0000881453 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:~~USTreasuryAndGovernmentMember 2019-09-30~~USStatesAndPoliticalSubdivisionsMember 2020-06-30

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended ~~September~~June 30, ~~2019~~2020



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

For the Transition Period from to

Commission File Number 033-44202

_________________________________________________________________

Prudential Annuities Life Assurance Corporation

(Exact Name of Registrant as Specified in its Charter)



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

One Corporate Drive

Shelton, CT 06484

(203) 926-1888

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:



Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Not Applicable	Not Applicable	Not Applicable

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of the Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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



Large Accelerated Filer	☐	Accelerated Filer	☐
Non-accelerated Filer	☒	Smaller Reporting Company	☐
		Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of ~~November 13, 2019,~~August 12, 2020, 25,000 shares of the registrant’s Common Stock (par value $100) consisting of 100 voting shares and 24,900 non-voting shares were outstanding. As of such date, Prudential Annuities, Inc., an indirect wholly-owned subsidiary of Prudential Financial, Inc., a New Jersey corporation, owned all of the registrant’s Common Stock.

Prudential Annuities Life Assurance Corporation meets the conditions set

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

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

Table of Contents

TABLE OF CONTENTS



			Page
PART I FINANCIAL INFORMATION
	Item 1.	Financial Statements:
		Unaudited Interim Statements of Financial Position as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019	4
		Unaudited Interim Statements of Operations and Comprehensive Income (Loss) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	5
		Unaudited Interim Statements of Equity for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	6
		Unaudited Interim Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	87
		Notes to Unaudited Interim Financial Statements	98
		1. Business and Basis of Presentation	98
		2. Significant Accounting Policies and Pronouncements	109
		3. Investments	1214
		4. Derivative Instruments	2124
		5. Fair Value of Assets and Liabilities	2730
		6. Reinsurance	3740
		7. Income Taxes	4043
		8. Equity	4043
		9. Related Party Transactions	4345
		10. Commitments and Contingent Liabilities	4750
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4851
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5862
	Item 4.	Controls and Procedures	5862
PART II OTHER INFORMATION			5963
	Item 1.	Legal Proceedings	5963
	Item 1A.	Risk Factors	5963
	Item 6.	Exhibits	6065
SIGNATURES			6166

Table of Contents

FORWARD-LOOKING STATEMENTS

Certain of the statements included in this Quarterly Report on Form 10-Q ~~including but not limited to those in Management’s Discussion and Analysis of Financial Condition and Results of Operations,~~ constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Prudential Annuities Life Assurance Corporation. There can be no assurance that future developments affecting Prudential Annuities Life Assurance Corporation will be those anticipated by management. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (1) the ongoing impact of the COVID-19 pandemic on the global economy, financial markets and our business, (2) losses on investments or financial contracts due to deterioration in credit quality or value, or counterparty default; ~~(2)~~(3) losses on insurance products due to mortality experience or policyholder behavior experience that differs significantly from our expectations when we price our products; ~~(3)~~(4) changes in interest rates and equity prices that may (a) adversely impact the profitability of our products, the value of separate accounts supporting these products or the value of assets we manage, (b) result in losses on derivatives we use to hedge risk or increase collateral posting requirements and (c) limit opportunities to invest at appropriate returns; ~~(4)~~(5) guarantees within certain of our products which are market sensitive and may decrease our earnings or increase the volatility of our results of operations or financial position; ~~(5)~~(6) liquidity needs resulting from (a) derivative collateral market exposure, (b) asset/liability mismatches, (c) the lack of available funding in the financial markets or (d) unexpected cash demands due to severe mortality calamity or lapse events; ~~(6)~~(7) financial or customer losses, or regulatory and legal actions, due to inadequate or failed processes or systems, external events and human error or misconduct such as (a) disruption of our systems and data, (b) an information security breach, (c) a failure to protect the privacy of sensitive data or (d) reliance on third ~~parties; (7)~~parties or (e) labor and employment matters; (8) changes in the regulatory landscape, including related to (a) financial sector regulatory reform, (b) changes in tax laws, (c) fiduciary rules and other standards of care, (d) state insurance laws and developments regarding group-wide supervision, capital and reserves, and (e) privacy and cybersecurity regulation; ~~(8)~~(9) technological changes which may adversely impact companies in our investment portfolio or cause insurance experience to deviate from our assumptions; ~~(9)~~(10) ratings downgrades; ~~(10)~~(11) market conditions that may adversely affect the sales or persistency of our products; ~~(11)~~(12) competition; and ~~(12)~~(13) reputational damage. Prudential Annuities Life Assurance Corporation does not intend, and is under no obligation, to update any particular forward-looking statement included in this document. See “Risk Factors” included in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 and the Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 for discussion of certain risks relating to our business and investment in our securities.

Table of Contents

PART I - Financial Information

Item 1. Financial Statements

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Financial Position

~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 (in thousands, except share amounts)


	September 30, 2019			December 31, 2018			June 30, 2020			December 31, 2019
ASSETS
Fixed maturities, available-for-sale, at fair value (amortized cost: 2019 – $12,076,220; 2018 – $10,186,465)	$	13,172,795		$	9,771,673
Fixed maturities, trading, at fair value (amortized cost: 2019 – $349,424; 2018 – $294,549)	392,749			289,752
Equity securities, at fair value (cost: 2019 – $68,391; 2018 – $18,765)	71,983			20,613
Commercial mortgage and other loans	1,335,206			1,353,478
Fixed maturities, available-for-sale, at fair value (amortized cost, 2020: $14,517,513; 2019: $12,465,746; 2020-net of $982 allowance for credit losses)							$	16,894,879		$	13,202,365
Fixed maturities, trading, at fair value (amortized cost, 2020: $525,032; 2019: $349,428)							620,449			383,198
Equity securities, at fair value (cost, 2020: $66,470; 2019: $63,647)							72,065			67,503
Commercial mortgage and other loans (net of $6,879 and $2,663 allowance for credit losses at June 30, 2020 and December 31, 2019, respectively)(1)							1,644,320			1,471,522
Policy loans	12,352			12,805			12,257			12,366
Short-term investments	618,443			37,568			3,642,940			335,358
Other invested assets (includes $10,412 and $50,945 measured at fair value at September 30, 2019 and December 31, 2018, respectively)	427,504			348,541
Other invested assets (includes $13,524 and $10,492 of assets measured at fair value at June 30, 2020 and December 31, 2019, respectively)							529,040			474,013
Total investments	16,031,032			11,834,430			23,415,950			15,946,325
Cash and cash equivalents	5,923,320			4,503,534			6,554,856			2,795,163
Deferred policy acquisition costs(1)	4,459,791			4,447,505			4,243,190			4,455,683
Accrued investment income	98,662			90,895			116,317			102,724
Reinsurance recoverables	710,596			572,102			860,518			621,510
Income taxes(1)	1,377,002			964,521			1,765,762			1,202,714
Value of business acquired	30,647			33,222			27,246			30,025
Deferred sales inducements	836,342			889,598			751,671			812,724
Receivables from parent and affiliates	15,101			46,381			89,092			62,765
Other assets	88,211			85,310			312,198			139,933
Separate account assets	32,057,438			31,210,346			29,379,668			32,665,431
TOTAL ASSETS	$	61,628,142		$	54,677,844		$	67,516,468		$	58,834,997
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits	$	16,193,345		$	9,368,986		$	25,263,142		$	12,932,461
Policyholders’ account balances	6,031,569			5,353,596			6,859,669			6,180,359
Payables to parent and affiliates	54,152			30,846			480,793			185,156
Cash collateral for loaned securities	0			384
Short-term debt	0			140,569			353,849			242,094
Long-term debt	653,596			787,596			299,747			419,418
Reinsurance payables	227,948			232,937			210,579			235,318
Other liabilities	645,867			811,016
Other liabilities(1)							893,740			447,405
Separate account liabilities	32,057,438			31,210,346			29,379,668			32,665,431
Total liabilities	55,863,915			47,936,276			63,741,187			53,307,642
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 10)
EQUITY
Common stock, $100 par value; 25,000 shares authorized, issued and outstanding	2,500			2,500			2,500			2,500
Additional paid-in capital	5,383,936			6,120,436			4,762,936			5,142,936
Retained earnings	(353,672		)	943,005
Retained earnings / (accumulated deficit)							(2,625,087		)	(46,693		)
Accumulated other comprehensive income (loss)	731,463			(324,373		)	1,634,932			428,612
Total equity	5,764,227			6,741,568			3,775,281			5,527,355
TOTAL LIABILITIES AND EQUITY	$	61,628,142		$	54,677,844		$	67,516,468		$	58,834,997

(1) June 30, 2020 amounts include the impacts of the January 1, 2020 adoption of ASU 2016-13. See Note 2 for details.

See Notes to Unaudited Interim Financial Statements

Table of Contents

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Operations and Comprehensive Income (Loss)

Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 (in thousands)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
REVENUES
Premiums	$	12,506		$	13,679		$	48,242		$	48,008		$	15,013		$	18,471		$	31,592		$	35,736
Policy charges and fee income	527,152			550,592			1,559,874			1,653,225			455,682			524,788			952,551			1,032,722
Net investment income	149,367			103,164			406,408			300,035			158,426			131,972			281,463			257,041
Asset administration fees and other income	120,927			93,320			345,520			291,460			105,849			115,205			250,982			224,593
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities	(769		)	(2,523		)	(2,626		)	(2,960		)
Other-than-temporary impairments on fixed maturity securities transferred to other comprehensive income (loss)	0			0			(168		)	0
Other realized investment gains (losses), net	(536,498		)	67,796			(2,770,907		)	636,782
Total realized investment gains (losses), net	(537,267		)	65,273			(2,773,701		)	633,822
Realized investment gains (losses), net													(3,375,764		)	(894,215		)	(4,133,455		)	(2,236,434		)
Total revenues	272,685			826,028			(413,657		)	2,926,550			(2,640,794		)	(103,779		)	(2,616,867		)	(686,342		)
BENEFITS AND EXPENSES
Policyholders’ benefits	69,833			49,931			125,673			113,624			(37,768		)	47,890			204,761			55,840
Interest credited to policyholders’ account balances	56,947			82,313			100,729			213,903			(33,254		)	33,355			79,716			43,782
Amortization of deferred policy acquisition costs	137,157			190,632			167,198			514,457			(194,304		)	40,132			235,214			30,041
Commission expense	220,828			192,951			672,110			644,628			191,055			221,090			409,129			451,282
General, administrative and other expenses	74,008			46,038			193,981			132,199			51,771			61,810			130,883			119,973
Total benefits and expenses	558,773			561,865			1,259,691			1,618,811			(22,500		)	404,277			1,059,703			700,918
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES	(286,088		)	264,163			(1,673,348		)	1,307,739			(2,618,294		)	(508,056		)	(3,676,570		)	(1,387,260		)
Income tax expense (benefit)	(58,576		)	(148,073		)	(377,042		)	57,278			(862,080		)	(339,286		)	(1,099,568		)	(318,466		)
NET INCOME (LOSS)	$	(227,512	)	$	412,236		$	(1,296,306	)	$	1,250,461		$	(1,756,214	)	$	(168,770	)	$	(2,577,002	)	$	(1,068,794	)
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments	(228		)	(64		)	(244		)	(1,192		)	2			(116		)	(481		)	(16		)
Net unrealized investment gains (losses)	628,916			(149,116		)	1,336,746			(383,434		)	247,379			423,402			1,527,467			707,830
Total	628,688			(149,180		)	1,336,502			(384,626		)	247,381			423,286			1,526,986			707,814
Less: Income tax expense (benefit) related to other comprehensive income (loss)	132,024			(31,328		)	280,666			(80,773		)	51,949			88,891			320,666			148,642
Other comprehensive income (loss), net of tax	496,664			(117,852		)	1,055,836			(303,853		)
Other comprehensive income (loss), net of taxes													195,432			334,395			1,206,320			559,172
Comprehensive income (loss)	$	269,152		$	294,384		$	(240,470	)	$	946,608		$	(1,560,782	)	$	165,625		$	(1,370,682	)	$	(509,622	)

See Notes to Unaudited Interim Financial Statements

Table of Contents

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Equity

Three and ~~Nine~~Six Months Ended ~~September~~June 30, 2020 and 2019 (in thousands)


	Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Equity			Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)		Total Equity
Balance, December 31, 2018	$	2,500	$	6,120,436		$	943,005		$	(324,373	)	$	6,741,568
Balance, December 31, 2019															$	2,500	$	5,142,936		$	(46,693	)	$	428,612	$	5,527,355
Cumulative effect of adoption of accounting changes(1)						(371		)	0			(371		)						(1,392		)			(1,392		)
Return of capital			(245,000		)							(245,000		)			(207,000		)						(207,000		)
Comprehensive income (loss):
Net income (loss)						(900,024		)				(900,024		)						(820,788		)			(820,788		)
Other comprehensive income (loss), net of tax									224,777			224,777											1,010,888		1,010,888
Total comprehensive income (loss)												(675,247		)											190,100
Balance, March 31, 2019	2,500		5,875,436			42,610			(99,596		)	5,820,950
Balance, March 31, 2020															$	2,500	$	4,935,936		$	(868,873	)	$	1,439,500	$	5,509,063
Return of capital			(246,500		)							(246,500		)			(173,000		)						(173,000		)
Comprehensive income (loss):
Net income (loss)						(168,770		)				(168,770		)						(1,756,214		)			(1,756,214		)
Other comprehensive income (loss), net of tax									334,395			334,395											195,432		195,432
Total comprehensive income (loss)												165,625													(1,560,782		)
Balance, June 30, 2019	2,500		5,628,936			(126,160		)	234,799			5,740,075
Return of capital			(245,000		)							(245,000		)
Comprehensive income (loss):
Net income (loss)						(227,512		)				(227,512		)
Other comprehensive income (loss), net of tax									496,664			496,664
Total comprehensive income (loss)												269,152
Balance, September 30, 2019	$	2,500	$	5,383,936		$	(353,672	)	$	731,463		$	5,764,227
Balance, June 30, 2020															$	2,500	$	4,762,936		$	(2,625,087	)	$	1,634,932	$	3,775,281



	Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Equity
Balance, December 31, 2018	$	2,500	$	6,120,436		$	943,005		$	(324,373	)	$	6,741,568
Cumulative effect of adoption of accounting changes(2)						(371		)				(371		)
Return of capital			(245,000		)							(245,000		)
Comprehensive income (loss):
Net income (loss)						(900,024		)				(900,024		)
Other comprehensive income (loss), net of tax									224,777			224,777
Total comprehensive income (loss)												(675,247		)
Balance, March 31, 2019	$	2,500	$	5,875,436		$	42,610		$	(99,596	)	$	5,820,950
Return of capital			(246,500		)							(246,500		)
Comprehensive income (loss):
Net income (loss)						(168,770		)				(168,770		)
Other comprehensive income (loss), net of tax									334,395			334,395
Total comprehensive income (loss)												165,625
Balance, June 30, 2019	$	2,500	$	5,628,936		$	(126,160	)	$	234,799		$	5,740,075

(1) Includes the impact from the adoption of ~~ASUs~~ASU 2016-13. See Note 2.

(2) Includes the impact from the adoption of ASU 2017-08 and 2017-12. See Note 2.

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

~~Unaudited Interim~~2 to the Financial Statements ~~of Equity - Continued~~

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

  Common
Stock

Additional
Paid-in
Capital
Retained Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total Equity
Balance, December 31, 2017 $ 2,500
$ 7,145,436
$ (776,762 ) $ (90,124 ) $ 6,281,050
Cumulative effect of adoption of ASU 2016-01 337
(3 ) 334
Cumulative effect of adoption of ASU 2018-02 36,714
(36,714 ) 0
Return of capital (300,000 ) (300,000 )
Comprehensive income (loss):
Net income (loss) 635,679
635,679
Other comprehensive income (loss), net of tax (139,866 ) (139,866 )
Total comprehensive income (loss) 495,813
Balance, March 31, 2018 2,500
6,845,436
(104,032 ) (266,707 ) 6,477,197
Return of capital (250,000 ) (250,000 )
Comprehensive income (loss):
Net income (loss) 202,546
202,546
Other comprehensive income (loss), net of tax (46,135 ) (46,135 )
Total comprehensive income (loss) 156,411
Balance, June 30, 2018 2,500
6,595,436
98,514
(312,842 ) 6,383,608
Return of capital (250,000 ) (250,000 )
Comprehensive income (loss):
Net income (loss) 412,236
412,236
Other comprehensive income (loss), net of tax (117,852 ) (117,852 )
Total comprehensive income (loss) 294,384
Balance, September 30, 2018 $ 2,500
$ 6,345,436
$ 510,750
$ (430,694 ) $ 6,427,992

included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information.

