direct write down toof the carrying amount of the loan is made. The carrying amount of the loan is not adjusted for subsequent recoveries in value.

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Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

Commercial mortgage and other loans are occasionally restructured in a troubled debt restructuring. These restructurings generally include one or more of the following: full or partial payoffs outside of the original contract terms; changes to interest rates; extensions of maturity; or additions or modifications to covenants. Additionally, the Company may accept assets in full or partial satisfaction of the debt as part of a troubled debt restructuring. When restructurings occur, they are evaluated individually to determine whether the restructuring or modification constitutes a “troubled debt restructuring” as defined by authoritative accounting guidance. If the borrower is experiencing financial difficulty and the Company has granted a concession, the restructuring, including those that involve a partial payoff or the receipt of assets in full satisfaction of the debt is deemed to be a troubled debt restructuring. Based on the Company’s credit review process described above, these loans generally would have been deemed impaired prior to the troubled debt restructuring, and specific allowances for losses would have been established prior to the determination that a troubled debt restructuring has occurred.

In a troubled debt restructuring where the Company receives assets in full satisfaction of the debt, any specific valuation allowance is reversed and a direct write-down of the loan is recorded for the amount of the allowance, and any additional loss, net of recoveries, or any gain is recorded for the difference between the fair value of the assets received and the recorded investment in the loan. When assets are received in partial settlement, the same process is followed, and the remaining loan is evaluated prospectively for impairment based on the credit review process noted above. When a loan is restructured in a troubled debt restructuring, the impairment of the loan is remeasured using the modified terms and the loan’s original effective yield, and the allowance for loss is adjusted accordingly. Subsequent to the modification, income is recognized prospectively based on the modified terms of the loans in accordance with the income recognition policy noted above. Additionally, the loan continues to be subject to the credit review process noted above.

In situations where a loan has been restructured in a troubled debt restructuring and the loan has subsequently defaulted, this factor is considered when evaluating the loan for a specific allowance for losses in accordance with the credit review process noted above.

See Note 3 for additional information about commercial mortgage and other loans that have been restructured in a troubled debt restructuring.

Policy loans represent funds loaned to policyholders up to the cash surrender value of the associated insurance policies and are carried at the unpaid principal ~~balances.~~balances due to the Company from the policyholders. Interest income on policy loans is recognized in “Net investment income” at the contract interest rate when earned. Policy loans are fully collateralized by the cash surrender value of the associated insurance policies.

~~Securities repurchase and resale agreements and securities loaned transactions~~ are used primarily to earn spread income, to borrow funds, or to facilitate trading activity. As part of securities repurchase agreements or securities loaned transactions, the Company transfers U.S. and foreign debt and equity securities, as well as U.S. government and government agency securities and receives cash as collateral. As part of securities resale agreements, the Company invests cash and receives as collateral U.S. government securities or other debt securities. For securities repurchase agreements and securities loaned transactions used to earn spread income, the cash received is typically invested in cash equivalents, short-term investments or fixed maturities.

~~Securities loaned transactions~~ are treated as financing arrangements and are recorded at the amount of cash received. The Company obtains collateral in an amount equal to 102% and 105% of the fair value of the domestic and foreign securities, respectively. The Company monitors the market value of the securities loaned on a daily basis with additional collateral obtained as necessary. Substantially all of the Company’s securities loaned transactions are with large brokerage firms. Income and expenses associated with securities loaned transactions used to earn spread income are reported as “Net investment income;” however, for securities loaned transactions used for funding purposes the associated rebate is reported as interest expense (included in “General, administrative and other expenses”).

Other long-term investments consist of the Company’s non-coupon investments in joint ventures and limited partnerships, other than operating joint ventures, as well as wholly-owned investment real estate and other investments. Joint venture and partnership interests are ~~either~~ accounted for using the equity method of accounting, ~~or under~~ the cost method when the Company’s partnership interest is so minor (generally less than 3%) that it exercises virtually no influence over operating and financial ~~policies.~~policies, or the fair value option where elected. The Company’s income from investments in joint ventures and partnerships accounted for using the equity method or the cost method, other than the Company’s ~~investment~~investments in operating joint ventures, is included in “Net investment income.” The carrying value of these investments is written down, or impaired, to fair value when a decline in value is considered to be other-than-temporary. In applying the equity method or the cost method (including assessment for ~~other-than-temporary impairment)~~OTTI), the Company uses financial information provided by the investee, generally on a one to three month lag.

Short-term investmentsprimarily consist of highly liquid debt instruments with a maturity of twelve months or less and greater than three months when purchased. These investments are generally carried at fair value and include certain money market investments, funds managed similar to regulated money market funds, short-term debt securities issued by government sponsored entities and other highly liquid debt instruments.

Realized investment gains (losses) are computed using the specific identification method. Realized investment gains and losses are generated from numerous sources, including the ~~sale~~sales of fixed maturity securities, equity securities, investments in joint ventures and limited partnerships and other types of investments, as well as adjustments to the cost basis of investments for net ~~other-than-temporary impairments~~OTTI recognized in earnings. Realized investment gains and losses ~~are~~ also ~~generated from prepayment premiums received on private fixed maturity securities,~~reflect changes in the allowance for losses on commercial mortgage and other loans, and fair value changes on embedded derivatives and free-standing derivatives that do not qualify for hedge accounting treatment. See “Derivative Financial Instruments” below for additional information regarding the accounting for derivatives.

The Company’s available-for-sale securities with unrealized losses are reviewed quarterly to identify ~~other-than-temporary impairments~~OTTI in value. In evaluating whether a decline in value is other-than-temporary, the Company considers several factors including, but not limited to the following: (1) the extent and the duration of the decline; (2) the reasons for the decline in value (credit event, currency or interest-rate related, including general credit spread widening); and (3) the financial condition of and near-term prospects of the issuer. With regard to available-for-sale equity securities, the Company also considers the ability and intent to hold the investment for a period of time to allow for a recovery of value. When it is determined that a decline in value of an equity security is ~~other-than-temporary,~~other-then-temporary, the carrying value of the equity security is reduced to its fair value, with a corresponding charge to earnings.

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Prudential Annuities Life Assurance Corporation

Notes to Financial ~~Statements—~~Statements - (Continued)

An ~~other-than-temporary impairment~~OTTI is recognized in earnings for a debt security in an unrealized loss position when the Company either ~~(a)~~(1) has the intent to sell the debt security or ~~(b)~~(2) more likely than not will be required to sell the debt security before its anticipated recovery. For all debt securities in unrealized loss positions that do not meet either of these two criteria, the Company analyzes its ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security prior to impairment. The Company may use the estimated fair value of collateral as a proxy for the net present value if it believes that the security is dependent on the liquidation of collateral for recovery of its investment. If the net present value is less than the amortized cost of the investment an ~~other-than-temporary impairment~~OTTI is recognized.

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

~~For debt securities, the~~

The split between the amount of an ~~other-than-temporary impairment~~OTTI recognized in other comprehensive income (loss) and the net amount recognized in earnings for debt securities is driven principally by assumptions regarding the amount and timing of projected cash flows. For mortgage-backed and asset-backed securities, cash flow estimates consider the payment terms of the underlying assets backing a particular security, including interest rate and prepayment assumptions, based on data from widely accepted third-party data sources or internal estimates. In addition to interest rate and prepayment assumptions, cash flow estimates also include other assumptions regarding the underlying collateral including default rates and recoveries, which vary based on the asset type and geographic location, as well as the vintage year of the security. For structured securities, the payment priority within the tranche structure is also considered. For all other debt securities, cash flow estimates are driven by assumptions regarding probability of default and estimates regarding timing and amount of recoveries associated with a default. The Company has developed these estimates using information based on its historical experience as well as using market observable data, such as industry analyst reports and forecasts, sector credit ratings and other data relevant to the collectability of a security, such as the general payment terms of the security and the security’s position within the capital structure of the issuer.

The new cost basis of an impaired security is not adjusted for subsequent increases in estimated fair value. In periods subsequent to the recognition of an ~~other-than-temporary impairment,~~OTTI, the impaired security is accounted for as if it had been purchased on the measurement date of the impairment. For debt securities, the discount (or reduced premium) based on the new cost basis may be accreted into net investment income in future periods, including increases in cash flow on a prospective basis. In certain cases where there are decreased cash flow expectations, the security is reviewed for further cash flow impairments.

Unrealized investment gains and losses are also considered in determining certain other balances, including DAC, VOBA, DSI, certain future policy benefits and deferred tax assets or liabilities. These balances are adjusted, as applicable, for the impact of unrealized gains or losses on investments as if these gains or losses had been realized, with corresponding credits or charges included in AOCI. Each of these balances is discussed in greater detail below.

~~Cash and Cash Equivalents~~

Cash and cash equivalents include cash on hand, amounts due from banks, certain money market investments, funds managed similar to regulated money market funds, and other debt instruments with maturities of three months or less when purchased, other than cash equivalents that are included in “Trading account assets, at fair value.” The Company also engages in overnight borrowing and lending of funds with Prudential Financial and affiliates which are considered cash and cash equivalents.

Accrued investment income primarily includes accruals of interest and dividend income from investments that have been earned but not yet received.

Deferred ~~Policy Acquisition Costs~~policy acquisition costs

~~Costs that~~ are related directly to the successful acquisition of new and renewal insurance and annuity business ~~are~~that have been deferred to the extent such costs are deemed recoverable from future profits. Such DAC primarily include commissions, costs of policy issuance and underwriting, and certain other expenses that are directly related to successfully negotiated contracts. In each reporting period, capitalized DAC is amortized to “Amortization of ~~deferred policy acquisition costs,”~~DAC", net of the accrual of imputed interest on DAC balances. DAC is subject to periodic recoverability testing. DAC, for applicable products, is adjusted for the impact of unrealized gains or losses on investments as if these gains or losses had been realized, with corresponding credits or charges included in AOCI.

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Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

DAC related to fixed and variable deferred annuity products are generally deferred and amortized over the expected life of the contracts in proportion to gross profits arising principally from investment margins, mortality and expense margins, and surrender charges, based on historical and anticipated future experience, which is updated periodically. The Company uses a reversion to the mean approach for equities to derive future equity return assumptions.

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Financial Statements—(Continued)~~

However, if the projected equity return calculated using this approach is greater than the maximum equity return assumption, the maximum equity return is utilized. Gross profits also include impacts from the embedded derivatives associated with certain of the optional living benefit features of the Company’s variable annuity contracts and related hedging activities. In calculating gross profits, profits and losses related to contracts 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, are also included. 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 described in Note ~~13.~~15. 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. Total gross profits include both actual gross profits and estimates of gross profits for future periods. The ~~effect~~Company regularly evaluates and adjusts DAC balances with a corresponding charge or credit to current period earnings, representing a cumulative adjustment to all prior periods’ amortization, for the impact of actual gross profits and changes in the Company's projections of estimated future gross profits. Adjustments to DAC balances include: (i) annual review of assumptions that reflect the comprehensive review of the assumptions used in estimating gross profits for future periods, (ii) quarterly adjustments for current period experience (also referred to as “experience true-up” adjustments) that reflect the impact of differences between actual gross profits for a given period and the previously estimated expected gross profits for that period, and (iii) quarterly adjustments for market performance (also referred to as “experience unlocking”) that reflect the impact of changes to the Company's estimate of total gross profits ~~on unamortized DAC is reflected in the period such total gross profits are revised.~~

to reflect actual fund performance and market conditions.

For some products, policyholders can elect to modify product benefits, features, rights or coverages by exchanging a contract for a new contract or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. These transactions are known as internal replacements. For internal replacement transactions, except those that involve the addition of a nonintegrated contract feature that does not change the existing base contract, the unamortized DAC is immediately charged to expense if the terms of the new policies are not substantially similar to those of the former policies. If the new terms are substantially similar to those of the earlier policies, the DAC is retained with respect to the new policies and amortized over the expected life of the new policies.

See Note 4 for additional information regarding DAC.

Deferred ~~Sales Inducements~~sales inducements represent

~~The Company offered~~ various types of sales inducements to contractholders related to fixed and variable deferred annuity contracts. The Company defers sales inducements and amortizes them over the anticipated life of the policy using the same methodology and assumptions used to amortize DAC. Sales ~~inducements~~inducement balances are subject to periodic recoverability testing. The Company records amortization of DSI in “Interest credited to policyholders’ account balances.” DSI for applicable products is adjusted for the impact of unrealized gains or losses on investments as if these gains or losses had been realized, with corresponding credits or charges included in AOCI. See Note 7 for additional information regarding sales inducements.

~~Value~~VOBA represents identifiable intangible assets to which a portion of ~~Business Acquired~~

Asthe purchase price in a ~~result of certain acquisitions and~~business acquisition is attributed under the application of purchase ~~accounting, the Company reports a financial asset representing VOBA. VOBA includes an explicit adjustment to reflect the cost of capital attributable to the acquired insurance contracts.~~accounting. VOBA represents an adjustment to the stated value of ~~inforce~~in force insurance contract liabilities to present them at fair value, determined as of the acquisition date. VOBA balances are subject to recoverability testing, in the manner in which it was acquired. The Company has established a VOBA asset primarily for its acquisition of American Skandia Life Assurance Corporation. ~~For~~The Company amortizes VOBA over the anticipated life of the acquired ~~annuity~~ contracts using the same methodology and assumptions used to amortize DAC. The Company records amortization of VOBA ~~is amortized~~ in ~~proportion to gross profits arising principally from investment margins, mortality~~“General, administrative, and ~~expense margins, and surrender charges, based on historical and anticipated future experience, which is updated periodically.~~other expenses.” See Note 5 for additional information regarding VOBA.

Reinsurance recoverables

~~Reinsurance recoverables~~ include corresponding receivables associated with reinsurance arrangements with affiliates. For additional information about these arrangements see Note 13.

~~Separate Account Assets~~Income taxes asset primarily represents the net deferred tax asset and ~~Liabilities~~the Company’s estimated taxes receivable for the current year.

The Company is a member of the federal income tax return of Prudential Financial and primarily files separate company state and local tax returns. Pursuant to the tax allocation arrangement with Prudential Financial, total federal income tax expense is determined on a separate company basis. Members with losses record tax benefits to the extent such losses are recognized in the consolidated federal tax provision.

Deferred income taxes are recognized, based on enacted rates, when assets and liabilities have different values for financial statement and tax reporting purposes. A valuation allowance is recorded to reduce a deferred tax asset to the amount expected to be realized.

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Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

Items required by tax regulations to be included in the tax return may differ from the items reflected in the financial statements. As a result, the effective tax rate reflected in the financial statements may be different than the actual rate applied on the tax return. Some of these differences are permanent such as expenses that are not deductible in the Company’s tax return, and some differences are temporary, reversing over time, such as valuation of insurance reserves. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in future years for which the Company has already recorded the tax benefit in the Company’s Statements of Operations. Deferred tax liabilities generally represent tax expense recognized in the Company’s financial statements for which payment has been deferred, or expenditures for which the Company has already taken a deduction in the Company’s tax return but have not yet been recognized in the Company’s financial statements.

The application of U.S. GAAP requires the Company to evaluate the recoverability of the Company’s deferred tax assets and establish a valuation allowance if necessary to reduce the Company’s deferred tax assets to an amount that is more likely than not expected to be realized. Considerable judgment is required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. See Note 9 for a discussion of factors considered when evaluating the need for a valuation allowance.

In December of 2017, SEC staff issued "SAB 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act" ("SAB 118"), which allows 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 9 for a discussion of provisional amounts related to the U.S. Tax Cuts and Jobs Act of 2017 ("Tax Act of 2017").

U.S. GAAP prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on tax returns. The application of this guidance is a two-step process. First, the Company determines whether it is more likely than not, based on the technical merits, that the tax position will be sustained upon examination. If a tax position does not meet the more likely than not recognition threshold, the benefit of that position is not recognized in the financial statements. The second step is measurement. The Company measures the tax position as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate resolution with a taxing authority that has full knowledge of all relevant information. This measurement considers the amounts and probabilities of the outcomes that could be realized upon ultimate settlement using the facts, circumstances, and information available at the reporting date.

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

See Note 9 for additional information regarding income taxes.

Other assets consist primarily of accruals for asset administration fees, deferred loss on reinsurance with an affiliate and receivables resulting from sales of securities that had not yet settled at the balance sheet date.

Separate account assets ~~are reported at fair value and~~ represent segregated funds that are invested for certain contractholders. “Separate account assets” are predominantly shares in Advanced Series Trust co-managed by AST Investment Services, Incorporated (“ASISI”) and Prudential Investments LLC, which utilizes various fund managers as sub-advisors. The remaining assets are shares in other mutual funds, which are managed by independent investment firms. The contractholder has the option of directing funds to a wide variety of investment options, most of which invest in mutual funds. The investment risk on the variable portion of a contract is borne by the contractholder, except to the extent of minimum guarantees by the Company, which are not separate account liabilities. ~~See Note 7 to the Financial Statements for additional information regarding separate account arrangements with contractual guarantees.~~ The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company. Separate account liabilities primarily represent the contractholders’ account balance in separate account assets and to a lesser extent borrowings of the separate account, and will be equal and offsetting to total separate account assets. The investment income and realized investment gains or losses from separate accounts generally accrue to the contractholders and are not included in the Company’s results of operations. Mortality, policy administration and surrender charges assessed against the accounts are included in “Policy charges and fee income”. Asset administration fees charged to the accounts are included in “Asset administration fees and other income.”

See Note 7 for additional information regarding separate account arrangements with contractual guarantees. See also “~~Other Assets and Other Liabilities~~Separate account liabilities”

~~“Other assets” consist primarily~~ below.

Table of accruals for asset administration fees. “Other assets” also consist of state insurance licenses. Licenses to do business in all states have been capitalized. Based on changes in facts and circumstances, effective September 30, 2012, the capitalized state insurance licenses were considered to have a finite life and are amortized over their useful life, which was estimated to be 8 years. Amortization is recorded through “General, administrative and other expenses.”

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Prudential Annuities Life Assurance Corporation

Notes to Financial ~~Statements—~~Statements - (Continued)

“Other liabilities” consist primarily of accrued expenses and technical overdrafts. Other liabilities may also include derivative instruments for which fair values are determined as described above under “Derivative Financial Instruments”.

LIABILITIES

Future ~~Policy Benefits and Other Policyholder Liabilities~~

~~The Company’s liability for future~~ policy benefits liability is primarily comprised of liabilities for guarantee benefits related to certain ~~nontraditional~~ long-duration life and annuity contracts, which are discussed more fully in Note 7. These reserves represent reserves for the guaranteed minimum death and optional living benefit features on the Company’s variable annuity products. The optional living benefits are primarily accounted for as embedded derivatives, with fair values calculated as the present value of future expected benefit payments to customers less the present value of assessed rider fees attributable to the embedded derivative feature. For additional information regarding the valuation of these optional living benefit features, see Note 10.

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 policyholders, 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, morbidity 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. Premium deficiency reserves do not include a provision for the risk of adverse deviation. Any adjustments to future policy benefit reserves related to net unrealized gains on securities classified as available-for-sale are included in AOCI. See Note 7 for additional information regarding future policy benefits.

Policyholders’ ~~Account Balances~~

~~The Company’s liability for policyholders’~~ account balances liability represents the contract value that has accrued to the benefit of the policyholder as of the balance sheet date. This liability is primarily associated with the accumulated account deposits, plus interest credited, less policyholder withdrawals and other charges assessed against the account balance. These policyholders’ account balances also include provision for benefits under non-life contingent payout annuities and certain unearned revenues.

See Note 6 for additional information regarding policyholders’ account balances.

~~Contingent Liabilities~~Securities sold under agreements to repurchase

~~Amounts~~represent liabilities associated with securities repurchase and resale agreements whichare used primarily to earn spread income, to borrow funds, or to facilitate trading activity. As part of securities repurchase agreements, the Company transfers U.S. government and government agency securities to a third-party and receives cash as collateral. As part of securities resale agreements, the Company invests cash and receives as collateral U.S. government securities or other debt securities. For securities repurchase agreements used to earn spread income, the cash received is typically invested in cash equivalents, short-term investments or fixed maturities.

Securities repurchase and resale agreements that satisfy certain criteria are treated as secured borrowing or secured lending arrangements. These agreements are carried at the amounts at which the securities will be subsequently resold or reacquired, as specified in the respective transactions. For securities purchased under agreements to resell, the Company’s policy is to take possession or control of the securities either directly or through a third party custodian. These securities are valued daily and additional securities or cash collateral is received, or returned, when appropriate to protect against credit exposure. Securities to be resold are the same, or substantially the same, as the securities received. The majority of these transactions are with large brokerage firms and large banks. For securities sold under agreements to repurchase, the market value of the securities to be repurchased is monitored, and additional collateral is obtained where appropriate, to protect against credit exposure. The Company obtains collateral in an amount at least equal to 95% of the fair value of the securities sold. Securities to be repurchased are the same, or substantially the same, as those sold. The majority of these transactions are with highly rated money market funds. Income and expenses related to these transactions executed within the insurance companies used to earn spread income are reported as “Net investment income”; however, for transactions used for funding purposes, the associated borrowing cost is reported as interest expense (included in “General, administrative and other expenses”). Income and expenses related to these transactions executed within the Company’s derivative operations are reported in “Other income”.

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Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

Cash collateral for loaned securities represent liabilities to return cash proceeds from security lending transactions. Securities lending transactions are used primarily to earn spread income, to borrow funds, or to facilitate trading activity. As part of securities lending transactions, the Company transfers U.S. and foreign debt and equity securities, as well as U.S. government and government agency securities, and receives cash as collateral. Cash proceeds from securities lending transactions are used to earn spread income, and are typically invested in cash equivalents, short-term investments or fixed maturities. Securities lending transactions are treated as financing arrangements and are recorded at the amount of cash received. The Company obtains collateral in an amount equal to 102% and 105% of the fair value of the domestic and foreign securities, respectively. The Company monitors the market value of the securities loaned on a daily basis with additional collateral obtained as necessary. Substantially all of the Company’s securities lending transactions are with large brokerage firms and large banks. Income and expenses associated with securities lending transactions used to earn spread income are reported as “Net investment income”; however, for securities lending transactions used for funding purposes the associated rebate is reported as interest expense (included in “General, administrative and other expenses”).

Short-term and long-term debt liabilities are primarily carried at an amount equal to unpaid principal balance, net of unamortized discount or premium and debt issue costs. Original-issue discount or premium and debt-issue costs are recognized as a component of interest expense over the period the debt is expected to be outstanding, using the interest method of amortization. Interest expense is generally presented within “General, administrative and other expenses” in the Company’s Statements of Operations. Short-term debt is debt coming due in the next twelve months, including that portion of debt otherwise classified as long-term. The short-term debt caption may exclude short-term debt items the Company intends to refinance on a long-term basis in the near term. See Note 15 for additional information regarding short-term and long-term debt.

Reinsurance payables include corresponding payables associated with reinsurance arrangements with affiliates. For additional information about these arrangements see Note 13.

Other liabilities consist primarily of accrued expenses, technical overdrafts, deferred gain on reinsurance with an affiliate, and payables resulting from purchases of securities that had not yet settled at the balance sheet date. Other liabilities may also include derivative instruments for which fair values are determined as described below under “Derivative Financial Instruments”.

Separate account liabilities primarily represent the contractholders’ account balance in separate account assets and to a lesser extent borrowings of the separate account, and will be equal and offsetting to total separate account assets. See also “Separate account assets” above.

Commitments and contingent liabilities are accrued if it is probable that a liability has been incurred and an amount is reasonably estimable. Management evaluates whether there are incremental legal or other costs directly associated with the ultimate resolution of the matter that are reasonably estimable and, if so, they are included in the accrual. These ~~items~~accruals are ~~recorded within~~generally reported in “Other ~~liabilities.”~~

liabilities”.

REVENUES AND BENEFITS AND EXPENSES

Insurance Revenue and Expense Recognition

Revenues for variable deferred annuity contracts consist of charges against contractholder account values or separate accounts for mortality and expense risks, administration fees, surrender charges and an annual maintenance fee per contract. Revenues for mortality and expense risk charges and administration fees are recognized as assessed against the contractholder. Surrender charge revenue is recognized when the surrender charge is assessed against the contractholder at the time of surrender. Liabilities for the variable investment options on annuity contracts represent the account value of the contracts and are included in “Separate account liabilities.”

Revenues for variable immediate annuity and supplementary contracts with life contingencies consist of certain charges against contractholder account values including mortality and expense risks and administration fees. These charges and fees are recognized as revenue when assessed against the contractholder. Liabilities for variable immediate annuity contracts represent the account value of the contracts and are included in “Separate account liabilities.”

Revenues for fixed immediate annuity and fixed supplementary contracts with and without life contingencies consist of net investment income. In addition, revenues for fixed immediate annuity contracts with life contingencies also consist of single premium payments recognized as annuity considerations when received. ~~Liabilities for these contracts are based on applicable U.S. GAAP standards with assumed interest rates that vary by contract year.~~ Reserves for contracts without life contingencies are included in “Policyholders’ account balances” while reserves for contracts with life contingencies are included in ~~“future~~“Future policy ~~benefits and other policyholder liabilities.~~benefits.” Assumed interest rates ranged from ~~0.00%~~0.0% to ~~8.25%~~8.3% at December 31, ~~2014,~~2017 and ~~from 0.00%~~2016.

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Prudential Annuities Life Assurance Corporation

Notes to ~~8.25% at December 31, 2013.~~

Financial Statements - (Continued)

Revenues for variable life insurance contracts consist of charges against contractholder account values or separate accounts for expense charges, administration fees, cost of insurance charges and surrender charges. Certain contracts also include charges against premium to pay state premium taxes. All of these charges are recognized as revenue when assessed against the contractholder. Liabilities for variable life insurance contracts represent the account value of the contracts and are included in “Separate account liabilities.”

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Financial Statements—(Continued)~~

Certain individual annuity contracts provide the contractholder a guarantee that the benefit received upon death or annuitization will be no less than a minimum prescribed amount. These benefits are accounted for as insurance contracts and are discussed in further detail in Note 7. The Company also provides contracts with certain optional living benefits which are considered embedded derivatives. These contracts are discussed in further detail in Note 7.

~~Premiums, benefits~~

Amounts received as payment for variable annuities and other contracts without life contingencies are reported as deposits to “Policyholders’ account balances” and/or “Separate account liabilities.” Revenues from these contracts are reflected in “Policy charges and fee income” consisting primarily of fees assessed during the period against the policyholders’ account balances for policy administration charges and surrender charges. In addition to fees, the Company earns investment income from the investments in the Company’s general account portfolio. Fees assessed that represent compensation to the Company for services to be provided in future periods and certain other fees are generally deferred and amortized into revenue over the life of the related contracts in proportion to estimated gross profits. Benefits and expenses ~~are stated net~~for these products include claims in excess of ~~reinsurance ceded~~related account balances, expenses of contract administration, interest credited to ~~other companies.~~

policyholders’ account balances and amortization of DAC, DSI and VOBA.

Asset ~~Administration Fees~~administration fees

~~The Company receives~~primarily include asset administration fee income received on contractholders’ account balances invested in the Advanced Series Trust, ~~Funds or “AST”~~and the Prudential Series Fund (see Note ~~13)~~15), which are a portfolio of mutual fund investments related to the Company’s separate account products. In addition, the Company receives fees on contractholders’ account balances invested in funds managed by companies other than affiliates of Prudential Insurance. Asset administration fees are recognized as income when earned.

OTHER ACCOUNTING POLICIES

Derivative Financial Instruments

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

Derivatives are used to manage the interest rate and currency characteristics of assets or liabilities. Additionally, derivatives may be used to seek to reduce exposure to interest rate, credit, foreign currency and equity risks associated with assets held or expected to be purchased or sold, and liabilities incurred or expected to be incurred. As discussed in detail below and in Note 11, all realized and unrealized changes in fair value of derivatives are recorded in current earnings, with the exception of the effective portion of cash flow hedges. Cash flows from derivatives are reported in the operating, investing, or financing activities sections in the Statements of Cash Flows based on the nature and purpose of the derivative.

Derivatives are recorded either as assets, within ~~“Trading account assets, at fair value” or~~ “Other long-term investments,” or as liabilities, within ~~“Other liabilities,~~“Payables to parent and affiliates,” except for embedded derivatives which are recorded with the associated host contract. The Company nets the fair value of all derivative financial instruments with counterparties for which a master netting arrangement has been executed.

The Company designates derivatives as either (1) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge); or (2) a derivative that does not qualify for hedge accounting.

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

The Company formally documents at inception all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives designated as cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions.

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Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

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

If it is determined that a derivative no longer qualifies as an effective cash flow hedge or management removes the hedge designation, the derivative will continue to be carried on the balance sheet at its fair value, with changes in fair value recognized currently in “Realized investment gains (losses), net.” The component of AOCI related to discontinued cash flow hedges is reclassified to the ~~income statement~~Statements of Operations line associated with the hedged cash flows consistent with the earnings impact of the original hedged cash flows.

When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, or because it is probable that the forecasted transaction will not occur by the end of the specified time period, the derivative will continue to be carried on the balance sheet at its fair value, with changes in fair value recognized currently in “Realized investment gains (losses), net.” Any asset or liability that was recorded pursuant to recognition of the firm commitment is removed from the balance sheet and recognized currently in “Realized investment gains (losses), net.” Gains and losses that were in AOCI pursuant to the cash flow hedge of a forecasted transaction are recognized immediately in “Realized investment gains (losses), net.”

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

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Financial Statements—(Continued)~~

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

The Company sold variable annuity contracts that include optional living benefit features that may be treated from an accounting perspective as embedded derivatives. The Company ~~has~~had reinsurance agreements to transfer the ~~risk~~risks related to certain of these benefit features to ~~an affiliate,~~affiliates, Pruco ~~Re.~~Re and Prudential Insurance through March 31, 2016. 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 living benefit guarantees, from Pruco Life, excluding the PLNJ business which was reinsured to Prudential Insurance, under a coinsurance and modified coinsurance agreement. See Note 1 and 13 for additional information. The embedded derivatives related to the living benefit features and the related reinsurance agreements are carried at fair value and included in “Future policy ~~benefits and other policyholder liabilities”~~benefits” and “Reinsurance recoverables,” respectively. Changes in the fair value are determined using valuation models as described in Note 10, and are recorded in “Realized investment gains (losses), net.”