See Notes to Unaudited Interim Financial Statements

Table of Contents

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Cash Flows

~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 (in thousands)


	2019			2018			2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(1,296,306	)	$	1,250,461		$	(2,577,002	)	$	(1,068,794	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Policy charges and fee income	(854		)	(2,147		)	59			(618		)
Realized investment (gains) losses, net	2,773,701			(633,822		)	4,133,455			2,236,434
Depreciation and amortization	453			6,227			(327		)	(69		)
Interest credited to policyholders’ account balances	100,729			213,903			79,716			43,782
Change in:
Future policy benefits	839,804			795,294			709,681			518,143
Accrued investment income	(7,767		)	12,103			(13,593		)	(7,254		)
Net receivables from/payables to parent and affiliates	3,589			1,490			(12,182		)	(5,904		)
Deferred sales inducements	(568		)	(1,836		)	(847		)	(447		)
Deferred policy acquisition costs	(155,778		)	241,665			79,404			(180,893		)
Income taxes	(693,049		)	(175,460		)	(883,346		)	(238,375		)
Reinsurance recoverables, net	(27,373		)	(52,210		)	(27,746		)	(3,031		)
Derivatives, net	3,144,906			(3,094,289		)	8,242,322			777,708
Other, net ~~(1)~~	25,324			110,198			(12,169		)	13,117
Cash flows from (used in) operating activities	4,706,811			(1,328,423		)	9,717,425			2,083,799
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale	596,626			2,144,273			464,413			404,235
Fixed maturities, trading	111			99,623			70,843			73
Equity securities	2,534			6,280			14,369			2,534
Commercial mortgage and other loans	247,723			137,766			21,007			117,869
Policy loans	1,256			553			529			1,069
Other invested assets	23,072			16,864			13,743			20,825
Short-term investments	491,254			981,355			2,829,379			384,990
Payments for the purchase/origination of:
Fixed maturities, available for sale	(2,646,186		)	(1,939,203		)	(2,399,294		)	(2,481,050		)
Fixed maturities, trading	(54,862		)	(208,007		)	(243,881		)	(54,862		)
Equity securities	(51,229		)	(3,253		)	(15,863		)	(26,246		)
Commercial mortgage and other loans	(239,275		)	(113,638		)	(207,350		)	(83,787		)
Policy loans	(288		)	(110		)	(73		)	(168		)
Other invested assets	(128,402		)	(99,983		)	(72,413		)	(74,670		)
Short-term investments	(1,071,423		)	(291,399		)	(6,134,853		)	(353,614		)
Notes receivable from parent and affiliates, net	34,008			2,967			0			34,008
Derivatives, net	(76,670		)	19,929			(626,097		)	(31,536		)
Other, net	0			(69		)	0			0
Cash flows from (used in) investing activities	(2,871,751		)	753,948			(6,285,541		)	(2,140,330		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account deposits	3,034,018			2,128,976			2,768,113			1,981,101
Ceded policyholders' account deposits	(13,881		)	(28,992		)	(30,493		)	(11,204		)
Policyholders' account withdrawals	(2,452,263		)	(1,979,186		)	(2,155,125		)	(1,670,995		)
Ceded policyholders' account withdrawals	28,760			20,786			22,107			23,598
Cash collateral for loaned securities	(384		)	(10,236		)	0			(384		)
Repayments of debt (maturities longer than 90 days)	(274,569		)	0			0			(274,569		)
Net increase/(decrease) in short-term borrowing							(7,916		)	0
Drafts outstanding	(455		)	(2,550		)	137,072			(4,650		)
Distribution to Parent	(736,500		)	(800,000		)	(380,000		)	(491,500		)
Other, net							(25,949		)	0
Cash flows from (used in) financing activities	(415,274		)	(671,202		)	327,809			(448,603		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	1,419,786			(1,245,677		)	3,759,693			(505,134		)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	4,503,534			1,639,939			2,795,163			4,503,534
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	5,923,320		$	394,262		$	6,554,856		$	3,998,400

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

Significant Non-Cash Transactions

There were no significant non-cash transactions for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019.

See Notes to Unaudited Interim Financial Statements

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

1. BUSINESS AND BASIS OF PRESENTATION

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

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

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

~~The Company resumed offering annuity products to new investors (except in New York) when it launched a new fixed indexed annuity and a new deferred income annuity in 2018.~~

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

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

Effective April 1, 2016, the Company reinsured the variable annuity base contracts, along with the living benefit guarantees, from Pruco Life Insurance Company ("Pruco Life"), excluding the ~~PLNJ~~Pruco Life Insurance Company of New Jersey ("PLNJ") business which was reinsured to Prudential Insurance Company of America (“Prudential Insurance”), in each case under a coinsurance and modified coinsurance agreement. This reinsurance agreement covers new and in force business and excludes business reinsured externally. In addition, the living benefit hedging program related to the living benefit guarantees as well as the product risks for retained and reinsured businesses are being managed within the Company and Prudential Insurance, as applicable.

Basis of Presentation

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

In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations have been made. All such adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Company’s Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~

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~~Prudential Annuities Life Assurance Corporation~~

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

2019.

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; policyholders' account balances related to the fair value of embedded derivative instruments associated with the index-linked features of certain fixed annuity products; value of business acquired ("VOBA") and its amortization; amortization of deferred sales inducements ("DSI"); valuation of investments including derivatives, measurement of allowance for credit losses, 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 accruals for contingent liabilities, including estimates for losses in connection with unresolved legal and regulatory matters.

COVID-19

Beginning in the first quarter of 2020, the outbreak of the novel coronavirus (“COVID-19”) has resulted in extreme stress and disruption in the global economy and financial markets and has adversely impacted, and may continue to adversely impact, our results of operations, financial condition and cash flows. Due to the highly uncertain nature of these conditions, it is not possible to estimate the ultimate impacts at this time. The risks may have manifested, and may continue to manifest, in our financial statements in the areas of, among others, i) investments: increased risk of loss on our investments due to default or deterioration in credit quality or value; and ii) insurance liabilities and related balances: potential changes to assumptions regarding investment returns, mortality, morbidity and policyholder behavior which are reflected in our insurance liabilities and certain related balances (e.g., DAC, VOBA, etc.). We cannot predict what impact the COVID-19 pandemic will ultimately have on the global economy, markets or our businesses.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Reclassifications

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

2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS

Recent Accounting Pronouncements

Changes to U.S. GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of Accounting Standards Updates ("~~ASU"~~ASUs") to the FASB Accounting Standards ~~Codification.~~Codification ("ASC"). The Company considers the applicability and impact of all ~~ASU. ASU~~ASUs. ASUs listed below include those that have been adopted during the current fiscal year and/or those that have been issued but not yet adopted as of June 30, 2020, and as of the date of this filing. ~~ASU~~ASUs not listed below were assessed and determined to be either not applicable or not material.

Adoption of ASU 2016-13

The Company adopted ASU 2016-13, and related ASUs, effective January 1, 2020 using the modified retrospective method for certain financial assets carried at amortized cost and certain off-balance sheet exposures. The modified retrospective method results in a cumulative effect adjustment to opening retained earnings. The Company adopted the guidance related to fixed maturities, available-for-sale on a prospective basis.

This ASU requires the use of a new current expected credit loss (“CECL”) model to account for expected credit losses on certain financial assets reported at amortized cost (e.g., loans held for investment, reinsurance receivables, etc.) and certain off-balance sheet credit exposures (e.g., indemnification of serviced mortgage loans and certain loan commitments). The guidance requires an entity to estimate lifetime credit losses related to such financial assets and credit exposures based on relevant information about past events, current conditions, and reasonable and supportable forecasts that may affect the collectability of the reported amounts. The standard also modifies the OTTI guidance for fixed maturities, available-for-sale requiring the use of an allowance rather than a direct write-down of the investment.

The impacts of this ASU on the Company’s Financial Statements primarily include (1) A Cumulative Effect Adjustment Upon Adoption; (2) Changes to the Presentation of the Statements of Financial Position and Statements of Operations; and (3) Changes to Accounting Policies. Each of these impacts is described below. This section is meant to serve as an update to, and should be read in conjunction with, Note 2 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

(1) Cumulative Effect Adjustment Upon Adoption

Adoption of the standard resulted in a cumulative effect adjustment to opening retained earnings in the amount of $1.4 million, primarily related to commercial mortgage and other loans. The impact of adoption is not material to the following financial statement line items: deferred policy acquisition costs; income taxes; and other liabilities. The prospective adoption of the portions of the standard related to fixed maturities, available-for-sale resulted in no impact to opening retained earnings.

(2) Changes to the Presentation of the Statements of Financial Position and Statements of Operations

The allowance for credit losses is presented parenthetically on relevant line items in the Statements of Financial Position. In the Statements of Operations, realized investment gains (losses), net are presented on one line item and will no longer reflect the breakout of OTTI on fixed maturity securities; OTTI on fixed maturity securities transferred to other comprehensive income (“OCI”); and other realized investment gains (losses), net. The presentation of this detail in prior periods is immaterial.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

(3) Changes to Accounting Policies

This section has been updated to include the following changes in our accounting policies resulting from the adoption of ASU 2016-13.

Fixed maturities, available-for-sale

Fixed maturities, available-for-sale (“AFS debt securities”) are reported at fair value in the Statements of Financial Position. Interest income, and amortization of premium and accretion of discount are included in “Net investment income” under the effective yield method. For mortgage-backed and asset-backed securities, the effective yield is based on estimated cash flows, including 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 relating to the underlying collateral, including default rates and changes in value. These assumptions can significantly impact income recognition and the amount of impairments recognized in earnings and OCI. For mortgage-backed and asset-backed securities rated below AA, the effective yield is adjusted prospectively for any changes in the estimated timing and amount of cash flows unless the investment is impaired or purchased with credit deterioration. For impaired mortgage-backed and asset-backed securities rated below AA, the effective yield is adjusted prospectively only if subsequent favorable or adverse changes in expected cash flows are not reflected in the allowance for credit losses. Prior to the adoption of this standard, the effective yield was adjusted prospectively regardless of whether the investment was impaired or not.

AFS debt securities with unrealized losses are reviewed quarterly to determine whether the amortized cost basis of the security is recoverable. In evaluating whether the amortized cost basis is recoverable, the Company considers several factors including, but not limited to the extent of the decline and the reasons for the decline in value (credit events, currency or interest-rate related, including general credit spread widening), and the financial condition of the issuer.

When an AFS debt security is in an unrealized loss position and (1) the Company has the intent to sell the AFS debt security, or (2) it is more likely than not the Company will be required to sell the AFS debt security before its anticipated recovery, or (3) the Company has deemed the AFS debt security to be uncollectable, the amortized cost basis of the AFS debt security is written down to fair value and any previously recognized allowance is reversed. The impairment is reported in “Realized investment gains (losses), net.” The new cost basis is not adjusted for subsequent increases in estimated fair value.

For an AFS debt security in an unrealized loss position that does not meet these conditions, the Company analyzes its ability to recover the amortized cost by comparing the net present value of projected future cash flows (the “net present value”) 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 AFS debt security at the date of acquisition. The Company may use the estimated fair value of collateral, if any, 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 allowance for losses is recognized in earnings for the difference between amortized cost and the net present value and is limited to the difference between amortized cost and fair value of the AFS debt security. Any difference between the fair value and the net present value of the debt security at the impairment measurement date remains in “Other comprehensive income (loss).” Changes in the allowance for losses are reported in “Realized investment gains (losses), net.”

Prior to the adoption of this standard, any impairments on AFS debt securities were reported as an adjustment to the amortized cost basis of the security. Subsequent to the impairment, the AFS debt security was treated as if it were newly acquired at the date of impairment, and any increases in cash flows expected to be collected were accreted into net investment income over the life of the investment.

Commercial mortgage and other loans

Commercial mortgage and other loans are reported in the Statements of Financial Position at amortized cost net of the CECL allowance. Additionally, certain off-balance sheet credit exposures (e.g., indemnification of serviced mortgage loans, and certain unfunded mortgage loan commitments where the Company cannot unconditionally cancel the commitment) are also subject to a CECL allowance.

The CECL allowance represents the Company’s best estimate of expected credit losses over the remaining life of the assets or off-balance sheet credit exposures. The determination of the allowance considers historical credit loss experience, current conditions, and reasonable and supportable forecasts. The allowance is calculated separately for commercial mortgage loans, agricultural mortgage loans, and other collateralized and uncollateralized loans.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

For commercial mortgage and agricultural mortgage loans (and related unfunded commitments where the Company cannot unconditionally cancel the commitment), the allowance is calculated using an internally developed CECL model.

Key inputs to the CECL model include unpaid principal balances, internal credit ratings, annual expected loss factors, average lives of the loans adjusted for prepayment considerations, current and historical interest rate assumptions, and other factors influencing the Company’s view of the current stage of the economic cycle and future economic conditions. Subjective considerations include a review of whether historical loss experience is representative of current market conditions and the Company’s view of the credit cycle. Model assumptions and factors are reviewed and updated as appropriate. Information about certain key inputs is detailed below.

Key factors in determining the internal credit ratings for commercial mortgage and agricultural mortgage loans include loan-to value and debt-service-coverage ratios. Other factors include amortization, loan term, and estimated market value growth rate and volatility for the property type and region. The loan-to-value ratio compares the carrying amount of the loan to the fair value of the underlying property or properties collateralizing the loan and is commonly expressed as a percentage. Loan-to-value ratios greater than 100% indicate that the carrying amount of the loan exceeds the collateral value. A loan-to-value ratio less than 100% indicates an excess of collateral value over the carrying amount of the loan. The debt-service-coverage ratio is a property’s net operating income as a percentage of its debt service payments. Debt-service-coverage ratios less than 1.0 times indicate that a property’s operations do not generate enough income to cover the loan’s current debt payments. A debt-service-coverage ratio greater than 1.0 times indicates 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 and agricultural mortgage loan portfolios, which includes an internal appraisal of the underlying collateral value. The Company’s periodic review also includes a credit re-rating process, whereby the internal credit rating originally assigned at underwriting is updated based on current loan, property and market information using a proprietary credit quality rating system. 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 mortgage loan portfolios. Generally, every loan is re-rated at least annually.

Annual expected loss rates are based on historical default and loss experience factors. Using average lives, the annual expected loss rates are converted into life-of-loan loss expectations.

When individual loans no longer have the credit risk characteristics of the commercial or agricultural mortgage loan pools, they are removed from the pools and are evaluated individually for an allowance. The allowance is determined based on the outstanding loan balance less the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

The CECL allowance on commercial mortgage and other loans can increase or decrease from period to period based on the factors noted above. The change in allowance is reported in “Realized investment gains (losses), net.” As it relates to unfunded commitments that are in scope of this guidance, the CECL allowance is reported in “Other liabilities”, and the change in the allowance is reported in “Realized investment gains (losses), net.”

When a commercial mortgage or other loan is deemed to be uncollectible, any allowance is reversed and a direct write-down of the carrying amount of the loan is recorded through "Realized investment gains (losses), net." The carrying amount of the loan is not adjusted for subsequent recoveries in value.

The CECL allowance for other collateralized and uncollateralized loans carried at amortized cost is determined based on probability of default and loss given default assumptions by sector, credit quality and average lives of the loans. Additions to or releases of the allowance are reported in “Realized investment gains (losses), net.”

Prior to the adoption of this standard, the impairments on commercial mortgage and other loans were collectively reviewed at a portfolio level for impairment based on probable incurred but not specifically identified losses with any such losses reflected in an allowance for credit losses. When a loan was individually identified to be impaired, the loan was individually evaluated for an allowance. Changes in these allowances were reported in “Realized investment gains (losses), net.” Additionally, an allowance for credit losses was not required on unfunded loan commitments.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Reinsurance

Reinsurance recoverables are reported on the Statements of Financial Position net of the CECL allowance. The CECL allowance considers the credit quality of the reinsurance counterparty and is generally determined based on the probability of default and loss given default assumptions, after considering any applicable collateral arrangements. The CECL allowance does not apply to reinsurance recoverables with affiliated counterparties under common control. Additions to or releases of the allowance are reported in “Policyholders’ benefits.”

Prior to the adoption of this standard, an allowance for credit losses for reinsurance recoverables was established only when it was deemed probable that a reinsurer may fail to make payments to us in a timely manner.

Other ASUs adopted during the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020.



Standard	Description	Effective date and method of adoption	Effect on the financial statements or other significant matters
ASU ~~2017-08,~~2020-04, Reference Rate Reform (Topic 848): Facilitation ~~Receivables -~~ ~~Nonrefundable Fees~~ ~~and Other Costs~~ ~~(Subtopic 310-20)~~ ~~Premium~~ ~~Amortization~~of the Effects of Reference Rate Reform on ~~Purchased Callable~~ ~~Debt Securities~~ Financial Reporting	This ASU ~~requires~~provides optional relief for certain ~~premiums on callable debt securities~~contracts impacted by reference rate reform. The standard permits an entity to consider contract modification due to reference rate reform to be ~~amortized~~an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. The ASU also temporarily (until December 31, 2022) allows hedge relationships to continue without de-designation upon changes due to reference rate reform.	March 12, 2020 to December 31, 2022 using the ~~earliest call date.~~prospective method.	~~January 1, 2019 using the modified retrospective method which included cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption.~~	~~Adoption of the~~ This ASU did not have a significant impact on the Company’s Financial Statements and Notes to the Financial Statements. The ~~impact of~~Company made the ~~cumulative-effect adjustment to retained earnings was immaterial.~~
election under ASU ~~2017-12,~~ Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting2020-04 for ~~Hedging Activities~~	~~This ASU makes targeted changes~~ all applicable contracts as they converted from the current reference rate 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.~~ The ASU eliminates separate measurement and recording of hedge ineffectiveness. It requires entities to present the earnings effect of the hedging instrument in the same income statement line item in which the hedged item is reported and also requires expanded disclosures.new reference rate.	~~January 1, 2019 using the modified retrospective method which included cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption.~~	Adoption of the ASU did not have a significant impact on the Company’s Financial Statements and Notes to the Financial Statements. The impact of the cumulative-effect adjustment to retained earnings and accumulated other comprehensive income (loss) ("AOCI") related to ineffectiveness of the hedge instruments outstanding at the date of the adoption was immaterial. See Note 4 for additional required disclosures.

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~~Prudential Annuities Life Assurance Corporation~~

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

ASU issued but not yet adopted as of ~~September~~June 30, ~~2019~~2020 — ASU 2018-12

ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the FASB on August 15, 2018 and is expected to have a significant impact on the Company’s Financial Statements and Notes to the Financial Statements. In October 2019, the FASB ~~affirmed~~issued ASU 2019-09, Financial Services - Insurance (Topic 944): Effective Date to affirm its decision to defer the effective date of ~~the~~ ASU 2018-12 to January 1, 2022 (with early adoption permitted), representing a one year extension from the original effective date of January 1, 2021. ~~This~~As a result of the COVID-19 pandemic, the FASB voted in June 2020 to tentatively defer for an additional one year the current effective date of ASU 2018-12 from January 1, 2022 to January 1, 2023, and to provide transition relief to facilitate the early adoption of the ASU. Subsequently in July 2020, the FASB issued a proposed ASU with a comment deadline of August 24, 2020 to obtain additional feedback on the tentative decisions, which are expected to be finalized during the third quarter of 2020. The transition relief would allow large calendar-year public companies that early adopt ASU 2018-12 to apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2022 financial statements. Companies that do not early adopt ASU 2018-12 would also apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2023 financial statements. ASU 2018-12 will impact, at least to some extent, the accounting and disclosure requirements for all long-duration insurance and investment contracts issued by the Company. Outlined below are four key areas of change, although there are other changes not noted below. In addition to the impacts to the balance sheet upon adoption, the Company also expects an impact to how earnings emerge thereafter.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)



ASU 2018-12 Amended Topic	Description	Method of adoption	Effect on the financial statements or other significant matters
Cash flow assumptions used to measure the liability for future policy benefits for non-participating traditional and limited-pay insurance products	Requires an entity to review, and if necessary, update the cash flow assumptions used to measure the liability for future policy benefits, for both changes in future assumptions and actual experience, at least annually using a retrospective update method with a cumulative catch-up adjustment recorded in a separate line item in the Statements of Operations.	An entity may choose one of two adoption methods for the liability for future policy benefits: (1) a modified retrospective transition method whereby the entity will apply the amendments to contracts in force as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in ~~AOCI~~Accumulated Other Comprehensive Income (loss) ("AOCI") or (2) a full retrospective transition method.	The options for method of adoption and the impacts of such methods are under assessment.
Discount rate assumption used to measure the liability for future policy benefits for non-participating traditional and limited-pay insurance products	Requires discount rate assumptions to be based on an upper-medium grade fixed income instrument yield and will be required to be updated each quarter with the impact recorded through ~~Other Comprehensive Income ("OCI").~~OCI.	As noted above, an entity may choose either a modified retrospective transition method or full retrospective transition method for the liability for future policy benefits. Under either method, for balance sheet remeasurement purposes, the liability for future policy benefits will be remeasured using current discount rates as of the beginning of the earliest period presented with the impact recorded as a cumulative effect adjustment to AOCI.	Upon adoption, under either transition method, there will be an adjustment to AOCI as a result of remeasuring in force contract liabilities using current upper-medium grade fixed income instrument yields. The adjustment upon adoption will largely reflect the difference between the discount rate locked-in at contract inception versus current discount rates at transition. The magnitude of such adjustment is currently being assessed.
Amortization of DAC and other balances	Requires DAC and other balances, such as unearned revenue reserves and DSI, to be amortized on a constant level basis over the expected term of the related contract, independent of expected profitability.	An entity may apply one of two adoption methods: (1) a modified retrospective transition method whereby the entity will apply the amendments to contracts in force as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or (2) if an entity chooses a full retrospective transition method for its liability for future policy benefits, as described above, it is required to also use a retrospective transition method for DAC and other balances.	The options for method of adoption and the impacts of such methods are under assessment. Under the modified retrospective transition method, the Company would not expect a significant impact to the balance sheet, other than the impact of the removal of any related amounts in AOCI.
Market Risk Benefits	Requires an entity to measure all market risk benefits (e.g., living benefit and death benefit guarantees associated with variable annuities) at fair value, ~~with changes~~and record market risk benefit assets and liabilities separately on the Statements of Financial Position. Changes in fair value of market risk benefits are recorded in net income, except for the portion of the change that is attributable to changes in an entity’s non-performance risk ("NPR"), which is recognized in OCI.	An entity ~~will apply a~~shall adopt the guidance for market risk benefits using the retrospective transition method, which ~~will include~~includes a cumulative-effect adjustment on the balance sheet as of the earliest period presented. An entity shall maximize the use of relevant observable information and minimize the use of unobservable information in determining the balance of the market risk benefits upon adoption.	Upon adoption, the Company expects an impact to retained earnings for the difference between the fair value and carrying value of benefits not currently measured at fair value (e.g., guaranteed minimum death benefits on variable annuities) and an impact from reclassifying the cumulative effect of changes in NPR from retained earnings to AOCI. The magnitude of such adjustments is currently being assessed.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

~~Other ASU issued but not yet adopted as of September 30, 2019~~

3. INVESTMENTS

Fixed Maturity Securities

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


	September 30, 2019											June 30, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI(3)			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Fair Value
	(in thousands)											(in thousands)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	6,658,235	$	829,212	$	4,009	$	7,483,438	$	0		$	7,209,338	$	1,959,308	$	10,467	$	0	$	9,158,179
Obligations of U.S. states and their political subdivisions	134,157		8,133		7		142,283		0			244,211		15,004		5		0		259,210
Foreign government bonds	202,792		19,761		12		222,541		0			161,316		19,384		25		0		180,675
U.S. public corporate securities	1,636,880		129,488		1,745		1,764,623		0			2,552,065		246,280		7,499		0		2,790,846
U.S. private corporate securities	1,042,425		52,255		3,703		1,090,977		0			1,458,519		87,180		8,102		0		1,537,597
Foreign public corporate securities	289,283		17,738		52		306,969		0			317,646		20,654		7,671		0		330,629
Foreign private corporate securities	1,038,186		29,438		16,883		1,050,741		0			1,231,622		35,456		27,817		982		1,238,279
Asset-backed securities(1)	443,291		4,445		2,280		445,456		(11		)	621,254		6,735		8,846		0		619,143
Commercial mortgage-backed securities	554,117		30,064		0		584,181		0			647,722		52,733		20		0		700,435
Residential mortgage-backed securities(2)	76,854		4,743		11		81,586		0			73,820		6,069		3		0		79,886
Total fixed maturities, available-for-sale	$	12,076,220	$	1,125,277	$	28,702	$	13,172,795	$	(11	)	$	14,517,513	$	2,448,803	$	70,455	$	982	$	16,894,879


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


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

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)



	December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI(3)
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	6,667,347	$	491,943	$	39,466	$	7,119,824	$	0
Obligations of U.S. states and their political subdivisions	252,304		7,814		436		259,682		0
Foreign government bonds	203,386		19,518		20		222,884		0
U.S. public corporate securities	1,615,060		126,947		1,331		1,740,676		0
U.S. private corporate securities	1,159,962		50,720		3,343		1,207,339		0
Foreign public corporate securities	321,111		16,989		113		337,987		0
Foreign private corporate securities	1,171,411		50,069		7,995		1,213,485		0
Asset-backed securities(1)	443,767		3,405		2,734		444,438		(20		)
Commercial mortgage-backed securities	557,584		20,941		236		578,289		0
Residential mortgage-backed securities(2)	73,814		3,960		13		77,761		0
Total fixed maturities, available-for-sale	$	12,465,746	$	792,306	$	55,687	$	13,202,365	$	(20	)


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


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


(3)	Represents the amount of unrealized losses remaining in AOCI, from the impairment measurement date. Amount excludes ~~$13.6~~$14.3 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.

The following table sets forth the fair value and gross unrealized losses on available-for-sale fixed maturity securities without an allowance for credit losses aggregated by investment category and length of time that individual fixed maturity securities had been in a continuous unrealized loss position, as of the date indicated:



	June 30, 2020
	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	$	539,420	$	10,467	$	0	$	0	$	539,420	$	10,467
Obligations of U.S. states and their political subdivisions	3,084		5		0		0		3,084		5
Foreign government bonds	368		14		81		11		449		25
U.S. public corporate securities	220,713		6,981		2,332		518		223,045		7,499
U.S. private corporate securities	124,703		6,429		19,376		1,673		144,079		8,102
Foreign public corporate securities	63,792		7,671		0		0		63,792		7,671
Foreign private corporate securities	412,032		15,832		118,199		11,980		530,231		27,812
Asset-backed securities	170,685		3,099		216,998		5,747		387,683		8,846
Commercial mortgage-backed securities	3,476		20		0		0		3,476		20
Residential mortgage-backed securities	0		0		84		3		84		3
Total fixed maturities, available-for-sale	$	1,538,273	$	50,518	$	357,070	$	19,932	$	1,895,343	$	70,450

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

December 31, 2018

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

OTTI
in AOCI(3)
(in thousands)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies $ 5,240,519
$ 20,065
$ 376,493
$ 4,884,091
$ 0
Obligations of U.S. states and their political subdivisions 133,670
621
3,127
131,164
0
Foreign government bonds 199,044
4,748
4,156
199,636
0
U.S. public corporate securities 1,498,130
26,425
50,582
1,473,973
0
U.S. private corporate securities 1,070,400
15,430
22,877
1,062,953
0
Foreign public corporate securities 296,029
1,888
6,831
291,086
0
Foreign private corporate securities 829,588
10,415
27,771
812,232
0
Asset-backed securities(1) 505,862
3,147
3,765
505,244
(16 )
Commercial mortgage-backed securities 364,601
2,770
5,491
361,880
0
Residential mortgage-backed securities(2) 48,622
1,290
498
49,414
0
Total fixed maturities, available-for-sale $ 10,186,465
$ 86,799
$ 501,591
$ 9,771,673
$ (16 )


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


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


~~(3)~~	Represents the amount of unrealized losses remaining in AOCI, from the impairment measurement date. Amount excludes $3.3 million of net unrealized losses on impaired available-for-sale securities relating to changes in the value of such securities subsequent to the impairment measurement date.

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

September 30, 2019
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 $ 112,315
$ 3,984
$ 5,844
$ 25
$ 118,159
$ 4,009
Obligations of U.S. states and their political subdivisions 2,215
7
0
0
2,215
7
Foreign government bonds 0
0
129
12
129
12
U.S. public corporate securities 34,279
321
38,133
1,424
72,412
1,745
U.S. private corporate securities 45,488
880
57,084
2,823
102,572
3,703
Foreign public corporate securities 9,706
18
8,374
34
18,080
52
Foreign private corporate securities 223,052
5,389
116,892
11,494
339,944
16,883
Asset-backed securities 118,339
401
199,108
1,879
317,447
2,280
Commercial mortgage-backed securities 0
0
0
0
0
0
Residential mortgage-backed securities 265
11
7
0
272
11
Total fixed maturities, available-for-sale $ 545,659
$ 11,011
$ 425,571
$ 17,691
$ 971,230
$ 28,702

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

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


	December 31, 2018												December 31, 2019
	Less Than Twelve Months				Twelve Months or More				Total				Less Than Twelve Months				Twelve Months or More				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(in thousands)												(in thousands)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	367,796	$	4,844	$	3,304,663	$	371,649	$	3,672,459	$	376,493	$	1,336,007	$	39,456	$	5,855	$	10	$	1,341,862	$	39,466
Obligations of U.S. states and their political subdivisions	25,764		322		83,950		2,805		109,714		3,127		97,752		436		0		0		97,752		436
Foreign government bonds	98,437		2,346		58,975		1,810		157,412		4,156		804		13		132		7		936		20
U.S. public corporate securities	627,589		28,474		386,599		22,108		1,014,188		50,582		93,147		870		15,491		461		108,638		1,331
U.S. private corporate securities	269,545		7,755		422,498		15,122		692,043		22,877		82,709		2,111		59,797		1,232		142,506		3,343
Foreign public corporate securities	97,367		2,521		107,286		4,310		204,653		6,831		50,150		113		0		0		50,150		113
Foreign private corporate securities	373,891		19,217		116,743		8,554		490,634		27,771		97,414		1,652		91,863		6,343		189,277		7,995
Asset-backed securities	358,668		3,501		24,529		264		383,197		3,765		103,911		717		235,759		2,017		339,670		2,734
Commercial mortgage-backed securities	45,432		355		159,638		5,136		205,070		5,491		66,071		236		0		0		66,071		236
Residential mortgage-backed securities	34		1		13,775		497		13,809		498		633		12		7		1		640		13
Total fixed maturities, available-for-sale	$	2,264,523	$	69,336	$	4,678,656	$	432,255	$	6,943,179	$	501,591	$	1,928,598	$	45,616	$	408,904	$	10,071	$	2,337,502	$	55,687

As of ~~September~~June 30, ~~2019 and December 31, 2018,~~2020, the gross unrealized losses on fixed maturity available-for-sale securities without an allowance were composed of ~~$24.2~~$43.8 million ~~and $485.7 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 ~~$4.5~~$26.6 million ~~and $15.9 million, respectively,~~ related to other than high or highest quality securities based on NAIC or equivalent rating. As of ~~September~~June 30, 2020, the $19.9 million of gross unrealized losses of twelve months or more were concentrated in the asset-backed securities and in the Company’s corporate securities within the consumer non-cyclical, utility and finance sectors.

As of December 31, 2019, the ~~$17.7~~gross unrealized losses on fixed maturity securities were composed of $52.5 million related to “1” highest quality or “2” high quality securities based on the NAIC or equivalent rating and $3.2 million related to other than high or highest quality securities based on NAIC or equivalent rating. As of December 31, 2019, the $10.1 million of gross unrealized losses of twelve months or more were concentrated in the Company’s corporate securities within the consumer non-cyclical, utility and ~~capital goods~~ ~~sectors. As of December 31, 2018, the $432.3 million of gross unrealized losses of twelve months or more were concentrated in~~ ~~U.S. government bonds~~consumer cyclical sectors and in ~~the Company’s corporate securities within the~~ asset-backed securities.~~finance, consumer non-cyclical and~~ ~~capital goods~~ ~~sectors.~~

In accordance with its policy described in Note 2, ~~to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018,~~ the Company concluded that an adjustment to earnings for ~~OTTI for~~credit losses related to these fixed maturity securities was not warranted at ~~either September~~June 30, ~~2019 or December 31, 2018.~~2020. 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.~~movements and the financial condition or near-term prospects of the issuer. As of ~~September~~June 30, ~~2019,~~2020, 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.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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


	September 30, 2019				June 30, 2020
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in thousands)				(in thousands)
Fixed maturities, available-for-sale:
Due in one year or less	$	128,354	$	129,099	$	234,713	$	237,640
Due after one year through five years	1,107,727		1,133,628		1,202,685		1,243,281
Due after five years through ten years	1,649,659		1,736,529		2,187,012		2,301,245
Due after ten years	8,116,218		9,062,316		9,550,307		11,713,249
Asset-backed securities	443,291		445,456		621,254		619,143
Commercial mortgage-backed securities	554,117		584,181		647,722		700,435
Residential mortgage-backed securities	76,854		81,586		73,820		79,886
Total fixed maturities, available-for-sale	$	12,076,220	$	13,172,795	$	14,517,513	$	16,894,879

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

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

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

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


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
	(in thousands)												(in thousands)
Fixed maturities, available-for-sale
Fixed maturities, available-for-sale:
Proceeds from sales(1)	$	77,697		$	391,271		$	231,106		$	1,834,190		$	136,699		$	21,640		$	332,677		$	153,409
Proceeds from maturities/prepayments	125,432			67,980			379,849			308,339			53,821			109,974			131,901			254,417
Gross investment gains from sales and maturities	15			2,532			982			20,109			10,774			(983		)	18,255			967
Gross investment losses from sales and maturities	(445		)	(10,764		)	(3,086		)	(85,869		)	(1,310		)	(1,985		)	(1,490		)	(2,641		)
OTTI recognized in earnings(2)	(769		)	(2,523		)	(2,794		)	(2,960		)	N/A			0			N/A			(2,025		)
Write-downs recognized in earnings(3)													0			N/A			(693		)	N/A
(Addition to) release of allowance for credit losses(4)													(796		)	N/A			(982		)	N/A


(1)	Includes ~~$14.3~~$0.2 million and ~~$(1.7)~~$3.6 million of non-cash related proceeds due to the timing of trade settlements for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively.