~~Short-Term and Long-Term Debt~~

~~Liabilities for short-term and long-term debt are primarily carried at an amount equal~~

Recent Accounting Pronouncements

Changes to unpaid principal balance, net of unamortized discount or premium. Original-issue discount or premium and debt-issue costs are recognized as a component of interest expense over the period the debt is expected to be outstanding, using the interest method of amortization. Short-term debt is debt coming due in the next twelve months, including that portion of debt otherwise classified as long-term. The short-term debt caption may exclude short-term debt items the Company intends to refinance on a long-term basis in the near term. See Note 13 for additional information regarding short-term and long-term debt.

~~Income Taxes~~

Items required by tax regulations to be included in the tax return may differ from the items reflected in the financial statements. As a result, the effective tax rate reflected in the financial statements may be different than the actual rate applied on the tax return. Some of these differences are permanent such as expenses that are not deductible in the Company’s tax return, and some differences are temporary, reversing over time, such as valuation of insurance reserves. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in future years for which the Company has already recorded the tax benefit in the Company’s income statement. Deferred tax liabilities generally represent tax expense recognized in the Company’s financial statements for which payment has been deferred, or expenditures for which the Company has already taken a deduction in the Company’s tax return but have not yet been recognized in the Company’s financial statements.

~~The application of~~ U.S. GAAP requires the Company to evaluate the recoverability of the Company’s deferred tax assets and establish a valuation allowance if necessary to reduce the Company’s deferred tax assets to an amount that is more likely than not to be realized. Considerable judgment is required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance the Company may consider many factors, including: (1) the nature of the deferred tax assets and liabilities; (2) whether they are ordinary or capital; (3) in which tax jurisdictions they were generated and the timing of their reversal; (4) taxable income in prior carryback years as well as projected taxable earnings exclusive of reversing temporary differences and carryforwards; (5) the length of time that carryovers can be utilized in the various taxing jurisdictions; (6) any unique tax rules that would impact the utilization of the deferred tax assets; and (7) any tax planning strategies that the Company would employ to avoid a tax benefit from expiring unused. Although realization is not assured, management believes it is more likely than not that the deferred tax assets, net of valuation allowances, will be realized.

U.S. GAAP prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on tax returns. The application of this guidance is a two-step process, the first step being recognition. The Company determines whether it is more likely than not, based on the technical merits, that the tax position will be sustained upon examination. If a tax position does not meet the more likely than not recognition threshold, the benefit of that position is not recognized in the financial statements. The second step is measurement. The Company measures the tax position as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate resolution with a taxing authority that has full knowledge of all relevant information. This measurement considers the amounts and probabilities of the outcomes that could be realized upon ultimate settlement using the facts, circumstances, and information available at the reporting date.

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Financial Statements—(Continued)~~

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

~~See Note 9 for additional information regarding income taxes.~~

~~Adoption of New Accounting Pronouncements~~

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

~~In July 2013,~~standards updates ("ASU") to the FASB Accounting Standards Codification.

The Company considers the applicability and impact of all ASU. ASU listed below include those that have been adopted during the current fiscal year and/or those that have been issued ~~new guidance regarding derivatives. The guidance permits~~but not yet adopted as of the ~~Fed Funds Effective Swap Rate (or Overnight Index Swap Rate)~~date of this filing. ASU not listed below were assessed and determined to be ~~used as a U.S. benchmark interest rate for hedge accounting, in addition to~~either not applicable or not material.

There have been no ASU adopted during the United States Treasury rate and London Inter-Bank Offered Rate (“LIBOR”). The guidance also removes the restriction on using different benchmark rates for similar hedges. The guidance is effective for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013, and was applied prospectively. Adoptionyear ended December 31, 2017.

Table of ~~the guidance did not have a significant effect on the Company’s financial position, results of operations or financial statement disclosures.~~

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

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

In December 2011 and January 2013, the FASB issued updated guidance regarding the disclosure of recognized derivative instruments (including bifurcated embedded derivatives), repurchase agreements and securities borrowing/lending transactions that are offset in the statement of financial position or are subject to an enforceable master netting arrangement or similar agreement (irrespective of whether they are offset in the statement of financial position). This new guidance requires an entity to disclose information on both a gross and net basis about instruments and transactions within the scope of this guidance. This new guidance became effective for interim or annual reporting periods that began on or after January 1, 2013, and was applied retrospectively for all comparative periods presented. The disclosures required by this guidance are included in Note 11.

~~Future Adoption of New Accounting Pronouncements~~

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

In May 2014, the FASB issued updated guidance on accounting for revenue recognition. The guidance is based on the core principle that revenue is recognized to depict the transfer of 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 guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from cost incurred to obtain or fulfill a contract. Revenue recognition for insurance contracts is explicitly scoped out of the guidance. The new guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2016, and must be applied using one of two retrospective application methods. Early adoption is not permitted. The Company is currently assessing the impact of the guidance on the Company’s financial position, results of operations and financial statement disclosures.

In August 2014, the FASB issued updated guidance for measuring the financial assets and the financial liabilities of a consolidated collateralized financing entity. Under the guidance, an entity within scope is permitted to measure both the financial assets and financial liabilities of a consolidated collateralized financing entity based on either the fair value of the financial assets or the financial liabilities, whichever is more observable. If elected, the guidance will eliminate the measurement difference that exists when both are measured at fair value. The new guidance is effective for annual

Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial ~~Statements—~~Statements - (Continued)

~~periods and interim reporting periods within those annual periods, beginning after~~

ASU issued but not yet adopted as of December ~~15, 2015. Early adoption will be permitted. This guidance can be elected~~31, 2017



Standard	Description	Effective date and method of adoption	Effect on the financial statements or other significant matters
ASU 2014-09, Revenue from Contracts with Customers (Topic 606)	The ASU is based on the core principle that revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The standard also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, and assets recognized from the costs to obtain or fulfill a contract with a customer. Revenue recognition for insurance contracts and financial instruments is explicitly scoped out of the standard.	January 1, 2018 using the modified retrospective method which will include a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption.	Adoption of the ASU will not have a significant impact on the Company’s Financial Statements and Notes to the Financial Statements.
ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities	The ASU revises an entity’s accounting related to the recognition and measurement of certain equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU requires equity investments, except for those accounted for using the equity method, to be measured at fair value with changes in fair value recognized in net income. The standard also amends certain disclosure requirements associated with the fair value of financial instruments.	January 1, 2018 using the modified retrospective method which will include a cumulative-effect adjustment to retained earnings.	Adoption of this guidance will result in 1) the reclassification of net unrealized gains on equity securities currently classified as available-for-sale from accumulated other comprehensive income to retained earnings and 2) adjustment of the basis of equity investments currently accounted for using the cost method to fair value with the embedded net unrealized gain included in retained earnings. The cumulative effect of adoption is expected to increase retained earnings by $0.3 million and total equity by $0.3 million after giving effect to offsetting items. See table below for ~~modified retrospective or full retrospective adoption. The Company is currently assessing~~ the impact to the line items in the Statements of Financial Position. There will be no impact to net income on the adoption date. Subsequent to the adoption date, the change in fair value of these equity investments will be reported in net income.



Summary of ASU 2016-01 Transition Impacts on the Statements
of Financial Position upon Adoption on January 1, 2018
(in thousands)
	Increase / (Decrease)
Other long-term investments	$	423
Total assets	$	423
Policyholders’ dividends	$	0
Income taxes	89
Total liabilities	89
Accumulated other comprehensive income (loss)	(3		)
Retained earnings	337
Total equity	334
Total liabilities and equity	$	423

Table of ~~the guidance on the Company’s financial position, results~~Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)



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

Table of ~~operations and financial statement disclosures.~~

In August 2014, the FASB issued guidance requiring that mortgage loans be derecognized and that a separate other receivable be recognized upon foreclosure if certain conditions are met. Upon foreclosure, the separate other receivable should be measured based on the amountContents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)



Standard	Description	Effective date and method of adoption	Effect on the financial statements or other significant matters
ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities	This ASU requires certain premiums on callable debt securities to be amortized to the earliest call date.	January 1, 2019 using the modified retrospective method (with early adoption permitted) which will include a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption.	The Company is currently assessing the impact of the ASU on the Company’s Financial Statements and Notes to the Financial Statements.
ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities	This ASU makes targeted changes to the existing hedge accounting model to better portray the economics of an entity’s risk management activities and to simplify the use of hedge accounting.	January 1, 2019 using the modified retrospective method (with early adoption permitted) which will include a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption.	The Company is currently assessing the impact of the ASU 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	In February 2018, this ASU was issued following the enactment of the Tax Act of 2017. This ASU allows an entity to elect a reclassification from accumulated other comprehensive income to retained earnings for stranded effects resulting from the Tax Act of 2017.	January 1, 2019 with early adoption permitted. The ASU should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act of 2017 is recognized.	The Company is currently assessing the impact of the ASU on the Company’s Financial Statements and Notes to the Financial Statements.

Table of ~~the loan balance (principal and interest) expected~~Contents

Prudential Annuities Life Assurance Corporation

Notes to be recovered from the guarantor. The new guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2014, with early adoption permitted. This guidance can be adopted using either a prospective transition method or a modified retrospective transition method. This guidance is not expected to have a significant impact on the Company’s financial position, results of operations or financial statement disclosures.

Financial Statements - (Continued)

3. INVESTMENTS

Fixed Maturities and Equity Securities

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

   December 31, 2014
   Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value Other-than-
temporary
Impairments
in AOCI (3)
   (in thousands)
Fixed maturities, available-for-sale

U.S. Treasury securities and obligations of U.S. government authorities and agencies
   $ 6,324 $ 22 $ 10 $ 6,336 $ -
Obligations of U.S. states and their political subdivisions
   69,486 1,323 20 70,789 -
Foreign government bonds
   29,738 7,621 4 37,355 -
Public utilities
   198,277 19,909 1,593 216,593 -
All other corporate securities
   1,743,110 146,872 4,891 1,885,091           -
Asset-backed securities (1)
   144,324 5,078 391 149,011 (39 )
Commercial mortgage-backed securities
   291,868 10,523 206 302,185 (10 )
Residential mortgage-backed securities (2)
   126,126 7,113 6 133,233 (36 )


Total fixed maturities, available-for-sale
   $           2,609,253 $           198,461 $           7,121 $           2,800,593 $ (85 )


Equity securities, available-for-sale

Common Stocks:

Public utilities
   $ - $ - $ - $ -
Mutual funds
   14 3 - 17


Total equity securities, available-for-sale
   $ 14 $ 3 $ - $ 17



	December 31, 2017
	Amortized Cost or Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI(3)
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	5,059,168	$	9,109	$	236,627	$	4,831,650	$	0
Obligations of U.S. states and their political subdivisions	102,709		2,089		158		104,640		0
Foreign government bonds	133,859		6,878		432		140,305		0
Public utilities	567,829		31,414		2,058		597,185		0
Redeemable preferred stock	29,504		615		59		30,060		0
All other U.S. public corporate securities	1,473,761		77,379		3,416		1,547,724		0
All other U.S. private corporate securities	938,144		35,327		3,795		969,676		0
All other foreign public corporate securities	194,201		5,663		918		198,946		0
All other foreign private corporate securities	638,785		38,030		3,231		673,584		0
Asset-backed securities(1)	341,277		4,438		128		345,587		(17		)
Commercial mortgage-backed securities	502,695		7,334		4,345		505,684		0
Residential mortgage-backed securities(2)	163,334		2,950		539		165,745		(4		)
Total fixed maturities, available-for-sale	$	10,145,266	$	221,226	$	255,706	$	10,110,786	$	(21	)
Equity securities, available-for-sale:
Common stocks:
Industrial, miscellaneous & other	$	0	$	0	$	0	$	0
Mutual funds	14		4		0		18
Total equity securities, available-for-sale	$	14	$	4	$	0	$	18


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


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


(3)	Represents the amount of ~~other-than-temporary impairment~~unrealized losses remaining in AOCI, ~~which were not included in earnings.~~from the impairment measurement date. Amount excludes ~~$0.1~~$12.3 million of net unrealized gains on impaired available-for-sale securities relating to changes in the value of such securities subsequent to the impairment measurement date.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial ~~Statements—~~Statements - (Continued)

   December 31, 2013 (4)
   Amortized
Cost    Gross
Unrealized
Gains    Gross
Unrealized
Losses    Fair
Value    Other-than-
temporary
Impairments
in AOCI (3)
   (in thousands)
Fixed maturities, available-for-sale

U.S. Treasury securities and obligations of U.S. government authorities and agencies
   $ 6,382    $ 36    $ 34    $ 6,384    $ -
Obligations of U.S. states and their political subdivisions
   67,225    2,911    1,570    68,566    -
Foreign government bonds
   25,437    5,717    -    31,154    -
Public utilities
   197,718    12,628    3,141    207,205    -
All other corporate securities
   2,061,809    162,780    9,152    2,215,437    -
Asset-backed securities (1)
   182,888    6,513    1,509    187,892    (1,351 )
Commercial mortgage-backed securities
   384,764    11,387    5,518    390,633                      -
Residential mortgage-backed securities (2)
   152,779    5,138    972    156,945    (40 )










Total fixed maturities, available-for-sale
   $           3,079,002    $           207,110    $           21,896    $           3,264,216    $ (1,391 )










Equity securities, available-for-sale

Common Stocks:

Public utilities
   $ 192    $ -    $ -    $ 192
Mutual funds
   14    2    -    16









Total equity securities, available-for-sale
   $ 206    $ 2    $ -    $ 208



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


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


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


(3)	Represents the amount of ~~other-than-temporary impairment~~unrealized losses remaining in AOCI, ~~which were not included in earnings.~~from the impairment measurement date. Amount excludes ~~$1.7~~$0.2 million of net unrealized gains on impaired available-for-sale securities relating to changes in the value of such securities subsequent to the impairment measurement date.

~~(4)~~

~~Prior period’s amounts are presented on a basis consistent~~

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

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)



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

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

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

As of December 31, 2017 and 2016, the gross unrealized losses on fixed maturity securities were composed of $253.0 million and $594.9 million, respectively, related to “1” highest quality or “2” high quality securities based on the National Association of Insurance Commissioners (“NAIC”) or equivalent rating and $2.7 million and $8.4 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. As of December 31, 2017, the $248.0 million of gross unrealized losses on fixed maturities of twelve months or more were concentrated in U.S. government bonds, commercial mortgage-backed securities and in the Company's corporate securities within the consumer non-cyclical and finance sectors. As of December 31, 2016, the $12.7 million of gross unrealized losses on fixed maturities of twelve months or more were concentrated in the Company's corporate securities within the consumer non-cyclical, finance and utility sectors. In accordance with its policy described in Note 2, the Company concluded that an adjustment to earnings for OTTI for these fixed maturity securities was not warranted at either December 31, 2017 or 2016. These conclusions were based on a detailed analysis of the underlying credit and cash flows on each security. Gross unrealized losses are primarily attributable to general credit spread widening, increases in interest rates and foreign currency exchange rate movements. As of December 31, 2017, the Company did not intend to sell these securities, and it was not more likely than not that the Company would be required to sell these securities before the anticipated recovery of the remaining amortized cost basis.

As of December 31, 2017, there were no gross unrealized losses on equity securities. As of December 31, 2016, $0 million of the gross unrealized losses on equity securities represented declines in value of 20% or more and had been in that position for less than six months. In accordance with its policy described in Note 2, the Company concluded that an adjustment to earnings for OTTI for these equity securities was not warranted at either December 31, 2017 or 2016.

The following table sets forth the ~~current period presentation.~~

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

   Available-for-Sale
   Amortized Cost    Fair Value
   (in thousands)
Due in one year or less
   $ 171,429    $ 173,444
Due after one year through five years
   888,464    938,289
Due after five years through ten years
   556,948    606,353
Due after ten years
   430,094    498,078
Asset-backed securities
   144,324    149,011
Commercial mortgage-backed securities
   291,868    302,185
Residential mortgage-backed securities
   126,126    133,233




Total
   $           2,609,253    $           2,800,593

of the date indicated:



	December 31, 2017
	Amortized Cost		Fair Value
	(in thousands)
Fixed maturities, available-for-sale:
Due in one year or less	$	253,164	$	253,552
Due after one year through five years	1,077,651		1,099,278
Due after five years through ten years	1,704,257		1,783,306
Due after ten years	6,102,888		5,957,634
Asset-backed securities	341,277		345,587
Commercial mortgage-backed securities	502,695		505,684
Residential mortgage-backed securities	163,334		165,745
Total fixed maturities, available-for-sale	$	10,145,266	$	10,110,786

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

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

   2014    2013    2012
   (in thousands)
Fixed maturities, available-for-sale

Proceeds from sales
   $           308,458    $ 314,415    $           504,001
Proceeds from maturities/repayments
   681,426              1,175,680    861,512
Gross investment gains from sales, prepayments, and maturities
   18,110    18,619    23,077
Gross investment losses from sales and maturities
   (3,404 )    (9,824 )    (134 )
Equity securities, available-for-sale

Proceeds from sales
   $ 192    $ 14    $ 3,201
Gross investment gains from sales
   1    10    703
Fixed maturity and equity security impairments

Net writedowns for other-than-temporary impairment losses on fixed maturities

recognized in earnings (1)
   $ -    $ -    $ (258 )

securities, for the periods indicated:



	Years Ended December 31,
	2017			2016			2015
	(in thousands)
Fixed maturities, available-for-sale
Proceeds from sales(1)	$	517,743		$	3,577,346		$	33,604
Proceeds from maturities/prepayments	630,140			495,465			453,016
Gross investment gains from sales and maturities	8,992			98,095			5,788
Gross investment losses from sales and maturities	(3,047		)	(5,412		)	(937		)
OTTI recognized in earnings(2)	(9,122		)	(6,499		)	(20		)


(1)	Includes $2.5 million, $0.6 million and $(0.0) million of non-cash related proceeds for the years ended December 31, 2017, 2016 and 2015, respectively.


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

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial ~~Statements—~~Statements - (Continued)

As discussed in Note 2, a portion of certain OTTI losses on fixed maturity securities is recognized in “Other comprehensive income (loss) (“OCI”)”. For these securities, the net amount recognized in earnings (“credit loss impairments”) represents the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. Any remaining difference between the fair value and amortized cost is recognized in OCI.

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

Year Ended December 31,
2014    2013



(in thousands)
Balance, beginning of period
$              1,800    $ 3,382
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period
(1,682 )    (1,628 )
Increases due to the passage of time on previously recorded credit losses
-    114
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected
(25 )    (68 )



Balance, end of period
$ 93    $              1,800

amounts, for the periods indicated:

Years Ended December 31,
2017 2016
(in thousands)
Credit loss impairments:
Balance, beginning of period $ 1,325
$ 86
New credit loss impairments 366
1,791
Additional credit loss impairments on securities previously impaired 606
0
Increases due to the passage of time on previously recorded credit losses 10
25
Reductions for securities which matured, paid down, prepaid or were sold during the period (21 ) (1,170 )
Reductions for securities impaired to fair value during the period(1) (1,481 ) 0
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected (13 ) (14 )
Assets transferred to parent and affiliates 0
607
Balance, end of period $ 792
$ 1,325


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

Trading Account Assets

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

December 31, 2014    December 31, 2013
Cost    Fair Value    Cost    Fair Value
(in thousands)
Total trading account assets - Equity securities
$             5,471    $             6,131    $             5,164    $             6,677



	December 31, 2017				December 31, 2016
	Amortized Cost or Cost		Fair Value		Amortized Cost or Cost		Fair Value
	(in thousands)
Fixed maturities	$	161,393	$	166,360	$	147,057	$	139,513
Equity securities	11,600		15,357		7,551		10,358
Total trading account assets	$	172,993	$	181,717	$	154,608	$	149,871

The net change in unrealized gains (losses) from trading account assets still held at period end, recorded within “Asset ~~management~~administrative fees and other ~~income”~~income,” was ~~$(0.9)~~$13.5 million, ~~$0.8~~$(4.8) million and ~~$(0.4)~~$(0.6) million during the years ended December 31, ~~2014, 2013,~~2017, 2016 and ~~2012,~~2015, respectively.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

Commercial Mortgage and Other Loans

The ~~Company’s commercial~~following table sets forth the composition of “Commercial mortgage and other loans, ~~are comprised as follows,~~” as of the dates indicated:

December 31, 2014 December 31, 2013
Amount
(in thousands)       % of
Total Amount
(in thousands)       % of
Total
Commercial and agricultural mortgage loans by property type:

Apartments/Multi-Family
$ 143,057       34.0 % $ 125,045       31.5 %
Industrial
87,088       20.7 88,009       22.1
Retail
72,226       17.2 72,325       18.2
Office
44,621       10.6 40,976       10.3
Other
14,119       3.4 13,796       3.5
Hospitality
5,081       1.2 5,133       1.3









Total commercial mortgage loans
366,192       87.1 345,284       86.9
Agricultural property loans
54,113       12.9 52,223       13.1









Total commercial and agricultural mortgage loans by property type
420,305                   100.0 % 397,507                   100.0 %








Valuation allowance
(482 )       (1,256 )




Total net commercial and agricultural mortgage loans by property type
419,823       396,251




Other Loans

Uncollateralized loans
2,740       2,740
Valuation allowance
-       -




Total net other loans
2,740       2,740




Total commercial mortgage and other loans
$               422,563       $             398,991

~~The~~



	December 31, 2017					December 31, 2016
	Amount (in thousands)			% of Total		Amount (in thousands)			% of Total
Commercial mortgage and agricultural property loans by property type:
Apartments/Multi-Family	$	348,718		25.0	%	$	277,296		22.5	%
Hospitality	3,782			0.3		3,925			0.3
Industrial	327,987			23.6		263,705			21.4
Office	294,072			21.2		294,304			23.8
Other	139,362			10.0		87,465			7.1
Retail	216,544			15.6		223,252			18.1
Total commercial mortgage loans	1,330,465			95.7		1,149,947			93.2
Agricultural property loans	59,197			4.3		84,235			6.8
Total commercial mortgage and agricultural property loans by property type	1,389,662			100.0	%	1,234,182			100.0	%
Valuation allowance	(2,650		)			(2,289		)
Total commercial mortgage and other loans	$	1,387,012				$	1,231,893

As of December 31, 2017, the commercial mortgage and agricultural property loans ~~are~~were geographically dispersed throughout the United States ~~with~~(with the largest concentrations in California ~~(17%~~(30%), Texas (11%) and ~~Texas (12%~~New York (7%)) ~~at December 31, 2014.~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Financial Statements—(Continued)~~

~~Activity~~and included loans secured by properties in Europe and Australia.

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

December 31, 2014    December 31, 2013    December 31, 2012
(in thousands)
Allowance for credit losses, beginning of year
$ 1,256    $ 2,177    $ 1,501
Addition to / (release of) allowance for losses
(774 )    (921 )    676





Total ending balance (1)
$             482    $         1,256    $             2,177

~~(1)~~

~~Agricultural loans represent less than $0.1 million of the ending allowance at both December 31, 2014 and 2013 and $0.2 million of the ending allowance at December 31, 2012.~~

indicated:



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

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

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

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

December 31, 2014 December 31, 2013
(in thousands)
Allowance for Credit Losses:

Individually evaluated for impairment (1)
$ - $ -
Collectively evaluated for impairment (2)
482 1,256

Total ending balance
$ 482 $ 1,256

Recorded Investment (3):

Gross of reserves: individually evaluated for impairment (1)
$ - $ -
Gross of reserves: collectively evaluated for impairment (2)
423,045 400,247

Total ending balance, gross of reserves
$ 423,045 $ 400,247



	December 31, 2017
	Commercial Mortgage Loans		Agricultural Property Loans		Total
	(in thousands)
Allowance for credit losses:
Individually evaluated for impairment	$	0	$	0	$	0
Collectively evaluated for impairment	2,616		34		2,650
Total ending balance(1)	$	2,616	$	34	$	2,650
Recorded investment(2):
Individually evaluated for impairment	$	1,571	$	4,865	$	6,436
Collectively evaluated for impairment	1,328,894		54,332		1,383,226
Total ending balance(1)	$	1,330,465	$	59,197	$	1,389,662


(1)	~~There~~As of December 31, 2017, there were no loans ~~individually evaluated for impairments at both December 31, 2014 and 2013.~~acquired with deteriorated credit quality.

~~(2)~~

Agricultural loans collectively evaluated for impairment had a recorded investment of $54 million and $52 million for the periods ending December 31, 2014 and 2013, respectively, and a related allowance of less than $0.1 million for both periods. Uncollateralized loans collectively evaluated for impairment had a recorded investment of $3 million at both December 31, 2014 and 2013 and no related allowance for both periods.

~~(3)~~(2)

Recorded investment reflects the ~~balance sheet~~ carrying value gross of related allowance.

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

Impaired commercial mortgage and other loans with no allowance for losses are loans in which the fair value of the collateral or the net present value of the loans’ expected future cash flows equals or exceeds the recorded investment. The Company had no such loans at both December 31, 2014 and 2013. See Note 2 for information regarding the Company’s accounting policies for non-performing loans.



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


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


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

The following ~~table sets~~tables set forth certain key credit quality indicators ~~as of December 31, 2014,~~for commercial mortgage and agricultural property loans, based upon the recorded investment gross of allowance for credit ~~losses.~~

~~Total commercial and agricultural mortgage loans~~

Debt Service Coverage Ratio - December 31, 2014
   Greater than 1.2X    1.0X to <1.2X    Less than 1.0X    Total
   (in thousands)
Loan-to-Value Ratio

0%-59.99%
$ 262,853    $ 4,295    $ 10,489    $ 277,637
60%-69.99%
115,708    468    -    116,176
70%-79.99%
25,034    1,458    -    26,492
Greater than 80%
-    -    -    -







Total commercial and agricultural mortgage loans
$               403,595    $           6,221    $           10,489    $           420,305

losses, as of the dates indicated:



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

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial ~~Statements—~~Statements - (Continued)



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

The following ~~table sets~~tables set forth ~~certain key credit quality indicators as~~an aging of ~~December 31, 2013,~~past due commercial mortgage and other loans based upon the recorded investment gross of allowance for credit ~~losses.~~

~~Total commercial and agricultural mortgage loans~~

   Debt Service Coverage Ratio - December 31, 2013
      Greater than 1.2X    1.0X to <1.2X    Less than 1.0X    Total
      (in thousands)
Loan-to-Value Ratio

0%-59.99%
   $ 251,278    $ 7,650    $ 1,865    $ 260,793
60%-69.99%
   102,755    -    -    102,755
70%-79.99%
   31,712    2,247    -    33,959
Greater than 80%
   -    -    -    -








Total commercial and agricultural mortgage loans
   $               385,745    $             9,897    $           1,865    $           397,507

Aslosses, as well as the amount of ~~both December 31, 2014 and 2013, all~~ commercial mortgage and other loans ~~were in current status. The Company defines current in its aging of past due commercial mortgage and other loans as less than 30 days past due.~~

~~There were no commercial mortgage and other loans in nonaccrual~~on non-accrual status, as of ~~both December 31, 2014 and 2013. Nonaccrual loans are those on which~~ the accrual of interest has been suspended after the loans become 90 days delinquent as to principal or interest payments, or earlier when the Company has doubts about collectability and loans for which a loan-specific reserve has been established. See Note 2, for further discussion regarding nonaccrual status loans.

dates indicated:



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


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


(2)	For additional information regarding the Company's policies for accruing interest on loans, see Note 2.



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


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


(2)	For additional information regarding the Company's policies for accruing interest on loans, see Note 2.

For the years ended December 31, ~~2014~~2017 and ~~2013,~~2016, there were no commercial mortgage and other loans acquired, other than those through direct ~~origination, or~~origination. For the year ended December 31, 2017, there were $129 million of commercial mortgage and other loans sold.

For the year ended December 31, 2016, there were no commercial mortgage and other loans sold. For the year ended December 31, 2017, there were no transfers of commercial mortgage and other loans to related parties. For the year ended December 31, 2016, the Company received $580 million of commercial mortgage and other loans from related parties.

The Company’s commercial mortgage and other loans may occasionally be involved in a troubled debt restructuring. As of both December 31, ~~2014~~2017 and ~~2013,~~2016, there were no new troubled debt restructurings related to commercial mortgage or other loans and no payment defaults on commercial mortgage or other loans that were modified as a troubled debt restructuring within the twelve months preceding. As of both December 31, 2017 and 2016, the Company had no significant commitments ~~to fund~~ to borrowers that have been involved in a troubled debt restructuring. For the years ended December 31, 2014 and 2013, there were no troubled debt restructurings related to commercial mortgage and other loans, and no payment defaults on commercial mortgage and other loans that were modified as a troubled debt restructuring within the 12 months preceding each respective period. See Note 2 for additional information relating to the accounting for troubled debt ~~restructurings.~~

restructurings, see Note 2.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

Other Long-Term Investments

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



	December 31,
	2017		2016
	(in thousands)
Joint ventures and limited partnerships:
Private equity	$	29,301	$	30,513
Hedge funds	106,776		98,554
Real estate-related	48,555		109,043
Total joint ventures and limited partnerships	184,632		238,110
Derivatives	151,179		313,821
Total other long-term investments	$	335,811	$	551,931

As of both December 31, ~~for~~2017 and 2016, the ~~years indicated.~~

   2014    2013
   (in thousands)
Joint ventures and limited partnerships
   $ 68,225    $ 60,585
Derivatives
   94,558    -




Total other long-term investments
   $           162,783    $               60,585

Company had no significant equity method investments.