(2)	~~Excludes~~For the three and six months ended June 30, 2019, amounts exclude the portion of OTTI amounts remaining 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.


(3)	For the three and six months ended June 30, 2020, amounts represent write-downs on securities approaching maturity related to foreign exchange movements and securities actively marketed for sale.


(4)	Effective January 1, 2020, credit losses on available-for-sale fixed maturity securities are recorded within the “allowance for credit losses.”

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
(in thousands)
Credit loss impairments:
Balance in OCI, beginning of period $ 1,142
$ 753
$ (209 ) $ 792
New credit loss impairments 0
0
1,343
0
Increases due to the passage of time on previously recorded credit losses 0
1
10
2
Reductions for securities which matured, paid down, prepaid or were sold during the period 0
0
(1 ) (40 )
Reductions for securities impaired to fair value during the period(1) (1,351 ) 0
(1,351 ) 0
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected 0
(1 ) (1 ) (1 )
Balance in OCI, end of period $ (209 ) $ 753
$ (209 ) $ 753



	June 30, 2020
	U.S. Treasury Securities and Obligations of U.S. States		Foreign Government Bonds		U.S. and Foreign Corporate Securities			Asset-Backed Securities		Commercial Mortgage-Backed Securities		Residential Mortgage-Backed Securities		Total
	(in thousands)
Fixed maturities, available-for-sale:
Balance, beginning of year	$	0	$	0	$	0		$	0	$	0	$	0	$	0
Additions to allowance for credit losses not previously recorded	0		0		1,168			0		0		0		1,168
Reductions for securities sold during the period	0		0		(2		)	0		0		0		(2		)
Addition (reductions) on securities with previous allowance	0		0		(184		)	0		0		0		(184		)
Balance, end of period	$	0	$	0	$	982		$	0	$	0	$	0	$	982


~~(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.

See Note 2 for additional information about the Company’s methodology for developing our allowance and expected losses.

As of June 30, 2020, the allowance for credit losses on available-for-sale securities was primarily related to adverse projected cash flows on private corporate securities.

The Company did not have any fixed maturity securities purchased with credit deterioration, as of June 30, 2020.

Equity Securities

The net change in unrealized gains (losses) from equity securities still held at period end, recorded within “Asset administration fees and other income,” was ~~$0.3~~$3.3 million and ~~$(0.3)~~$0.6 million during the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and $1.7 million and ~~$0.1~~$1.5 million during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Commercial Mortgage and Other Loans

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


	September 30, 2019					December 31, 2018					June 30, 2020					December 31, 2019
	Amount (in thousands)			% of Total		Amount (in thousands)			% of Total		Amount (in thousands)			% of Total		Amount (in thousands)			% of Total
Commercial mortgage and agricultural property loans by property type:
Apartments/Multi-Family	$	264,146		19.8	%	$	304,644		22.4	%	$	367,359		22.3	%	$	272,150		18.5	%
Hospitality	5,618			0.4		3,633			0.3		16,705			1.0		16,819			1.1
Industrial	438,973			32.8		355,758			26.2		498,323			30.3		464,528			31.5
Office	315,647			23.6		305,537			22.5		359,595			21.8		372,823			25.3
Other	128,779			9.6		137,781			10.2		182,189			11.1		156,768			10.6
Retail	123,138			9.2		194,646			14.4		130,606			7.9		131,051			8.9
Total commercial mortgage loans	1,276,301			95.4		1,301,999			96.0		1,554,777			94.4		1,414,139			95.9
Agricultural property loans	61,205			4.6		54,375			4.0		92,514			5.6		60,046			4.1
Total commercial mortgage and agricultural property loans by property type	1,337,506			100.0	%	1,356,374			100.0	%	1,647,291			100.0	%	1,474,185			100.0	%
Allowance for credit losses	(2,300		)			(2,896		)			(6,879		)			(2,663		)
Total net commercial mortgage and agricultural property loans by property type											1,640,412					1,471,522
Other loans:
Other collateralized loans											3,908					0
Allowance for credit losses											0					0
Total net other loans											3,908					0
Total commercial mortgage and other loans	$	1,335,206				$	1,353,478				$	1,644,320				$	1,471,522

As of ~~September~~June 30, ~~2019,~~2020, the commercial mortgage and agricultural property loans were secured by properties geographically dispersed throughout the United States (with the largest concentrations in California ~~(29%~~(24%), Texas ~~(13%~~(12%) and New York ~~(8%~~(11%)) and included loans secured by properties in Europe ~~(14%~~(15%) and Australia (3%).

The following table sets forth the activity in the allowance for credit losses for commercial mortgage and other loans, as of the dates indicated:



	Commercial Mortgage Loans			Agricultural Property Loans		Other Collateralized Loans		Total
	(in thousands)
Balance at December 31, 2018	$	2,861		$	35	$	0	$	2,896
Addition to (release of) allowance for credit losses	(239		)	6		0		(233		)
Balance at December 31, 2019	2,622			41		0		2,663
Cumulative effect of adoption of ASU 2016-13	3,118			39		0		3,157
Addition to (release of) allowance for expected losses	961			98		0		1,059
Balance at June 30, 2020	$	6,701		$	178	$	0	$	6,879

Commercial Mortgage Loans Agricultural Property Loans Total
(in thousands)
Balance at December 31, 2017 $ 2,616
$ 34
$ 2,650
Addition to (release of) allowance for credit losses 245
1
246
Charge-offs, net of recoveries 0
0
0
Balance at December 31, 2018 2,861
35
2,896
Addition to (release of) allowance for credit losses (611 ) 15
(596 )
Charge-offs, net of recoveries 0
0
0
Balance at September 30, 2019 $ 2,250
$ 50
$ 2,300

See Note 2 for additional information about the Company's methodology for developing our allowance and expected losses.

As of June 30, 2020, the increase in the allowance for credit losses on commercial mortgage and other loans was primarily related to the cumulative effect of adoption of ASU 2016-13.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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

September 30, 2019
Commercial Mortgage Loans Agricultural Property Loans Total
(in thousands)
Allowance for credit losses:
Individually evaluated for impairment $ 0
$ 0
$ 0
Collectively evaluated for impairment 2,250
50
2,300
Total ending balance(1) $ 2,250
$ 50
$ 2,300
Recorded investment(2):
Individually evaluated for impairment $ 0
$ 0
$ 0
Collectively evaluated for impairment 1,276,301
61,205
1,337,506
Total ending balance(1) $ 1,276,301
$ 61,205
$ 1,337,506


~~(1)~~	~~As of September 30, 2019, there were 0 loans acquired with deteriorated credit quality.~~


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

December 31, 2018
Commercial Mortgage Loans Agricultural Property Loans Total
(in thousands)
Allowance for credit losses:
Individually evaluated for impairment $ 0
$ 0
$ 0
Collectively evaluated for impairment 2,861
35
2,896
Total ending balance(1) $ 2,861
$ 35
$ 2,896
Recorded investment(2):
Individually evaluated for impairment $ 0
$ 3,439
$ 3,439
Collectively evaluated for impairment 1,301,999
50,936
1,352,935
Total ending balance(1) $ 1,301,999
$ 54,375
$ 1,356,374


~~(1)~~	~~As of December 31, 2018, there were 0 loans acquired with deteriorated credit quality.~~


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

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


	September 30, 2019								June 30, 2020
	Debt Service Coverage Ratio								Amortized Cost by Origination Year
	≥ 1.2X		1.0X to <1.2X		< 1.0X		Total		2020		2019		2018		2017		2016		Prior		Revolving Loans		Total
	(in thousands)								(in thousands)
Loan-to-Value Ratio:
Commercial mortgage loans
0%-59.99%									$	0	$	115,190	$	26,510	$	82,913	$	162,983	$	247,331	$	0	$	634,927
60%-69.99%									125,732		165,219		32,186		121,512		93,427		104,153		0		642,229
70%-79.99%									47,417		68,579		47,798		76,558		28,378		7,906		0		276,636
80% or greater									0		0		0		0		0		985		0		985
Subtotal									173,149		348,988		106,494		280,983		284,788		360,375		0		1,554,777
Agricultural property loans
0%-59.99%									34,465		13,798		1,261		8,553		1,180		33,257		0		92,514
60%-69.99%									0		0		0		0		0		0		0		0
70%-79.99%									0		0		0		0		0		0		0		0
80% or greater									0		0		0		0		0		0		0		0
Subtotal									34,465		13,798		1,261		8,553		1,180		33,257		0		92,514
Total commercial mortgage and agricultural property loans
0%-59.99%	$	635,907	$	6,801	$	3,615	$	646,323	34,465		128,988		27,771		91,466		164,163		280,588		0		727,441
60%-69.99%	465,223		13,525		0		478,748		125,732		165,219		32,186		121,512		93,427		104,153		0		642,229
70%-79.99%	179,558		30,696		0		210,254		47,417		68,579		47,798		76,558		28,378		7,906		0		276,636
80% or greater	1,177		1,004		0		2,181		0		0		0		0		0		985		0		985
Total commercial mortgage and agricultural property loans	$	1,281,865	$	52,026	$	3,615	$	1,337,506	$	207,614	$	362,786	$	107,755	$	289,536	$	285,968	$	393,632	$	0	$	1,647,291



	June 30, 2020				December 31, 2019
	Commercial Mortgage Loans		Agricultural Property Loans		Commercial Mortgage Loans		Agricultural Property Loans
	(in thousands)
Debt Service Coverage Ratio:
Greater or equal to 1.2x	$	1,501,432	$	88,916	$	1,361,868	$	56,437
1.0 - 1.2x	50,597		0		52,271		0
Less than 1.0x	2,748		3,598		0		3,609
Total	$	1,554,777	$	92,514	$	1,414,139	$	60,046

See Note 2 for additional information about the Company’s commercial mortgage and other loans credit quality monitoring process.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

December 31, 2018
Debt Service Coverage Ratio
≥ 1.2X 1.0X to <1.2X < 1.0X Total
(in thousands)
Loan-to-Value Ratio:
0%-59.99% $ 709,342
$ 14,814
$ 345
$ 724,501
60%-69.99% 442,308
23,260
0
465,568
70%-79.99% 156,049
7,236
0
163,285
80% or greater 2,000
1,020
0
3,020
Total commercial mortgage and agricultural property loans $ 1,309,699
$ 46,330
$ 345
$ 1,356,374

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


	September 30, 2019												June 30, 2020
	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due(1)		Total Loans		Non-Accrual Status(2)		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)												(in thousands)
Commercial mortgage loans	$	1,276,301	$	0	$	0	$	0	$	1,276,301	$	0	$	1,553,547	$	0	$	1,230	$	0	$	1,554,777	$	0
Agricultural property loans	61,205		0		0		0		61,205		0		88,237		0		0		4,277		92,514		4,277
Other collateralized loans													3,908		0		0		0		3,908		0
Total	$	1,337,506	$	0	$	0	$	0	$	1,337,506	$	0	$	1,645,692	$	0	$	1,230	$	4,277	$	1,651,199	$	4,277


(1)	As of ~~September~~June 30, 2020, there were 0 loans in this category accruing interest.


(2)	For additional information regarding the Company's policies for accruing interest on loans, see Note 2 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.



	December 31, 2019
	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	$	1,414,139	$	0	$	0	$	0	$	1,414,139	$	0
Agricultural property loans	60,046		0		0		0		60,046		0
Total	$	1,474,185	$	0	$	0	$	0	$	1,474,185	$	0


(1)	As of December 31, 2019, there were 0 loans in this category accruing interest.


(2)	For additional information regarding the Company's policies for accruing interest on loans, see Note 2 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2018.~~

December 31, 2018
Current 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due(1) Total Loans Non-Accrual Status(2)
(in thousands)
Commercial mortgage loans $ 1,301,999
$ 0
$ 0
$ 0
$ 1,301,999
$ 0
Agricultural property loans 54,375
0
0
0
54,375
0
Total $ 1,356,374
$ 0
$ 0
$ 0
$ 1,356,374
$ 0


~~(1)~~	~~As of December 31, 2018, there were 0 loans in this category accruing interest.~~


~~(2)~~	For additional information regarding the Company's policies for accruing interest on loans, see Note 2 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.2019.

There were $4.3 million of loans on non-accrual status, all of which did not have a related allowance for credit losses as of June 30, 2020, and did not recognize interest income for both the three and six months ended June 30, 2020.

For both the three and six months ended June 30, 2020, there were 0 commercial mortgage and other loans acquired, other than those through direct origination, and there were 0 commercial mortgage and other loans sold. For the three and ~~nine~~six months ended ~~September~~June 30, 2019, there were 0 commercial mortgage and other loans acquired, other than those through direct origination, and there were ~~$105~~$0 million and ~~$206~~$101 million, respectively, of commercial mortgage and other loans sold. ~~For both the three and nine months ended September 30, 2018, there were 0~~

The Company did not have any commercial mortgage and other loans ~~acquired, other than those through direct origination, and there were $13 million and $96 million, respectively,~~purchased with credit deterioration, as of ~~commercial mortgage and other loans sold.~~June 30, 2020.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Other Invested Assets

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


	September 30, 2019		December 31, 2018		June 30, 2020		December 31, 2019
	(in thousands)				(in thousands)
LPs/LLCs:
Equity method:
Private equity	$	23,798	$	23,844	$	22,283	$	23,414
Hedge funds	242,784		179,014		313,198		273,615
Real estate-related	150,510		94,738		180,034		166,492
Subtotal equity method	417,092		297,596		515,515		463,521
Fair value:
Private equity	3,954		4,142		4,116		4,115
Hedge funds	238		263		174		194
Real estate-related	6,218		3,562		6,362		6,181
Subtotal fair value	10,410		7,967		10,652		10,490
Total LPs/LLCs	427,502		305,563		526,167		474,011
Derivative instruments	2		42,978		2,873		2
Total other invested assets	$	427,504	$	348,541	$	529,040	$	474,013

Accrued Investment Income

The following table sets forth the composition of “Accrued investment income,” as of the date indicated:



	June 30, 2020
	(in thousands)

Fixed maturities	$	108,200
Equity securities	1
Commercial mortgage and other loans	4,585
Policy loans	10
Short-term investments and cash equivalents	3,262
Other(1)	259
Total accrued investment income	$	116,317


(1)	Primarily includes affiliated accrued income.

There were 0 write-downs on accrued investment income for both the three and six months ended June 30, 2020.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Net Investment Income

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


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
	(in thousands)												(in thousands)
Fixed maturities, available-for-sale	$	100,249		$	81,551		$	289,289		$	235,487		$	109,465		$	96,829		$	210,199		$	189,040
Fixed maturities, trading	2,579			2,006			7,497			3,091			2,921			2,553			5,502			4,918
Equity securities, at fair value	67			72			213			248
Equity securities													64			73			131			146
Commercial mortgage and other loans	12,761			12,567			37,661			38,818			15,437			13,168			28,619			24,900
Policy loans	153			175			430			546			229			218			356			277
Other invested assets													18,579			7,765			5,866			16,607
Short-term investments and cash equivalents	31,807			5,103			62,313			18,988			18,516			16,766			43,968			30,506
Other invested assets	7,083			5,573			23,690			14,083
Gross investment income	154,699			107,047			421,093			311,261			165,211			137,372			294,641			266,394
Less: investment expenses	(5,332		)	(3,883		)	(14,685		)	(11,226		)	(6,785		)	(5,400		)	(13,178		)	(9,353		)
Net investment income	$	149,367		$	103,164		$	406,408		$	300,035		$	158,426		$	131,972		$	281,463		$	257,041

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

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

Realized Investment Gains (Losses), Net

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

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
(in thousands)
Fixed maturities(1) $ (1,199 ) $ (10,755 ) $ (4,898 ) $ (68,720 )
Commercial mortgage and other loans 950
201
(292 ) 53
Derivatives (537,079 ) 75,810
(2,768,959 ) 702,465
Short-term investments and cash equivalents 61
17
448
24
Realized investment gains (losses), net $ (537,267 ) $ 65,273
$ (2,773,701 ) $ 633,822



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
	(in thousands)
Fixed maturities(1)	$	8,668		$	(2,968	)	$	15,090		$	(3,699	)
Commercial mortgage and other loans	(1,394		)	(461		)	(1,736		)	(1,242		)
Derivatives	(3,386,059		)	(890,952		)	(4,150,599		)	(2,231,880		)
Other invested assets	970			0			1,470			0
Short-term investments and cash equivalents	2,051			166			2,320			387
Realized investment gains (losses), net	$	(3,375,764	)	$	(894,215	)	$	(4,133,455	)	$	(2,236,434	)


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

Net Unrealized Gains (Losses) on Investments within AOCI

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


	September 30, 2019		December 31, 2018			June 30, 2020			December 31, 2019
	(in thousands)					(in thousands)
Fixed maturity securities, available-for-sale — with OTTI(1)	$	13,584	$	(3,334	)	$ N/A			$	14,309
Fixed maturity securities, available-for-sale — all other(1)	1,082,991		(411,458		)	N/A			722,310
Derivatives designated as cash flow hedges(1)	26,882		(3,849		)
Fixed maturity securities, available-for-sale with an allowance						(47		)	N/A
Fixed maturity securities, available-for-sale without an allowance						2,378,395			N/A
Derivatives designated as cash flow hedges(2)						68,175			(287		)
Affiliated notes	641		658			3,813			598
Other investments	0		1,074
Net unrealized gains (losses) on investments	$	1,124,098	$	(416,909	)	$	2,450,336		$	736,930


(1)	Effective January 1, 2020, per ASU 2016-13, fixed maturity securities, available-for-sale are no longer required to be disclosed “with OTTI” and “all other”.


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

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Repurchase Agreements and Securities Lending

In the normal course of business, the Company sells securities under agreements to repurchase and enters into securities lending transactions. As of ~~September~~both June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had 0 repurchase ~~agreements.~~

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

September 30, 2019 December 31, 2018
Remaining Contractual Maturities of the Agreements Remaining Contractual Maturities of the Agreements
Overnight & Continuous Up to 30 Days Total Overnight & Continuous Up to 30 Days Total
(in thousands)
Foreign government bonds $ 0
$ 0
$ 0
$ 0
$ 0
$ 0
U.S. public corporate securities 0
0
0
384
0
384
Total cash collateral for loaned securities(1) $ 0
$ 0
$ 0
$ 384
$ 0
$ 384


~~(1)~~	~~The Company did 0t have any agreements with remaining contractual maturities of thirty days or greater, as of the dates indicated.~~

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

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

4. DERIVATIVE INSTRUMENTS

Types of Derivative Instruments and Derivative Strategies

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

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

•Equity contracts: futures, options and total return swaps

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

•Credit contracts: single and index reference credit default swaps

Other types of financial contracts that the Company accounts for as derivatives include:

•Embedded derivatives

For detailed information on these contracts and the related strategies, see Note 4 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Primary Risks Managed by Derivatives

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

September 30, 2019 December 31, 2018
Primary Underlying Risk/Instrument Type
Gross
Notional
Fair Value
Gross
Notional
Fair Value
Assets Liabilities Assets Liabilities
(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Currency/Interest Rate
Foreign Currency Swaps $ 1,011,740
$ 66,182
$ (6,817 ) $ 768,075
$ 33,348
$ (21,794 )
Total Derivatives Designated as Hedge Accounting Instruments $ 1,011,740
$ 66,182
$ (6,817 ) $ 768,075
$ 33,348
$ (21,794 )
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Futures $ 4,315,800
$ 408
$ (1,585 ) $ 908,100
$ 4,380
$ (664 )
Interest Rate Swaps 88,656,425
9,135,289
(3,093,358 ) 82,172,825
3,344,033
(1,395,270 )
Interest Rate Options 14,730,000
820,638
(193,893 ) 19,255,000
139,765
(245,523 )
Interest Rate Forwards 198,834
33,269
0
1,713,947
56,562
(1,976 )
Foreign Currency
Foreign Currency Forwards 16,331
192
(65 ) 19,467
287
(27 )
Currency/Interest Rate
Foreign Currency Swaps 204,104
20,804
0
231,245
11,659
(2,850 )
Credit
Credit Default Swaps 0
0
0
0
0
0
Equity
Equity Futures 1,288,315
209
(4,923 ) 860,718
0
(6,629 )
Total Return Swaps 15,960,466
114,009
(136,596 ) 14,456,836
986,130
(53,235 )
Equity Options 24,376,699
209,440
(388,487 ) 26,861,807
271,630
(412,821 )
Total Derivatives Not Qualifying as Hedge Accounting Instruments $ 149,746,974
$ 10,334,258
$ (3,818,907 ) $ 146,479,945
$ 4,814,446
$ (2,118,995 )
Total Derivatives(1)(2) $ 150,758,714
$ 10,400,440
$ (3,825,724 ) $ 147,248,020
$ 4,847,794
$ (2,140,789 )



	June 30, 2020							December 31, 2019
Primary Underlying Risk/Instrument Type	Gross Notional		Fair Value					Gross Notional		Fair Value
Primary Underlying Risk/Instrument Type	Gross Notional		Assets		Liabilities			Gross Notional		Assets		Liabilities
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Currency/Interest Rate
Foreign Currency Swaps	$	1,264,012	$	106,587	$	(1,326	)	$	1,172,899	$	39,019	$	(26,511	)
Total Derivatives Designated as Hedge Accounting Instruments	$	1,264,012	$	106,587	$	(1,326	)	$	1,172,899	$	39,019	$	(26,511	)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Futures	$	5,489,400	$	2,606	$	(7,609	)	$	3,857,700	$	638	$	(5,872	)
Interest Rate Swaps	103,962,850		16,394,336		(6,850,128		)	88,557,425		6,598,625		(1,997,944		)
Interest Rate Options	10,648,000		1,622,018		(191,759		)	12,583,000		283,386		(172,085		)
Interest Rate Forwards	496,300		9,051		0			959,772		24,487		(4,185		)
Foreign Currency
Foreign Currency Forwards	18,874		48		(46		)	16,683		0		(394		)
Currency/Interest Rate
Foreign Currency Swaps	187,151		27,400		0			234,767		11,482		(663		)
Credit
Credit Default Swaps	239,173		182		(2,311		)	0		0		0
Equity
Equity Futures	7,018,091		1,197		(83,449		)	1,191,237		0		(2,638		)
Total Return Swaps	24,138,579		277,250		(971,604		)	16,314,165		36,692		(573,957		)
Equity Options	33,717,741		514,582		(363,740		)	12,866,043		329,722		(422,700		)
Total Derivatives Not Qualifying as Hedge Accounting Instruments	$	185,916,159	$	18,848,670	$	(8,470,646	)	$	136,580,792	$	7,285,032	$	(3,180,438	)
Total Derivatives(1)(2)	$	187,180,171	$	18,955,257	$	(8,471,972	)	$	137,753,691	$	7,324,051	$	(3,206,949	)

(1)

Excludes embedded derivatives and associated reinsurance recoverables which contain multiple underlying risks. The fair value of these embedded derivatives was a net liability of $23,999 million and $11,823 million as of June 30, 2020 and December 31, 2019, respectively included in “Future policy benefits” and $226 million and $197 million as of June 30, 2020 and December 31, 2019, respectively included in “Policyholders’ account balances". Other assets included $27 million and $8 million as of June 30, 2020 and December 31, 2019, respectively. Other liabilities included $11 million and $0 million as of June 30, 2020 and December 31, 2019, respectively. The fair value of the related reinsurance, included in "Reinsurance recoverables" and/or "Reinsurance payables" was an asset of $593 million and $350 million as of June 30, 2020 and December 31, 2019, respectively.


(2)	Recorded in “Other invested assets”, “Other liabilities”, and "Payables to parent and affiliates" on the Unaudited Interim Statements of Financial Position.

The fair value of the embedded derivatives, included in "Future policy benefits", was a net liability of $15,086 million and $8,332 million as of September 30, 2019 and December 31, 2018, respectively. The fair value of the related reinsurance recoverables to Prudential Insurance was a net asset of $368 million and $234 million as of September 30, 2019 and December 31, 2018, respectively, included in "Reinsurance recoverables". See Note 6 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, included in "Reinsurance recoverables" or "Reinsurance payables", was a net asset of $44 million and $6 million as of September 30, 2019 and December 31, 2018, respectively.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

The fair value of the embedded derivatives, included in "Policyholders' account balances", was a net liability of $154 million and $42 million as of September 30, 2019 and December 31, 2018, respectively. There were no related reinsurance recoverables at each respective period.

Offsetting Assets and Liabilities

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


	September 30, 2019												June 30, 2020
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statements of Financial Position			Net Amounts Presented in the Statements of Financial Position		Financial Instruments/ Collateral(1)			Net Amount		Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statements of Financial Position			Net Amounts Presented in the Statements of Financial Position		Financial Instruments/ Collateral(1)			Net Amount
	(in thousands)												(in thousands)
Offsetting of Financial Assets:
Derivatives(1)	$	10,400,440	$	(10,400,438	)	$	2	$	0		$	2	$	18,955,257	$	(18,952,384	)	$	2,873	$	(2,873	)	$	0
Securities purchased under agreements to resell	1,255,000		0			1,255,000		(1,255,000		)	0		1,016,505		0			1,016,505		(1,016,505		)	0
Total Assets	$	11,655,440	$	(10,400,438	)	$	1,255,002	$	(1,255,000	)	$	2	$	19,971,762	$	(18,952,384	)	$	1,019,378	$	(1,019,378	)	$	0
Offsetting of Financial Liabilities:
Derivatives(1)	$	3,825,724	$	(3,814,060	)	$	11,664	$	(11,664	)	$	0	$	8,471,972	$	(7,947,699	)	$	524,273	$	0		$	524,273
Securities sold under agreements to repurchase	0		0			0		0			0		0		0			0		0			0
Total Liabilities	$	3,825,724	$	(3,814,060	)	$	11,664	$	(11,664	)	$	0	$	8,471,972	$	(7,947,699	)	$	524,273	$	0		$	524,273


	December 31, 2018												December 31, 2019
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statements of Financial Position			Net Amounts Presented in the Statements of Financial Position		Financial Instruments/ Collateral(1)			Net Amount		Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statements of Financial Position			Net Amounts Presented in the Statements of Financial Position		Financial Instruments/ Collateral(1)			Net Amount
	(in thousands)												(in thousands)
Offsetting of Financial Assets:
Derivatives(1)	$	4,847,794	$	(4,804,816	)	$	42,978	$	0		$	42,978	$	7,324,051	$	(7,324,049	)	$	2	$	0		$	2
Securities purchased under agreements to resell	675,000		0			675,000		(675,000		)	0		302,000		0			302,000		(302,000		)	0
Total Assets	$	5,522,794	$	(4,804,816	)	$	717,978	$	(675,000	)	$	42,978	$	7,626,051	$	(7,324,049	)	$	302,002	$	(302,000	)	$	2
Offsetting of Financial Liabilities:
Derivatives(1)	$	2,140,789	$	(2,134,160	)	$	6,629	$	(6,629	)	$	0	$	3,206,949	$	(3,053,132	)	$	153,817	$	(820	)	$	152,997
Securities sold under agreements to repurchase	0		0			0		0			0		0		0			0		0			0
Total Liabilities	$	2,140,789	$	(2,134,160	)	$	6,629	$	(6,629	)	$	0	$	3,206,949	$	(3,053,132	)	$	153,817	$	(820	)	$	152,997


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

For information regarding the rights of offset associated with the derivative assets and liabilities in the table above see “Credit Risk” below and Note 9. For securities purchased under agreements to resell and securities sold under agreements to repurchase, the Company monitors the value of the securities and maintains collateral, as appropriate, to protect against credit exposure. Where the Company has entered into repurchase and resale agreements with the same counterparty, in the event of default, the Company would generally be permitted to exercise rights of offset. For additional information on the Company’s accounting policy for securities repurchase and resale agreements, see Note 2 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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~~equity derivatives in any of its cash flow hedge accounting relationships.

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

Three Months Ended September 30, 2019
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 $ (130 ) $ 2,665
$ 7,771
$ 27,184
Total cash flow hedges (130 ) 2,665
7,771
27,184
Derivatives Not Qualifying as Hedge Accounting Instruments:

Interest Rate 2,571,885
0
0
0
Currency 681
0
0
0
Currency/Interest Rate 17,781
0
76
0
Credit 198
0
0
0
Equity (145,305 ) 0
0
0
Embedded Derivatives (2,982,189 ) 0
0
0
Total Derivatives Not Qualifying as Hedge Accounting Instruments: (536,949 ) 0
76
0
Total $ (537,079 ) $ 2,665
$ 7,847
$ 27,184

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

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

Nine Months Ended September 30, 2019
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 $ (850 ) $ 8,375
$ 8,168
$ 30,689
Total cash flow hedges (850 ) 8,375
8,168
30,689
Derivatives Not Qualifying as Hedge Accounting Instruments:

Interest Rate 5,328,630
0
0
0
Currency 930
0
0
0
Currency/Interest Rate 26,397
0
97
0
Credit 1,775
0
0
0
Equity (2,378,529 ) 0
0
0
Embedded Derivatives (5,747,312 ) 0
0
0
Total Derivatives Not Qualifying as Hedge Accounting Instruments: (2,768,109 ) 0
97
0
Total $ (2,768,959 ) $ 8,375
$ 8,265
$ 30,689


	Three Months Ended September 30, 2018(2)									Three Months Ended June 30, 2020
	Realized Investment Gains (Losses)			Net Investment Income		Other Income		AOCI(1)		Realized Investment Gains (Losses)			Net Investment Income		Other Income			AOCI(1)
	(in thousands)									(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	(286	)	$	2,141	$	2,484	$	257	$	2,712		$	4,668	$	(9,648	)	$	(34,394	)
Total cash flow hedges	(286		)	2,141		2,484		257		2,712			4,668		(9,648		)	(34,394		)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	(772,889		)	0		0		0		(79,874		)	0		0			0
Currency	213			0		0		0		57			0		0			0
Currency/Interest Rate	1,510			0		33		0		(11,767		)	0		(2		)	0
Credit	0			0		0		0		1,629			0		0			0
Equity	(640,413		)	0		0		0		(4,830,379		)	0		0			0
Embedded Derivatives	1,487,675			0		0		0		1,531,563			0		0			0
Total Derivatives Not Qualifying as Hedge Accounting Instruments:	76,096			0		33		0		(3,388,771		)	0		(2		)	0
Total	$	75,810		$	2,141	$	2,517	$	257	$	(3,386,059	)	$	4,668	$	(9,650	)	$	(34,394	)

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)


	Nine Months Ended September 30, 2018(2)									Six Months Ended June 30, 2020
	Realized Investment Gains (Losses)			Net Investment Income		Other Income		AOCI(1)		Realized Investment Gains (Losses)			Net Investment Income		Other Income		AOCI(1)
	(in thousands)									(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	(964	)	$	5,841	$	8,973	$	1,984	$	4,567		$	8,928	$	7,295	$	68,462
Total cash flow hedges	(964		)	5,841		8,973		1,984		4,567			8,928		7,295		68,462
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	(2,360,922		)	0		0		0		6,970,027			0		0		0
Currency	537			0		0		0		1,087			0		0		0
Currency/Interest Rate	6,243			0		62		0		30,082			0		69		0
Credit	0			0		0		0		(5,528		)	0		0		0
Equity	(879,866		)	0		0		0		184,909			0		0		0
Embedded Derivatives	3,937,437			0		0		0		(11,335,743		)	0		0		0
Total Derivatives Not Qualifying as Hedge Accounting Instruments:	703,429			0		62		0		(4,155,166		)	0		69		0
Total	$	702,465		$	5,841	$	9,035	$	1,984	$	(4,150,599	)	$	8,928	$	7,364	$	68,462



	Three Months Ended June 30, 2019
	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	$	(399	)	$	2,977	$	1,956	$	1,882
Total cash flow hedges	(399		)	2,977		1,956		1,882
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	1,764,300			0		0		0
Currency	435			0		0		0
Currency/Interest Rate	6,784			0		17		0
Credit	1,579			0		0		0
Equity	(583,113		)	0		0		0
Embedded Derivatives	(2,080,538		)	0		0		0
Total Derivatives Not Qualifying as Hedge Accounting Instruments:	(890,553		)	0		17		0
Total	$	(890,952	)	$	2,977	$	1,973	$	1,882

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)



	Six Months Ended June 30, 2019
	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	$	(720	)	$	5,710	$	398	$	3,505
Total cash flow hedges	(720		)	5,710		398		3,505
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	2,756,745			0		0		0
Currency	248			0		0		0
Currency/Interest Rate	8,616			0		20		0
Credit	1,577			0		0		0
Equity	(2,233,223		)	0		0		0
Embedded Derivatives	(2,765,123		)	0		0		0
Total Derivatives Not Qualifying as Hedge Accounting Instruments:	(2,231,160		)	0		20		0
Total	$	(2,231,880	)	$	5,710	$	418	$	3,505


(1)	Net change in AOCI.