Net Investment Income

~~Net~~

The following table sets forth “Net investment ~~income~~income” by investment type, for the ~~years ended December 31, was from the following sources:~~

   2014    2013    2012
   (in thousands)
Fixed maturities, available-for-sale
   $           140,114    $           191,043    $           246,479
Equity securities, available-for-sale
   -    -      7
Trading account assets
   325    342    923
Commercial mortgage and other loans
   21,802    28,463    28,449
Policy loans
   739    675    845
Short-term investments
   281    323    620
Other long-term investments
   6,492    3,601    8,302






Gross investment income
   169,753    224,447    285,625
Less: investment expenses
   (5,742)       (6,564)       (7,974)






Net investment income
   $ 164,011    $ 217,883    $ 277,651

~~Carrying~~periods indicated:



	Years Ended December 31,
	2017			2016			2015
	(in thousands)
Fixed maturities, available-for-sale	$	332,148		$	249,496		$	115,998
Trading account assets	4,927			3,473			349
Commercial mortgage and other loans	48,598			40,258			22,696
Policy loans	1,069			444			794
Short-term investments and cash equivalents	31,505			26,831			396
Other long-term investments	20,626			29,160			4,638
Gross investment income	438,873			349,662			144,871
Less: investment expenses	(16,064		)	(11,292		)	(5,441		)
Net investment income	$	422,809		$	338,370		$	139,430

The carrying value ~~for~~of non-income producing assets included $1$1.9 million in fixed maturities as of December 31, ~~2014.~~2017. Non-income producing assets represent investments that ~~have~~had not produced income for the twelve months preceding ~~twelve months.~~

December 31, 2017.

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Financial Statements—(Continued)~~

Realized Investment Gains (Losses), Net

~~Realized~~

The following table sets forth “Realized investment gains (losses), ~~net,~~net” by investment type, for the ~~years ended December 31, were from the following sources:~~

   2014    2013    2012
   (in thousands)
Fixed maturities
   $                 14,706    $                 8,795    $                 22,684
Equity securities
   1    10    703
Commercial mortgage and other loans
   774    933    1,043
Derivatives
   (8,113)       (194,055)       (107,663)
Other
   -    (34)       3






Realized investment gains (losses), net
   $ 7,368    $ (184,351)       $ (83,230)

~~Accumulated Other Comprehensive Income (Loss)~~

~~The balance of and changes in each component of “Accumulated other comprehensive income (loss)” for the years ended December 31, are as follows:~~

   Accumulated Other Comprehensive Income (Loss)
   Foreign Currency
Translation
Adjustment       Net Unrealized
Investment
Gains (Losses) (1)       Total Accumulated
Other
Comprehensive
Income (Loss)
   (in thousands)
Balance, December 31, 2011
   $ -       $ 160,711       $ 160,711
Change in component during period (2)
   7       (13,431)          (13,424)






Balance, December 31, 2012
   $ 7       $ 147,280       $ 147,287
Change in component during period (2)
   3       (76,423)          (76,420)






Balance, December 31, 2013
   $ 10       $ 70,857       $ 70,867
Change in other comprehensive income before reclassifications
   (63)          35,931       35,868
Amounts reclassified from AOCI
   -                   (14,706)                      (14,706)
Income tax benefit (expense)
   23       (7,430)          (7,407)






Balance, December 31, 2014
   $                         (30)          $             84,652       $             84,622

periods indicated:



	Years Ended December 31,
	2017			2016			2015
	(in thousands)
Fixed maturities	$	(3,177	)	$	86,184		$	4,831
Commercial mortgage and other loans	(840		)	(2,326		)	(161		)
Derivatives(1)	(801,429		)	(3,526,514		)	1,381
Other long-term investments	(39		)	(648		)	1
Short-term investments and cash equivalents	85			544			0
Realized investment gains (losses), net	$	(805,400	)	$	(3,442,760	)	$	6,052


(1)	Includes ~~cash flow hedges of $5.0 million, $(4.0) million, and $(3.0) million as of December 31, 2014, 2013, and 2012, respectively.~~the hedged items offset in qualifying fair value hedge accounting relationships.

~~(2)~~

~~Net of taxes.~~

~~Reclassifications out~~

Table of ~~Accumulated Other Comprehensive Income (Loss)~~

   Year Ended
December 31,
2014    Year Ended
December 31,
2013    Year Ended
December 31,
2012
   (in thousands)
Amounts reclassified from AOCI (1)(2):

Net unrealized investment gains (losses):

Cash flow hedges - Currency/Interest rate (3)
   $ 148    $ (95)       $ (101)
Net unrealized investment gains (losses) on available-for-sale securities
   14,558    8,900    23,488






Total net unrealized investment gains (losses) (4)
   14,706    8,805    23,387






Total reclassifications for the period
   $                 14,706    $             8,805    $             23,387

~~(1)~~

~~All amounts are shown before tax.~~

~~(2)~~

~~Positive amounts indicate gains/benefits reclassified out of AOCI. Negative amounts indicate losses/costs reclassified out of AOCI.~~

~~(3)~~

~~See Note 11 for additional information on cash flow hedges.~~

~~(4)~~

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

Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial ~~Statements—(Continued)~~

~~Net Unrealized Investment Gains (Losses)~~

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

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

Net Unrealized
Gains (Losses)
on Investments (1) Deferred Policy
Acquisition Costs
and Other Costs Future
Policy
Benefits Deferred
Income Tax
(Liability)
Benefit Accumulated
Other
Comprehensive
Income (Loss)
Related To Net
Unrealized
Investment
Gains (Losses)
(in thousands)
Balance, December 31, 2011
$ (1,740 ) $ 692 $ -    $ 382 $ (666 )
Net investment gains (losses) on investments arising during the period
3,067 -    -    (1,073 ) 1,994
Reclassification adjustment for (gains) losses included in net income
(782 ) -    -    274 (508 )
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs
-    (906 ) -    317 (589 )
Impact of net unrealized investment (gains) losses on future policy benefits
-    -    -    -    -

Balance, December 31, 2012
$ 545 $ (214 ) $ -    $ (100 ) $ 231

Net investment gains (losses) on investments arising during the period
      483 -    -    (168 ) 315
Reclassification adjustment for (gains) losses included in net income
(705 ) -                    -                    247 (458 )
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs
-    98 -    (35 ) 63
Impact of net unrealized investment (gains) losses on future policy benefits
-    -    (14 ) 5 (9 )

Balance, December 31, 2013
$ 323 $ (116 ) $ (14 ) $ (51 ) $           142

Net investment gains (losses) on investments arising during the period
(11 ) -    -    4 (7 )
Reclassification adjustment for (gains) losses included in net income
(311 ) -    -    109 (202 )
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs
-    116 -    (41 ) 75
Impact of net unrealized investment (gains) losses on future policy benefits
-    -    14 (5 ) 9

Balance, December 31, 2014
$ 1 $ -    $ -    $ 16 $ 17

~~(1)~~

~~Includes cash flow hedges. See Note 11 for information on cash flow hedges.~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Financial Statements—~~- (Continued)

~~All Other Net Unrealized Investment Gains and Losses in AOCI~~

   Net Unrealized
Gains (Losses)
on Investments (1)    Deferred Policy
Acquisition Costs
and Other Costs    Future
Policy
Benefits    Deferred
Income Tax
(Liability)
Benefit    Accumulated
Other
Comprehensive
Income (Loss)
Related To Net
Unrealized
Investment
Gains (Losses)
   (in thousands)
Balance, December 31, 2011
   $                   441,677    $ (192,119 )    $ -       $ (88,181 )    $ 161,377
Net investment gains (losses) on investments arising during the period
   (42,295 )    -       -       14,804    (27,491 )
Reclassification adjustment for (gains) losses included in net income
   (22,605 )    -       -       7,912    (14,693 )
Reclassification adjustment for OTTI losses excluded

Impact of net unrealized investment (gains) losses on deferred policy acquisition costs, deferred sales inducements and other costs
   -       45,030    -       (15,760 )                  29,270
Impact of net unrealized investment (gains) losses on future policy benefits
   -       -       (2,164 )    757    (1,407 )










Balance, December 31, 2012
   $ 376,777    $ (147,089 )    $ (2,164 )    $ (80,468 )    $ 147,056










Net investment gains (losses) on investments arising during the period
   (183,950 )    -       -       64,383    (119,567 )
Reclassification adjustment for (gains) losses included in net income
   (8,100 )    -       -       2,835    (5,265 )
Reclassification adjustment for OTTI losses excluded

Impact of net unrealized investment (gains) losses on deferred policy acquisition costs, deferred sales inducements and other costs
   -       80,637                    -               (28,222)       52,415
Impact of net unrealized investment (gains) losses on future policy benefits
   -       -       (6,023 )    2,109    (3,914 )










Balance, December 31, 2013
   $ 184,727    $ (66,452 )    $ (8,187 )    $ (39,363 )    $ 70,725










Net investment gains (losses) on investments arising during the period
   28,590    -       -       (10,013 )    18,577
Reclassification adjustment for (gains) losses included in net income
   (14,395 )    -       -       5,036    (9,359 )
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs
   -       7,407    -       (2,594 )    4,813
Impact of net unrealized investment (gains) losses on future policy benefits
   -       -       (185 )    64    (121 )










Balance, December 31, 2014
   $ 198,922    $ (59,045 )    $ (8,372 )    $ (46,870 )    $ 84,635

~~(1)~~

~~Includes cash flow hedges. See Note 11 for information on cash flow hedges.~~

Net Unrealized Gains (Losses) on Investments ~~by Asset Class~~

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

   2014    2013    2012
   (in thousands)
Fixed maturity securities on which an OTTI loss has been recognized
   $ 1    $ 323    $ 545
Fixed maturity securities, available-for-sale-all other
   191,339    184,891    375,409
Equity securities, available-for-sale
   3    2    4
Affiliated notes
   2,351    3,113    4,386
Derivatives designated as cash flow hedges (1)
   4,839    (3,653)       (3,068)
Other investments
   390    374    46






Net unrealized gains (losses) on investments
   $             198,923    $             185,050    $             377,322



	December 31,
	2017			2016			2015
	(in thousands)
Fixed maturity securities, available-for-sale—with OTTI	$	12,311		$	(1,261	)	$	9
Fixed maturity securities, available-for-sale—all other	(46,791		)	(454,274		)	90,637
Equity securities, available-for-sale	4			(347		)	3
Derivatives designated as cash flow hedges(1)	(25,851		)	11,745			14,847
Affiliated notes	829			1,181			1,660
Other investments	86			(619		)	304
Net unrealized gains (losses) on investments	$	(59,412	)	$	(443,575	)	$	107,460


(1)	See Note 11 for more information on cash flow hedges.

~~Prudential Annuities Life Assurance Corporation~~

~~Notes~~

Repurchase Agreements and Securities Lending

In the normal course of business, the Company sells securities under agreements to ~~Financial Statements—(Continued)~~

~~Duration~~repurchase and enters into securities lending transactions. As of ~~Gross Unrealized Loss Positions for Fixed Maturities~~both December 31, 2017 and ~~Equity Securities~~

2016, the Company had no repurchase agreements.

The following table ~~shows~~sets forth the ~~fair value and gross unrealized losses aggregated by investment category and length~~composition of ~~time that individual fixed maturity~~“Cash collateral for loaned securities, ~~and equity securities have been in a continuous unrealized loss position, at December 31~~” which represents the liability to return cash collateral received for the ~~years~~following types of securities loaned, as of the dates indicated:

   2014
   Less than twelve months    Twelve months or more    Total
   Fair Value    Gross
  Unrealized
Losses      Fair Value      Gross
  Unrealized
Losses    Fair Value    Gross
  Unrealized
Losses
   (in thousands)
Fixed maturities, available-for-sale

U.S. Treasury securities and obligations of U.S. government authorities and agencies
   $ 2,676    $ 10    $ -    $ -    $ 2,676    $ 10
Obligations of U.S. States and their political subdivisions
   -    -    7,305    20    7,305    20
Foreign government bonds
   4,632    4    -    -    4,632    4
Public utilities
   18,222    1,321    2,174    272    20,396    1,593
All other corporate securities
   260,414    4,462    9,403    429    269,817    4,891
Asset-backed securities
   31,756    58    32,732    333    64,488    391
Commercial mortgage-backed securities
   4,309    108    7,377    98    11,686    206
Residential mortgage-backed securities
   342    6    -    -    342    6












Total
   $ 322,351    $ 5,969    $ 58,991    $ 1,152    $ 381,342    $ 7,121












Equity securities, available-for-sale
   $                 -    $                 -    $                 -    $                 -    $                 -    $                 -












   2013 (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
   $ 3,347    $ 34    $ -    $ -    $ 3,347    $ 34
Obligations of U.S. States and their political subdivisions
   5,420    588    6,402    982    11,822    1,570
Public utilities
   59,312    3,141    -    -    59,312    3,141
All other corporate securities
   291,994    8,782    2,704    370    294,698    9,152
Asset-backed securities
   97,575    1,509    -    -    97,575    1,509
Commercial mortgage-backed securities
   86,132    5,249    2,941    269    89,073    5,518
Residential mortgage-backed securities
   100,150    972    -    -    100,150    972












Total
   $ 643,930    $ 20,275    $ 12,047    $ 1,621    $ 655,977    $ 21,896












Equity securities, available-for-sale
   $                 -    $                 -    $                 -    $                 -    $                 -    $                 -



	December 31, 2017						December 31, 2016
	Remaining Contractual Maturities of the Agreements						Remaining Contractual Maturities of the Agreements
	Overnight & Continuous		Up to 30 Days		Total		Overnight & Continuous		Up to 30 Days		Total
	(in thousands)						(in thousands)
Foreign government bonds	$	10,505	$	0	$	10,505	$	10,712	$	0	$	10,712
U.S. public corporate securities	6,878		0		6,878		12,638		0		12,638
Total cash collateral for loaned securities(1)	$	17,383	$	0	$	17,383	$	23,350	$	0	$	23,350


(1)	~~Prior period’s amounts are presented on a basis consistent~~The Company did not have agreements with remaining contractual maturities of thirty days or greater, as of the ~~current period presentation.~~dates indicated.

The gross unrealized losses on fixed maturity securities at December 31, 2014 and 2013, are composed of $4.0 million and $20.4 million, respectively, related to high or highest quality securities based on the National Association of Insurance Commissioners (“NAIC”) or equivalent rating and $3.1 million and $1.5 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. At December 31, 2014, the $1.2 million of gross unrealized losses of twelve months or more were concentrated in asset-backed securities and the energy and utility sectors of the Company’s corporate securities. At December 31, 2013, the $1.6 million of gross unrealized losses of twelve months or more were concentrated in U.S. obligations and the consumer non-cyclical sector of the Company’s corporate securities. In accordance with its policy described in Note 2, the Company concluded that an adjustment to earnings for other-than-temporary impairments for these securities was not warranted at December 31, 2014 or 2013. These conclusions are based on a detailed analysis of the underlying credit and cash flows on each security. The gross unrealized losses are primarily attributable to credit spread widening. At December 31, 2014, the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before the anticipated recovery of its remaining amortized cost basis.

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Financial Statements—(Continued)~~

Securities Pledged, Restricted Assets and Special Deposits

The Company pledges as collateral investment securities it owns to unaffiliated parties through certain transactions, including securities lending, securities sold under agreements to repurchase, collateralized borrowings and postings of collateral with derivative counterparties. ~~At December 31,~~The following table sets forth the carrying value of investments pledged to third parties ~~as reported in the Statements of Financial Position included the following:~~

   2014    2013
   (in thousands)
Fixed maturity securities, available-for-sale
   $             5,098    $               46,156
Trading account assets
   -    287




Total securities pledged
   $ 5,098    $ 46,443

~~As of December 31, 2014~~ and ~~2013,~~ the carrying amount of the associated liabilities supported by the pledged collateral, as of the dates indicated:



	December 31,
	2017		2016
	(in thousands)
Pledged collateral:
Fixed maturity securities, available-for-sale	$	16,825	$	21,908
Total securities pledged	$	16,825	$	21,908
Liabilities supported by pledged collateral:
Cash collateral for loaned securities	$	17,383	$	23,350
Total liabilities supported by pledged collateral	$	17,383	$	23,350

In the normal course of its business activities, the Company accepts collateral that can be sold or repledged. The primary sources of this collateral were securities purchased under agreements to resell. As of December 31, 2017, there was $5no such collateral. As of December 31, 2016, the fair value of this collateral was $255 million, noneof which had either been sold or repledged.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

As of December 31, 2017 and 2016, there were fixed maturities of $8.3 million and ~~$48~~$7.5 million, respectively, ~~which was “Cash collateral for loaned securities”.~~

~~Fixed maturities of $7 million and $8 million at December 31, 2014 and 2013, respectively, were~~ on deposit with governmental authorities or trustees as required by certain insurance laws.

4. DEFERRED POLICY ACQUISITION COSTS

The balances of and changes in DAC as of and for the years ended December 31, are as follows:

   2014    2013    2012
   (in thousands)
Balance, beginning of year
   $ 1,345,504    $ 906,814    $ 666,764
Capitalization of commissions, sales and issue expenses
   2,804    4,050    25,081
Amortization-Impact of Assumption and experience unlocking and true-ups
   91,895    31,666    274,503
Amortization-All Other
   (330,311)       353,895    (86,461)
Changes in unrealized investment gains and losses
   4,539    49,079    26,927






Balance, end of year
   $             1,114,431    $             1,345,504    $             906,814



	2017			2016			2015
	(in thousands)
Balance, beginning of year	$	4,344,361		$	749,302		$	1,114,431
Capitalization of commissions, sales and issue expenses	277,586			269,679			1,535
Amortization-Impact of assumption and experience unlocking and true-ups	288,974			226,204			33,113
Amortization-All other	(275,028		)	(46,388		)	(342,265		)
Changes in unrealized investment gains and losses	(39,328		)	18,772			16,352
Ceded DAC upon reinsurance agreement with Prudential Insurance(1)(2)	0			(7,480		)	(73,864		)
Assumed DAC upon reinsurance agreement with Pruco Life(1)	0			3,134,272			0
Balance, end of year	$	4,596,565		$	4,344,361		$	749,302


(1)	See Note 1 and Note 13 for additional information.


(2)	Represents a $7.5 million true-up in 2016 to the ceded DAC upon reinsurance agreement with Prudential Insurance in 2015.

5. VALUE OF BUSINESS ACQUIRED

~~Details~~

The balances of and changes in VOBA as of and ~~related interest and gross amortization~~ for the years ended December 31, are as follows:

   2014    2013    2012
   (in thousands)
Balance, beginning of period
   $ 43,500    $ 43,090    $ 29,010
Amortization-Impact of assumption and experience unlocking and true-ups (1)
   5,412    6,376    21,931
Amortization-All other (1)
   (11,181)       (11,593)       (13,871)
Interest (2)
   2,615    2,762    2,077
Change in unrealized gains/losses
   (608)       2,865    3,943






Balance, end of year
   $                  39,738    $                  43,500    $               43,090



	2017			2016			2015

	(in thousands)
Balance, beginning of year	$	30,287		$	33,640		$	39,738
Amortization-Impact of assumption and experience unlocking and true-ups (1)	10,035			2,372			3,412
Amortization-All other (1)	(7,422		)	(8,176		)	(10,477		)
Interest (2)	2,001			1,939			2,436
Change in unrealized investment gains and losses	208			512			1,163
Ceded VOBA upon reinsurance agreement with Prudential Insurance (3)	0			0			(2,632		)
Balance, end of year	$	35,109		$	30,287		$	33,640


(1)	The weighted average remaining expected life of VOBA was approximately ~~5.26~~5.47 years ~~from the date~~as of ~~acquisition.~~December 31, 2017.


(2)	The interest accrual rate for the VOBA related to the businesses acquired was ~~6.10%~~5.96%, ~~6.14%~~6.00% and ~~6.18%~~6.05% for the years ended December 31, ~~2014, 2013~~2017, 2016 and ~~2012.~~2015.

(3) See Note 1 for additional information.

The following table provides estimated future amortization, net of interest, for the periods ~~indicated (in thousands):~~

   2015    2016    2017    2018    2019
   (in thousands)
Estimated future VOBA amortization
   $         6,571    $         5,276    $         4,446    $         3,804    $         3,134

~~6. REINSURANCE~~

The Company utilizes both affiliated and unaffiliated reinsurance arrangements. On its unaffiliated arrangements, the Company uses primarily modified coinsurance reinsurance arrangements whereby the reinsurer shares in the experienceindicated:



	2018		2019		2020		2021		2022

	(in thousands)
Estimated future VOBA amortization	$	5,867	$	4,997	$	4,258	$	3,620	$	3,077

Table of a specified book of business. These reinsurance transactions result in the Company receiving from the reinsurer an upfront ceding commission on the book of business ceded in exchange for the reinsurer receiving in the future, a percentage of the future fees and benefits generated from that book of business. Such transfer does not relieve the Company of its primary liability and, as such, failure of reinsurers to honor their obligation could result in losses to the Company. The Company reduces this risk by evaluating the financial condition and credit worthiness of reinsurers.

Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial ~~Statements—~~Statements - (Continued)

On its affiliated arrangements, the Company uses automatic coinsurance reinsurance arrangements. These agreements cover all significant risks under features of the policies reinsured. The Company is not relieved of its primary obligation to the policyholder as a result of these reinsurance transactions. These affiliated agreements include the reinsurance of the Company’s GMWB, GMIWB and GMAB features. These features are accounted for as embedded derivatives, and changes in the fair value of the embedded derivative are recognized through “Realized investment gains (losses), net.” Please see Note 13 for further details around the affiliated reinsurance agreements.

~~The effect of reinsurance~~


6.	POLICYHOLDERS’ LIABILITIES

Future Policy Benefits

Future policy benefits at December 31 for the years ~~ended December 31, 2014, 2013 and 2012, was~~indicated are as ~~follows (in thousands):~~

   Gross Unaffiliated
Ceded Affiliated
Ceded Net
2014

Policy charges and fee income - Life (1)
   $ 3,522 $ (856 ) $ -    $ 2,666
Policy charges and fee income - Annuity
   805,550 (1,889 ) -    803,661
Realized investment gains (losses), net
   (1,967,588 ) -    1,974,956 7,368
Policyholders’ benefits
   137,502 (367 ) -    137,135
General, administrative and other expenses
   $ 398,960 $ (838 ) $ (3,874 ) $ 394,248
2013

Policy charges and fee income - Life (1)
   $ 3,472 $ (1,231 ) $ -    $ 2,241
Policy charges and fee income - Annuity
   809,549 (2,548 ) -    807,001
Realized investment gains (losses), net
   1,076,184 -    (1,260,535 ) (184,351 )
Policyholders’ benefits
   29,874 (147 ) -    29,727
General, administrative and other expenses
   $ 407,365 $ (776 ) $ (3,910 ) $ 402,679
2012

Policy charges and fee income - Life (1)
   $ 3,522 $                 (1,099 ) $ -    $ 2,423
Policy charges and fee income - Annuity
   796,711 (2,139 ) -    794,572
Realized investment gains (losses), net
   202,568 -            (285,798 ) (83,230 )
Policyholders’ benefits
   124,517 (201 ) -    124,316
General, administrative and other expenses
   $                 429,383 $ (784 ) $ (3,835 ) $             424,764

follows:



	2017		2016

	(in thousands)
Life insurance – domestic	$	800	$	964
Individual and group annuities and supplementary contracts(2)	970,936		446,318
Other contract liabilities(2)	8,160,833		1,267,739
Individual and group annuities assumed upon reinsurance agreement with Pruco Life(1)	0		528,210
Other contract liabilities assumed upon reinsurance agreement with Pruco Life(1)	0		6,442,965
Total future policy benefits	$	9,132,569	$	8,686,196


(1)	~~Life insurance inforce face amounts at December 31, 2014, 2013 and 2012 was $ 121 million, $ 128 million and $ 132 million, respectively.~~See Note 1 for additional information.

(2) Includes assumed reinsurance business from Pruco Life.

Life insurance liabilities include reserves for death benefits. Individual and group annuities and supplementary contract liabilities include reserves for life contingent immediate annuities and life contingent group annuities. Other contract liabilities include unearned premiums and certain other reserves for annuities and individual life products.

Future policy benefits for domestic individual non-participating traditional life insurance policies are generally equal to the present value of future benefit payments and related expenses, less the present value of future net premiums. Assumptions as to mortality, morbidity and persistency are based on the Company’s experience, industry data, and/or other factors, when the basis of the reserve is established. Interest rates used in the determination of the present values range from 0.0% to 0.0% for setting domestic insurance reserves.

Future policy benefits for individual and group annuities and supplementary contracts with life contingencies are generally equal to the present value of expected future payments. Assumptions as to mortality are based on the Company’s experience, industry data, and/or other factors, when the basis of the reserve is established. The interest rates used in the determination of the present values generally range from 0.0% to 8.3%, with less than 0.5% of the reserves based on an interest rate in excess of 8.0%.

The Company’s ~~Statements~~liability for future policy benefits are primarily liabilities for guaranteed benefits related to certain long-duration life and annuity contracts. Liabilities for guaranteed benefits with embedded derivative features are primarily in "Other contract liabilities" in the table above. The remaining liabilities for guaranteed benefits are primarily reflected with the underlying contract. The interest rates used in the determination of ~~Financial Position also~~the present values range from 2.0% to 3.6%. See Note 7 for additional information regarding liabilities for guaranteed benefits related to certain long-duration contracts.

Premium deficiency reserves included ~~reinsurance recoverables from Pruco Re~~in “Future policy benefits” 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 ~~Prudential Insurance Company~~expenses. Premium deficiency reserves have been recorded for the individual annuity business, which consists of ~~America (“Prudential Insurance”) of $ 2,997 million~~limited-payment, long-duration; and ~~$ 749 million~~single premium immediate annuities with life contingencies.

Policyholders’ Account Balances

Policyholders’ account balances at December 31 ~~2014~~for the years indicated are as follows:



	2017		2016

	(in thousands)
Interest-sensitive life contracts	$	15,301	$	15,666
Individual annuities(2)	4,162,138		1,441,126
Guaranteed interest accounts	668,713		893,419
Assumed policyholders' liabilities upon reinsurance agreement with Pruco Life(1)	0		2,386,678
Total policyholders’ account balances	$	4,846,152	$	4,736,889


(1)	See Note 1 for additional information.


(2)	Includes assumed reinsurance business from Pruco Life.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

Policyholders’ account balances represent an accumulation of account deposits plus credited interest less withdrawals, expenses and ~~2013, respectively.~~

mortality charges, if applicable. These policyholders’ account balances also include provisions for benefits under non-life contingent payout annuities. Interest crediting rates range from 3.5% to 6.0% for interest-sensitive life contracts. Interest crediting rates for individual annuities range from 0.0% to 6.5%. Interest crediting rates for guaranteed interest accounts range from 0.0% to 5.8%.

7. CERTAIN ~~NONTRADITIONAL~~ LONG-DURATION CONTRACTS

WITH GUARANTEES

The Company ~~has~~ issued ~~traditional~~ variable annuity contracts through its separate accounts for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contractholder. The Company ~~has~~ also issued variable annuity contracts with general and separate account options where the Company contractually guarantees to the contractholder a return of no less than total deposits made to the contract adjusted for any partial withdrawals ("return of net deposits"). In certain of these variable annuity contracts, the Company also contractually guarantees to the contractholder a return of no less than (1) total deposits made to the contract ~~less any partial withdrawals (“return of net deposits”), (2) total deposits made to the contract less~~adjusted for any partial withdrawals plus a minimum return ~~(“minimum return”~~('minimum return"), and/or ~~(3)~~(2) the highest contract value on a specified date adjusted for any withdrawals (“contract value”). These guarantees include benefits that are payable in the event of death, annuitization or at specified dates during the accumulation period and withdrawal and income benefits payable during specified periods. The Company ~~has~~also issued annuity contracts with market value adjusted investment options (“MVAs”), which provide for a return of principal plus a fixed-rate of return if held to maturity, or, alternatively, a “market adjusted value” if surrendered prior to maturity or if funds are ~~allocated~~reallocated to other investment options. The market value adjustment may result in a gain or loss to the Company, depending on crediting rates or an indexed rate at surrender, as applicable. The Company also issued fixed deferred annuity contracts without MVA that have a guaranteed credited rate and annuity benefit.

The assets supporting the variable portion of ~~both traditional~~all variable annuities ~~and certain variable contracts with guarantees~~ are carried at fair value and reported as “Separate account assets” with an equivalent amount reported as “Separate account liabilities.” Amounts assessed against the contractholders for mortality, administration, and other services are included within revenue in “Policy charges and fee income” and changes in liabilities for minimum guarantees are generally included in “Policyholders’ benefits”.

or "Realized investment gains (losses), net."

For those guarantees of benefits that are payable in the event of death, the net amount at risk is generally defined as the current guaranteed minimum death benefit in excess of the current account balance at the balance sheet date. The Company’s primary risk exposures for these contracts relates to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including fixed income and equity market returns, contract lapses and contractholder mortality.

For guarantees of benefits that are payable at annuitization, the net amount at risk is generally defined as the present value of the minimum guaranteed annuity payments available to the contractholder determined in accordance with the terms of the contract in excess of the current account balance. The Company’s primary risk exposures for these contracts relates to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including fixed income and equity market returns, timing of annuitization, contract lapses and contractholder mortality.

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Financial Statements—(Continued)~~

For guarantees of benefits that are payable at withdrawal, the net amount at risk is generally defined as the present value of the minimum guaranteed withdrawal payments available to the contractholder determined in accordance with the terms of the contract in excess of the current account balance. For guarantees of accumulation balances, the net amount at risk is generally defined as the guaranteed minimum accumulation balance minus the current account balance. The Company’s primary risk exposures for these contracts relates to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including equity market returns, interest rates, market volatility orand contractholder behavior.