~~(2)~~	~~Prior period amounts have been updated to conform to current period presentation.~~

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


	(in thousands)			(in thousands)
Balance, December 31, 2018	$	(3,849	)
Cumulative-effect adjustment from the adoption of ASU 2017-12(1)	42
Balance, December 31, 2019				$	(287	)
Amount recorded in AOCI
Currency/Interest Rate	46,382			89,252
Total amount recorded in AOCI	46,382			89,252
Amount reclassified from AOCI to income
Currency/Interest Rate	(15,693		)	(20,790		)
Total amount reclassified from AOCI to income	(15,693		)	(20,790		)
Balance, September 30, 2019	$	26,882
Balance, June 30, 2020				$	68,175

~~(1) See Note 2 for details.~~

The changes in fair value of cash flow hedges are deferred in AOCI and are included in "Net unrealized investment gains (losses)" in the Unaudited Interim Statements of Operations and Comprehensive Income (Loss); these amounts are then reclassified to earnings when the hedged item affects earnings. Using ~~September~~June 30, ~~2019~~2020 values, it is estimated that a pre-tax gain of ~~$15~~$18 million is expected to be reclassified from AOCI to earnings during the subsequent twelve months ending ~~September~~June 30, ~~2020, offset by amounts pertaining to the hedged items.~~2021.

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

There were no material amounts reclassified from AOCI 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.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Credit Derivatives

Credit derivatives, where the Company has written credit protection on certain index references had outstanding notional amounts of $233 million and $0 million as of June 30, 2020 and December 31, 2019, respectively. These credit derivatives are reported at fair value as a liability of $2 million and $0 million as of June 30, 2020 and December 31, 2019, respectively. As of June 30, 2020, the notional amount of these credit derivatives had the following NAIC rating: $233 million in NAIC 4.

The Company has ~~no exposure from credit derivative positions where it has written or~~ purchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio. The Company has outstanding notional amounts of $6 million and $0 million reported as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019, respectively with a fair value of $0 million for both periods.

Credit Risk

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

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

5. FAIR VALUE OF ASSETS AND LIABILITIES

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

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

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

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

For a discussion of the Company's valuation methodologies for assets and liabilities measured at fair value and the fair value hierarchy, see Note 5 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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


	As of September 30, 2019											As of June 30, 2020
	Level 1		Level 2		Level 3		Netting(1)			Total		Level 1		Level 2		Level 3		Netting(1)			Total
	(in thousands)											(in thousands)
Fixed maturities, available-for-sale:
U.S Treasury securities and obligations of U.S. government authorities and agencies	$	0	$	7,473,555	$	9,883	$	0		$	7,483,438	$	0	$	9,145,963	$	12,216	$	0		$	9,158,179
Obligations of U.S. states and their political subdivisions	0		142,283		0		0			142,283		0		259,210		0		0			259,210
Foreign government bonds	0		222,541		0		0			222,541		0		180,675		0		0			180,675
U.S. corporate public securities	0		1,756,623		8,000		0			1,764,623		0		2,782,763		8,083		0			2,790,846
U.S. corporate private securities	0		1,056,417		34,560		0			1,090,977		0		1,478,651		58,946		0			1,537,597
Foreign corporate public securities	0		306,777		192		0			306,969		0		330,445		184		0			330,629
Foreign corporate private securities	0		1,020,459		30,282		0			1,050,741		0		1,182,103		56,176		0			1,238,279
Asset-backed securities(2)	0		425,773		19,683		0			445,456		0		601,015		18,128		0			619,143
Commercial mortgage-backed securities	0		584,181		0		0			584,181		0		700,435		0		0			700,435
Residential mortgage-backed securities	0		81,586		0		0			81,586		0		79,886		0		0			79,886
Subtotal	0		13,070,195		102,600		0			13,172,795		0		16,741,146		153,733		0			16,894,879
Fixed maturities, trading	0		388,789		3,960		0			392,749		0		616,148		4,301		0			620,449
Equity securities	4,962		51,912		5,109		0			61,983		4,561		52,262		5,242		0			62,065
Short-term investments	0		373,443		0		0			373,443		1,484,744		1,333,257		0		0			2,818,001
Cash equivalents	534,463		3,547,913		0		0			4,082,376		2,691,682		1,853,288		0		0			4,544,970
Other invested assets(3)	616		10,399,824		0		(10,400,438		)	2		3,803		18,951,454		0		(18,952,384		)	2,873
Other assets												0		0		27,136		0			27,136
Reinsurance recoverables	0		0		412,099		0			412,099		0		53,405		539,123		0			592,528
Receivables from parent and affiliates	0		3,167		0		0			3,167		0		55,789		0		0			55,789
Subtotal excluding separate account assets	540,041		27,835,243		523,768		(10,400,438		)	18,498,614		4,184,790		39,656,749		729,535		(18,952,384		)	25,618,690
Separate account assets(4)	0		32,057,438		0		0			32,057,438		0		29,379,668		0		0			29,379,668
Total assets	$	540,041	$	59,892,681	$	523,768	$	(10,400,438	)	$	50,556,052	$	4,184,790	$	69,036,417	$	729,535	$	(18,952,384	)	$	54,998,358
Future policy benefits(5)	$	0	$	0	$	15,086,125	$	0		$	15,086,125	$	0	$	0	$	23,998,671	$	0		$	23,998,671
Policyholders' account balances	0		0		153,935		0			153,935		0		0		226,072		0			226,072
Payables to parent and affiliates	0		3,819,216		0		(3,813,444		)	5,772		0		8,380,915		0		(7,945,093		)	435,822
Other liabilities	6,508		0		0		(616		)	5,892		91,057		11,088		0		(2,606		)	99,539
Total liabilities	$	6,508	$	3,819,216	$	15,240,060	$	(3,814,060	)	$	15,251,724	$	91,057	$	8,392,003	$	24,224,743	$	(7,947,699	)	$	24,760,104

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)


	As of December 31, 2018											As of December 31, 2019
	Level 1		Level 2		Level 3		Netting(1)			Total		Level 1		Level 2		Level 3		Netting(1)			Total
	(in thousands)											(in thousands)
Fixed maturities, available-for-sale:
U.S Treasury securities and obligations of U.S. government authorities and agencies	$	0	$	4,875,959	$	8,132	$	0		$	4,884,091	$	0	$	7,109,277	$	10,547	$	0		$	7,119,824
Obligations of U.S. states and their political subdivisions	0		131,164		0		0			131,164		0		259,682		0		0			259,682
Foreign government bonds	0		199,636		0		0			199,636		0		222,884		0		0			222,884
U.S. corporate public securities	0		1,473,973		0		0			1,473,973		0		1,732,632		8,044		0			1,740,676
U.S. corporate private securities	0		1,008,632		54,321		0			1,062,953		0		1,155,464		51,875		0			1,207,339
Foreign corporate public securities	0		291,086		0		0			291,086		0		337,800		187		0			337,987
Foreign corporate private securities	0		781,101		31,131		0			812,232		0		1,169,324		44,161		0			1,213,485
Asset-backed securities(2)	0		495,908		9,336		0			505,244		0		425,613		18,825		0			444,438
Commercial mortgage-backed securities	0		361,880		0		0			361,880		0		578,289		0		0			578,289
Residential mortgage-backed securities	0		49,414		0		0			49,414		0		77,761		0		0			77,761
Subtotal	0		9,668,753		102,920		0			9,771,673		0		13,068,726		133,639		0			13,202,365
Fixed maturities, trading	0		289,752		0		0			289,752		0		378,734		4,464		0			383,198
Equity securities	4,896		12		5,705		0			10,613		5,314		46,942		5,247		0			57,503
Short-term investments	0		29,818		0		0			29,818		0		260,354		0		0			260,354
Cash equivalents	1,098,903		2,593,456		0		0			3,692,359		150,631		1,654,974		0		0			1,805,605
Other invested assets(3)	4,380		4,843,414		0		(4,804,816		)	42,978		639		7,323,412		0		(7,324,049		)	2
Other assets												0		0		8,059		0			8,059
Reinsurance recoverables	0		0		239,911		0			239,911		0		47,006		302,814		0			349,820
Receivables from parent and affiliates	0		37,193		0		0			37,193		0		2,573		0		0			2,573
Subtotal excluding separate account assets	1,108,179		17,462,398		348,536		(4,804,816		)	14,114,297		156,584		22,782,721		454,223		(7,324,049		)	16,069,479
Separate account assets(4)	0		31,210,346		0		0			31,210,346		0		32,665,431		0		0			32,665,431
Total assets	$	1,108,179	$	48,672,744	$	348,536	$	(4,804,816	)	$	45,324,643	$	156,584	$	55,448,152	$	454,223	$	(7,324,049	)	$	48,734,910
Future policy benefits(5)	$	0	$	0	$	8,332,474	$	0		$	8,332,474	$	0	$	0	$	11,822,998	$	0		$	11,822,998
Policyholders' account balances	0		0		42,350		0			42,350		0		0		196,892		0			196,892
Payables to parent and affiliates	0		2,133,496		0		(2,133,496		)	0		0		3,198,440		0		(3,052,493		)	145,947
Other liabilities	7,293		0		0		(664		)	6,629		8,509		260		0		(639		)	8,130
Total liabilities	$	7,293	$	2,133,496	$	8,374,824	$	(2,134,160	)	$	8,381,453	$	8,509	$	3,198,700	$	12,019,890	$	(3,053,132	)	$	12,173,967


(1)	“Netting” amounts represent cash collateral of ~~$6,586~~$11,005 million and ~~$2,671~~$4,271 million as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.


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

(3)

Other invested assets excluded from the fair value hierarchy include certain hedge funds, private equity funds and other funds for which fair value is measured at net asset value ("NAV") per share (or its equivalent) as a practical expedient. ~~As of September~~At June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the fair values of such investments were ~~$10.4~~$10.7 million and ~~$8.0~~$10.5 million, respectively.

(4)

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

(5)

As of ~~September~~June 30, ~~2019,~~2020, the net embedded derivative liability position of ~~$15,086~~$23,999 million includes ~~$408~~$223 million of embedded derivatives in an asset position and ~~$15,494~~$24,222 million of embedded derivatives in a liability position. As of December 31, ~~2018,~~2019, the net embedded derivative liability position of ~~$8,332~~$11,823 million includes ~~$625~~$583 million of embedded derivatives in an asset position and ~~$8,957~~$12,406 million of embedded derivatives in a liability position.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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


	As of September 30, 2019											As of June 30, 2020
	Fair Value		Valuation Techniques	Unobservable Inputs	Minimum		Maximum		Weighted Average		Impact of Increase in Input on Fair Value(1)	Fair Value		Valuation Techniques	Unobservable Inputs	Minimum		Maximum		Weighted Average		Impact of Increase in Input on Fair Value(1)
	(in thousands)											(in thousands)
Assets:
Corporate securities(2)	$	17,812	Discounted cash flow	Discount rate	7	%	20	%	10.06	%	Decrease	$	35,072	Discounted cash flow	Discount rate	1.44	%	25	%	6.15	%	Decrease
			Market Comparables	EBITDA multiples(3)	6.7X		6.7X		6.7X		Increase
Reinsurance recoverables	$	412,099	Fair values are determined using the same unobservable inputs as future policy benefits.									$	539,123	Fair values are determined using the same unobservable inputs as future policy benefits.
Liabilities:
Future policy benefits(4)	$	15,086,125	Discounted cash flow	Lapse rate(6)	1	%	18	%			Decrease	$	23,998,671	Discounted cash flow	Lapse rate(6)	1	%	20	%			Decrease
				Spread over LIBOR(7)	0.16	%	1.46	%			Decrease				Spread over LIBOR(7)	0.17	%	1.69	%			Decrease
				Utilization rate(8)	43	%	97	%			Increase				Utilization rate(8)	39	%	96	%			Increase
				Withdrawal rate	See table footnote (9) below.										Withdrawal rate	See table footnote (9) below.
				Mortality rate(10)	0	%	15	%			Decrease				Mortality rate(10)	0	%	15	%			Decrease
				Equity volatility curve	14	%	23	%			Increase				Equity volatility curve	18	%	29	%			Increase
Policyholders' account balances(5)	$	153,935	Discounted cash flow	Lapse rate(6)	1	%	42	%			Decrease	$	226,072	Discounted cash flow	Lapse rate(6)	1	%	42	%			Decrease
				Spread over LIBOR(7)	0.16	%	1.46	%			Decrease				Spread over LIBOR(7)	0.17	%	1.69	%			Decrease
				Equity volatility curve	13	%	25	%			Increase				Equity volatility curve	6	%	38	%			Increase


	As of December 31, 2018											As of December 31, 2019
	Fair Value		Valuation Techniques	Unobservable Inputs	Minimum		Maximum		Weighted Average		Impact of Increase in Input on Fair Value(1)	Fair Value		Valuation Techniques	Unobservable Inputs	Minimum		Maximum		Weighted Average		Impact of Increase in Input on Fair Value(1)
	(in thousands)											(in thousands)
Assets:
Corporate securities(2)	$	18,609	Discounted cash flow	Discount rate	7	%	20	%	11.30	%	Decrease	$	17,149	Discounted cash flow	Discount rate	4.79	%	20	%	8.66	%	Decrease
			Market Comparables	EBITDA multiples(3)	6.7	X	6.7	X	6.7	X	Increase
			Liquidation	Liquidation value	41	%	41	%	41	%	Increase			Market Comparables	EBITDA multiples(3)	6.7	X	6.7	X	6.7	X	Increase
Reinsurance recoverables	$	239,911	Fair values are determined using the same unobservable inputs as future policy benefits.									$	302,814	Fair values are determined using the same unobservable inputs as future policy benefits.
Liabilities:
Future policy benefits(4)	$	8,332,474	Discounted cash flow	Lapse rate(6)	1	%	13	%			Decrease	$	11,822,998	Discounted cash flow	Lapse rate(6)	1	%	18	%			Decrease
				Spread over LIBOR(7)	0.36	%	1.60	%			Decrease				Spread over LIBOR(7)	0.10	%	1.23	%			Decrease
				Utilization rate(8)	50	%	97	%			Increase				Utilization rate(8)	43	%	97	%			Increase
				Withdrawal rate	See table footnote (9) below.										Withdrawal rate	See table footnote (9) below.
				Mortality rate(10)	0	%	15	%			Decrease				Mortality rate(10)	0	%	15	%			Decrease
				Equity volatility curve	18	%	22	%			Increase				Equity volatility curve	13	%	23	%			Increase
Policyholders' account balances(5)												$	196,892	Discounted cash flow	Lapse rate(6)	1	%	42	%			Decrease
															Spread over LIBOR(7)	0.10	%	1.23	%			Decrease
															Equity volatility curve	6	%	25	%			Increase


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


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


(3)	Represents multiples of earnings before interest, taxes, depreciation and amortization ("EBITDA"), and are amounts used when the Company has determined that market participants would use such multiples when valuing the investments.

(4)

Future policy benefits primarily represent general account liabilities for the living benefit features of the Company’s variable annuity contracts which are accounted for as embedded derivatives. Since the valuation methodology for these liabilities uses a range of inputs that vary at the contract level over the cash flow projection period, presenting a range, rather than a 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 Unaudited Interim Financial Statements—(Continued)

(5)

Policyholders’ account balances primarily represent general account liabilities for the index-linked interest credited on certain of the Company’s annuity products that 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 a 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 Unaudited Interim Financial Statements—(Continued)~~

~~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.~~

(6)

Lapse rates for contracts with living benefit guarantees 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 for contracts with index-linked crediting guarantees may be adjusted at the contract level based on the applicability of any surrender charges, product type, and market related factors such as interest rates. Lapse rates are also generally assumed to be lower for the period where surrender charges apply. For any given contract, lapse rates vary throughout the period over which cash flows are projected for the purposes of valuing these embedded derivatives.

(7)

The spread over the London Inter-Bank Offered Rate ("LIBOR") swap curve represents the premium added to the proxy for the risk-free rate (LIBOR) to reflect the Company's estimates of rates that a market participant would use to value the living benefits in both the accumulation and payout phases and index-linked interest crediting guarantees. This spread includes an estimate of NPR, which is the risk that the obligation will not be fulfilled by the Company. NPR is primarily estimated by utilizing the credit spreads associated with issuing funding agreements, adjusted for any illiquidity risk premium. In order to reflect the financial strength ratings of the Company, credit spreads associated with funding agreements, as opposed to credit spread associated with debt, are utilized in developing this estimate because funding agreements, living benefit guarantees, and index-linked interest crediting guarantees are insurance liabilities and are therefore senior to debt.