The Company’s contracts with guarantees may offer more than one type of guarantee in each contract; therefore, the amounts listed may not be mutually exclusive. The liabilities related to the net amount at risk are reflected within “Future policy ~~benefits and other policyholder liabilities.~~benefits.” As of December 31, ~~2014~~2017 and ~~2013,~~2016, the Company had the following guarantees associated with ~~its~~these contracts, by product and guarantee type:

December 31, 2014    December 31, 2013
In the Event of
Death      At Annuitization/
Accumulation (1)    In the Event of
Death      At Annuitization/
Accumulation (1)



Variable Annuity Contracts (in thousands)
Return of net deposits

Account value
$           38,410,155      N/A       $             40,828,166      N/A
Net amount at risk
$ 353,902      N/A       $ 407,488      N/A
Average attained age of contractholders
65 years         N/A       64 years         N/A
Minimum return or contract value

Account value
$ 7,886,833      $             38,471,465    $ 8,446,938      $           40,678,507
Net amount at risk
$ 916,016      $ 1,358,023    $ 916,094      $ 1,272,641
Average attained age of contractholders
67 years         64 years       66 years         64 years
Average period remaining until expected annuitization
N/A         0.1 years       N/A         0.2 year

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)



	December 31, 2017				December 31, 2016
	In the Event of Death(2)		At Annuitization/ Accumulation(1)(2)		In the Event of Death(2)		At Annuitization/ Accumulation (1)(2)

Annuity Contracts	(in thousands)
Return of net deposits
Account value	$	119,182,143	N/A		$	110,194,439	N/A
Net amount at risk	$	274,617	N/A		$	463,423	N/A
Average attained age of contractholders	66 years		N/A		66 years		N/A
Minimum return or contract value
Account value	$	25,835,100	$	129,630,456	$	24,725,084	$	120,237,955
Net amount at risk	$	2,161,133	$	3,225,700	$	3,098,018	$	5,041,214
Average attained age of contractholders	69 years		67 years		69 years		66 years
Average period remaining until earliest expected annuitization	N/A		0 years		N/A		0 years


(1)	Includes income and withdrawal ~~benefits described herein.~~benefits.

   December 31, 2014      December 31, 2013
   Unadjusted Value      Adjusted Value      Unadjusted Value      Adjusted Value
Variable Annuity Contracts    (in thousands)
Market value adjusted annuities

Account value
   $             1,244,131      $                 1,251,084      $               1,554,743      $               1,580,487

(2) Includes assumed reinsurance business from Pruco Life.

Account balances of variable annuity contracts with guarantees were invested in separate account investment options as follows:

         December 31, 2014              December 31, 2013
   (in thousands)
Equity funds
   $ 28,191,315    $ 28,992,157
Bond funds
   12,844,788    14,924,698
Money market funds
   2,783,023    2,430,792




Total
   $ 43,819,126    $ 46,347,647



	December 31, 2017(1)		December 31, 2016(1)

	(in thousands)
Equity funds	$	83,556,771	$	77,133,820
Bond funds	53,027,241		44,025,867
Money market funds	3,726,553		9,099,337
Total	$	140,310,565	$	130,259,024


(1)	Amounts include assumed reinsurance business from Pruco Life.

In addition to the ~~above mentioned~~ amounts invested in separate account investment options ~~$2.5~~above, $4.7 billion at December 31, 2017 and ~~$2.9~~$4.7 billion at December 31, 2016 of account balances of variable annuity contracts with guarantees, inclusive of contracts with MVA features, were invested in general account investment ~~options~~options. The 2016 amount includes the impact of the Variable Annuities Recapture effective April 1, 2016, as ~~of December 31, 2014 and 2013, respectively.~~described in Note 1. For the years ended December 31, ~~2014, 2013~~2017, 2016 and ~~2012,~~2015, there were no transfers of assets, other than cash, from the general account to any separate account, and accordingly no gains or losses recorded.

Liabilities for Guarantee Benefits

The table below summarizes the changes in general account liabilities for guarantees. The liabilities for guaranteed minimum death benefits (“GMDB”) and guaranteed minimum income benefits (“GMIB”) are included in “Future policy ~~benefits and other policyholder liabilities”~~benefits” and the related changes in the liabilities are included in “Policyholders’ benefits.” Guaranteed minimum accumulation benefits (“GMAB”), guaranteed minimum withdrawal benefits (“GMWB”) and guaranteed minimum income and withdrawal benefits (“GMIWB”) ~~features~~ are accounted for as ~~bifurcated~~ embedded derivatives and are recorded at fair ~~value.~~value within “Future policy benefits.” Changes in the fair value of these derivatives, including changes in the Company’s own risk of non-performance, along with any fees attributed or payments made relating to the derivative are recorded in “Realized investment gains (losses), net.” See Note 10 for additional information regarding the methodology used in determining the fair value of these embedded derivatives. The ~~liabilities for GMAB, GMWB and GMIWB are included in “Future policy benefits and other policyholder liabilities.” As discussed below, the~~ Company ~~and a reinsurance affiliate maintain~~maintains a portfolio of derivative investments that serve as a partial hedge of the risks associated with these

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Financial Statements—(Continued)~~

products, for which the changes in fair value are also recorded in “Realized investment gains (losses), net.” This portfolio of derivative investments does not qualify for hedge accounting treatment under U.S. GAAP.

GMDB    GMAB/GMWB/
GMIWB    GMIB    Totals
Variable Annuity

(in thousands)
Beginning Balance as of December 31, 2011
$                     177,718    $             1,783,594    $                 14,377    $             1,975,689
Incurred guarantee benefits (1)
76,240    9,541    9,821    95,602
Paid guarantee benefits
(31,431)       -    (682)       (32,113)







Beginning Balance as of December 31, 2012
222,527    1,793,135    23,516    2,039,178







Incurred guarantee benefits (1)
(3,191)       (1,014,909)       (11,650)       (1,029,750)
Paid guarantee benefits
(27,507)       -       (747)       (28,254)
Changes in unrealized investment gains and losses
8,041    -    160    8,201







Beginning Balance as of December 31, 2013
199,870    778,226    11,279    989,375







Incurred guarantee benefits (1)
81,524    2,334,185    8,506    2,424,215
Paid guarantee benefits
(25,909)       -    (724)       (26,633)
Changes in unrealized investment gains and losses
128    -    43    171







Balance as of December 31, 2014
$ 255,613    $ 3,112,411    $ 19,104    $ 3,387,128

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)



	GMDB			GMAB/GMWB/ GMIWB			GMIB			Totals
Variable Annuity	(in thousands)
Balance at December 31, 2014	$	255,613		$	3,112,411		$	19,104		$	3,387,128
Incurred guarantee benefits(1)	43,167			21,666			(4,616		)	60,217
Paid guarantee benefits	(29,240		)	0			(511		)	(29,751		)
Change in unrealized investment gains and losses	(3,663		)	0			(113		)	(3,776		)
Balance at December 31, 2015	265,877			3,134,077			13,864			3,413,818
Incurred guarantee benefits(1)(2)	43,185			(1,979,215		)	(3,683		)	(1,939,713		)
Paid guarantee benefits(2)	(55,604		)	0			(2,209		)	(57,813		)
Change in unrealized investment gains and losses(2)	(5,206		)	0			(209		)	(5,415		)
Assumed guarantees upon reinsurance agreement with Pruco Life	389,067			6,552,471			30,130			6,971,668
Balance at December 31, 2016	637,319			7,707,333			37,893			8,382,545
Incurred guarantee benefits(1)(2)	29,605			444,569			(11,686		)	462,488
Paid guarantee benefits(2)	(57,053		)	0			(3,798		)	(60,851		)
Change in unrealized investment gains and losses(2)	12,931			0			117			13,048
Balance at December 31, 2017	$	622,802		$	8,151,902		$	22,526		$	8,797,230


(1)	Incurred guarantee benefits include the portion of assessments established as additions to ~~reserve~~reserves as well as changes in estimates affecting the reserves. Also includes changes in the fair value of features ~~accounted for as~~considered to be derivatives.

(2) Amounts include assumed reinsurance business from Pruco Life.

The GMDB liability is determined each period end by estimating the accumulated value of a portion of the total assessments to date less the accumulated value of the guaranteed death benefits in excess of the account balance. The GMIB liability associated with variable annuities is determined each period by estimating the accumulated value of a portion of the total assessments to date less the accumulated value of the projected income benefits in excess of the account balance. The portion of assessments used is chosen such that, at issue the present value of expected death benefits or expected income benefits in excess of the projected account balance and the portion of the present value of total expected assessments over the lifetime of the contracts are equal. The GMIB liability associated with fixed annuities is determined each period by estimating the present value of projected income benefits in excess of the account balance. The Company regularly evaluates the estimates used and adjusts the GMDB and GMIB liability balances with an associated charge or credit to earnings, if actual experience or other evidence suggests that earlier estimates should be revised.

The GMAB features provide the contractholder with a guaranteed return of initial account value or an enhanced value if applicable. The most significant of the Company’s GMAB features are the guaranteed return option ~~(“GRO”)~~ features, which ~~include~~includes an ~~asset transfer feature~~automatic rebalancing element that reduces the Company’s exposure to these guarantees. The GMAB liability is calculated as the present value of future expected payments ~~to customers~~in excess of the account balance less the present value of ~~assessed~~future expected rider fees attributable to the embedded derivative feature.

The GMWB features provide the contractholder with access to a guaranteed remaining balance if the account value is reduced to zero through a combination of market declines and withdrawals. The guaranteed remaining balance is generally equal to the protected value under the contract, which is initially established as the greater of the account value or cumulative deposits when withdrawals commence, less cumulative withdrawals. The contractholder also has the option, after a specified time period, to reset the guaranteed remaining balance to the then-current account value, if greater. The contractholder accesses the guaranteed remaining balance through payments over time, subject to maximum annual limits. The GMWB liability is calculated as the present value of future expected payments to customers less the present value of ~~assessed~~future expected rider fees attributable to the embedded derivative feature.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

The GMIWB features, taken collectively, provide a contractholder two optional methods to receive guaranteed minimum payments over time, a “withdrawal” option or an “income” option. The withdrawal option (which was available under only one of the GMIWBs and is no longer offered) guarantees that a contractholder can withdraw an amount each year until the cumulative withdrawals reach a total guaranteed balance. The income option (which varies among the Company’s GMIWBs) in general guarantees the contractholder the ability to withdraw an amount each year for life (or for joint lives, in the case of any spousal version of the benefit) where such amount is equal to a percentage of a protected value under the benefit. The contractholder also has the potential to increase this annual amount, based on certain subsequent increases in account value that may occur. The GMIWB can be elected by the ~~contract holder~~contractholder upon issuance of an appropriate deferred variable annuity contract or at any time following contract issue prior to annuitization. Certain GMIWB features include an ~~asset transfer feature~~automatic rebalancing element that reduces the Company’s exposure to these guarantees. The GMIWB liability is calculated as the present value of future expected payments to customers less the present value of ~~assessed~~future expected rider fees attributable to the embedded derivative feature.

As part of its risk management strategy, the Company limits its exposure to these risks through a combination of product design elements, such as an asset transfer feature and affiliated reinsurance agreements. The asset transfer feature, included in the design of certain optional living benefits, transfers assets between certain variable investments selected by the annuity contractholder and, depending on the benefit feature, a fixed rate account in the general account or a bond portfolio within the separate accounts. The transfers are based on the static mathematical formula, used with the particular optional benefit, which considers a number of factors, including, but not limited to, the impact of investment performance of the contractholder total account value. In general, but not always, negative investment performance may result in transfers to a fixed-rate account in the

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Financial Statements—(Continued)~~

general account or a bond portfolio within the separate accounts, and positive investment performance may result in transfers back to contractholder-selected variable investments. Other product design elements utilized for certain products to manage these risks include asset allocation restrictions and minimum issuance age requirements. For risk management purposes the Company segregates the variable annuity living benefit features into those that include the asset transfer feature including certain GMIWB riders and certain GMAB riders that feature the GRO policyholder benefits; and those that do not include the asset transfer feature, including certain legacy GMIWB, GMWB, GMAB and GMIB riders. Living benefit riders that include the asset transfer feature also include GMDB riders, and as such the GMDB risk in these riders also benefits from this feature.

Sales Inducements

The Company defers sales inducements and amortizes them over the anticipated life of the policy using the same methodology and assumptions used to amortize DAC. ~~These deferred sales inducements are~~DSI is included in “Deferred sales inducements” in the Company’s Statements of Financial Position. The Company has offered various types of sales ~~inducements. These~~ inducements, ~~include:~~including: (1) a bonus whereby the policyholder’s initial account balance is increased by an amount equal to a specified percentage of the customer’s initial deposit and (2) additional credits after a certain number of years a contract is held. Changes in DSI, reported as “Interest credited to ~~policyholders’ account balances”,~~policyholders’account balances,” are as follows:

Sales Inducements
(in thousands)
Balance as of December 31, 2011
$ 445,841
Capitalization
59,269
Amortization - Impact of assumption and experience unlocking and true-ups
133,214
Amortization - All other
(94,752 )
Change in unrealized gains/losses
13,258

Balance as of December 31, 2012
556,830

Capitalization
31,370
Amortization - Impact of assumption and experience unlocking and true-ups
13,038
Amortization - All other
179,219
Change in unrealized gains/losses
28,790

Balance as of December 31, 2013
809,247

Capitalization
11,515
Amortization - Impact of assumption and experience unlocking and true-ups
45,417
Amortization - All other
(204,563 )
Change in unrealized gains/losses
3,591

Balance as of December 31, 2014
$ 665,207



	Sales Inducements
	(in thousands)
Balance at December 31, 2014	$	665,207
Capitalization	873
Amortization - Impact of assumption and experience unlocking and true-ups	21,125
Amortization - All other	(206,263		)
Change in unrealized investment gains and losses	11,063
Ceded DSI upon reinsurance agreement with Prudential Insurance(1)	(39,253		)
Balance at December 31, 2015	452,752
Capitalization	1,805
Amortization - Impact of assumption and experience unlocking and true-ups	101,424
Amortization - All other	(81,603		)
Change in unrealized investment gains and losses	4,915
Assumed DSI upon reinsurance agreement with Pruco Life(1)	499,530
Balance at December 31, 2016	978,823
Capitalization	1,551
Amortization - Impact of assumption and experience unlocking and true-ups	145,141
Amortization - All other	(94,014		)
Change in unrealized investment gains and losses	(10,715		)
Balance at December 31, 2017	$	1,020,786


(1)	See Note 1 for additional information.

8. STATUTORY NET INCOME AND SURPLUS AND DIVIDEND RESTRICTIONS

The Company is required to prepare statutory financial statements in accordance with accounting practices prescribed or permitted by the State of Arizona Insurance Department. Prescribed statutory accounting practices include publications of the NAIC, as well as state laws, regulations and general administrative rules. Statutory accounting practices ("SAP") primarily differ from U.S. GAAP by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions and valuing investments, deferred taxes and certain assets on a different basis.

Statutory net income (loss) of the Company amounted to ~~$393~~$3,911 million, ~~$406~~$(2,018) million and ~~$217~~$340 million for the years ended December 31, ~~2014, 2013~~2017, 2016 and ~~2012,~~2015, respectively. Statutory surplus of the Company amounted to ~~$606~~$8,059 million and ~~$443~~$5,718 million at December 31, ~~2014~~2017 and ~~2013,~~2016, respectively.

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Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

The Company does not utilize prescribed or permitted practices that vary materially from the statutory accounting practices prescribed by the NAIC.

The Company is subject to Arizona law, which limits the amount of dividends that insurance companies can pay to ~~its stockholder.~~stockholders. The maximum dividend, which may be paid in any twelve month period without notification or approval, is limited to the lesser of 10% of statutory surplus, as of December 31 of the preceding year, or the net gain from operations of the preceding calendar year. Cash dividends may only be paid out of surplus derived from realized net profits. Based on these limitations, ~~there~~the Company is ~~a capacity~~not permitted to pay a dividend ~~of $61 million after December 19, 2015,~~in 2018 without prior ~~approval.~~

notification.

On December ~~19, 2014~~21, September 28 and June ~~27, 2014,~~28, 2017, the Company paid an extra-ordinary dividend of $650 million, $200 million and $100 million, respectively, to its parent, PAI, which was recorded as a return of capital. On December 21, 2016, the Company paid an extra-ordinary dividend of $1,140 million to PAI, which was recorded as a return of capital. On December 22, 2015 and June 29, 2015, the Company paid dividends of ~~$75~~$180 million and ~~$267~~$270 million, respectively, to its parent, Prudential Annuities, Inc. On December 16, 2013 and June 26, 2013, the Company paid dividends of $100 million and $184 million, respectively, to Prudential Annuities, Inc. On December 11, 2012 and June 29, 2012, the Company paid dividends of $160 million and $248 million, respectively, to Prudential Annuities, Inc.

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Financial Statements—(Continued)~~

PAI.

9. INCOME TAXES

The following schedule discloses significant components of income tax expense (benefit) for each year presented:



	Year Ended December 31,
	2017		2016			2015
			(in thousands)
Current tax expense (benefit):
U.S. federal	$	501,088	$	2,524,458		$	76,175
State and local	1,349		0			0
Total	502,437		2,524,458			76,175
Deferred tax expense (benefit):
U.S. federal	698,662		(3,204,951		)	(84,460		)
State and local	0		0			0
Total	698,662		(3,204,951		)	(84,460		)
Total income tax expense (benefit)	1,201,099		(680,493		)	(8,285		)
Total income tax expense (benefit) reported in equity related to:
Other comprehensive income (loss)	98,644		(194,446		)	(20,708		)
Additional paid-in capital	0		(9,531		)	0
Total income tax expense (benefit)	$	1,299,743	$	(884,470	)	$	(28,993	)

Reconciliation of Expected Tax at Statutory Rates to Reported Income Tax Expense (Benefit)

The differences between income taxes expected at the ~~years ended December 31, were as follows:~~

   2014    2013    2012
      (in thousands)
Current tax expense:

U.S.
   $ (8,499)       $ 36,759    $ 26,637
State and local
   -       -       -






Total
   $ (8,499)       $ 36,759    $ 26,637






Deferred tax expense:

U.S.
   17,103    295,613    196,997
State and local
   -       -       -






Total
   $ 17,103    $ 295,613    $ 196,997






Total income tax expense (benefit) on income from continuing operations
   8,604    332,372    223,634
Income tax expense (benefit) reported in equity related to:

Other comprehensive income (loss)
   7,407    (41,149)       (7,218)
Additional paid-in capital
   -       4,354    5,730






Total income tax expense (benefit)
   $                     16,011    $                     295,577    $                 222,146

~~In July 2014, the Internal Revenue Service (“IRS”) issued guidance relating to the hedging~~U.S. federal statutory income tax rate of variable annuity guaranteed minimum benefits (“Hedging IDD”). The Hedging IDD provides an elective safe harbor tax accounting method for certain contracts which permits the current deduction of losses35% and the deferral of gains for hedging activities that can be applied to open years under IRS examination beginning with the earliest open year. The Company will apply this tax accounting method for hedging gains and losses covered by the Hedging IDD beginning with 2013. As a result of applying such accounting method in 2014 the Company’s U.S. current tax benefit includes an additional tax benefit of $59 million and a corresponding reduction of deferred tax assets.

~~The Company’s actual~~reported income tax expense (benefit) are summarized as follows:



	Year Ended December 31,
	2017			2016			2015
	(in thousands)
Expected federal income tax expense (benefit)	$	391,158		$	(619,704	)	$	57,727
Non-taxable investment income	(46,625		)	(49,630		)	(56,614		)
Tax credits	(10,358		)	(10,507		)	(9,389		)
Changes in tax law	882,175			0			0
Other	(15,251		)	(652		)	(9		)
Reported income tax expense (benefit)	$	1,201,099		$	(680,493	)	$	(8,285	)
Effective tax rate	107.5		%	38.4		%	(5.0		)%

The effective tax rate is the ratio of “Total income tax expense (benefit)” divided by “Income (loss) from operations before income taxes.” The Company’s effective tax rate for fiscal years 2017, 2016 and 2015 was 107.5%, 38.4% and (5.0)%, respectively. The following is a description of items that had the most significant impact on ~~continuing operations for~~ the ~~years ended December 31 differs from~~difference between the ~~expected amount computed by applying the~~Company’s statutory U.S. federal income tax rate of 35% and the Company’s effective tax rate during the periods presented:

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

Changes in Tax Law. The following is a list of notable changes in tax law that impacted the Company’s effective tax rate for the periods presented:

U.S. Tax Cuts and Jobs Act of 2017 (“Tax Act of 2017”). On December 22, 2017, the Tax Act of 2017 was enacted into U.S. law. This law includes a broad range of tax reform changes that will affect U.S. businesses, including changes to corporate tax rates, business deductions and international tax provisions. Under U.S. GAAP, changes in tax rates and tax law are accounted for in the period of enactment (the date the President signed the bill into law).

In December 2017, the SEC staff issued SAB 118 to address the application of U.S. GAAP in situations when a registrant does not have necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act of 2017. SAB 118 provides guidance for registrants under three scenarios: (1) measurement of certain income tax effects is complete, (2) measurement of certain income tax effects can be reasonably estimated and (3) measurement of certain income tax effects cannot be reasonably estimated. SAB 118 provides that the measurement period is complete when a company’s accounting is complete and in no circumstances should the measurement period extend beyond one year from ~~continuing operations before~~the enactment date. SAB 118 acknowledges that a company may be able to complete the accounting for some provisions earlier than others. As a result, it may need to apply all three scenarios in determining the accounting for the Tax Act of 2017 based on information that is available.

The Company has not fully completed its accounting for the tax effects of the Tax Act of 2017. However, we have recorded the effects of the Tax Act of 2017 as reasonable estimates due to the need for further analysis of the provisions within the Tax Act of 2017 and collection, preparation and analysis of relevant data necessary to complete the accounting. As a result, upon enactment of the Tax Act of 2017, the Company recognized a $882 million tax expense in “Total income tax expense (benefit)” in the Company’s Statements of Operations for the year ended December 31, 2017. This net tax expense was comprised of the following component:

$882 million tax expense from the reduction in net deferred tax assets to reflect the reduction in the U.S. tax rate from 35% to 21%

As we complete the collection, preparation and analysis of data relevant to the Tax Act of 2017, interpret any additional guidance issued by the IRS, U.S. Department of the Treasury, or other standard-setting organizations, we may make adjustments to these provisional amounts. These adjustments may materially impact our provision for income taxes ~~for~~in the ~~following reasons:~~

   2014    2013    2012
   (in thousands)
Expected federal income tax expense (benefit)
   $ 90,780    $ 413,162    $ 300,192
Non taxable investment income
   (69,122)       (69,665)       (66,895)
Tax credits
   (13,080)       (10,595)       (10,279)
Other
   26    (529)       616






Total income tax expense (benefit)
   $                       8,604    $                     332,372    $                 223,634

period in which the adjustments are made.

Non-Taxable Investment Income. The ~~dividends received deduction~~U.S. Dividends Received Deduction (“DRD”) reduces the amount of dividend income subject to U.S. tax and ~~is the primary component~~accounts for most of the non-taxable investment income shown in the table ~~above, and, as such, is a significant component~~above. More specifically, the U.S. DRD constitutes $46 million of the ~~difference between~~total $47 million of 2017 non-taxable investment income, $50 million of the ~~Company’s effective tax rate~~total $50 million of 2016 non-taxable investment income, and $57 million of the ~~federal statutory tax rate~~total $57 million of ~~35%.~~2015 non-taxable investment income. The DRD for the current period was estimated using information from ~~2013 and~~2016, current year investment results, and ~~was adjusted to take into account the~~ current year’s equity market performance. The actual current year DRD can vary ~~from the estimate~~ based on factors such as, but not limited to, changes in the amount of dividends received that are eligible for the DRD, changes in the amount of distributions received from ~~mutual~~ fund investments, changes in the account balances of variable life and annuity contracts, and the Company’s taxable income before the DRD.

~~In August 2007,~~

Other. This line item represents insignificant reconciling items that are individually less than 5% of the ~~IRS released Revenue Ruling 2007-54, which included, among other items, guidance on the methodology to be followed~~computed expected federal income tax expense (benefit) and have therefore been aggregated for purposes of this reconciliation in calculating the DRD related to variable life insurance and annuity contracts. In September 2007, the IRS released Revenue Ruling 2007-61. Revenue Ruling 2007-61 suspended Revenue Ruling 2007-54 and informed taxpayers that the U.S. Treasury Department and the IRS intend to address through new guidance the issues considered in Revenue Ruling 2007-54, including the methodology to be followed in determining the DRD related to variable life insurance and annuity contracts. In May 2010, the IRS issued an Industry Director Directive (“IDD”) confirming that the methodology for calculating the DRD set forth in Revenue Ruling 2007-54 should not be followed. The IDD also confirmed that the IRS guidance issued before Revenue Ruling 2007-54, which guidance the Company relied upon in calculating its DRD, should be used to determine the DRD. In February 2014, the IRS released Revenue Ruling 2014-7, which modified and superseded Revenue Ruling 2007-54, by removing the provisionsaccordance with relevant disclosure guidance.

Table of Revenue Ruling 2007-54 related to the methodology to be followed in calculating the DRD and obsoleting Revenue Ruling 2007-61. These activities had no impact on the Company’s 2012, 2013 or 2014 results. However, there remains the possibility that the IRS and the U.S. Treasury will address,

Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial ~~Statements—~~Statements - (Continued)

~~through subsequent guidance, the issues related to the calculation~~

Schedule of the DRD. For the last several years, the revenue proposals included in the Obama Administration’s budgets included a proposal that would change the method used to determine the amount of the DRD. A change in the DRD, including the possible retroactive or prospective elimination of this deduction through guidance or legislation, could increase actual tax expenseDeferred Tax Assets and ~~reduce the Company’s net income.~~

Deferred ~~tax assets and liabilities at December 31, resulted from the items listed in the following table:~~

   2014    2013
   (in thousands)
Deferred tax assets

Insurance reserves
     $ 267,536      $ 292,815
Investments
   13,270    124,489
Compensation reserves
   1,760    1,860
Other
   -    -




Deferred tax assets
   282,566    419,165




Deferred tax liabilities

VOBA and deferred policy acquisition cost
   370,548    435,775
Deferred sales inducements
   232,822    283,236
Net unrealized gain on securities
   68,819    66,046
Other
   1,239    464




Deferred tax liabilities
   673,428    785,521




Net deferred tax asset (liability)
     $                     (390,863)         $                     (366,356)

Tax Liabilities



	As of December 31,
	2017		2016
	(in thousands)
Deferred tax assets:
Insurance reserves	$	2,064,659	$	3,369,384
Investments	404,703		418,128
Net unrealized loss on securities	7,048		159,362
Other	205		440
Deferred tax assets	2,476,615		3,947,314
Deferred tax liabilities:
VOBA and deferred policy acquisition cost	960,841		1,506,010
Deferred sales inducements	214,365		342,588
Deferred tax liabilities	1,175,206		1,848,598
Net deferred tax asset (liability)	$	1,301,409	$	2,098,716

The application of U.S. GAAP requires the Company to evaluate the recoverability of deferred tax assets and establish a valuation allowance if necessary to reduce the deferred tax asset to an amount that is more likely than not expected to be realized. Considerable judgment is required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance, the Company considers many factors, including: (1) the nature of the deferred tax assets and liabilities; (2) whether they are ordinary or capital; (3) in which tax jurisdictions they were generated and the timing of their reversal; (4) taxable income in prior carryback years as well as projected taxable earnings exclusive of reversing temporary differences and carryforwards; (5) the length of time that carryovers can be utilized in the various taxing jurisdictions; (6) any unique tax rules that would impact the utilization of the deferred tax assets; and (7) any tax planning strategies that the Company would employ to avoid a tax benefit from expiring unused. Although realization is not assured, management believes it is more likely than not that the deferred tax assets, net of valuation allowances, will be realized.

The ~~Company~~company had no valuation allowance as of December 31, ~~2014,~~2017, 2016, and ~~2013.~~

~~Management believes that based on its historical pattern of taxable income, the Company will produce sufficient income in the future to realize its deferred tax assets.~~2015. Adjustments to the valuation allowance will be made if there is a change in management’s assessment of the amount of deferred tax asset that is realizable.

The Company’s income (loss) from ~~continuing~~ operations before income taxes includes income (loss) from domestic operations of ~~$259~~$1,118 million, ~~$1,180~~$(1,771) million, and ~~$858~~$165 million ~~and no income from foreign operations~~ for the years ended December 31, ~~2014, 2013~~2017, 2016 and ~~2012,~~2015, respectively.

Tax Audit and 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 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 classifies all interest and penalties related to tax uncertainties as income tax expense (benefit). In December 31, 2014 and 2013, the Company recognized nothing in the statement of operations and recognized no liabilities in the statement of financial position for tax-related interest and penalties.

The Company had ~~zero~~no unrecognized tax benefits as of December 31, ~~2014~~2017, 2016, and ~~2013.~~2015. The Company does not anticipate any significant changes within the next 12twelve months to its total unrecognized tax benefits related to tax years for which the statute of limitations has not expired.

At December 31, ~~2014,~~2017, the Company remains subject to examination in the U.S. for tax years ~~2009~~2014 through ~~2014.~~

~~In 2009, the Company joined in filing the federal tax return with its ultimate parent, Prudential Financial, Inc. For tax years 2009 through 2015, the~~2016.

The Company is participating in the IRS’s Compliance Assurance ~~Program (“CAP”).~~Program. Under ~~CAP,~~this program, the IRS assigns an examination team to review completed transactions as they occur in order to reach agreement with the Company on how they should be reported in the relevant tax returns. If disagreements arise, accelerated ~~resolutions~~resolution programs are available to resolve the disagreements in a timely manner before the tax returns are filed.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial ~~Statements—~~Statements - (Continued)

10. FAIR VALUE OF ASSETS AND LIABILITIES

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

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

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

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

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

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

   As of December 31, 2014
   Level 1    Level 2    Level 3    Netting (1)    Total
   (in thousands)
Fixed maturities, available-for-sale:

U.S Treasury securities and obligations of U.S. government authorities and agencies
   $ -       $             6,336    $ -       $ -       $ 6,336
Obligations of U.S. states and their political subdivisions
   -       70,789    -       -       70,789
Foreign government bonds
   -       37,355    -       -       37,355
Corporate securities
   -       1,985,614    116,070    -       2,101,684
Asset-backed securities
   -       108,487    40,524    -       149,011
Commercial mortgage-backed securities
   -    �� 302,185    -       -       302,185
Residential mortgage-backed securities
   -       133,233    -       -       133,233










Sub-total
   -       2,643,999    156,594    -       2,800,593
Trading account assets:

Equity securities
   6,131    -       -       -       6,131










Sub-total
   6,131    -       -       -       6,131










Equity securities, available-for-sale
   -       17    -       -       17
Short-term investments
   57,185    -       -       -       57,185
Cash equivalents
   -       -       225    -       225
Other long-term investments
   -       118,846    633    (24,288)       95,191
Reinsurance recoverables
   -       -       2,996,154    -       2,996,154
Receivables from parent and affiliates
   -       18,748    22,320    -       41,068










Sub-total excluding separate account assets
   63,316    2,781,610    3,175,926    (24,288)       5,996,564
Separate account assets (2)
   -       44,101,699    -       -       44,101,699










Total assets
   $         63,316    $         46,883,309    $ 3,175,926    $ (24,288)       $         50,098,263










Future policy benefits (3)
   $ -       $ -       $         3,112,411    $ -       $ 3,112,411
Payables to parent and affiliates
   -       21,249    -       (21,249)       -










Total liabilities
   $ -       $ 21,249    $ 3,112,411    $         (21,249)       $ 3,112,411



	As of December 31, 2017
	Level 1		Level 2		Level 3		Netting(1)			Total
	(in thousands)
Fixed maturities, available-for-sale:
U.S Treasury securities and obligations of U.S. government authorities and agencies	$	0	$	4,826,413	$	5,237	$	0		$	4,831,650
Obligations of U.S. states and their political subdivisions	0		104,640		0		0			104,640
Foreign government bonds	0		140,305		0		0			140,305
U.S. corporate public securities	0		1,806,888		1,562		0			1,808,450
U.S. corporate private securities	0		1,148,536		59,408		0			1,207,944
Foreign corporate public securities	0		229,006		215		0			229,221
Foreign corporate private securities	0		737,539		34,021		0			771,560
Asset-backed securities(4)	0		160,229		185,358		0			345,587
Commercial mortgage-backed securities	0		505,684		0		0			505,684
Residential mortgage-backed securities	0		165,745		0		0			165,745
Subtotal	0		9,824,985		285,801		0			10,110,786
Trading account assets:
U.S Treasury securities and obligations of U.S. government authorities and agencies	0		123,820		0		0			123,820
Corporate securities	0		42,540		0		0			42,540
Asset-backed securities(4)	0		0		0		0			0
Equity securities	5,599		0		9,758		0			15,357
Subtotal	5,599		166,360		9,758		0			181,717
Equity securities, available-for-sale	0		18		0		0			18
Short-term investments	448,712		262,272		87		0			711,071
Cash equivalents	0		1,146,466		0		0			1,146,466
Other long-term investments(5)	10,738		5,059,779		147		(4,919,486		)	151,178
Reinsurance recoverables	0		0		244,006		0			244,006
Receivables from parent and affiliates	0		38,145		0		0			38,145
Subtotal excluding separate account assets	465,049		16,498,025		539,799		(4,919,486		)	12,583,387
Separate account assets(2)	0		37,990,547		0		0			37,990,547
Total assets	$	465,049	$	54,488,572	$	539,799	$	(4,919,486	)	$	50,573,934
Future policy benefits(3)	$	0	$	0	$	8,151,902	$	0		$	8,151,902
Payables to parent and affiliates	0		1,941,403		0		(1,941,403		)	0
Other liabilities	0		0		0		0			0
Total liabilities	$	0	$	1,941,403	$	8,151,902	$	(1,941,403	)	$	8,151,902

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial ~~Statements—~~Statements - (Continued)

   As of December 31, 2013
   Level 1    Level 2    Level 3    Netting (1)    Total
   (in thousands)
Fixed maturities, available-for-sale:

U.S Treasury securities and obligations of U.S. government authorities and agencies
   $ -       $             6,384    $ -       $ -       $             6,384
Obligations of U.S. states and their political subdivisions
   -       68,566    -       -       68,566
Foreign government securities
   -       31,154    -       -       31,154
Corporate securities
   -       2,325,846    96,796    -       2,422,642
Asset-backed securities
   -       124,103    63,789    -       187,892
Commercial mortgage-backed securities
   -       390,633    -       -       390,633
Residential mortgage-backed securities
   -       156,945    -       -       156,945










Sub-total
   -       3,103,631    160,585    -       3,264,216
Trading account assets:

Equity securities
   6,364    -       313    -       6,677










Sub-total
   6,364    -       313    -       6,677










Equity securities, available-for-sale
   -       16    192    -       208
Short-term investments
   118,188    -       -       -       118,188
Other long-term investments
   -       73,535    486    (73,535)       486
Reinsurance recoverables
   -       -       748,005    -       748,005
Receivables from parent and affiliates
   -       19,071    6,347    -       25,418










Sub-total excluding separate account assets
   124,552    3,196,253    915,928    (73,535)       4,163,198
Separate account assets (2)
   1,190,903    45,435,925    -       -       46,626,828










Total assets
   $         1,315,455    $ 48,632,178    $ 915,928    $ (73,535)       $ 50,790,026










Future policy benefits (3)
   $ -       $ -       $         778,226    $ -       $ 778,226
Payables to parent and affiliates
   -       94,580    -       (72,822)       21,758










Total liabilities
   $ -       $         94,580    $ 778,226    $         (72,822)       $         799,984



	As of December 31, 2016
	Level 1		Level 2		Level 3		Netting (1)			Total

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


(1)	“Netting” amounts represent cash collateral of ~~$3.0~~$2,978 million and ~~$0.7~~$2,928 million as of December 31, ~~2014~~2017 and ~~December 31, 2013,~~2016, respectively, and the impact of offsetting asset and liability positions held with the same counterparty, subject to master netting arrangements.

(2)

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

(3)

As of December 31, ~~2014,~~2017, the net embedded derivative liability position of ~~$3,112~~$8,152 million includes ~~$55~~$819 million of embedded derivatives in an asset position and ~~$3,167~~$8,971 million of embedded derivatives in a liability position. As of December 31, ~~2013,~~2016, the net embedded derivative liability position of ~~$778~~$7,707 million includes ~~$245~~$1,060 million of embedded derivatives in an asset position and ~~$1,023~~$8,767 million of embedded derivatives in a liability position.

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

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)


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

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

Fixed Maturity Securities – The fair values of the Company’s public fixed maturity securities are generally based on prices obtained from independent pricing services. Prices for each security are generally sourced from multiple pricing vendors, and a vendor hierarchy is maintained by asset type based on historical pricing experience and vendor expertise. The Company ultimately uses the price from the pricing service highest in the vendor hierarchy based on the respective asset type. The pricing hierarchy is updated for new financial products and recent pricing experience with various vendors. Consistent with the fair value hierarchy described above, securities with validated quotes from pricing services are generally reflected within Level 2, as they are primarily based on observable pricing for similar assets and/or other market observable inputs. Typical inputs used by these pricing services include but are not limited to reported trades, benchmark yields, issuer spreads, bids, offers, and/or estimated cash flow, prepayment speeds and default rates. If the pricing information received from third party pricing services is deemed not reflective of market activity or other inputs observable in the market, the Company may challenge the price through a formal process with the pricing service or classify the ~~security~~securities as Level 3. If the pricing service updates the price to be more consistent with the presented market observations, the security remains within Level 2.

Internally-developed valuations or indicative broker quotes are also used to determine fair value in circumstances where vendor pricing is not available, or where the Company ultimately concludes that pricing information received from the independent pricing services is not reflective of market activity. If the Company concludes the values from both pricing services and brokers are not reflective of market activity, it may override the information with an internally developed valuation. As of December 31, ~~2014~~2017 and ~~2013~~2016 overrides on a net basis were not material. Pricing service overrides, internally-developed valuations and indicative broker quotes are generally included in Level 3 in the fair value hierarchy.

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Financial Statements—(Continued)~~

The Company conducts several specific price monitoring activities. Daily analyses identify price changes over ~~pre-determined~~predetermined thresholds defined at the financial instrument level. Various pricing integrity reports are reviewed on a daily and monthly basis to determine if pricing is reflective of market activity or if it would warrant any adjustments. Other procedures performed include, but are not limited to, reviews of third-party pricing services methodologies, reviews of pricing trends, and back testing.

The fair ~~value~~values of private fixed maturities, which are ~~comprised of investments in private placement securities,~~ originated by internal private asset managers, are primarily determined using discounted cash flow models. These models primarily use observable inputs that include Treasury or similar base rates plus estimated credit spreads to value each security. The credit spreads are obtained through a survey of private market intermediaries who are active in both primary and secondary transactions, and consider, among other factors, the credit quality and ~~industry sector of the issuer and~~ the reduced liquidity associated with private placements. Internal adjustments are made to reflect variation in observed sector spreads. Since most private placements are valued using standard market observable inputs and inputs derived from, or corroborated by, market observable data including, but not limited to observed prices and spreads for similar publicly ~~traded~~ or privately traded issues, they have been reflected within Level 2. For certain private fixed maturities, the discounted cash flow model may incorporate significant unobservable inputs, which reflect the Company’s own assumptions about the inputs that market participants would use in pricing the asset. To the extent management determines that such unobservable inputs are significant to the price of a security, a Level 3 classification is made.

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

Equity Securities –Equity securities consist principally of investments in common ~~stock~~ of publicly traded companies, ~~perpetual preferred stock,~~ privately traded securities, as well as mutual fund shares. The fair values of most publicly traded equity securities are based on quoted market prices in active markets for identical assets and are classified within Level 1 in the fair value hierarchy. Estimated fair values for most privately traded equity securities are determined using discounted cash flow, earnings multiple and other valuation models that require a substantial level of judgment around inputs and therefore are classified within Level 3. The fair values of mutual fund shares that transact regularly (but do not trade in active markets because they are not publicly available) are based on transaction prices of identical fund shares and are classified within Level 2 in the fair value hierarchy. The fair values of perpetual preferred stock are based on inputs obtained from independent pricing services that are primarily based on indicative broker quotes. As a result, the fair values of perpetual preferred stock are classified as Level 3.

Derivative Instruments – Derivatives are recorded at fair value either as assets, within “Other long-term investments,” or as liabilities, within “Payables to parent and ~~affiliates,”~~affiliates”, except for embedded derivatives which are recorded with the associated host contract. The fair values of derivative contracts can be affected by changes in interest rates, foreign exchange rates, credit spreads, market volatility, expected returns, ~~non-performance risk (“NPR”),~~NPR, liquidity and other factors. For derivative positions included within Level 3 of the fair value hierarchy, liquidity valuation adjustments are made to reflect the cost of exiting significant risk positions, and consider the bid-ask spread, maturity, complexity, and other specific attributes of the underlying derivative position.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

The Company's exchange-traded futures and options include treasury and equity futures. Exchange-traded futures and options are valued using quoted prices in active markets and are classified within Level 1 in the fair value hierarchy.

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

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

~~To reflect the market’s perception of its own~~

Cash Equivalents and ~~the counterparty’s NPR, the Company incorporates additional spreads over LIBOR into the discount rate used in determining the fair value of OTC derivative assets~~Short-Term Investments – Cash equivalents and ~~liabilities that are not otherwise collateralized.~~

Derivatives classified as Level 3 include structured products. These derivatives are valued based upon models, such as Monte Carlo simulation models and other techniques, that utilize significant unobservable inputs. Level 3 methodologies are validated through periodic comparison of the Company’s fair values to external broker-dealer values. As of December 31, 2014 and 2013, there were no internally valued derivatives with the fair value classified within Level 3, and all derivatives were classified within Level 2. See Note 11 for more details on the fair value of derivative instruments by primary underlying.

~~Short-Term Investments~~ ~~– Short-term~~short-term investments include money market instruments and other highly liquid debt instruments. Certain money market instruments are valued using unadjusted quoted prices in active markets that are accessible for identical assets and are primarily classified as Level 1. The remaining instruments in this category are classified within Level 2 and Level 3. Level 2 instruments are generally fair valued based on market observable inputs. Level 3 instruments are internally valued based on internal asset manager valuations.

Separate Account Assets – Separate account assets include fixed maturity securities, treasuries, equity securities, ~~and~~ mutual funds, and commercial mortgage loans for which values are determined consistent with similar instruments described above under “Fixed Maturity Securities” and “Equity ~~Securities.”~~Securities”.

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

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Financial Statements—(Continued)~~

Reinsurance Recoverables – Reinsurance recoverables carried at fair value include the reinsurance of the Company’s living benefit guarantees on certain ~~of its~~ variable annuity contracts. These guarantees are accounted for as embedded derivatives and are recorded in “Reinsurance Recoverables” or “Reinsurance Payables” when fair value is in an asset or liability position, respectively. The methods and assumptions used to estimate the fair value are consistent with those described below in “Future Policy ~~Benefits.”~~Benefits”. The reinsurance agreements covering these guarantees are derivatives with fair value determined in the same manner as the living benefit ~~guarantees.~~guarantee.

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

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

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

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

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

Transfers between Levels 1 and 2– ~~Overall, transfers~~Transfers between levels are made to reflect changes in observability of inputs and market activity. Transfers into or out of any level are ~~assumed to occur~~generally reported at the value as of the beginning of the quarter in which the transfers ~~occur.~~occur for any such assets still held at the end of the quarter. Periodically there are transfers between Level 1 and Level 2 for assets held in the Company’s Separate Account. ~~During~~The fair value of foreign common stock held in the ~~year ended December 31, 2014, $963 million was transferred from~~Company's Separate Account may reflect differences in market levels between the close of foreign trading markets and the close of U.S. trading markets for the respective day. Dependent on the existence of such a timing difference, the assets may move between Level 1 toand Level 2. During the ~~year~~years ended December 31, ~~2013, $933 million was transferred from~~2017 and 2016, there were no transfers between Level ~~2 to~~1 and Level 1.2.

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

   As of December 31, 2014
   Internal (1)           External (2)           Total
   (in thousands)
Corporate securities
   $ 99,209       $ 16,861       $ 116,070
Asset-backed securities
   -       40,524       40,524
Cash equivalents
   225       -       225
Other long-term investments
   -       633       633
Reinsurance recoverables
   2,996,154       -       2,996,154
Receivables from parent and affiliates
   -       22,320       22,320






Total assets
   $ 3,095,588       $               80,338       $ 3,175,926






Future policy benefits
   3,112,411       -       3,112,411






Total liabilities
   $           3,112,411       $ -       $           3,112,411






   As of December 31, 2013
   Internal (1)       External (2)       Total
   (in thousands)
Corporate securities
   $ 94,730       $ 2,066       $ 96,796
Asset-backed securities
   -       63,789       63,789
Equity securities
   192       313       505
Other long-term investments
   -       486       486
Reinsurance recoverables
   748,005       -       748,005
Receivables from parent and affiliates
   -       6,347       6,347






Total assets
   $ 842,927       $               73,001       $ 915,928






Future policy benefits
   778,226       -       778,226






Total liabilities
   $             778,226       $ -       $           778,226

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Financial Statements—(Continued)~~

~~(1)~~

~~Represents valuations reflecting both internally-derived and market inputs. See below for additional information related to internally-developed valuation for significant items in the above table.~~

~~(2)~~

~~Represents unadjusted prices from independent pricing-services and independent indicative broker quotes where pricing inputs are not readily available.~~

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

As of December 31, 2014
Fair Value
Primary Valuation
Techniques

Unobservable
Inputs
  Minimum     Maximum
Weighted
Average

Impact of Increase in
Input on Fair Value (1)
(in thousands)
Assets:

Corporate securities
$ 99,209 Discounted cash flow Discount rate 3.55 % 11.75 % 3.96% Decrease
Reinsurance recoverables
$     2,996,154 Fair values are determined in the same manner as future policy benefits
Liabilities:

Future policy benefits (2)
$ 3,112,411 Discounted cash flow Lapse rate (3) 0 % 14 % Decrease
NPR spread (4) 0.00 % 1.30 % Decrease
Utilization rate (5) 63 % 95 % Increase
Withdrawal rate (6) 74 % 100 % Increase
Mortality rate (7) 0 % 14 % Decrease
Equity Volatility curve 17 % 28 % Increase
As of December 31, 2013
Fair Value
  Primary Valuation
Techniques

Unobservable
Inputs
Minimum Maximum
Weighted
    Average

Impact of Increase in
  Input on Fair Value (1)
(in thousands)
Assets:

Corporate securities
$ 94,730 Discounted cash flow Discount rate 3.73 % 12.06 % 3.90% Decrease
Reinsurance recoverables
$     748,005 Fair values are determined in the same manner as future policy benefits
Liabilities:

Future policy benefits (2)
$ 778,226 Discounted cash flow Lapse rate (3) 0 % 11 % Decrease
NPR spread (4) 0.08 % 1.09 % Decrease
Utilization rate (5) 70 % 94 % Increase
Withdrawal rate (6) 86 % 100 % Increase
Mortality rate (7) 0 % 13 % Decrease
Equity Volatility curve 15 % 28 % Increase



	As of December 31, 2017
	Fair Value		Primary Valuation Techniques	Unobservable Inputs	Minimum		Maximum		Weighted Average		Impact of Increase in Input on Fair Value(1)

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



	As of December 31, 2016
	Fair Value		Primary Valuation Techniques	Unobservable Inputs	Minimum		Maximum		Weighted Average		Impact of Increase in Input on Fair Value (1)

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


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

(2)

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

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)


(3)	Lapse rates are adjusted at the contract level based on a 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.

(4)

~~To reflect NPR, the Company incorporates an additional~~The spread over LIBOR ~~into~~swap curve represents the premium added to the risk-free discount rate ~~used in~~(i.e., LIBOR) to reflect our estimates of rates that a market participant would use to value the ~~valuation of individual~~ living benefit contracts in ~~a liability position~~both the accumulation and ~~generally~~payout phases. This spread includes an estimate of NPR, which is the risk that the obligation will not ~~to those in a contra-liability position. The~~be fulfilled by the Company. NPR ~~spread reflects the financial strength ratings of the Company and its affiliates, as these are insurance liabilities and senior to debt. The additional spread over LIBOR~~ is ~~determined~~primarily estimated by utilizing the credit spreads associated with issuing funding agreements, adjusted for any illiquidity risk premium. In order to reflect the financial strength ratings of the Company, credit spreads associated with funding agreements, as opposed to credit spread associated with debt, are utilized in developing this estimate because both funding agreements and living benefit contracts are insurance liabilities and are therefore senior to debt.

(5)

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

(6)

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

(7)

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

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Financial Statements—(Continued)~~

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

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

Future Policy Benefits – The Company expects efficient benefit utilization and withdrawal rates to generally be correlated with lapse rates. However, behavior is generally highly dependent on the facts and circumstances surrounding the individual contractholder, such as their liquidity needs or tax situation, which could drive lapse behavior independent of other contractholder behavior assumptions. To the extent more efficient contractholder behavior results in greater in-the-moneyness at the contract level, lapse rates may decline for those contracts. Similarly, to the extent that increases in equity volatility are correlated with overall declines in the capital markets, lapse rates may decline as contracts become more in-the-money.

Valuation Process for Fair Value Measurements Categorized within Level 3 – The Company has established an internal control infrastructure over the valuation of financial instruments that requires ongoing oversight by its various ~~Business Groups.~~business groups. These management control functions are segregated from the trading and investing functions. For invested assets, the Company has established oversight teams, often in the form of ~~Pricing Committees~~pricing committees within each asset management group. The teams, which typically include representation from investment, accounting, operations, legal and other disciplines are responsible for overseeing and monitoring the pricing of the Company’s investments and performing periodic due diligence reviews of independent pricing services. An actuarial valuation team oversees the valuation of ~~optional~~ living benefit features of the Company’s variable annuity contracts.

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

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

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial ~~Statements—~~Statements - (Continued)

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

Year Ended December 31, 2014
Fixed Maturities Available-For-Sale
Corporate
Securities       Asset-
Backed
Securities       Commercial
Mortgage-Backed
Securities       Trading Account
Assets - Equity
Securities       Equity
Securities
Available-
for-Sale
(in thousands)
Fair Value, beginning of period assets/(liabilities)
$ 96,796    $ 63,789    $ -    $ 313    $ 192
Total gains (losses) (realized/unrealized):

Included in earnings:

Realized investment gains (losses), net
1,592    -    -    -    -
Asset management fees and other income
-    -    -    15    -
Included in other comprehensive income (loss)
(846)       196    (83)       -    -
Net investment income
5,024    120    -    -    -
Purchases
20,720    14,933    52,518    -    -
Sales
(202)       -    -    -    (192)
Issuances
-    -    -    -    -
Settlements
(7,014)       (40,337)       -    (328)       -
Transfers into Level 3 (1)
-    28,152    -    -    -
Transfers out of Level 3 (1)
-    (26,329)       (52,435)       -    -









Fair Value, end of period assets/(liabilities)
$           116,070    $               40,524    $                 -       $                 -       $             -









Unrealized gains (losses) for the period relating to those

Level 3 assets that were still held at the end of the period (2):

Included in earnings:

Realized investment gains (losses), net
$ -    $ -    $ -    $ -    $ -
Asset management fees and other income
$ -    $ -    $ -    $ 15    $ -
Year Ended December 31, 2014
Cash
Equivalents       Other Long-term
Investments       Reinsurance
Recoverables       Receivables from
parent and
affiliates       Future
Policy
Benefits
(in thousands)
Fair Value, beginning of period assets/(liabilities)
$ -    $ 486    $ 748,005    $ 6,347    (778,226)
Total gains (losses) (realized/unrealized):

Included in earnings:

Realized investment gains (losses), net
-    -    2,013,931    -    (2,088,505)
Asset management fees and other income
-    (14)       -    -    -
Included in other comprehensive income (loss)
-    -    -    (420)       -
Net investment income
-    -    -    -    -
Purchases
400    166    234,218    19,351    -
Sales
(175)       -    -    -    -
Issuances
-    -    -    -    (245,680)
Settlements
-    (5)       -    -    -
Transfers into Level 3 (1)
-    -    -    1,985    -
Transfers out of Level 3 (1)
-    -    -    (4,943)       -









Fair Value, end of period assets/(liabilities)
$             225    $             633    $             2,996,154    $             22,320    (3,112,411)









Unrealized gains (losses) for the period relating to those

Level 3 assets that were still held at the end of the period (2):

Included in earnings:

Realized investment gains (losses), net
$ -    $ -    $ 2,040,048    $ -    (2,115,680)
Asset management fees and other income
$ -    $ (14)       $ -    $ -    -



	Year Ended December 31, 2017
	Fixed Maturities Available-For-Sale
	U.S. Government		Foreign Government			Corporate Securities(5)			Asset-Backed Securities(4)
	(in thousands)
Fair value, beginning of period	$	0	$	87		$	151,989		$	31,735
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0		0			(6,877		)	576
Asset management fees and other income	0		0			0			0
Included in other comprehensive income (loss)	0		0			(3,627		)	217
Net investment income	0		0			7,874			183
Purchases	4,264		0			17,920			237,469
Sales	0		0			(15,283		)	(5,613		)
Issuances	0		0			0			0
Settlements	0		0			(111,675		)	(55,184		)
Transfers into Level 3(1)	0		0			64,412			106,034
Transfers out of Level 3(1)	0		(87		)	(5,370		)	(130,059		)
Other(3)	973		0			(4,157		)	0
Fair Value, end of period	$	5,237	$	0		$	95,206		$	185,358
Unrealized gains (losses) for assets still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0		$	(6,498	)	$	(8	)
Asset management fees and other income	$	0	$	0		$	0		$	0

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial ~~Statements—~~Statements - (Continued)

Year Ended December 31, 2013
Fixed Maturities Available-For-Sale Trading
Account
Assets -
Equity
Securities    Equity
Securities
Available-
for-Sale
Corporate
Securities       Asset-
Backed
Securities       Commercial
Mortgage-
Backed
(in thousands)
Fair Value, beginning of period assets/(liabilities)
$ 95,555    $ 69,298    $ -    $ 207    $ -
Total gains (losses) (realized/unrealized):

Included in earnings:

Realized investment gains (losses), net
49    -    -    -    -
Asset management fees and other income
-    -    -    106    -
Included in other comprehensive income (loss)
(4,179)       (470)       18    -    -
Net investment income
4,729    454    -    -    -
Purchases
4,817    40,868    17,169    -    192
Sales
-    -    -    -    -
Issuances
-    -    -    -    -
Settlements
(4,629)       (13,924)       -    -    -
Transfers into Level 3 (1)
4,976    -    -    -    -
Transfers out of Level 3 (1)
(4,522)       (29,441)       (17,187)       -    -
Other (3)
-    (2,996)       -    -    -









Fair Value, end of period assets/(liabilities)
$             96,796    $             63,789    $             -    $             313    $             192









Unrealized gains (losses) for the period relating to those

Level 3 assets that were still held at the end of the period (2):

Included in earnings:

Realized investment gains (losses), net
$ -    $ -    $ -    $ -    $ -
Asset management fees and other income
$ -    $ -    $ -    $ 107    $ -
Year Ended December 31, 2013
Other Long-term
Investments       Reinsurance
Recoverables       Receivables from
parent and
affiliates       Future Policy
Benefits
(in thousands)
Fair Value, beginning of period assets/(liabilities)
$ 1,054    $ 1,732,094    $ 1,995    $ (1,793,137)
Total gains (losses) (realized/unrealized):

Included in earnings:

Realized investment gains (losses), net
(739)       (1,220,073)       -             1,262,310
Asset management fees and other income
60    -       -       -
Included in other comprehensive income (loss)
-       -       99    -
Net investment income
-       -       -       -
Purchases
111    235,984    6,250    -
Sales
-       -       (2,996)       -
Issuances
-       -       -       (247,399)
Settlements
-       -       -       -
Transfers into Level 3 (1)
-       -       -       -
Transfers out of Level 3 (1)
-       -       (1,997)       -
Other (3)
-       -             2,996    -








Fair Value, end of period assets/(liabilities)
$             486    $               748,005    $ 6,347    $ (778,226)








Unrealized gains (losses) for the period relating to those

Level 3 assets that were still held at the end of the period (2):

Included in earnings:

Realized investment gains (losses), net
$ -       $ (1,166,676)       $ -       $ 1,207,600
Asset management fees and other income
$ 51    $ -       $ -       $ -



	Year Ended December 31, 2017
	Trading Account Assets
	Asset-Backed Securities(4)		Equity Securities		Equity Securities, Available- for-Sale			Short-term Investments			Cash Equivalents
	(in thousands)
Fair value, beginning of period	$	0	$	4,864	$	0		$	450		$	375
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0		0		0			0			0
Asset management fees and other income	0		689		0			0			0
Included in other comprehensive income (loss)	0		0		351			0			0
Net investment income	0		0		0			0			0
Purchases	0		0		0			94			0
Sales	0		0		0			(5		)	0
Issuances	0		0		0			0			0
Settlements	0		0		0			(2		)	0
Transfers into Level 3(1)	0		0		0			0			0
Transfers out of Level 3(1)	0		0		0			0			0
Other(3)	0		4,205		(351		)	(450		)	(375		)
Fair Value, end of period	$	0	$	9,758	$	0		$	87		$	0
Unrealized gains (losses) for assets still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0	$	0		$	0		$	0
Asset management fees and other income	$	0	$	338	$	0		$	0		$	0

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial ~~Statements—~~Statements - (Continued)

Year Ended December 31, 2012
Fixed Maturities Available-For-Sale
Corporate
Securities       Asset Backed
Securities
Trading
Account
Assets -
Equity
      Other Long-
Term
Investments       Reinsurance
Recoverables
(in thousands)
Fair Value, beginning of period assets/(liabilities)
$ 89,658    $ 48,563    $ 203    $ 1,213    $ 1,747,757
Total gains or (losses) (realized/unrealized):

Included in earnings:

Realized investment gains (losses), net
1,606    -       -       (2,326 )    (244,519 )
Asset management fees and other income
-       -       4    (3 )    -
Included in other comprehensive income (loss)
2,271    1,109    -       -       -
Net investment income
4,634    649    -       -       -
Purchases
5,400    30,311    -       2,166    228,856
Sales
(29 )    -       -       -       -
Issuances
-       -       -       -       -
Settlements
(8,286 )    (11,334 )    -       4    -
Transfers into Level 3 (1)
11,992    -       -       -       -
Transfers out of Level 3 (1)
(11,691 )    -       -       -       -









Fair Value, end of period assets/(liabilities)
$             95,555    $               69,298    $                 207    $             1,054    $             1,732,094









Unrealized gains (losses) for the period relating to those

Level 3 assets that were still held at the end of the period (2):

Included in earnings:

Realized investment gains (losses), net
$ -       $ -       $ -       $ (1,349 )    $ (194,274 )
Asset management fees and other income
$ -       $ -       $ 4    $ (3 )    $ -
Year Ended December 31, 2012
Receivables from
parent and
affiliates       Future Policy
Benefits
(in thousands)
Fair Value, beginning of period assets/(liabilities)
$ -       $ (1,783,595 )
Total gains or (losses) (realized/unrealized):

Included in earnings:

Realized investment gains (losses), net
-       230,349
Asset management fees and other income
-       -
Included in other comprehensive income (loss)
(5 )    -
Net investment income
-       -
Purchases
2,000    -
Sales
-       -
Issuances
-       (239,891 )
Settlements
-       -
Transfers into Level 3 (1)
-       -
Transfers out of Level 3 (1)
-       -




Fair Value, end of period assets/(liabilities)
$             1,995    $ (1,793,137 )




Unrealized gains (losses) for the period relating to those

Level 3 assets that were still held at the end of the period (2):

Included in earnings:

Realized investment gains (losses), net
$ -       $ 179,477
Asset management fees and other income
$ -       $ -



	Year Ended December 31, 2017
	Other Long-term Investments			Reinsurance Recoverables			Receivables from Parent and Affiliates			Future Policy Benefits
	(in thousands)
Fair value, beginning of period	$	0		$	240,091		$	33,962		$	(7,707,333	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net(6)	(7		)	(18,240		)	0			552,047
Asset management fees and other income	0			0			0			0
Included in other comprehensive income (loss)	0			0			0			0
Net investment income	0			0			0			0
Purchases	0			19,416			0			0
Sales	0			0			0			0
Issuances	0			0			0			(996,616		)
Settlements	0			0			0			0
Transfers into Level 3(1)	0			0			0			0
Transfers out of Level 3(1)	0			0			(33,962		)	0
Other(3)	154			2,739			0			0
Fair value, end of period	$	147		$	244,006		$	0		$	(8,151,902	)
Unrealized gains (losses) for assets/liabilities still held(2):
Included in earnings:
Realized investment gains (losses), net	$	(7	)	$	(10,303	)	$	0		$	307,529
Asset management fees and other income	$	0		$	0		$	0		$	0

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)



	Year Ended December 31, 2016
	Fixed Maturities Available-For-Sale
	Foreign Government			Corporate Securities(5)			Asset-Backed Securities(4)
	(in thousands)
Fair value, beginning of period	$	0		$	127,308		$	46,493
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			(3,988		)	(26		)
Asset management fees and other income	0			0			0
Included in other comprehensive income (loss)	(8		)	2,313			161
Net investment income	0			5,835			139
Purchases	0			22,871			72,939
Sales	0			(105		)	(6,739		)
Issuances	0			0			0
Settlements	0			(9,085		)	(540		)
Transfers into Level 3(1)	95			19,694			34,984
Transfers out of Level 3(1)	0			(12,854		)	(115,676		)
Other	0			0			0
Fair value, end of period	$	87		$	151,989		$	31,735
Unrealized gains (losses) for assets still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0		$	(4,917	)	$	(26	)
Asset management fees and other income	$	0		$	0		$	0

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)



	Year Ended December 31, 2016
	Trading Account Assets
	Asset-Backed Securities(4)			Equity Securities			Equity Securities, Available-For-Sale			Short-Term Investments		Cash Equivalents
	(in thousands)
Fair value, beginning of period	$	0		$	0		$	0		$	450	$	225
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			0			0			0		0
Asset management fees and other income	(161		)	(123		)	0			0		0
Included in other comprehensive income (loss)	0			0			(351		)	0		0
Net investment income	0			0			0			0		0
Purchases	0			3,422			351			0		150
Sales	0			0			0			0		0
Issuances	0			0			0			0		0
Settlements	(2,634		)	0			0			0		0
Transfers into Level 3(1)	0			0			0			0		0
Transfers out of Level 3(1)	0			0			0			0		0
Other(3)	2,795			1,565			0			0		0
Fair value, end of period	$	0		$	4,864		$	0		$	450	$	375
Unrealized gains (losses) for assets still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0		$	0		$	0		$	0	$	0
Asset management fees and other income	$	0		$	(123	)	$	0		$	0	$	0

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)



	Year Ended December 31, 2016
	Other Long-term Investments			Reinsurance Recoverables			Receivables from Parent and Affiliates			Future Policy Benefits
	(in thousands)
Fair value, beginning of period	$	1,565		$	3,012,653		$	7,664		$	(3,134,077	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net(6)	0			(2,852,588		)	(13		)	(3,791,759		)
Asset management fees and other income	0			0			0			0
Included in other comprehensive income (loss)	0			0			50			0
Net investment income	0			0			0			0
Purchases	0			70,448			34,000			0
Sales	0			0			(1,987		)	0
Issuances	0			0			0			(781,497		)
Settlements	0			0			0			0
Transfers into Level 3(1)	0			0			0			0
Transfers out of Level 3(1)	0			0			(2,957		)	0
Other(3)	(1,565		)	9,578			(2,795		)	0
Fair value, end of period	$	0		$	240,091		$	33,962		$	(7,707,333	)
Unrealized gains (losses) for assets/liabilities still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0		$	59,501		$	0		$	(3,740,535	)
Asset management fees and other income	$	0		$	0		$	0		$	0

The following tables summarize the portion of changes in fair values of Level 3 assets and liabilities included in earnings and other comprehensive income for the year ended December 31, 2015, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held as of December 31, 2015.