(8)

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.

(9)

The withdrawal rate assumption estimates the magnitude of annual contractholder withdrawals relative to the maximum allowable amount under the contract. These assumptions vary based on the age of the contractholder, the tax status of the contract and the duration since the contractholder began lifetime withdrawals. As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the minimum withdrawal rate assumption is 76% and78% respectively. As of June 30, 2020 and December 31, 2019, 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%.

(10)

The range reflects the mortality rates for the vast majority of business with living benefits, ~~and other contracts,~~ with policyholders ranging from 45 to 90 years old. While the majority of living benefits have a minimum age requirement, certain other contracts do not have an age restriction. This results in contractholders with mortality rates approaching 0% for certain benefits. Mortality rates may vary by product, age, and duration. A mortality improvement assumption is also incorporated into the overall mortality table.

Interrelationships Between Unobservable Inputs – In addition to the sensitivities of fair value measurements to changes in each unobservable input in isolation, as reflected in the table above, interrelationships between these inputs may also exist, such that a change in one unobservable input may give rise to a change in another, or multiple, inputs. ~~For the discussion~~Examples of ~~the relationships between unobservable inputs as well as market factors that may affect the range of inputs used in the valuation of~~such interrelationships for significant internally-priced Level 3 assets and liabilities ~~see Note 5~~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. During weaker economic cycles, as the expectations of default increases, credit spreads widen, which results in a decrease in fair value.

Future Policy Benefits – The Company expects efficient benefit utilization and withdrawal rates to generally be correlated with lapse rates. However, behavior is 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 ~~Financial Statements included~~extent that increases in equity volatility are correlated with overall declines in the ~~Company's Annual Report on Form 10-K for the year ended December 31, 2018.~~capital markets, lapse rates may decline as contracts become more in-the-money.

Changes in Level 3 Assets and Liabilities – The following tables describe changes in fair values of Level 3 assets and liabilities as of the dates indicated, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at the end of their respective periods. When a determination is made to classify assets and liabilities within Level 3, the determination is based on significance of the unobservable inputs in the overall fair value measurement. All transfers are based on changes in the observability of the valuation inputs, including the availability of pricing service information that the Company can validate. ~~All transfers~~Transfers into Level 3 are generally ~~reported at~~ the ~~value~~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 ~~beginning of the quarter in which transfers occur for any such assets still held at the end of the quarter.~~Company can validate.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)


	Three Months Ended September 30, 2019																												Three Months Ended June 30, 2020
	Fair Value, beginning of period			Total realized and unrealized gains (losses)(1)			Purchases		Sales		Issuances			Settlements			Other(2)		Transfers into Level 3		Transfers out of Level 3		Fair Value, end of period			Unrealized gains (losses) for assets still held(3)			Fair Value, beginning of period			Total realized and unrealized gains (losses)(1)			Purchases		Sales			Issuances			Settlements			Other(2)		Transfers into Level 3		Transfers out of Level 3			Fair Value, end of period			Unrealized gains (losses) for assets still held(3)
	(in thousands)																												(in thousands)
Fixed maturities, available-for-sale:
U.S. Government	$	9,380		$	0		$	503	$	0	$	0		$	0		$	0	$	0	$	0	$	9,883		$	0		$	11,458		$	0		$	758	$	0		$	0		$	0		$	0	$	0	$	0		$	12,216		$	0
Corporate Securities(4)	71,071			(361		)	10,340		0		0			(8,016		)	0		0		0		73,034			(769		)	111,606			8,603			3,896		(7,810		)	0			(3,445		)	0		10,783		(244		)	123,389			7,738
Structured Securities(5)	19,725			296			0		0		0			(338		)	0		0		0		19,683			0			24,227			157			0		0			0			(620		)	0		0		(5,636		)	18,128			155
Other assets:
Fixed maturities, trading	4,044			(84		)	0		0		0			0			0		0		0		3,960			(79		)	3,593			708			0		0			0			0			0		0		0			4,301			713
Equity securities	5,363			(254		)	0		0		0			0			0		0		0		5,109			(254		)	4,986			256			0		0			0			0			0		0		0			5,242			256
Other invested assets	0			0			0		0		0			0			0		0		0		0			0			0			0			0		0			0			0			0		0		0			0			0
Short-term investments	0			0			0		0		0			0			0		0		0		0			0
Other assets																													12,242			4,558			10,338		0			0			(2		)	0		0		0			27,136			4,556
Reinsurance recoverables	339,744			67,909			4,446		0		0			0			0		0		0		412,099			70,279			565,090			(30,207		)	4,240		0			0			0			0		0		0			539,123			(26,137		)
Receivables from parent and affiliates	0			0			0		0		0			0			0		0		0		0			0
Liabilities:
Future policy benefits	(11,738,480		)	(3,069,876		)	0		0		(277,769		)	0			0		0		0		(15,086,125		)	(3,187,867		)	(25,302,654		)	1,588,409			0		0			(284,426		)	0			0		0		0			(23,998,671		)	1,421,382
Policyholders' account balances(6)	(121,102		)	274			0		0		(33,107		)	0			0		0		0		(153,935		)	2,610			(158,920		)	(39,095		)	0		0			(28,057		)	0			0		0		0			(226,072		)	(34,321		)


	Three Months Ended September 30, 2019																	Three Months Ended June 30, 2020
	Total realized and unrealized gains (losses)											Unrealized gains (losses) for assets still held(3)						Total realized and unrealized gains (losses)										Unrealized gains (losses) for assets still held(3)
	Realized investment gains (losses), net(1)			Asset administration fees and other income			Included in other comprehensive income (losses)		Net investment income			Realized investment gains (losses), net			Asset administration fees and other income			Realized investment gains (losses), net(1)			Asset administration fees and other income		Included in other comprehensive income (loss)		Net investment income			Realized investment gains (losses), net			Asset administration fees and other income		Included in other comprehensive income (loss)(7)
	(in thousands)																	(in thousands)
Fixed maturities, available-for-sale	$	(630	)	$	0		$	515	$	50		$	(769	)	$	0		$	(57	)	$	0	$	8,799	$	18		$	(982	)	$	0	$	8,875
Other assets:
Fixed maturities, trading	0			(79		)	0		(5		)	0			(79		)	0			713		0		(5		)	0			713		0
Equity securities	0			(254		)	0		0			0			(254		)	0			256		0		0			0			256		0
Other invested assets	0			0			0		0			0			0			0			0		0		0			0			0		0
Short-term investments	0			0			0		0			0			0
Other assets																		4,558			0		0		0			4,556			0		0
Reinsurance recoverables	67,909			0			0		0			70,279			0			(30,207		)	0		0		0			(26,137		)	0		0
Receivables from parent and affiliates	0			0			0		0			0			0
Liabilities:
Future policy benefits	(3,069,876		)	0			0		0			(3,187,867		)	0			1,588,409			0		0		0			1,421,382			0		0
Policyholders' account balances	274			0			0		0			2,610			0			(39,095		)	0		0		0			(34,321		)	0		0

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)


	Nine Months Ended September 30, 2019																														Six Months Ended June 30, 2020
	Fair Value, beginning of period			Total realized and unrealized gains (losses)(1)			Purchases		Sales			Issuances			Settlements			Other(2)		Transfers into Level 3		Transfers out of Level 3			Fair Value, end of period			Unrealized gains (losses) for assets still held(3)			Fair Value, beginning of period			Total realized and unrealized gains (losses)(1)			Purchases		Sales			Issuances			Settlements			Other(2)		Transfers into Level 3		Transfers out of Level 3			Fair Value, end of period			Unrealized gains (losses) for assets still held(3)
	(in thousands)																														(in thousands)
Fixed maturities, available-for-sale:
U.S. Government	$	8,132		$	0		$	1,751	$	0		$	0		$	0		$	0	$	0	$	0		$	9,883		$	0		$	10,547		$	0		$	1,669	$	0		$	0		$	0		$	0	$	0	$	0		$	12,216		$	0
Corporate Securities(4)	85,452			262			17,653		0			0			(30,105		)	0		1,790		(2,018		)	73,034			(2,765		)	104,267			(6,164		)	15,173		(8,965		)	0			(5,810		)	0		25,132		(244		)	123,389			(8,042		)
Structured Securities(5)	9,336			825			44,273		0			0			(4,724		)	0		551		(30,578		)	19,683			(2		)	18,825			(131		)	6,145		0			0			(1,075		)	0		0		(5,636		)	18,128			(131		)
Other assets:
Fixed maturities, trading	0			(1,061		)	0		0			0			0			0		5,021		0			3,960			(1,051		)	4,464			(163		)	0		0			0			0			0		0		0			4,301			(153		)
Equity securities	5,705			333			0		(929		)	0			0			0		0		0			5,109			344			5,247			(5		)	0		0			0			0			0		0		0			5,242			(5		)
Other invested assets	0			0			0		0			0			0			0		0		0			0			0			0			0			0		0			0			0			0		0		0			0			0
Short-term investments	0			0			0		0			0			0			0		0		0			0			0
Other assets																															8,059			945			18,134		0			0			(2		)	0		0		0			27,136			944
Reinsurance recoverables	239,911			136,770			13,523		0			0			0			21,895		0		0			412,099			142,329			302,814			227,746			8,563		0			0			0			0		0		0			539,123			232,325
Receivables from parent and affiliates	0			0			0		0			0			0			0		0		0			0			0
Liabilities:
Future policy benefits	(8,332,474		)	(5,954,076		)	0		0			(799,575		)	0			0		0		0			(15,086,125		)	(6,177,050		)	(11,822,998		)	(11,609,063		)	0		0			(566,610		)	0			0		0		0			(23,998,671		)	(11,807,482		)
Policyholders' account balances(6)	(42,350		)	(12,804		)	0		0			(98,781		)	0			0		0		0			(153,935		)	(8,672		)	(196,892		)	21,334			0		0			(50,514		)	0			0		0		0			(226,072		)	10,084


	Nine Months Ended September 30, 2019																	Six Months Ended June 30, 2020
	Total realized and unrealized gains (losses)											Unrealized gains (losses) for assets still held(3)						Total realized and unrealized gains (losses)												Unrealized gains (losses) for assets still held(3)
	Realized investment gains (losses), net(1)			Asset administration fees and other income			Included in other comprehensive income (losses)		Net investment income			Realized investment gains (losses), net			Asset administration fees and other income			Realized investment gains (losses), net(1)			Asset administration fees and other income			Included in other comprehensive income (loss)			Net investment income			Realized investment gains (losses), net			Asset administration fees and other income			Included in other comprehensive income (loss)(7)
	(in thousands)																	(in thousands)
Fixed maturities, available-for-sale	$	(2,530	)	$	0		$	3,429	$	188		$	(2,767	)	$	0		$	(167	)	$	0		$	(6,125	)	$	(3	)	$	(982	)	$	0		$	(7,191	)
Other assets:
Fixed maturities, trading	0			(1,051		)	0		(10		)	0			(1,051		)	0			(153		)	0			(10		)	0			(153		)	0
Equity securities	0			333			0		0			0			344			0			(5		)	0			0			0			(5		)	0
Other invested assets	0			0			0		0			0			0			0			0			0			0			0			0			0
Short-term investments	0			0			0		0			0			0
Other assets																		945			0			0			0			944			0			0
Reinsurance recoverables	136,770			0			0		0			142,329			0			227,746			0			0			0			232,325			0			0
Receivables from parent and affiliates	0			0			0		0			0			0
Liabilities:
Future policy benefits	(5,954,076		)	0			0		0			(6,177,050		)	0			(11,609,063		)	0			0			0			(11,807,482		)	0			0
Policyholders' account balances	(12,804		)	0			0		0			(8,672		)	0			21,334			0			0			0			10,084			0			0

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)



	Three Months Ended June 30, 2019
	Fair Value, beginning of period			Total realized and unrealized gains (losses)(1)			Purchases		Sales			Issuances			Settlements			Other (2)			Transfers into Level 3		Transfers out of Level 3			Fair Value, end of period			Unrealized gains (losses) for assets still held(3)
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Government	$	8,779		$	0		$	601	$	0		$	0		$	0		$	0		$	0	$	0		$	9,380		$	0
Corporate Securities(4)	84,800			13			4,087		0			0			(16,626		)	0			815		(2,018		)	71,071			0
Structured Securities(5)	50,258			384			0		0			0			(339		)	0			0		(30,578		)	19,725			0
Other assets:
Fixed maturities, trading	0			(977		)	0		0			0			0			0			5,021		0			4,044			(972		)
Equity securities	5,616			481			0		(734		)	0			0			0			0		0			5,363			480
Other invested assets	0			0			0		0			0			0			0			0		0			0			0
Other assets	0			0			0		0			0			0			0			0		0			0			0
Reinsurance recoverables	283,991			51,236			4,518		0			0			0			(1		)	0		0			339,744			53,335
Liabilities:
Future policy benefits	(9,316,905		)	(2,157,110		)	0		0			(264,465		)	0			0			0		0			(11,738,480		)	(2,240,816		)
Policyholders' account balances(6)	(80,579		)	(5,095		)	0		0			(35,428		)	0			0			0		0			(121,102		)	(3,299		)



	Three Months Ended June 30, 2019
	Total realized and unrealized gains (losses)											Unrealized gains (losses) for assets still held(3)
	Realized investment gains (losses), net(1)			Asset administration fees and other income			Included in other comprehensive income (loss)		Net investment income			Realized investment gains (losses), net			Asset administration fees and other income
	(in thousands)
Fixed maturities, available-for-sale	$	(1,175	)	$	0		$	1,473	$	99		$	0		$	0
Other assets:
Fixed maturities, trading	0			(972		)	0		(5		)	0			(972		)
Equity securities	0			481			0		0			0			480
Other invested assets	0			0			0		0			0			0
Other assets	0			0			0		0			0			0
Reinsurance recoverables	51,236			0			0		0			53,335			0
Liabilities:
Future policy benefits	(2,157,110		)	0			0		0			(2,240,816		)	0
Policyholders' account balances	(5,095		)	0			0		0			(3,299		)	0

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)


	Three Months Ended September 30, 2018(7)																																Six Months Ended June 30, 2019
	Fair Value, beginning of period			Total realized and unrealized gains (losses)(1)			Purchases		Sales			Issuances			Settlements			Other (2)			Transfers into Level 3			Transfers out of Level 3			Fair Value, end of period			Unrealized gains (losses) for assets still held(3)			Fair Value, beginning of period			Total realized and unrealized gains (losses)(1)			Purchases		Sales			Issuances			Settlements			Other (2)		Transfers into Level 3		Transfers out of Level 3			Fair Value, end of period			Unrealized gains (losses) for assets still held(3)
	(in thousands)																																(in thousands)
Fixed maturities, available-for-sale:
U.S. Government	$	6,658		$	0		$	255	$	0		$	0		$	0		$	0		$	0		$	0		$	6,913		$	0		$	8,132		$	0		$	1,248	$	0		$	0		$	0		$	0	$	0	$	0		$	9,380		$	0
Corporate Securities(4)	96,849			(6,816		)	1,323		0			0			(6,495		)	3			0			0			84,864			(2,771		)	85,452			623			7,313		0			0			(22,089		)	0		1,790		(2,018		)	71,071			(1,996		)
Structured Securities(5)	59,178			(155		)	0		(13,850		)	0			(14,052		)	0			(194		)	(20,975		)	9,952			0			9,336			529			44,273		0			0			(4,386		)	0		551		(30,578		)	19,725			(2		)
Other assets:
Fixed maturities, trading																																	0			(977		)	0		0			0			0			0		5,021		0			4,044			(972		)
Equity securities	9,309			(46		)	0		(1,584		)	0			0			0			0			0			7,679			(375		)	5,705			587			0		(929		)	0			0			0		0		0			5,363			598
Other invested assets	0			0			0		0			0			0			0			0			0			0			0			0			0			0		0			0			0			0		0		0			0			0
Short-term investments	0			0			0		0			0			31			(23		)	0			0			8			0
Other assets																																	0			0			0		0			0			0			0		0		0			0			0
Reinsurance recoverables	185,258			(33,467		)	4,930		0			0			0			2,485			0			0			159,206			(47,218		)	239,911			68,861			9,077		0			0			0			21,895		0		0			339,744			72,829
Receivables from parent and affiliates	0			0			0		0			0			0			0			0			0			0			0
Liabilities:
Future policy benefits	(6,222,612		)	1,485,428			0		0			(258,121		)	0			0			0			0			(4,995,305		)	1,428,629			(8,332,474		)	(2,884,200		)	0		0			(521,806		)	0			0		0		0			(11,738,480		)	(3,025,994		)
Policyholders' account balances(6)	(13,835		)	(1,093		)	0		0			(19,141		)	0			0			0			0			(34,069		)	(1,093		)	(42,350		)	(13,078		)	0		0			(65,674		)	0			0		0		0			(121,102		)	(11,282		)