	Year Ended December 31, 2015
	Fixed Maturities Available-For-Sale
	Foreign Government		Corporate Securities(5)			Asset-Backed Securities(4)
	(in thousands)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	$	0	$	46		$	9
Asset management fees and other income	$	0	$	0		$	0
Included in other comprehensive income (loss)	$	0	$	(3,039	)	$	(170	)
Net investment income	$	0	$	5,274		$	49
Unrealized gains (losses) for assets still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0		$	0
Asset management fees and other income	$	0	$	0		$	0

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)



	Year Ended December 31, 2015
	Trading Account Assets
	Asset-Backed Securities(4)		Equity Securities		Equity Securities, Available-For-Sale		Short-term Investments		Cash Equivalents
	(in thousands)
Total gains or (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0	$	0	$	0	$	0
Asset management fees and other income	$	0	$	0	$	0	$	0	$	0
Included in other comprehensive income (loss)	$	0	$	0	$	0	$	0	$	0
Net investment income	$	0	$	0	$	0	$	0	$	0
Unrealized gains (losses) for assets/liabilities still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0	$	0	$	0	$	0
Asset management fees and other income	$	0	$	0	$	0	$	0	$	0



	Year Ended December 31, 2015
	Other Long-term Investments		Reinsurance Recoverables			Receivables from Parent and Affiliates			Future Policy Benefits
	(in thousands)
Total gains(losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net(6)	$	1,405	$	(212,035	)	$	0		$	217,101
Asset management fees and other income	$	0	$	0		$	0		$	0
Included in other comprehensive income (loss)	$	0	$	0		$	(264	)	$	0
Net investment income	$	0	$	0		$	1		$	0
Unrealized gains (losses) for assets/liabilities still held(2):
Included in earnings:
Realized investment gains (losses), net	$	1,405	$	(117,840	)	$	0		$	119,609
Asset management fees and other income	$	0	$	0		$	0		$	0


(1)	Transfers into or out of ~~Level 3~~any level are generally reported asat the value as of the beginning of the quarter in which the transfer ~~occurs.~~occurs for any such assets still held at the end of the quarter.


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


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

(4) Includes credit-tranched securities collateralized by syndicated bank loans, sub-prime mortgages, auto loans, credit cards, education loans and other asset types.
(5) Includes U.S. corporate public, U.S. corporate private, foreign corporate public and foreign corporate private securities. Prior period amounts were aggregated to conform to current period presentation.
(6) Realized investment gains (losses) on Future Policy Benefits and Reinsurance Recoverables primarily represent the change in the fair value of the Company's living benefit guarantees on certain of its variable annuity contracts. Refer to Note 1 for impacts to Realized investment gains (losses) related to the Variable Annuities Recapture.

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

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial ~~Statements—~~Statements - (Continued)

Fair Value of Financial Instruments

The table below presents the carrying amount and fair value by fair value hierarchy level of certain financial instruments that are not reported at fair value. The financial instruments presented below are reported at carrying value on the Company’s Statements of Financial ~~Position; however, in~~Position. In some cases, as described below, the carrying amount equals or approximates fair value.

   December 31, 2014
      Fair Value    Carrying
Amount (1)
   Level 1    Level 2    Level 3    Total    Total
   (in thousands)
Assets:

Commercial mortgage and other loans
   $ -       $ 2,779    $ 447,157    $ 449,936    $ 422,563
Policy loans
   -       -       13,355    13,355    13,355
Other long term investments
   -       -       2,639    2,639    2,238
Cash and cash equivalents
   369    -       -       369    369
Accrued investment income
   -       25,008    -       25,008    25,008
Receivables from parent and affiliates
   -       10,367    -       10,367    10,367
Other assets
   -       1,009    -       1,009    1,009










Total assets
   $ 369    $ 39,163    $ 463,151    $ 502,683    $ 474,909










Liabilities:

Policyholders’ account balances - investment contracts
   $ -       $ -       $ 91,217    $ 91,217    $ 92,663
Cash collateral for loaned securities
   -       5,285    -       5,285    5,285
Short-term debt
   -       54,354    -       54,354    54,354
Payables to parent and affiliates
   -       37,415    -       37,415    37,415
Other liabilities
   -       89,956    -       89,956    89,956
Separate account liabilities - investment contracts
   -       487    -       487    487










Total liabilities
   $ -       $ 187,497    $ 91,217    $ 278,714    $ 280,160










   December 31, 2013
   Fair Value    Carrying
Amount (1)
   Level 1    Level 2    Level 3    Total    Total
   (in thousands)
Assets:

Commercial mortgage and other loans
   $ -    $ -    $ 422,584    $ 422,584    $ 398,991
Policy loans
   -    -    12,454    12,454    12,454
Other long term investments
   -    -    1,623    1,623    1,440
Cash and cash equivalents
   1,417    -    -    1,417    1,417
Accrued investment income
   -    32,169    -    32,169    32,169
Receivables from parent and affiliates
   -    10,177    -    10,177    10,177
Other assets
   -    11,190    -    11,190    11,190










Total assets
   $         1,417    $ 53,536    $         436,661    $         491,614    $         467,838










Liabilities:

Policyholders’ account balances - investment contracts
   $ -    $ -    $ 84,153    $ 84,153    $ 85,672
Cash collateral for loaned securities
   -    47,896    -    47,896    47,896
Short-term debt
   -    218,488    -    218,488    205,000
Payables to parent and affiliates
   -    85,204    -    85,204    85,204
Other liabilities
   -    101,656    -    101,656    101,656
Separate account liabilities - investment contracts
   -    796    -    796    796










Total liabilities
   $ -    $         454,040    $ 84,153    $ 538,193    $ 526,224



	December 31, 2017(1)
	Fair Value								Carrying Amount(2)
	Level 1		Level 2		Level 3		Total		Total

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

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)



	December 31, 2016(1)
	Fair Value								Carrying Amount(2)
	Level 1		Level 2		Level 3		Total		Total

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

(1)

Other long-term investments excluded from the fair value hierarchy include certain hedge funds, private equity funds and other funds for which fair value is measured at NAV per share (or its equivalent) as a practical expedient. At December 31, 2017 and December 31, 2016, the fair values of these cost method investments were $6.4 million and $3.4 million, respectively. The carrying values of these investments were $6.0 million and $3.1 million as of December 31, 2017 and December 31, 2016, respectively.

(2)

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

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

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Financial Statements—(Continued)~~

Commercial Mortgage and Other Loans

The fair value of most commercial mortgage loans is based upon the present value of the expected future cash flows discounted at the appropriate U.S. Treasury rate or foreign government bond rate (for non-U.S. dollar-denominated loans) plus an appropriate credit spread for loans of similar quality, ~~loans.~~average life and currency. The quality ratings for these loans, a primary determinant of the credit spreads and a significant component of the pricing process, are based on an internally-developed methodology.

Certain commercial mortgage loans are valued incorporating other factors, including the terms of the loans, the principal exit strategies for the loans, prevailing interest rates and credit risk.

Policy Loans

Policy loans carrying value approximates fair value.

~~Other Long-term~~

Short-Term Investments,

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

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

The Company believes that due to the short-term nature of certain assets, the carrying value approximates fair value. These assets include: certain short-term investments which are not securities, are recorded at amortized cost; cash and cash ~~equivalents,~~equivalent instruments; accrued investment ~~income,~~income; and other assets that meet the definition of financial instruments, including receivables such as unsettled trades and accounts receivable.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

Reinsurance Recoverables and Reinsurance Payables

Reinsurance recoverables and reinsurance payables include corresponding receivables and payables associated with reinsurance arrangements between the Company and related parties. See Note 13 for additional information about the Company's reinsurance arrangements.

Policyholders’ Account Balances - Investment Contracts

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

Cash Collateral for Loaned Securities

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

Debt

The fair value of short-term and long-term debt is generally determined by either prices obtained from independent pricing services, which are validated by the Company, or discounted cash flow models. ~~These fair values consider the Company’s own NPR.~~ Discounted cash flow models predominately use market observable inputs such as the borrowing rates currently available to the Company for debt and financial instruments with similar terms and remaining maturities. For debt with a maturity of less than 90 days, the carrying value approximates fair value.

Other Liabilities and Payables to Parent and Affiliates

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

Separate Account Liabilities - Investment Contracts

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

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Financial Statements—(Continued)~~

11. DERIVATIVE INSTRUMENTS

Types of Derivative Instruments and Derivative Strategies

Interest Rate Contracts

Interest rate swaps, options and futures are used by the Company to reduce risks from changes in interest rates, manage interest rate exposures arising from mismatches between assets and liabilities ~~(including duration mismatches)~~ and to hedge against changes in ~~the value of assets~~their values it owns or anticipates acquiring or selling.

Swaps may be attributed to specific assets or liabilities or ~~may be used on~~to a portfolio ~~basis.~~of assets or liabilities. Under interest rate swaps, the Company agrees with counterparties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed upon notional principal amount. ~~Generally, no cash~~

The Company also uses interest rate swaptions, caps and floors to manage interest rate risk. A swaption is ~~exchanged~~an option to enter into a swap with a forward starting effective date. The Company pays a premium for purchased swaptions and receives a premium for written swaptions. In an interest rate cap, the buyer receives payments at the ~~outset~~end of each period in which the ~~contract~~interest rate exceeds the agreed strike price. Similarly, in an interest rate floor, the buyer receives payments at the end of each period in which the interest rate is below the agreed strike price. Swaptions, caps and ~~no principal payments~~floors are ~~made~~included in interest rate options.

In standardized exchange-traded interest rate futures transactions, the Company purchases or sells a specified number of contracts, the values of which are determined by ~~either party. These transactions~~the daily market values of underlying referenced investments. The Company enters into exchange-traded futures with regulated futures commission's merchants who are ~~entered into pursuant~~members of a trading exchange.

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Prudential Annuities Life Assurance Corporation

Notes to ~~master agreements that provide for a single net payment to be made by one counterparty at each due date.~~

Financial Statements - (Continued)

Equity Contracts

Equity options, total return swaps, and futures are used by the Company to manage its exposure to the equity markets which impacts the value of assets and liabilities it owns or anticipates acquiring or selling.

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

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

In standardized exchange-traded equity futures transactions, the Company purchases or sells a specified number of contracts, the values of which are determined by the daily market values underlying referenced equity indices. The Company enters into exchange-traded futures with regulated futures commission's merchants who are members of a trading exchange.

Foreign Exchange Contracts

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

Under currency forwards, the Company agrees with counterparties to deliver a specified amount of an identified currency at a specified future date. Typically, the price is agreed upon at the time of the contract and payment for such a contract is made at the specified future date. The Company executes forward sales of the hedged currency in exchange for U.S. dollars at a specified exchange rate. The maturities of these forwards correspond with the future periods in which the non-U.S. dollar-denominated earnings are expected to be generated.

Under currency swaps, the Company agrees with counterparties to exchange, at specified intervals, the difference between one currency and another at an exchange rate and calculated by reference to an agreed principal amount. Generally, the principal amount of each currency is exchanged at the beginning and termination of the currency swap by each party. ~~These transactions are entered into pursuant~~

Credit Contracts

The Company writes credit protection to ~~master agreements that provide for a single net payment to be made by one counterparty for payments made in the same currency at each due date.~~

~~Credit Contracts~~

~~Credit derivatives are used by the Company to enhance the return on the Company’s investment portfolio by creating credit~~gain exposure similar to an investment in public fixed maturity cash instruments. With these credit derivatives the Company sells credit protection on ~~an identified~~a single name reference, or certain index reference, and in return receives a quarterly premium. ~~With credit default derivatives, this~~This premium or credit spread generally corresponds to the difference between the yield on the referenced ~~name’s~~names (or an index's referenced names) public fixed maturity cash instruments and swap rates, at the time the agreement is executed. If there is an event of default by the referenced name or one of the referenced names in the index, as defined by the agreement, then the Company is obligated to pay the ~~counterparty the~~ referenced amount of the contract to the counterparty and receive in return the referenced defaulted security or similar security or (in the case of a credit default index) pay the referenced amount less the auction recovery rate. ~~See credit derivatives section for discussion of guarantees related to credit derivatives written.~~

In addition to selling credit protection, the Company ~~has purchased~~purchases credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio.

Embedded Derivatives

The Company ~~sells~~sold variable annuity products, which may include guaranteed benefit features that are accounted for as embedded derivatives. ~~The~~Related to these embedded derivatives, the Company ~~has~~had previously entered into reinsurance agreements ~~to transfer the risk related to certain of these benefit features to affiliates,~~with Pruco Re and ~~The~~ Prudential Insurance through March 31, 2016; effective April 1, 2016, the Company recaptured these reinsurances. Also, effective April 1, 2016, the Company assumed variable annuities living benefit guarantees from Pruco Life, excluding PLNJ business. See Note 1 for additional information on the change to the reinsurance agreements.

Additionally, the Company reinsured the majority of ~~America (“~~its New York business to an affiliate, Prudential ~~Insurance”). The~~Insurance, as a result of surrendering its New York license, effective December 31, 2015. See Note 1 for additional information on these reinsurance agreements.

These embedded derivatives ~~related to the living benefit features~~ and ~~the related~~ reinsurance agreements, also accounted for as derivatives, are carried at fair ~~value. These embedded derivatives are~~value and marked to market through “Realized investment gains (losses), net” based on the change in value of the underlying contractual guarantees, which are determined using valuation models, as described in Note 10.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial ~~Statements—~~Statements - (Continued)

Primary Risks Managed by Derivatives

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

December 31, 2014 December 31, 2013
   Gross Fair Value       Gross Fair Value
Primary Underlying

Notional    Assets    Liabilities

   Notional    Assets    Liabilities
(in thousands)
Derivatives Designated as Hedge Accounting Instruments:

Currency/Interest Rate

Currency/Interest Rate
$ 83,412    $ 5,555    $ (654)       $ 72,747    $ 940    $ (4,635)











Total Qualifying Hedges
$ 83,412    $ 5,555    $ (654)       $ 72,747    $ 940    $ (4,635)











Derivatives Not Qualifying as Hedge Accounting Instruments:

Interest Rate
      ��
Interest Rate Swaps
$ 1,902,750    $ 92,507    $ (18,480)       $ 1,533,750    $ 59,872    $ (80,601)
Interest Rate Options
100,000    10,736    -    100,000    6,534    -
Currency/Interest Rate

Foreign Currency Swaps
57,011    4,363    (5)       55,919    19    (1,349)
Credit

Credit Default Swaps
1,200    -    (43)       6,050    -    (115)
Equity

Total Return Swaps
220,986    1,937    -    219,896    -    (4,712)
Equity Options
6,842,242    3,748    (2,067)       13,170,805    6,170    (3,168)











Total Non-Qualifying Hedges
$       9,124,189    $       113,291    $       (20,595)       $       15,086,420    $       72,595    $       (89,945)











Total Derivatives (1)
$ 9,207,601    $ 118,846    $ (21,249)       $ 15,158,667    $ 73,535    $ (94,580)



	December 31, 2017							December 31, 2016
			Gross Fair Value							Gross Fair Value
Primary Underlying	Notional		Assets		Liabilities			Notional		Assets		Liabilities

	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Currency/Interest Rate
Foreign Currency Swaps	$	677,257	$	13,348	$	(47,209	)	$	472,701	$	38,249	$	(2,776	)
Total Qualifying Hedges	$	677,257	$	13,348	$	(47,209	)	$	472,701	$	38,249	$	(2,776	)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Futures	$	1,964,000	$	8,296	$	0		$	2,474,000	$	23,967	$	0
Interest Rate Swaps	87,939,425		4,374,658		(1,065,549		)	81,872,695		4,439,270		(1,163,388		)
Interest Rate Options	15,775,000		175,156		(160,181		)	10,825,000		278,763		(135,554		)
Interest Rate Forwards	975,929		19,870		(2		)	498,311		0		(25,082		)
Foreign Currency
Foreign Currency Forwards	12,455		1		(319		)	1,491		6		0
Currency/Interest Rate
Foreign Currency Swaps	151,400		7,779		(7,488		)	130,470		16,627		(635		)
Equity
Equity Futures	672,055		2,442		0			1,269,044		0		(5,051		)
Total Return Swaps	13,841,333		8,517		(341,700		)	12,784,166		69,827		(281,193		)
Equity Options	31,702,334		460,597		(318,955		)	4,610,001		29,650		(45,732		)
Total Non-Qualifying Hedges	$	153,033,931	$	5,057,316	$	(1,894,194	)	$	114,465,178	$	4,858,110	$	(1,656,635	)
Total Derivatives (1)	$	153,711,188	$	5,070,664	$	(1,941,403	)	$	114,937,879	$	4,896,359	$	(1,659,411	)

(1)

Excludes embedded derivatives and the related reinsurance recoverables which contain multiple underlyings. The fair value of the embedded derivatives related to the living benefit feature was a liability of $3,112 million and $778 million as of December 31, 2014 and December 31, 2013, respectively, included in “Future policy benefits.” The fair value of the embedded derivatives related to the reinsurance of certain of these benefits to Pruco Re and Prudential Insurance included in “Reinsurance recoverables” was an asset of $2,996 million and $748 million as of December 31, 2014 and December 31, 2013, respectively.

The fair value of the embedded derivatives, included in "Future policy benefits," was a net liability of $8,152 million and $7,707 million as of December 31, 2017 and 2016, respectively. The fair value of the related reinsurance recoverables to Prudential Insurance was an asset of $232 million and $231 million as of December 31, 2017 and 2016, respectively, included in "Reinsurance recoverables". See Note 13 for additional information on these reinsurance agreements.

The fair value of the embedded derivatives pertaining to the variable annuity products with a market value adjustment option assumed from Pruco Life as part of the Variable Annuities Recapture, included in "Reinsurance recoverables", was a net asset of $12 million and $10 million as of December 31, 2017 and 2016, respectively.

Table of Contents
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)

Offsetting Assets and Liabilities

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

   December 31, 2014
   Gross
Amounts of
Recognized
Financial
Instruments    Gross Amounts
Offset in the
Statement of
Financial
Position Net
Amounts
Presented in
the Statement
of Financial
Position    Financial
Instruments/
Collateral (1) Net
Amount
   (in thousands)
Offsetting of Financial Assets:

Derivatives
   $       118,846    $       (24,288)    $       94,558    $       (82,602)    $       11,956






Offsetting of Financial Liabilities:

Derivatives
   $ 21,249    $ (21,249 ) $ -    $ -    $ -






   December 31, 2013
   Gross
Amounts of
Recognized
Financial
Instruments    Gross Amounts
Offset in the
Statement of
Financial
Position Net
Amounts
Presented in
the Statement
of Financial
Position    Financial
Instruments/
Collateral (1) Net
Amount
   (in thousands)
Offsetting of Financial Assets:

Derivatives
   $ 73,535    $ (73,535 ) $ -    $ - $ -






Offsetting of Financial Liabilities:

Derivatives
   $ 94,580    $ (72,822 ) $ 21,758    $ (21,758 ) $ -

Statements of Financial Position.



	December 31, 2017
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statement of Financial Position			Net Amounts Presented in the Statement of Financial Position		Financial Instruments/ Collateral(1)			Net Amount

	(in thousands)
Offsetting of Financial Assets:
Derivatives(1)	$	5,070,517	$	(4,919,486	)	$	151,031	$	0		$	151,031
Securities purchased under agreements to resell	0		0			0		0			0
Total Assets	$	5,070,517	$	(4,919,486	)	$	151,031	$	0		$	151,031
Offsetting of Financial Liabilities:
Derivatives(1)	$	1,941,403	$	(1,941,403	)	$	0	$	0		$	0
Securities sold under agreements to repurchase	0		0			0		0			0
Total Liabilities	$	1,941,403	$	(1,941,403	)	$	0	$	0		$	0

	December 31, 2016
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statement of Financial Position			Net Amounts Presented in the Statement of Financial Position		Financial Instruments/ Collateral(1)			Net Amount

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


(1)	Amounts exclude the excess of collateral received/pledged from/to the counterparty. ~~Prior period has been revised to conform to current period presentation.~~

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Financial Statements—(Continued)~~

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

below and Note 15. For securities purchased under agreements to resell and securities sold under agreements to repurchase, the Company monitors the value of the securities and maintains collateral, as appropriate, to protect against credit exposure. Where the Company has entered into repurchase and resale agreements with the same counterparty, in the event of default, the Company would generally be permitted to exercise rights of offset. For additional information on the Company’s accounting policy for securities repurchase and resale agreements, see Note 2 to the Financial Statements.

Cash Flow Hedges

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

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

Year Ended December 31, 2014
Realized
Investment
Gains (Losses)    Net Investment
Income    Other Income    Accumulated
Other
Comprehensive
Income (Loss) (1)
(in thousands)
Derivatives Designated as Hedging Instruments:

Cash flow hedges

Currency/Interest Rate
$ -    $ 14 $ 134 $ 8,492

Total cash flow hedges
-    14 134 8,492

Derivatives Not Qualifying as Hedging Instruments:
Interest Rate
123,327 -    -    -
Currency/Interest Rate
5,934 -    143 -
Credit
(14 ) -    -    -
Equity
(23,811 ) -    -    -
Embedded Derivatives
(113,549 ) -    -    -

Total non-qualifying hedges
(8,113 ) -    143 -

Total
$ (8,113 ) $ 14 $ 277 $ 8,492

   Year Ended December 31, 2013
Realized
Investment
Gains (Losses)    Net Investment
Income    Other Income    Accumulated
Other
Comprehensive
Income (Loss) (1)
(in thousands)
Derivatives Designated as Hedging Instruments:

Cash flow hedges

Currency/Interest Rate
$ -    $ (89 ) $ (7 ) $ (585 )

Total cash flow hedges
-    (89 ) (7 ) (585 )

Derivatives Not Qualifying as Hedging Instruments:
Interest Rate
(116,025 ) -    -    -
Currency/Interest Rate
(204 ) -    24 -
Credit
(103 ) -    -    -
Equity
(79,498 ) -    -    -
Embedded Derivatives
1,775 -    -    -

Total non-qualifying hedges
(194,055 ) -    24 -

Total
$ (194,055 ) $ (89 ) $ 17 $ (585 )

relationship.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial ~~Statements—~~Statements - (Continued)

   Year Ended December 31, 2012
Realized
Investment
Gains (Losses)    Net Investment
Income    Other Income    Accumulated
Other
Comprehensive
Income (Loss) (1)
(in thousands)
Derivatives Designated as Hedging Instruments:

Cash flow hedges

Currency/Interest Rate
$ -    $ (116 ) $ 14 $ (2,106 )

Total cash flow hedges
-    (116 ) 14 (2,106 )

Derivatives Not Qualifying as Hedging Instruments:
Interest Rate
5,030 -    -    -
Currency
(15 ) -    -    -
Currency/Interest Rate
(1,368 ) -    (17 ) -
Credit
143 -    -    -
Equity
(56,158 ) -    -    -
Embedded Derivatives
(55,295 ) -    -    -

Total non-qualifying hedges
(107,663 ) -    (17 ) -

Total
$ (107,663 ) $ (116 ) $ (3 ) $ (2,106 )



	Year Ended December 31, 2017
	Realized Investment Gains (Losses)			Net Investment Income		Other Income			AOCI(1)
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	0		$	6,152	$	(11,043	)	$	(37,596	)
Total cash flow hedges	0			6,152		(11,043		)	(37,596		)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	550,797			0		0			0
Currency	(454		)	0		0			0
Currency/Interest Rate	(30,173		)	0		(183		)	0
Credit	0			0		0			0
Equity	(2,000,297		)	0		0			0
Embedded Derivatives	678,698			0		0			0
Total non-qualifying hedges	(801,429		)	0		(183		)	0
Total	$	(801,429	)	$	6,152	$	(11,226	)	$	(37,596	)

	Year Ended December 31, 2016
	Realized Investment Gains (Losses)			Net Investment Income		Other Income			AOCI(1)
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	0		$	3,006	$	9,648		$	(3,102	)
Total cash flow hedges	0			3,006		9,648			(3,102		)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	(2,219,894		)	0		0			0
Currency	361			0		0			0
Currency/Interest Rate	11,642			0		516			0
Credit	0			0		0			0
Equity	(1,755,946		)	0		0			0
Embedded Derivatives	437,323			0		0			0
Total non-qualifying hedges	(3,526,514		)	0		516			0
Total	$	(3,526,514	)	$	3,006	$	10,164		$	(3,102	)

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)



	Year Ended December 31, 2015
	Realized Investment Gains (Losses)			Net Investment Income		Other Income		AOCI(1)
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	0		$	608	$	1,116	$	10,008
Total cash flow hedges	0			608		1,116		10,008
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	20,536			0		0		0
Currency	115			0		0		0
Currency/Interest Rate	8,337			0		202		0
Credit	(3		)	0		0		0
Equity	(3,233		)	0		0		0
Embedded Derivatives	(24,371		)	0		0		0
Total non-qualifying hedges	1,381			0		202		0
Total	$	1,381		$	608	$	1,318	$	10,008


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

For the years ended December 31, ~~2014, 2013~~2017, 2016 and ~~2012,~~2015, the ineffective portion of derivatives accounted for using hedge accounting ~~was not material~~were de minimis to the Company’s results of operations. Also, there were no material amounts reclassified into earnings relating to instances in which the Company discontinued cash flow hedge accounting because the forecasted transaction did not occur by the anticipated date or within the additional time period permitted by the authoritative guidance for the accounting for derivatives and hedging.

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

(in thousands)
Balance, December 31, 2011
$ (962 )
Net deferred gains (losses) on cash flow hedges from January 1 to December 31, 2012
(2,207 )
Amount reclassified into current period earnings
101

Balance, December 31, 2012
(3,068 )
Net deferred gains (losses) on cash flow hedges from January 1 to December 31, 2013
(680 )
Amount reclassified into current period earnings
95

Balance, December 31, 2013
(3,653 )
Net deferred gains (losses) on cash flow hedges from January 1 to December 31, 2014
8,640
Amount reclassified into current period earnings
(148 )

Balance, December 31, 2014
$ 4,839



	(in thousands)
Balance, December 31, 2014	$	4,839
Net deferred gains (losses) on cash flow hedges from January 1 to December 31, 2015	12,078
Amount reclassified into current period earnings	(2,070		)
Balance, December 31, 2015	14,847
Net deferred gains (losses) on cash flow hedges from January 1 to December 31, 2016	9,698
Amount reclassified into current period earnings	(12,800		)
Balance, December 31, 2016	11,745
Net deferred gains (losses) on cash flow hedges from January 1 to December 31, 2017	(39,434		)
Amounts reclassified into current period earnings	1,838
Balance, December 31, 2017	$	(25,851	)

The changes in fair value of cash flow hedges are deferred in AOCI and are included in “Net unrealized investment gains (losses)” in the Consolidated Statements of Comprehensive Income; these amounts are then reclassified to earnings when the hedged item affects earnings. Using December 31, 2017 values, it is estimated that a pre-tax gain of approximately $7 million will be reclassified from AOCI to earnings during the subsequent twelve months ending December 31, 2018, offset by amounts pertaining to the hedged item.

As of December 31, ~~2014 and 2013,~~2017, the Company did not have any qualifying cash flow hedges of forecasted transactions other than those related to the variability of the payment or receipt of interest or foreign currency amounts on existing financial instruments. The maximum length of time for which these variable cash flows are hedged is 1918 years. ~~Income amounts deferred in “Accumulated other comprehensive income (loss)” as a result~~

Table of ~~cash flow hedges are included in “Net unrealized investment gains (losses)” in the~~Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements ~~of Equity.~~

- (Continued)

Credit Derivatives

The Company has no ~~longer has~~ exposure from credit ~~derivatives~~derivative positions where it has written or purchased credit protection as of December 31, ~~2014~~2017 and ~~December 31, 2013.~~

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

2016.

Credit Risk

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

transactions with a positive fair value. The Company ~~has~~manages credit risk ~~exposure to an~~by entering into derivative transactions with its affiliate, Prudential Global Funding, LLC (“PGF”), related to its OTC ~~derivative transactions.~~derivatives. PGF, in turn, manages its credit risk ~~with external counterparties by~~by: (i) entering into derivative transactions with highly rated major international financial institutions and other creditworthy counterparties governed by master netting agreement as applicable; (ii) trading through a central clearing and byOTC; (iii) obtaining collateral, such as cash and securities, when ~~appropriate. Additionally,~~appropriate; and (iv) setting limits ~~are set~~ on single party credit exposures which are subject to periodic management review.

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Financial Statements—(Continued)~~

~~Under fair value measurements, the Company incorporates the market’s perception of its own and the counterparty’s non-performance risk in determining the fair value~~

Substantially all of the ~~portion of its OTC~~Company’s derivative ~~assets and liabilities that are uncollateralized. Credit spreads are applied to~~agreements have zero thresholds which require daily full collateralization by the ~~derivative fair values on~~party in a ~~net basis by counterparty. To reflect the Company’s own credit spread a proxy based on relevant debt spreads is applied to OTC derivative net~~ liability ~~positions. Similarly, the Company’s counterparty’s credit spread is applied to OTC derivative net asset positions.~~

position.

12. COMMITMENTS, CONTINGENT LIABILITIES AND LITIGATION AND REGULATORY MATTERS

Commitments

The Company ~~had~~has made commitments to fund $1$37 million and $9 million of commercial loans as of December 31, ~~2014.~~2017 and 2016, respectively. The Company also made commitments to purchase or fund investments, mostly private fixed maturities, of ~~$22~~$134 million and $121 million as of December 31, ~~2014.~~

2017 and 2016, respectively.

Contingent Liabilities

On an ongoing basis, the ~~Company’s internal supervisory~~Company reviews its operations including, but not limited to, practices and ~~control functions review the quality of sales, marketing~~procedures for meeting obligations to our customers and other ~~customer interface procedures and practices and~~parties. This review may ~~recommend modifications or enhancements. From time to time, this review process results~~result in the ~~discovery~~modification or enhancement of ~~product administration, servicing or other errors,~~processes, including ~~errors relating to~~concerning the timing or ~~amount~~computation of payments ~~or contract values due~~ to ~~customers.~~customers and other parties. In certain cases, if appropriate, the Company may offer customers or other parties remediation and may incur charges, including the cost of such remediation, administrative costs and regulatory fines.

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

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

Litigation and Regulatory Matters

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

Table of ~~certain pending proceedings.~~

Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

The Company establishes accruals for litigation and regulatory matters when it is probable that a loss has been incurred and the amount of that loss can be reasonably estimated. For litigation and regulatory matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but the matter, if material, is disclosed, including matters discussed below. The Company estimates that as of December 31, ~~2014,~~2017, the aggregate range of reasonably possible losses in excess of accruals established for those litigation and regulatory matters for which such an estimate currently can be made is ~~$0 to approximately $3~~less than $150 million. This estimate is not an indication of expected loss, if any, or the Company’s maximum possible loss exposure on such matters. The Company reviews relevant information with respect to its litigation and regulatory matters on a quarterly and annual basis and updates its accruals, disclosures and estimates of reasonably possible loss based on such reviews.

~~In January 2013, a qui tam action on behalf of the State of Florida,~~~~Total Asset Recovery Services v. Met Life Inc., et al., Manulife Financial Corporation, et. al., Prudential Financial, Inc., The Prudential Insurance Company of America,~~

Escheatment Audit and ~~Prudential Insurance Agency, LLC~~, filed in the Circuit Court of Leon County, Florida, was served on Prudential Insurance. The complaint alleges that Prudential Insurance failed to escheat life insurance proceeds to the State of Florida in violation of the Florida False Claims Act and seeks injunctive relief, compensatory damages, civil penalties, treble damages, prejudgment interest, attorneys’ fees and costs. In March 2013, the Company filed a motion to dismiss the complaint. In August 2013, the court dismissed the complaint with prejudice. In September 2013, plaintiff filed an appeal with Florida’s Circuit Court of the Second Judicial Circuit in Leon County. In September 2014, the Florida District Court of Appeal First District affirmed the trial court’s decision.

Settlement Practices Market Conduct Exam

In January 2012, a Global Resolution Agreement entered into by the Company and a ~~third party~~third-party auditor became effective upon its acceptance by the unclaimed property departments of 20 states and jurisdictions. Under the terms of the Global Resolution Agreement, the ~~third party~~third-party auditor acting on

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Financial Statements—(Continued)~~

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

During 2017, audits were satisfactorily completed by the third party auditor of the Global Resolution Agreement and by the regulators for the Regulatory Settlement Agreement to assure that the Company had complied with the terms of both agreements.

The New York Attorney General has subpoenaed the Company, along with other companies, regarding its unclaimed property procedures and may ultimately seek remediation and other relief, including damages. Additionally, the New York Office of Unclaimed Funds is conducting an audit of the Company’s compliance with New York’s unclaimed property laws.

Securities Lending Matter

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

Summary

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

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Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

13. REINSURANCE

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

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

Realized investment gains and losses include the impact of reinsurance agreements, particularly reinsurance agreements involving living benefit guarantees. These reinsurance agreements are derivatives and have been accounted for in the same manner as embedded derivatives and the changes in the fair value of these derivatives are recognized through "Realized investment gains (losses), net". See Note 11 for additional information related to the accounting for embedded derivatives.

Reinsurance amounts included in the Company's Statements of Financial Position as of December 31, were as follows:



	2017			2016
	(in thousands)
Reinsurance recoverables	$	563,428		$	588,608
Deferred policy acquisition costs	3,766,066			3,557,248
Deferred sales inducements	540,389			520,182
Value of business acquired	(2,702		)	(2,357		)
Other assets	105,167			112,802
Policyholders’ account balances	2,825,030			2,576,357
Future policy benefits	5,511,496			5,130,753
Reinsurance payables(1)	262,588			275,822
Other liabilities	329,019			335,713


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

The reinsurance recoverables by counterparty are broken out below:



	December 31, 2017		December 31, 2016
	(in thousands)
Prudential Insurance	$	310,758	$	306,191
Pruco Life	252,383		282,326
Unaffiliated	287		91
Total reinsurance recoverables	$	563,428	$	588,608

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Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

Reinsurance amounts, included in the Company’s Statements of Operations and Comprehensive Income for the years ended December 31, were as follows:



	2017			2016			2015(3)
	(in thousands)
Premiums:
Direct	$	33,908		$	39,326		$	33,250
Assumed	32,890			860,831			0
Ceded	(3,225		)	(3,318		)	(23,463		)
Net premiums	63,573			896,839			9,787
Policy charges and fee income:
Direct	622,099			647,226			743,956
Assumed	1,632,132			1,153,752			0
Ceded(1)	(44,652		)	(45,754		)	(3,133		)
Net policy charges and fee income	2,209,579			1,755,224			740,823
Asset administration fees and other income:
Direct	129,847			103,892			177,479
Assumed	293,275			205,221			0
Ceded	(9,747		)	(9,729		)	0
Net asset administration fees and other income	413,375			299,384			177,479
Realized investment gains (losses), net:
Direct	(1,335,253		)	(3,612,578		)	247,525
Assumed	554,686			(81,510		)	0
Ceded	(24,833		)	251,328			(241,473		)
Realized investment gains (losses), net	(805,400		)	(3,442,760		)	6,052
Policyholders' benefits (including change in reserves):
Direct	52,477			74,438			81,719
Assumed	46,375			553,280			0
Ceded(2)	15,216			(23,661		)	(21,258		)
Net policyholders' benefits (including change in reserves)	114,068			604,057			60,461
Interest credited to policyholders’ account balances:
Direct	9,834			74,389			225,555
Assumed	24,708			(1,551		)	0
Ceded	(4,262		)	(3,949		)	0
Net interest credited to policyholders’ account balances	30,280			68,889			225,555
Reinsurance expense allowances and general and administrative expenses, net of capitalization and amortization	725,749			563,027			(6,054		)


(1)	"Policy charges and fee income ceded" includes $(2) million, $(2) million and $(3) million of unaffiliated activity for the years ended December 31, 2017, 2016 and 2015, respectively.


(2)	"Policyholders' benefits (including change in reserves) ceded" includes $(0.1) million, $(0.3) million and $(0.1) million of unaffiliated activity for the years ended December 31, 2017, 2016 and 2015, respectively.


(3)	Prior period amounts are presented on a basis consistent with the current presentation.

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Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

14. EQUITY

Accumulated Other Comprehensive Income (Loss)

~~13.~~The balance of and changes in each component of "Accumulated other comprehensive income (loss)” for the years ended December 31, are as follows:



	Accumulated Other Comprehensive Income (Loss)
	Foreign Currency Translation Adjustment			Net Unrealized Investment Gains (Losses)(1)			Total Accumulated Other Comprehensive Income (Loss)

	(in thousands)
Balance, December 31, 2014	$	(30	)	$	84,652		$	84,622
Change in OCI before reclassifications	(54		)	(54,279		)	(54,333		)
Amounts reclassified from AOCI	0			(4,831		)	(4,831		)
Income tax benefit (expense)	19			20,689			20,708
Balance, December 31, 2015	(65		)	46,231			46,166
Change in OCI before reclassifications	(20		)	(469,356		)	(469,376		)
Amounts reclassified from AOCI	0			(86,184		)	(86,184		)
Income tax benefit (expense)	7			194,439			194,446
Balance, December 31, 2016	(78		)	(314,870		)	(314,948		)
Change in OCI before reclassifications	109			320,182			320,291
Amounts reclassified from AOCI	0			3,177			3,177
Income tax benefit (expense)	(38		)	(98,606		)	(98,644		)
Balance, December 31, 2017	$	(7	)	$	(90,117	)	$	(90,124	)


(1)	Includes cash flow hedges of $(26) million, $12 million and $15 millionas of December 31, 2017, 2016, and 2015, respectively.

Reclassifications out of Accumulated Other Comprehensive Income (Loss)



	Year Ended December 31, 2017			Year Ended December 31, 2016		Year Ended December 31, 2015

	(in thousands)
Amounts reclassified from AOCI(1)(2):
Net unrealized investment gains (losses):
Cash flow hedges - Currency/Interest rate(3)	$	(1,838	)	$	12,800	$	2,070
Net unrealized investment gains (losses) on available-for-sale securities	(1,339		)	73,384		2,761
Total net unrealized investment gains (losses)(4)	(3,177		)	86,184		4,831
Total reclassifications for the period	$	(3,177	)	$	86,184	$	4,831


(1)	All amounts are shown before tax.


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


(3)	See Note 11 for additional information on cash flow hedges.


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

Net Unrealized Investment Gains (Losses)

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

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Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

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



	Net Unrealized Gains (Losses) on Investments			Deferred Policy Acquisition Costs and Other Costs			Future Policy Benefits and Other Liabilities			Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses)

	(in thousands)
Balance, December 31, 2014	$	1		$	0		$	0		$	16		$	17
Net investment gains (losses) on investments arising during the period	(9		)	0			0			3			(6		)
Reclassification adjustment for (gains) losses included in net income	17			0			0			(6		)	11
Reclassification adjustment for OTTI losses excluded from net income	0			0			0			0			0
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs	0			(3		)	0			1			(2		)
Impact of net unrealized investment (gains) losses on future policy benefits	0			0			0			0			0
Balance, December 31, 2015	9			(3		)	0			14			20
Net investment gains (losses) on investments arising during the period	378			0			0			(132		)	246
Reclassification adjustment for (gains) losses included in net income	556			0			0			(195		)	361
Reclassification adjustment for OTTI losses excluded from net income	(2,204		)	0			0			771			(1,433		)
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs	0			(2,130		)	0			746			(1,384		)
Impact of net unrealized investment (gains) losses on future policy benefits	0			0			(522		)	183			(339		)
Balance, December 31, 2016	(1,261		)	(2,133		)	(522		)	1,387			(2,529		)
Net investment gains (losses) on investments arising during the period	11,328			0			0			(3,481		)	7,847
Reclassification adjustment for (gains) losses included in net income	2,172			0			0			(667		)	1,505
Reclassification adjustment for OTTI losses excluded from net income(1)	72			0			0			(22		)	50
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs	0			1,125			0			(352		)	773
Impact of net unrealized investment (gains) losses on future policy benefits and other liabilities	0			0			365			(128		)	237
Balance, December 31, 2017	$	12,311		$	(1,008	)	$	(157	)	$	(3,263	)	$	7,883


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

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Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

All Other Net Unrealized Investment Gains (Losses) in AOCI



	Net Unrealized Gains (Losses) on Investments (1)			Deferred Policy Acquisition Costs and Other Costs			Future Policy Benefits and Other Liabilities			Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses)

	(in thousands)
Balance, December 31, 2014	$	198,922		$	(59,045	)	$	(8,372	)	$	(46,870	)	$	84,635
Net investment gains (losses) on investments arising during the period	(86,623		)	0			0			30,319			(56,304		)
Reclassification adjustment for (gains) losses included in net income	(4,848		)	0			0			1,697			(3,151		)
Reclassification adjustment for OTTI losses excluded from net income	0			0			0			0			0
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs	0			28,580			0			(10,003		)	18,577
Impact of net unrealized investment (gains) losses on future policy benefits	0			0			3,776			(1,322		)	2,454
Balance, December 31, 2015	107,451			(30,465		)	(4,596		)	(26,179		)	46,211
Net investment gains (losses) on investments arising during the period	(637,597		)	0			0			223,159			(414,438		)
Reclassification adjustment for (gains) losses included in net income	85,628			0			0			(29,970		)	55,658
Reclassification adjustment for OTTI losses excluded from net income	2,204			0			0			(771		)	1433
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs	0			(786		)	0			275			(511		)
Impact of net unrealized investment (gains) losses on future policy benefits	0			0			(1,068		)	374			(694		)
Balance, December 31, 2016	(442,314		)	(31,251		)	(5,664		)	166,888			(312,341		)
Net investment gains (losses) on investments arising during the period	376,012			0			0			(115,538		)	260,474
Reclassification adjustment for (gains) losses included in net income	(5,349		)	0			0			1,644			(3,705		)
Reclassification adjustment for OTTI losses excluded from net income(2)	(72		)	0			0			22			(50		)
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs	0			(50,961		)	0			15,949			(35,012		)
Impact of net unrealized investment (gains) losses on future policy benefits and other liabilities	0			0			(11,333		)	3,967			(7,366		)
Balance, December 31, 2017	$	(71,723	)	$	(82,212	)	$	(16,997	)	$	72,932		$	(98,000	)


(1)	Includes cash flow hedges. See Note 11 for information on cash flow hedges.


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

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Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

15. RELATED PARTY TRANSACTIONS

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

Expense Charges and Allocations

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

These expenses can be grouped into general and administrative expenses and agency distribution expenses.

The Company’s general and administrative expenses are charged to the Company using allocation methodologies based on business production processes. Management believes that the methodology is reasonable and reflects costs incurred by Prudential Insurance to process transactions on behalf of the Company. The Company operates under service and lease agreements whereby services of officers and employees, supplies, use of equipment and office space are provided by Prudential Insurance. The Company reviews its allocation methodology periodically which it may adjust accordingly. General and administrative expenses ~~also~~ include allocations of stock compensation expenses related to a ~~stock option~~stock-based awards program and a deferred compensation program issued by Prudential Financial. The expense charged to the Company for the ~~stock option~~stock-based awards program was $0.1 million for each of the years ended December 31, 2017, 2016 and 2015. The expense charged to the Company for the deferred compensation program was $1$0.9 million, $2$0.8 million and $2$0.6 million for the years ended December 31, ~~2014, 2013~~2017, 2016 and ~~2012,~~2015, respectively.

The Company is charged for its share of employee ~~benefits~~benefit expenses. These expenses include costs for funded and non-funded contributory and non-contributory defined benefit pension plans. Some of these benefits are based on final earnings and length of ~~service. Other benefits~~service while others are based on an account balance, which takes into consideration age, service and earnings during a career. The Company’s share of net expense for the pension plans was $1 million ~~$3 million and $3 million~~ for each of the years ended December 31, ~~2014, 2013~~2017, 2016 and ~~2012, respectively.~~

2015.

The Company is also charged for its share of the costs associated with welfare plans issued by Prudential Insurance. These expenses include costs related to medical, dental, life insurance and disability. The Company's share of net expense for the welfare plans was $2 million for each of the years ended December 31, 2017, 2016 and 2015.

Prudential Insurance sponsors voluntary savings plans for ~~the Company’s employees (“~~its employee 401(k) ~~plans”).~~plans. The ~~401(k)~~ plans provide for salary reduction contributions by employees and matching contributions by the Company of up to 4% of annual salary. The Company's expense ~~charged~~for its share of the voluntary savings plan was $0.5 million for each of the years ended December 31, 2017, 2016 and 2015.

The Company pays commissions and certain other fees to PAD in consideration for PAD’s marketing and underwriting of the Company’s products. Commissions and fees are paid by PAD to broker-dealers who sell the Company’s products. Commissions and fees paid by the Company ~~for the matching contribution~~ to ~~the 401(k) plans was $1~~PAD were $109 million, $108 million and $143 million for the years ended December 31, ~~2014, 2013~~2017, 2016 and ~~2012,~~2015, respectively.

~~Affiliated Asset Administration Fee Income~~

~~In accordance with a revenue sharing agreement with AST Investment Services, Inc.~~

The Company is charged for its share of corporate expenses incurred by Prudential Financial to benefit its businesses, such as advertising, executive oversight, external affairs and Prudential Investments LLC, the Company receives fee income calculated on contractholder separate account balances invested in the Advanced Series Trust. Income received from AST Investment Services, Inc. and Prudential Investments LLC related to this agreementphilanthropic activity. The Company’s share of corporate expenses was ~~$221~~$14 million ~~$227~~$10 million and ~~$226~~$11 million for the years ended December 31, ~~2014, 2013~~2017, 2016 and ~~2012,~~2015, respectively. ~~These revenues are recorded as “Asset administration fees and other income” in the Statements of Operations and Comprehensive Income.~~

~~Affiliated Investment Management Expenses~~

In accordance with an agreement with Prudential Investment Management, Inc. (“PIMI”), the Company pays investment management expenses to PIMI who acts as investment manager to certain Company general account and separate account assets. Investment management expenses paid to PIMI related to this agreement were $6 million, $7 million and $8 million for the years ended December 31, 2014, 2013 and 2012, respectively. These expenses are recorded as “Net investment income” in the Statements of Operations and Comprehensive Income.

~~Prudential Annuities Life Assurance Corporation~~

~~Notes to Financial Statements—(Continued)~~

~~Cost Allocation Agreements with Affiliates~~

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

Allocated lease expense was ~~$4 million, $10 million and $4 million for the years ended December 31, 2014, 2013 and 2012, respectively. Allocated sub-lease rental income, recorded as a reduction to lease expense was $1~~$3 million, $4 million and $4 million for the years ended December 31, ~~2014, 2013~~2017, 2016 and ~~2012,~~2015, respectively. Sub-lease rental income, recorded as a reduction to lease expense, was $0 million for each of the years ended December 31, 2017, 2016 and 2015. Assuming that the written service agreement between PALAC and PAIST continues indefinitely, ~~PALAC’s~~PALAC's allocated future minimum lease payments and sub-lease receipts per year and in aggregate as of December 31, ~~2014~~2017 are as follows:

   Lease    Sub-Lease
   (in thousands)
2015
   $ 3,397    $ -
2016
   3,397    -
2017
   3,397    -
2018
   3,397    -
2019
   3,114    -
2020 and thereafter
   -    -




Total
   $           16,702    $             -

~~The~~

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)



	Lease		Sub-Lease
	(in thousands)
2018	$	2,992	$	0
2019	2,742		0
2020	2,992		0
2021	2,992		0
2022	2,992		0
2023 and thereafter	0		0
Total	$	14,710	$	0

Affiliated Investment Management Expenses

In accordance with an agreement with PGIM, Inc. (“PGIM”), the Company pays ~~commissions~~investment management expenses to PGIM who acts as investment manager to certain Company general account and ~~certain other fees~~separate account assets. Investment management expenses paid to ~~PAD in consideration for PAD’s marketing and underwriting of the Company’s products. Commissions and fees are paid by PAD~~PGIM related to ~~broker-dealers who sold and service the Company’s products. Commissions and fees paid by the Company to PAD~~this agreement were ~~$177~~$13 million, ~~$172~~$11 million and ~~$186~~$5 million for the years ended December 31, ~~2014, 2013~~2017, 2016 and ~~2012,~~2015, respectively.

~~Debt Agreements~~

~~Short-term and Long-term Debt~~

The Company is authorized to borrow funds up to $2 billion from Prudential Financial and its affiliates to meet its capital and other funding needs. The Company had debt of $54 million and $5 million outstanding with Prudential Funding, LLC These expenses are recorded as ~~of December 31, 2014 and December 31, 2013, respectively. Total interest expense on debt with Prudential Funding, LLC was less than $1 million for~~“Net investment income” in the ~~years ended December 31, 2014, 2013 and 2012.~~

The Company had debt of $0 million and $200 million outstanding with Prudential Financial as of December 31, 2014 and December 31, 2013, respectively. This loan had a fixed interest rate of 4.49% and matured on December 29, 2014. In December 2014 we paid off the remaining portion of debt with a payment of $200 million. Total interest expense on debt with Prudential Financial was $9 million, $17 million and $27 million for the years ended December 31, 2014, 2013 and 2012, respectively.

~~Reinsurance Agreements~~

The Company uses reinsurance as part of its risk management and capital management strategies for certain of its optional living benefit features. Fees ceded under these agreements are included in “Realized investment gains (losses), net” on the StatementStatements of Operations and Comprehensive Income. The Company ceded fees of $274 million, $275 million and $269 million to Pruco Re for the years ended December 31, 2014, 2013 and 2012, respectively. The Company ceded fees of $1 million to Prudential Insurance for the years ended December 31, 2014, 2013 and 2012. The Company’s reinsurance payables related to affiliated reinsurance were $25 million as of both December 31, 2014 and December 31, 2013.

The Company’s reinsurance recoverables related to affiliated reinsurance were $2,997 million and $748 million as of December 31, 2014 and December 31, 2013, respectively. The assets are reflected in “Reinsurance recoverables” in the Company’s Statements of Financial Position. Realized gains (losses) were $1,975 million, $(1,260) million and $(286) million for the years ended December 31, 2014, 2013 and 2012, respectively. Changes in realized gains (losses) for the 2014 and 2013 periods were primarily due to changes in market conditions in each respective period.

Derivative Trades

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

See Note 11 for additional information.

Joint Ventures

The Company has made investments in joint ventures with certain subsidiaries of Prudential Financial. "Other long-term investments" includes $111 million and $102 million as of December 31, 2017 and 2016, respectively. "Net investment income" related to these ventures includes a gain of $9 million, $5 million and $0.1 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Affiliated Asset Administration Fee Income

The Company has a revenue sharing agreement with AST Investment Services, Inc. (“ASTISI”) and PGIM Investments LLC (“PGIM Investments”) whereby the Company receives fee income based on policyholders' separate account balances invested in the Advanced Series Trust and the Prudential Series Fund. Income received from ASTISI and PGIM Investments related to this agreement was $111 million, $112 million and $173 million for the years ended December 31, 2017, 2016 and 2015, respectively. These revenues are recorded as “Asset administration fees and other income” in the Statements of Operations and Comprehensive Income.

Affiliated Notes Receivable

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



	Maturity Dates			Interest Rates				2017		2016
								(in thousands)
U.S. Dollar floating rate notes			2028	2.77%	-	3.12	%	$	34,268	$	0
U.S. Dollar fixed rate notes	2027	-	2028	2.31%	-	14.85	%	3,877		40,925
Total long-term notes receivable - affiliated(1)								$	38,145	$	40,925


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

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

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial ~~Statements—~~Statements - (Continued)

~~Purchase/sale~~

Accrued interest receivable related to these loans was $0.2 million and $0.1 million as of ~~fixed maturities from/~~December 31, 2017 and 2016, respectively, and is included in “Other assets”. Revenues related to ~~an affiliate~~

~~During 2014,~~these loans were $0.7 million, $0.9 million and $1 million for the years ended December 31, 2017, 2016 and 2015, respectively, and are included in “Asset administration fees and other income”.

Affiliated Asset Transfers

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



Affiliate	Date	Transaction	Security Type	Fair Value		Book Value		APIC, Net of Tax Increase/ (Decrease)			Realized Investment Gain/ (Loss), Net of Tax
				(in thousands)
Gibraltar Life Insurance Co Ltd	August 2016	Sale	Fixed Maturities	$	11,559	$	11,485	$	0		$	48
Prudential Insurance	September 2016	Sale	Fixed Maturities	$	47,066	$	36,639	$	0		$	6,777
Pruco Re	September 2016	Transfer in	Fixed Maturities	$	91,586	$	80,732	$	(7,055	)	$	0
Pruco Life	January 2017	Sale	Fixed Maturities	$	29	$	29	$	0		$	0
Prudential Insurance	October 2017	Sale	Commercial Mortgages	$	131,953	$	128,529	$	0		$	2,226
Gibraltar Universal Life Reinsurance Company	October 2017	Purchase	Fixed Maturities	$	113,686	$	96,583	$	0		$	(11,117	)
Prudential Insurance	December 2017	Purchase	Other long-term investments - Derivatives	$	171,363	$	171,363	$	0		$	0
Prudential Insurance	December 2017	Sale	Fixed Maturities	$	13,793	$	7,113	$	0		$	4,342

Debt Agreements

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

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)



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

The total interest expense to the Company ~~sold fixed maturity securities~~related to ~~affiliated companies. These securities had an amortized cost of $36~~loans and other payables to affiliates was $66 million, $53 million and ~~a fair value of $44 million. The net difference between historic amortized cost~~$0.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Contributed Capital and Dividends

For the ~~fair value of $8 million was accounted for as a realized gain on the Company’s Statement of Operations and Comprehensive Income.~~

~~During 2014,~~year ended December 31, 2017, the Company ~~purchased commercial mortgage loans~~did not receive any capital contributions. In June of 2016, the Company received a capital contribution in the amount of $8,422 million from ~~an affiliated company. These securities had an amortized cost~~PAI, related to the Variable Annuities Recapture, as discussed in Note 1. For the year ended December 31, 2015, the Company did not receive any capital contributions.

In June, September and December of $62017, there was a $100 million, $200 million and ~~were purchased at~~$650 million return of capital, respectively, to PAI. In December of 2016, there was a ~~cost~~$1,140 million return of ~~$6 million. The~~capital to PAI. In June and December of 2015, the Company ~~also purchased fixed maturity securities from an affiliated company. These securities had an amortized cost~~paid dividends in the amounts of ~~$27~~$270 million and ~~were purchased at a cost of $30 million. The securities were recorded on the Company’s Statement of Financial Position.~~

~~During 2013,~~$180 million, respectively, to Prudential Financial.

Reinsurance with Affiliates

As discussed in Note 13, the Company sold fixed maturity securities to Prudential Financial. These securities had an amortized cost of $90 million and a fair value of $103 million. The net difference between historic amortized cost and the fair value was accounted for as an increase of $8 million to additional paid-in capital, net of taxes. The Company also sold commercial mortgage loans to an affiliated company. These securities had an amortized cost of $6 million and a fair value of $6 million. The net difference between historic amortized cost and the fair value was less than $1 million and was recorded as a realized investment gain on the Company’s Statement of Operations and Comprehensive Income.

~~14.~~participates in reinsurance transactions with certain affiliates.

16. CONTRACT WITHDRAWAL PROVISIONS

Most of the Company’s separate account liabilities are subject to discretionary withdrawal by contractholders at market value or with market value adjustment. Separate account assets, which are carried at fair value, are adequate to pay such withdrawals, which are generally subject to surrender charges ranging from 9% to 1% for contracts held less than 10 years.

~~15.~~

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Financial Statements - (Continued)

17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The unaudited quarterly results of operations for the years ended December 31, ~~2014~~2017 and ~~2013~~2016 are summarized in the table below:

   Three months ended
   March 31    June 30    September 30 December 31
2014    (in thousands)
Total revenues
   $ 311,249    $ 309,786    $ 308,006 $ 311,187
Total benefits and expenses
   216,896    242,370    197,204 324,387
Income (loss) from operations before income taxes and cumulative effect of
accounting change
   94,353    67,416    110,802 (13,200 )
Net income
   $ 77,498    $ 57,431    $ 96,037 $ 19,801






   Three months ended
   March 31    June 30    September 30 December 31
   (in thousands)
2013

Total revenues
   $ 290,576    $ 283,524    $ 250,028 $ 286,154
Total benefits and expenses
   93,190    96,720    (332,523 ) 72,431
Income from operations before income taxes and cumulative effect of
accounting change
   197,386    186,804    582,551 213,723
Net income
   $         147,388    $         143,670    $          400,296 $         156,738

~~Results~~



	Three Months Ended
	March 31			June 30			September 30			December 31

2017	(in thousands)
Total revenues	$	766,669		$	(726,666	)	$	1,949,155		$	314,778
Total benefits and expenses	386,941			(165,242		)	597,242			367,400
Income (loss) from operations before income taxes	379,728			(561,424		)	1,351,913			(52,622		)
Net income (loss)	$	262,358		$	(400,583	)	$	938,926		$	(884,205	)
2016
Total revenues	$	201,095		$	(892,563	)	$	719,985		$	(181,460	)
Total benefits and expenses	429,590			1,215,062			(149,250		)	122,236
Income (loss) from operations before income taxes	(228,495		)	(2,107,625		)	869,235			(303,696		)
Net income (loss)	$	(142,665	)	$	(1,316,230	)	$	569,649		$	(200,842	)

The variability in the quarterly results for ~~the fourth quarter of 2014 include a pre-tax expense of $8 million related to an out of period adjustment recorded by the Company~~2017 was primarily due to ~~additional DAC amortization related~~NPR gains/losses as a result of credit spread widening/tightening coupled with $882 million tax expense impact due to the ~~overstatement~~enactment of ~~reinsured reserves~~the Tax Act of 2017 on December 22, 2017. See Note 9 for additional information.

The variability in ~~prior periods. Results~~the quarterly results for ~~the fourth quarter of 2013 include a pre-tax expense of $22 million related to an out of period adjustment recorded by the Company~~2016 was primarily due to the Variable Annuities Recapture. See Note 1 for additional DAC amortization related to the overstatement of reinsured reserves in the third quarter of 2013. The overstatement resulted from the use of incorrect data inputs to calculate the impact of the market’s perception of our own non-performance risk on the reserves for certain annuities with guaranteed benefits. This item impacted only the third and fourth quarters of 2013 and had no impact to full year 2013 reported results. Management has evaluated the impact of all out of period adjustments, both individually and in the aggregate, and concluded that they are not material to the current quarter or to any previously reported quarterly or annual financial statements.

information.

122



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



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	Page
PART I	Item 1.	Business	4
	Item 1A.		Risk Factors			11	15
		Item 1B		Unresolved Staff Comments			21	23
		Item 2.		Properties			21	23
		Item 3.		Legal Proceedings			21	24
		Item 4.		Mine Safety Disclosures			21	24
PART II		Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			22	25
		Item 6.		Selected Financial Data			22	25
		Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			22	25
		Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			30	39
		Item 8.		Financial Statements and Supplementary Data			33	42
		Item 9.		Changes Inin and Disagreements with Accountants on Accounting and Financial Disclosure			33	42
		Item 9A.		Controls and Procedures			33	42
		Item 9B.		Other Information			33	42
PART III		Item 10.		Directors, Executive Officers and Corporate Governance			33	43
		Item 14.		Principal Accountant Fees and Services			33	43
PART IV		Item 15.		Exhibits and Financial Statement Schedules	44
	Item 16.	33 Form 10-K Summary	44
SIGNATURES					35	45


◦	Federal and State Securities Regulation Affecting Insurance Operations


	December 31, 2014

	Increase/(Decrease) in DAC			Increase/(Decrease) in DSI

	(in millions)
Increase in future rate of return by 100 basis points	$	46		$	27
Decrease in future rate of return by 100 basis points	$	(49	)	$	(29	)


		2014			2013

		(in millions)
Tax provision	$		9	$		332
Impact of:
Non taxable investment income			69			70
Tax credits			13			11
Other			-			1

Tax provision at statutory rate	$		91	$		413


	December 31, 2014							December 31, 2013

	Notional		Fair Value			Hypothetical Change in Fair Value		Notional		Fair Value			Hypothetical Change in Fair Value
	(in millions)
Financial assets with interest rate risk:
Financial Assets:
Fixed maturities, available for sale			$	2,801	$		(123)			$	3,264	$		(129)
Policy loans				13			-				12			-
Commercial loans				423			(17)				399			(18)
Derivatives (1):
Swaps	$	2,265		85			(74)	$	1,888		(31)			(85)
Options		6,942		12			(4)		13,271		10			(3)
Financial liabilities with interest rate risk:
Investment Contracts				(91)			3				(84)			3

Total estimated potential loss					$		(215)					$		(232)


(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)
~~(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.~~10-K, Registration No 33-44202, filed March 15, 2011.
(i)(d)
~~(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)
~~(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)
~~(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)
~~(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.

9.		~~None.~~

~~10.~~		~~None.~~

~~11.~~		~~Not applicable.~~

~~12.~~		~~Not applicable.~~

~~13.~~		~~Not applicable.~~

~~16.~~		~~None.~~

~~18.~~		~~None.~~

~~21.~~		~~Not applicable.~~

~~22.~~		~~None.~~

~~23.~~		~~Not applicable.~~

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.


	December 31, 2014		December 31, 2013
ASSETS
Fixed maturities, available-for-sale, at fair value (amortized cost, 2014: $2,609,253; 2013: $3,079,002)	$	2,800,593	$	3,264,216
Trading account assets, at fair value		6,131		6,677
Equity securities, available-for-sale, at fair value (cost, 2014: $14; 2013: $206)		17		208
Commercial mortgage and other loans, net of valuation allowance		422,563		398,991
Policy loans		13,355		12,454
Short-term investments		57,185		118,188
Other long-term investments		162,783		60,585

Total investments		3,462,627		3,861,319

Cash and cash equivalents		594		1,417
Deferred policy acquisition costs		1,114,431		1,345,504
Accrued investment income		25,008		32,169
Reinsurance recoverables		2,996,845		748,690
Value of business acquired		39,738		43,500
Deferred sales inducements		665,207		809,247
Receivables from parent and affiliates		60,490		44,643
Other assets		6,193		16,994
Separate account assets		44,101,699		46,626,828

TOTAL ASSETS	$	52,472,832	$	53,530,311

LIABILITIES AND EQUITY
LIABILITIES
Policyholders’ account balances	$	2,633,085	$	3,191,215
Future policy benefits and other policyholder liabilities		3,539,521		1,127,342
Payables to parent and affiliates		71,675		120,452
Cash collateral for loaned securities		5,285		47,896
Income taxes		299,084		358,818
Short-term debt		54,354		205,000
Other liabilities		105,972		113,125
Separate account liabilities		44,101,699		46,626,828

Total Liabilities		50,810,675		51,790,676


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		901,422		901,422
Retained earnings		673,613		764,846
Accumulated other comprehensive income		84,622		70,867

Total Equity		1,662,157		1,739,635

TOTAL LIABILITIES AND EQUITY	$	52,472,832	$	53,530,311


	2014		2013		2012
REVENUES
Premiums	$	34,903	$	28,019	$	21,824
Policy charges and fee income		806,327		809,242		796,995
Net investment income		164,011		217,883		277,651
Asset administration fees and other income		227,619		239,489		266,321
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities		(10)		-		(6,852)
Other-than-temporary impairments on fixed maturity securities transferred to other comprehensive income		10		-		6,594
Other realized investment gains (losses), net		7,368		(184,351)		(82,972)

Total realized investment gains (losses), net		7,368		(184,351)		(83,230)

Total revenues		1,240,228		1,110,282		1,279,561


BENEFITS AND EXPENSES
Policyholders’ benefits		137,135		29,727		124,316
Interest credited to policyholders’ account balances		211,058		(117,027)		60,830
Amortization of deferred policy acquisition costs		238,416		(385,561)		(188,042)
General, administrative and other expenses		394,248		402,679		424,764

Total benefits and expenses		980,857		(70,182)		421,868


INCOME FROM OPERATIONS BEFORE INCOME TAXES		259,371		1,180,464		857,693

Total income tax expense		8,604		332,372		223,634

NET INCOME		250,767		848,092		634,059


Other comprehensive income (loss), before tax:
Foreign currency translation adjustments		(63)		5		10
Net unrealized investment gains (losses):
Unrealized investment gains (losses) for the period		35,931		(108,769)		2,734
Reclassification adjustment for (gains) losses included in net income		(14,706)		(8,805)		(23,387)

Net unrealized investment gains (losses)		21,225		(117,574)		(20,653)

Other comprehensive income (loss), before tax:		21,162		(117,569)		(20,643)
Less: Income tax expense (benefit) related to other comprehensive income (loss)
Foreign currency translation adjustments		(23)		2		4
Net unrealized income (losses)		7,430		(41,151)		(7,222)

Total		7,407		(41,149)		(7,218)

Other comprehensive income (loss), net of taxes		13,755		(76,420)		(13,425)

COMPREHENSIVE INCOME	$	264,522	$	771,672	$	620,634


	Common stock		Additional paid-in capital		Retained earnings (Accumulated deficit)		Accumulated other comprehensive income (loss)		Total equity

Balance, December 31, 2011	$	2,500	$	882,670	$	(25,305)	$	160,712	$	1,020,577
Contributed capital		-		10,666		-		-		10,666
Distribution to parent		-		-		(408,000)		-		(408,000)
Comprehensive income:
Net income		-		-		634,059		-		634,059
Other comprehensive income (loss), net of taxes		-		-		-		(13,425)		(13,425)

Total comprehensive income										620,634


Balance, December 31, 2012	$	2,500	$	893,336	$	200,754	$	147,287	$	1,243,877
Contributed capital		-		8,086		-		-		8,086
Distribution to parent		-		-		(284,000)		-		(284,000)
Comprehensive income:
Net income		-		-		848,092		-		848,092
Other comprehensive income (loss), net of taxes		-		-		-		(76,420)		(76,420)

Total comprehensive income										771,672


Balance, December 31, 2013	$	2,500	$	901,422	$	764,846	$	70,867	$	1,739,635
Distribution to parent		-		-		(342,000)		-		(342,000)
Comprehensive income:
Net income		-		-		250,767		-		250,767
Other comprehensive income, net of taxes		-		-		-		13,755		13,755

Total comprehensive income										264,522


Balance, December 31, 2014	$	2,500	$	901,422	$	673,613	$	84,622	$	1,662,157



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


	December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Other-than- temporary Impairments in AOCI (3)
	(in thousands)
Fixed maturities, available-for-sale
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	6,324	$	22	$	10	$	6,336	$	-
Obligations of U.S. states and their political subdivisions		69,486		1,323		20		70,789		-
Foreign government bonds		29,738		7,621		4		37,355		-
Public utilities		198,277		19,909		1,593		216,593		-
All other corporate securities		1,743,110		146,872		4,891		1,885,091		-
Asset-backed securities (1)		144,324		5,078		391		149,011		(39	)
Commercial mortgage-backed securities		291,868		10,523		206		302,185		(10	)
Residential mortgage-backed securities (2)		126,126		7,113		6		133,233		(36	)

Total fixed maturities, available-for-sale	$	2,609,253	$	198,461	$	7,121	$	2,800,593	$	(85	)

Equity securities, available-for-sale
Common Stocks:
Public utilities	$	-	$	-	$	-	$	-
Mutual funds		14		3		-		17

Total equity securities, available-for-sale	$	14	$	3	$	-	$	17


	December 31, 2013 (4)
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Other-than- temporary Impairments in AOCI (3)
		(in thousands)
Fixed maturities, available-for-sale
U.S. Treasury securities and obligations of U.S. government authorities and agencies		$	6,382	$	36	$	34	$	6,384	$	-
Obligations of U.S. states and their political subdivisions			67,225		2,911		1,570		68,566		-
Foreign government bonds			25,437		5,717		-		31,154		-
Public utilities			197,718		12,628		3,141		207,205		-
All other corporate securities			2,061,809		162,780		9,152		2,215,437		-
Asset-backed securities (1)			182,888		6,513		1,509		187,892		(1,351	)
Commercial mortgage-backed securities			384,764		11,387		5,518		390,633		-
Residential mortgage-backed securities (2)			152,779		5,138		972		156,945		(40	)

Total fixed maturities, available-for-sale		$	3,079,002	$	207,110	$	21,896	$	3,264,216	$	(1,391	)

Equity securities, available-for-sale
Common Stocks:
Public utilities		$	192	$	-	$	-	$	192
Mutual funds			14		2		-		16

Total equity securities, available-for-sale		$	206	$	2	$	-	$	208


	Available-for-Sale
	Amortized Cost		Fair Value
	(in thousands)
Due in one year or less	$	171,429	$	173,444
Due after one year through five years		888,464		938,289
Due after five years through ten years		556,948		606,353
Due after ten years		430,094		498,078
Asset-backed securities		144,324		149,011
Commercial mortgage-backed securities		291,868		302,185
Residential mortgage-backed securities		126,126		133,233

Total	$	2,609,253	$	2,800,593


	December 31, 2014				December 31, 2013
	Cost		Fair Value		Cost		Fair Value
	(in thousands)
Total trading account assets - Equity securities	$	5,471	$	6,131	$	5,164	$	6,677


	December 31, 2014			December 31, 2013			December 31, 2012
	(in thousands)
Allowance for credit losses, beginning of year	$	1,256		$	2,177		$	1,501
Addition to / (release of) allowance for losses		(774	)		(921	)		676

Total ending balance (1)	$	482		$	1,256		$	2,177


	Debt Service Coverage Ratio - December 31, 2014
	Greater than 1.2X		1.0X to <1.2X		Less than 1.0X		Total
			(in thousands)
Loan-to-Value Ratio
0%-59.99%	$	262,853	$	4,295	$	10,489	$	277,637
60%-69.99%		115,708		468		-		116,176
70%-79.99%		25,034		1,458		-		26,492
Greater than 80%		-		-		-		-

Total commercial and agricultural mortgage loans	$	403,595	$	6,221	$	10,489	$	420,305


	Year Ended December 31, 2014		Year Ended December 31, 2013		Year Ended December 31, 2012
	(in thousands)
Amounts reclassified from AOCI (1)(2):
Net unrealized investment gains (losses):
Cash flow hedges - Currency/Interest rate (3)	$	148	$	(95)	$	(101)
Net unrealized investment gains (losses) on available-for-sale securities		14,558		8,900		23,488

Total net unrealized investment gains (losses) (4)		14,706		8,805		23,387

Total reclassifications for the period	$	14,706	$	8,805	$	23,387


	Gross			Unaffiliated Ceded			Affiliated Ceded			Net
2014
Policy charges and fee income - Life (1)	$	3,522		$	(856	)	$	-		$	2,666
Policy charges and fee income - Annuity		805,550			(1,889	)		-			803,661
Realized investment gains (losses), net		(1,967,588	)		-			1,974,956			7,368
Policyholders’ benefits		137,502			(367	)		-			137,135
General, administrative and other expenses	$	398,960		$	(838	)	$	(3,874	)	$	394,248

2013
Policy charges and fee income - Life (1)	$	3,472		$	(1,231	)	$	-		$	2,241
Policy charges and fee income - Annuity		809,549			(2,548	)		-			807,001
Realized investment gains (losses), net		1,076,184			-			(1,260,535	)		(184,351	)
Policyholders’ benefits		29,874			(147	)		-			29,727
General, administrative and other expenses	$	407,365		$	(776	)	$	(3,910	)	$	402,679

2012
Policy charges and fee income - Life (1)	$	3,522		$	(1,099	)	$	-		$	2,423
Policy charges and fee income - Annuity		796,711			(2,139	)		-			794,572
Realized investment gains (losses), net		202,568			-			(285,798	)		(83,230	)
Policyholders’ benefits		124,517			(201	)		-			124,316
General, administrative and other expenses	$	429,383		$	(784	)	$	(3,835	)	$	424,764


	December 31, 2014				December 31, 2013

	In the Event of Death		At Annuitization/ Accumulation (1)		In the Event of Death		At Annuitization/ Accumulation (1)

Variable Annuity Contracts	(in thousands)

*Return of net deposits*
Account value	$	38,410,155		N/A	$	40,828,166		N/A
Net amount at risk	$	353,902		N/A	$	407,488		N/A
Average attained age of contractholders		65 years		N/A		64 years		N/A
*Minimum return or contract value*
Account value	$	7,886,833	$	38,471,465	$	8,446,938	$	40,678,507
Net amount at risk	$	916,016	$	1,358,023	$	916,094	$	1,272,641
Average attained age of contractholders		67 years		64 years		66 years		64 years
Average period remaining until expected annuitization		N/A		0.1 years		N/A		0.2 year


	December 31, 2014				December 31, 2013

	Unadjusted Value		Adjusted Value		Unadjusted Value		Adjusted Value
Variable Annuity Contracts	(in thousands)
*Market value adjusted annuities*
Account value	$	1,244,131	$	1,251,084	$	1,554,743	$	1,580,487


	Sales Inducements
	(in thousands)
Balance as of December 31, 2011	$	445,841
Capitalization		59,269
Amortization - Impact of assumption and experience unlocking and true-ups		133,214
Amortization - All other		(94,752	)
Change in unrealized gains/losses		13,258

Balance as of December 31, 2012		556,830

Capitalization		31,370
Amortization - Impact of assumption and experience unlocking and true-ups		13,038
Amortization - All other		179,219
Change in unrealized gains/losses		28,790

Balance as of December 31, 2013		809,247

Capitalization		11,515
Amortization - Impact of assumption and experience unlocking and true-ups		45,417
Amortization - All other		(204,563	)
Change in unrealized gains/losses		3,591

Balance as of December 31, 2014	$	665,207


	As of December 31, 2014
	Level 1			Level 2		Level 3		Netting (1)		Total
	(in thousands)
Fixed maturities, available-for-sale:
U.S Treasury securities and obligations of U.S. government authorities and agencies	$	-		$	6,336	$	-	$	-	$	6,336
Obligations of U.S. states and their political subdivisions		-			70,789		-		-		70,789
Foreign government bonds		-			37,355		-		-		37,355
Corporate securities		-			1,985,614		116,070		-		2,101,684
Asset-backed securities		-			108,487		40,524		-		149,011
Commercial mortgage-backed securities		-	��		302,185		-		-		302,185
Residential mortgage-backed securities		-			133,233		-		-		133,233

Sub-total		-			2,643,999		156,594		-		2,800,593
Trading account assets:
Equity securities		6,131			-		-		-		6,131

Sub-total		6,131			-		-		-		6,131


Equity securities, available-for-sale		-			17		-		-		17
Short-term investments		57,185			-		-		-		57,185
Cash equivalents		-			-		225		-		225
Other long-term investments		-			118,846		633		(24,288)		95,191
Reinsurance recoverables		-			-		2,996,154		-		2,996,154
Receivables from parent and affiliates		-			18,748		22,320		-		41,068

Sub-total excluding separate account assets		63,316			2,781,610		3,175,926		(24,288)		5,996,564

Separate account assets (2)		-			44,101,699		-		-		44,101,699

Total assets	$	63,316		$	46,883,309	$	3,175,926	$	(24,288)	$	50,098,263

Future policy benefits (3)	$	-		$	-	$	3,112,411	$	-	$	3,112,411
Payables to parent and affiliates		-			21,249		-		(21,249)		-

Total liabilities	$	-		$	21,249	$	3,112,411	$	(21,249)	$	3,112,411


	As of December 31, 2013
	Level 1		Level 2		Level 3		Netting (1)		Total
	(in thousands)
Fixed maturities, available-for-sale:
U.S Treasury securities and obligations of U.S. government authorities and agencies	$	-	$	6,384	$	-	$	-	$	6,384
Obligations of U.S. states and their political subdivisions		-		68,566		-		-		68,566
Foreign government securities		-		31,154		-		-		31,154
Corporate securities		-		2,325,846		96,796		-		2,422,642
Asset-backed securities		-		124,103		63,789		-		187,892
Commercial mortgage-backed securities		-		390,633		-		-		390,633
Residential mortgage-backed securities		-		156,945		-		-		156,945

Sub-total		-		3,103,631		160,585		-		3,264,216
Trading account assets:
Equity securities		6,364		-		313		-		6,677

Sub-total		6,364		-		313		-		6,677


Equity securities, available-for-sale		-		16		192		-		208
Short-term investments		118,188		-		-		-		118,188
Other long-term investments		-		73,535		486		(73,535)		486
Reinsurance recoverables		-		-		748,005		-		748,005
Receivables from parent and affiliates		-		19,071		6,347		-		25,418

Sub-total excluding separate account assets		124,552		3,196,253		915,928		(73,535)		4,163,198

Separate account assets (2)		1,190,903		45,435,925		-		-		46,626,828

Total assets	$	1,315,455	$	48,632,178	$	915,928	$	(73,535)	$	50,790,026

Future policy benefits (3)	$	-	$	-	$	778,226	$	-	$	778,226
Payables to parent and affiliates		-		94,580		-		(72,822)		21,758

Total liabilities	$	-	$	94,580	$	778,226	$	(72,822)	$	799,984


	As of December 31, 2014
	Internal (1)		External (2)		Total
	(in thousands)
Corporate securities	$	99,209	$	16,861	$	116,070
Asset-backed securities		-		40,524		40,524
Cash equivalents		225		-		225
Other long-term investments		-		633		633
Reinsurance recoverables		2,996,154		-		2,996,154
Receivables from parent and affiliates		-		22,320		22,320

Total assets	$	3,095,588	$	80,338	$	3,175,926

Future policy benefits		3,112,411		-		3,112,411

Total liabilities	$	3,112,411	$	-	$	3,112,411


	As of December 31, 2013
	Internal (1)		External (2)		Total
	(in thousands)
Corporate securities	$	94,730	$	2,066	$	96,796
Asset-backed securities		-		63,789		63,789
Equity securities		192		313		505
Other long-term investments		-		486		486
Reinsurance recoverables		748,005		-		748,005
Receivables from parent and affiliates		-		6,347		6,347

Total assets	$	842,927	$	73,001	$	915,928

Future policy benefits		778,226		-		778,226

Total liabilities	$	778,226	$	-	$	778,226


	As of December 31, 2014
	Fair Value		Primary Valuation Techniques	Unobservable Inputs	Minimum			Maximum			Weighted Average	Impact of Increase in Input on Fair Value (1)
	(in thousands)
Assets:
Corporate securities	$	99,209	Discounted cash flow	Discount rate		3.55	%		11.75	%	3.96%	Decrease
Reinsurance recoverables	$	2,996,154	Fair values are determined in the same manner as future policy benefits
Liabilities:

Future policy benefits (2)	$	3,112,411	Discounted cash flow	Lapse rate (3)		0	%		14	%		Decrease

				NPR spread (4)		0.00	%		1.30	%		Decrease
				Utilization rate (5)		63	%		95	%		Increase
				Withdrawal rate (6)		74	%		100	%		Increase
				Mortality rate (7)		0	%		14	%		Decrease
				Equity Volatility curve		17	%		28	%		Increase

	As of December 31, 2013
	Fair Value		Primary Valuation Techniques	Unobservable Inputs	Minimum			Maximum			Weighted Average	Impact of Increase in Input on Fair Value (1)
	(in thousands)
Assets:
Corporate securities	$	94,730	Discounted cash flow	Discount rate		3.73	%		12.06	%	3.90%	Decrease
Reinsurance recoverables	$	748,005	Fair values are determined in the same manner as future policy benefits
Liabilities:

Future policy benefits (2)	$	778,226	Discounted cash flow	Lapse rate (3)		0	%		11	%		Decrease

				NPR spread (4)		0.08	%		1.09	%		Decrease
				Utilization rate (5)		70	%		94	%		Increase
				Withdrawal rate (6)		86	%		100	%		Increase
				Mortality rate (7)		0	%		13	%		Decrease
				Equity Volatility curve		15	%		28	%		Increase


	Year Ended December 31, 2014
	Fixed Maturities Available-For-Sale

	Corporate Securities		Asset- Backed Securities		Commercial Mortgage-Backed Securities		Trading Account Assets - Equity Securities		Equity Securities Available- for-Sale
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	96,796	$	63,789	$	-	$	313	$	192
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		1,592		-		-		-		-
Asset management fees and other income		-		-		-		15		-
Included in other comprehensive income (loss)		(846)		196		(83)		-		-
Net investment income		5,024		120		-		-		-
Purchases		20,720		14,933		52,518		-		-
Sales		(202)		-		-		-		(192)
Issuances		-		-		-		-		-
Settlements		(7,014)		(40,337)		-		(328)		-
Transfers into Level 3 (1)		-		28,152		-		-		-
Transfers out of Level 3 (1)		-		(26,329)		(52,435)		-		-

Fair Value, end of period assets/(liabilities)	$	116,070	$	40,524	$	-	$	-	$	-

Unrealized gains (losses) for the period relating to those
Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	-	$	-	$	-	$	-	$	-
Asset management fees and other income	$	-	$	-	$	-	$	15	$	-

	Year Ended December 31, 2014
	Cash Equivalents		Other Long-term Investments		Reinsurance Recoverables		Receivables from parent and affiliates		Future Policy Benefits
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	-	$	486	$	748,005	$	6,347		(778,226)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		-		-		2,013,931		-		(2,088,505)
Asset management fees and other income		-		(14)		-		-		-
Included in other comprehensive income (loss)		-		-		-		(420)		-
Net investment income		-		-		-		-		-
Purchases		400		166		234,218		19,351		-
Sales		(175)		-		-		-		-
Issuances		-		-		-		-		(245,680)
Settlements		-		(5)		-		-		-
Transfers into Level 3 (1)		-		-		-		1,985		-
Transfers out of Level 3 (1)		-		-		-		(4,943)		-

Fair Value, end of period assets/(liabilities)	$	225	$	633	$	2,996,154	$	22,320		(3,112,411)

Unrealized gains (losses) for the period relating to those
Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	-	$	-	$	2,040,048	$	-		(2,115,680)
Asset management fees and other income	$	-	$	(14)	$	-	$	-		-


	Year Ended December 31, 2013
	Fixed Maturities Available-For-Sale						Trading Account Assets - Equity Securities		Equity Securities Available- for-Sale
	Corporate Securities		Asset- Backed Securities		Commercial Mortgage- Backed		Trading Account Assets - Equity Securities		Equity Securities Available- for-Sale
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	95,555	$	69,298	$	-	$	207	$	-
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		49		-		-		-		-
Asset management fees and other income		-		-		-		106		-
Included in other comprehensive income (loss)		(4,179)		(470)		18		-		-
Net investment income		4,729		454		-		-		-
Purchases		4,817		40,868		17,169		-		192
Sales		-		-		-		-		-
Issuances		-		-		-		-		-
Settlements		(4,629)		(13,924)		-		-		-
Transfers into Level 3 (1)		4,976		-		-		-		-
Transfers out of Level 3 (1)		(4,522)		(29,441)		(17,187)		-		-
Other (3)		-		(2,996)		-		-		-

Fair Value, end of period assets/(liabilities)	$	96,796	$	63,789	$	-	$	313	$	192

Unrealized gains (losses) for the period relating to those
Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	-	$	-	$	-	$	-	$	-
Asset management fees and other income	$	-	$	-	$	-	$	107	$	-

	Year Ended December 31, 2013
	Other Long-term Investments		Reinsurance Recoverables		Receivables from parent and affiliates		Future Policy Benefits
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	1,054	$	1,732,094	$	1,995	$	(1,793,137)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		(739)		(1,220,073)		-		1,262,310
Asset management fees and other income		60		-		-		-
Included in other comprehensive income (loss)		-		-		99		-
Net investment income		-		-		-		-
Purchases		111		235,984		6,250		-
Sales		-		-		(2,996)		-
Issuances		-		-		-		(247,399)
Settlements		-		-		-		-
Transfers into Level 3 (1)		-		-		-		-
Transfers out of Level 3 (1)		-		-		(1,997)		-
Other (3)		-		-		2,996		-

Fair Value, end of period assets/(liabilities)	$	486	$	748,005	$	6,347	$	(778,226)

Unrealized gains (losses) for the period relating to those
Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	-	$	(1,166,676)	$	-	$	1,207,600
Asset management fees and other income	$	51	$	-	$	-	$	-


	Year Ended December 31, 2012
	Fixed Maturities Available-For-Sale

	Corporate Securities			Asset Backed Securities			Trading Account Assets - Equity		Other Long- Term Investments			Reinsurance Recoverables
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	89,658		$	48,563		$	203	$	1,213		$	1,747,757
Total gains or (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		1,606			-			-		(2,326	)		(244,519	)
Asset management fees and other income		-			-			4		(3	)		-
Included in other comprehensive income (loss)		2,271			1,109			-		-			-
Net investment income		4,634			649			-		-			-
Purchases		5,400			30,311			-		2,166			228,856
Sales		(29	)		-			-		-			-
Issuances		-			-			-		-			-
Settlements		(8,286	)		(11,334	)		-		4			-
Transfers into Level 3 (1)		11,992			-			-		-			-
Transfers out of Level 3 (1)		(11,691	)		-			-		-			-

Fair Value, end of period assets/(liabilities)	$	95,555		$	69,298		$	207	$	1,054		$	1,732,094

Unrealized gains (losses) for the period relating to those
Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	-		$	-		$	-	$	(1,349	)	$	(194,274	)
Asset management fees and other income	$	-		$	-		$	4	$	(3	)	$	-

	Year Ended December 31, 2012

	Receivables from parent and affiliates			Future Policy Benefits
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	-		$	(1,783,595	)
Total gains or (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		-			230,349
Asset management fees and other income		-			-
Included in other comprehensive income (loss)		(5	)		-
Net investment income		-			-
Purchases		2,000			-
Sales		-			-
Issuances		-			(239,891	)
Settlements		-			-
Transfers into Level 3 (1)		-			-
Transfers out of Level 3 (1)		-			-

Fair Value, end of period assets/(liabilities)	$	1,995		$	(1,793,137	)

Unrealized gains (losses) for the period relating to those
Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	-		$	179,477
Asset management fees and other income	$	-		$	-

~~Large accelerated filer~~

~~Accelerated filer~~

~~Non-accelerated filer~~

~~Smaller reporting company~~