Three Months Ended September 30, 2018(7)
Total realized and unrealized gains (losses) Unrealized gains (losses) for assets still held(3)
Realized investment gains (losses), net(1) Asset administration fees and other income Included in other comprehensive income (losses) Net investment income Realized investment gains (losses), net Asset administration fees and other income
(in thousands)
Fixed maturities, available-for-sale $ (2,865 ) $ 0
$ (4,153 ) $ 47
$ (2,771 ) $ 0
Other assets:
Equity securities 0
(46 ) 0
0
0
(375 )
Other invested assets 0
0
0
0
0
0
Short-term investments 0
0
0
0
0
0
Reinsurance recoverables (33,467 ) 0
0
0
(47,218 ) 0
Receivables from parent and affiliates 0
0
0
0
0
0
Liabilities:
Future policy benefits 1,485,428
0
0
0
1,428,629
0
Policyholders' account balances (1,093 ) 0
0
0
(1,093 ) 0

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

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

Nine Months Ended September 30, 2018(7)
Fair Value, beginning of period Total realized and unrealized gains (losses)(1) Purchases Sales Issuances Settlements Other (2) Transfers into Level 3 Transfers out of Level 3 Fair Value, end of period Unrealized gains (losses) for assets still held(3)
(in thousands)
Fixed maturities, available-for-sale:
U.S. Government $ 5,237
$ 0
$ 1,676
$ 0
$ 0
$ 0
$ 0
$ 0
$ 0
$ 6,913
$ 0
Corporate Securities(4) 95,206
(8,302 ) 6,348
(241 ) 0
(14,899 ) 26
6,941
(215 ) 84,864
(2,992 )
Structured Securities(5) 185,358
(659 ) 84,810
(14,043 ) 0
(37,665 ) 0
51,785
(259,634 ) 9,952
0
Other assets:
Equity securities 9,758
366
0
(2,592 ) 0
0
147
0
0
7,679
(125 )
Other invested assets 147
0
0
0
0
0
(147 ) 0
0
0
0
Short-term investments 87
(55 ) 0
0
0
0
(24 ) 0
0
8
(55 )
Reinsurance recoverables 244,006
(90,205 ) 14,444
0
0
0
(9,039 ) 0
0
159,206
(95,836 )
Receivables from parent and affiliates 0
(106 ) 0
0
0
0
0
34,269
(34,163 ) 0
0
Liabilities:
Future policy benefits (8,151,902 ) 3,925,867
0
0
(769,270 ) 0
0
0
0
(4,995,305 ) 3,677,070
Policyholders' account balances(6) 0
(1,138 ) 0
0
(32,931 ) 0
0
0
0
(34,069 ) (1,138 )


	Nine Months Ended September 30, 2018(7)																Six Months Ended June 30, 2019
	Total realized and unrealized gains (losses)										Unrealized gains (losses) for assets still held(3)						Total realized and unrealized gains (losses)											Unrealized gains (losses) for assets still held(3)
	Realized investment gains (losses), net(1)			Asset administration fees and other income		Included in other comprehensive income (losses)			Net investment income		Realized investment gains (losses), net			Asset administration fees and other income			Realized investment gains (losses), net(1)			Asset administration fees and other income			Included in other comprehensive income (loss)		Net investment income			Realized investment gains (losses), net			Asset administration fees and other income
	(in thousands)																(in thousands)
Fixed maturities, available-for-sale	$	(3,050	)	$	0	$	(6,105	)	$	194	$	(2,992	)	$	0		$	(1,900	)	$	0		$	2,914	$	138		$	(1,998	)	$	0
Other assets:
Fixed maturities, trading																	0			(972		)	0		(5		)	0			(972		)
Equity securities	0			366		0			0		0			(125		)	0			587			0		0			0			598
Other invested assets	0			0		0			0		0			0			0			0			0		0			0			0
Short-term investments	(55		)	0		0			0		(55		)	0
Other assets																	0			0			0		0			0			0
Reinsurance recoverables	(90,205		)	0		0			0		(95,836		)	0			68,861			0			0		0			72,829			0
Receivables from parent and affiliates	0			0		(106		)	0		0			0
Liabilities:
Future policy benefits	3,925,867			0		0			0		3,677,070			0			(2,884,200		)	0			0		0			(3,025,994		)	0
Policyholders' account balances	(1,138		)	0		0			0		(1,138		)	0			(13,078		)	0			0		0			(11,282		)	0


(1)	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.


(2)	Other includes reclassifications of certain assets and liabilities between reporting categories.


(3)	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.


(4)	Includes U.S. corporate public, U.S. corporate private, foreign corporate public and foreign corporate private securities.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)


~~(4)~~	~~Includes U.S. corporate public, U.S. corporate private, foreign corporate public and foreign corporate private securities.~~


(5)	Includes asset-backed, commercial mortgage-backed and residential mortgage-backed securities.


(6)	Issuances and settlements for Policyholders' account balances are presented net in the rollforward.

(7)

~~Prior~~

Effective January 1, 2020, the changes in unrealized gains and losses for the period ~~amounts have been updated~~included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period were added prospectively due to ~~conform~~adoption of ASU 2018-13. Fair Value Measurement (Topic 820): Disclosure Framework - Changes to ~~current period presentation.~~the Disclosure Requirements for Fair Value Measurement.

Fair Value of Financial Instruments

The table below presents the carrying amount and fair value by fair value hierarchy level of certain financial instruments that are not reported at fair value. The financial instruments presented below are reported at carrying value on the Company’s Unaudited Interim Statements of Financial Position. In some cases, as described below, the carrying amount equals or approximates fair value.


	September 30, 2019											June 30, 2020
	Fair Value									Carrying Amount(1)		Fair Value								Carrying Amount(1)
	Level 1		Level 2		Level 3		Total			Total		Level 1		Level 2		Level 3		Total		Total
	(in thousands)											(in thousands)
Assets:
Commercial mortgage and other loans	$	0	$	0	$	1,381,743	$	1,381,743		$	1,335,206	$	0	$	0	$	1,697,362	$	1,697,362	$	1,644,320
Policy loans	0		0		12,352		12,352			12,352		0		0		12,257		12,257		12,257
Short-term investments	245,000		0		0		245,000			245,000		824,939		0		0		824,939		824,939
Cash and cash equivalents	585,944		1,255,000		0		1,840,944			1,840,944		993,381		1,016,505		0		2,009,886		2,009,886
Accrued investment income	0		98,662		0		98,662			98,662		0		116,317		0		116,317		116,317
Reinsurance recoverables	0		0		57,595		57,595			57,191		0		0		53,392		53,392		52,596
Receivables from parent and affiliates	0		11,934		0		11,934			11,934		0		33,303		0		33,303		33,303
Other assets	0		14,845		0		14,845			14,845		0		5,173		226,165		231,338		231,338
Total assets	$	830,944	$	1,380,441	$	1,451,690	$	3,663,075		$	3,616,134	$	1,818,320	$	1,171,298	$	1,989,176	$	4,978,794	$	4,924,956
Liabilities:
Policyholders’ account balances - investment contracts	$	0	$	0	$	1,259,338	$	1,259,338	��	$	1,251,639	$	0	$	0	$	1,891,373	$	1,891,373	$	1,871,759
Cash collateral for loaned securities	0		0		0		0			0		0		0		0		0		0
Short-term debt	0		0		0		0			0		0		359,900		0		359,900		353,849
Long-term debt	0		683,860		0		683,860			653,596		0		335,225		0		335,225		299,747
Reinsurance payables	0		0		51,267		51,267			51,267		0		0		46,079		46,079		46,079
Payables to parent and affiliates	0		48,380		0		48,380			48,380		0		44,971		0		44,971		44,971
Other liabilities	0		413,737		0		413,737			413,737		0		588,257		0		588,257		588,257
Separate account liabilities - investment contracts	0		58		0		58			58		0		38		0		38		38
Total liabilities	$	0	$	1,146,035	$	1,310,605	$	2,456,640		$	2,418,677	$	0	$	1,328,391	$	1,937,452	$	3,265,843	$	3,204,700

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)


	December 31, 2018										December 31, 2019
	Fair Value								Carrying Amount(1)		Fair Value								Carrying Amount(1)
	Level 1		Level 2		Level 3		Total		Total		Level 1		Level 2		Level 3		Total		Total
	(in thousands)										(in thousands)
Assets:
Commercial mortgage and other loans	$	0	$	0	$	1,339,707	$	1,339,707	$	1,353,478	$	0	$	0	$	1,512,283	$	1,512,283	$	1,471,522
Policy loans	0		0		12,805		12,805		12,805		0		0		12,366		12,366		12,366
Short-term investments	7,750		0		0		7,750		7,750		75,004		0		0		75,004		75,004
Cash and cash equivalents	136,175		675,000		0		811,175		811,175		687,558		302,000		0		989,558		989,558
Accrued investment income	0		90,895		0		90,895		90,895		0		102,724		0		102,724		102,724
Reinsurance recoverables	0		0		55,236		55,236		55,236		0		0		56,171		56,171		55,796
Receivables from parent and affiliates	0		9,188		0		9,188		9,188		0		10,192		50,587		60,779		60,192
Other assets	0		3,735		0		3,735		3,735		0		1,893		63,106		64,999		64,999
Total assets	$	143,925	$	778,818	$	1,407,748	$	2,330,491	$	2,344,262	$	762,562	$	416,809	$	1,694,513	$	2,873,884	$	2,832,161
Liabilities:
Policyholders’ account balances - investment contracts	$	0	$	0	$	560,548	$	560,548	$	565,903	$	0	$	0	$	1,445,486	$	1,445,486	$	1,438,742
Cash collateral for loaned securities	0		384		0		384		384		0		0		0		0		0
Short-term debt	0		139,843		0		139,843		140,569		0		245,617		0		245,617		242,094
Long-term debt	0		791,670		0		791,670		787,596		0		446,105		0		446,105		419,418
Reinsurance payables	0		0		55,236		55,236		55,236		0		0		50,035		50,035		50,035
Payables to parent and affiliates	0		30,846		0		30,846		30,846		0		39,209		0		39,209		39,209
Other liabilities	0		554,162		0		554,162		554,162		0		205,988		0		205,988		205,988
Separate account liabilities - investment contracts	0		71		0		71		71		0		54		0		54		54
Total liabilities	$	0	$	1,516,976	$	615,784	$	2,132,760	$	2,134,767	$	0	$	936,973	$	1,495,521	$	2,432,494	$	2,395,540


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

6. 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. Effective April 1, 2016, the Company recaptured the risks related to its variable annuity living benefit guarantees that were previously reinsured to affiliates. 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.

Effective December 31, 2015, the Company surrendered its New York license 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.~~ Reinsurance ceded arrangements do not discharge the Company as the primary insurer. Ceded balances would represent a liability of the Company in the event the reinsurers were unable to meet their obligations to the Company under the terms of the reinsurance agreements. The Company believes a material reinsurance liability resulting from such inability of reinsurers to meet their obligations is unlikely.

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 4 for additional information related to the accounting for embedded derivatives.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Reinsurance amounts included in the Company's Unaudited Interim Statements of Financial Position as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 were as follows:


	September 30, 2019			December 31, 2018			June 30, 2020			December 31, 2019
	(in thousands)						(in thousands)
Reinsurance recoverables(1)	$	710,596		$	572,102		$	860,518		$	621,510
Deferred policy acquisition costs	3,719,370			3,703,166			3,530,644			3,725,719
Deferred sales inducements	448,274			476,608			397,925			437,594
Value of business acquired	(2,306		)	(2,431		)	(2,135		)	(2,275		)
Other assets(2)	72,061			79,992			52,143			65,819
Policyholders’ account balances	3,238,585			3,098,537			3,322,132			3,253,474
Future policy benefits	10,787,006			5,680,939			17,724,091			8,328,777
Reinsurance payables~~(2)~~(3)	227,948			232,937			210,579			235,318
Other liabilities(4)	284,581			290,330			489,594			337,909


(1)	Includes ~~$0.1~~$0.5 million and ~~$0.0~~$0.2 million of unaffiliated activity as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.


(2)	Includes ~~$0.1~~$(13.3) million and $(3.9) million of unaffiliated activity as of ~~both September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019, respectively.


(3)	Includes $0.1 million of unaffiliated activity at both June 30, 2020 and December 31, 2019.


(4)	Includes $214.3 million and $60.4 million of unaffiliated activity as of June 30, 2020 and December 31, 2019, respectively.

~~The reinsurance~~Reinsurance recoverables by counterparty are broken out below:


	September 30, 2019		December 31, 2018		June 30, 2020		December 31, 2019
	(in thousands)				(in thousands)
Prudential Insurance	$	457,305	$	335,349	$	634,470	$	387,355
Pruco Life	253,207		236,716		225,566		233,933
Unaffiliated	84		37		482		222
Total reinsurance recoverables	$	710,596	$	572,102	$	860,518	$	621,510

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
	(in thousands)												(in thousands)
Premiums:
Direct	$	6,522		$	7,582		$	22,957		$	27,519		$	7,717		$	8,381		$	14,215		$	16,435
Assumed	6,355			6,568			25,848			22,714			8,003			10,398			18,430			19,493
Ceded	(371		)	(471		)	(563		)	(2,225		)	(707		)	(308		)	(1,053		)	(192		)
Net premiums	12,506			13,679			48,242			48,008			15,013			18,471			31,592			35,736
Policy charges and fee income:
Direct	119,509			137,719			363,540			423,170			95,670			122,420			201,924			244,031
Assumed	416,389			422,888			1,222,535			1,260,550			367,194			411,058			765,855			806,146
Ceded(1)	(8,746		)	(10,015		)	(26,201		)	(30,495		)	(7,182		)	(8,690		)	(15,228		)	(17,455		)
Net policy charges and fee income	527,152			550,592			1,559,874			1,653,225			455,682			524,788			952,551			1,032,722
Asset administration fees and other income:
Direct	44,616			18,360			124,587			70,053			35,964			41,226			105,837			79,971
Assumed	78,408			77,276			227,182			228,423			71,725			76,079			148,964			148,774
Ceded	(2,097		)	(2,316		)	(6,249		)	(7,016		)	(1,840		)	(2,100		)	(3,819		)	(4,152		)
Net asset administration fees and other income	120,927			93,320			345,520			291,460			105,849			115,205			250,982			224,593
Realized investment gains (losses), net:
Direct	1,644,998			(1,033,002		)	1,404,528			(2,239,254		)	(4,643,352		)	593,738			4,399,638			(240,470		)
Assumed	(2,243,942		)	1,133,110			(4,290,175		)	2,965,558			1,305,763			(1,530,524		)	(8,754,691		)	(2,046,233		)
Ceded	61,677			(34,835		)	111,946			(92,482		)	(38,175		)	42,571			221,598			50,269
Realized investment gains (losses), net	(537,267		)	65,273			(2,773,701		)	633,822			(3,375,764		)	(894,215		)	(4,133,455		)	(2,236,434		)
Policyholders' benefits (including change in reserves):
Direct	22,680			20,847			47,399			51,364			467			17,616			59,633			24,719
Assumed	48,154			29,743			82,130			64,401			(38,289		)	31,619			150,235			33,976
Ceded(2)	(1,001		)	(659		)	(3,856		)	(2,141		)	54			(1,345		)	(5,107		)	(2,855		)
Net policyholders' benefits (including change in reserves)	69,833			49,931			125,673			113,624			(37,768		)	47,890			204,761			55,840
Interest credited to policyholders’ account balances:
Direct	27,944			41,949			49,289			113,522			(12,284		)	15,335			33,555			21,345
Assumed	30,959			43,662			55,053			109,210			(22,561		)	19,283			45,854			24,094
Ceded	(1,956		)	(3,298		)	(3,613		)	(8,829		)	1,591			(1,263		)	307			(1,657		)
Net interest credited to policyholders’ account balances	56,947			82,313			100,729			213,903			(33,254		)	33,355			79,716			43,782
Reinsurance expense allowances and general and administrative expenses, net of capitalization and amortization	298,565			283,512			738,045			875,265			38,342			240,225			583,806			439,480


(1)	Includes ~~$(1)~~$(0.4) million and ~~$(0.4)~~$(1.0) million of unaffiliated activity for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~$(1)~~$(0.7) million and $(1.0) million for ~~both~~ the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, ~~and 2018.~~respectively.


(2)	Includes ~~$0.0~~$(0.5) million and $(0.1) million of unaffiliated activity for ~~both~~ the three months ended ~~September~~June 30, 2020 and 2019, respectively, and ~~2018 and $0.0~~$(0.4) million and ~~$(0.2)~~$(0.1) million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

7. INCOME TAXES

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

The Company's income tax provision amounted to an income tax benefit of ~~$(377)~~$(1,100) million, or ~~22.53%~~29.91% of income (loss) from operations before income taxes in the first ~~nine~~six months of ~~2019,~~2020, compared to ~~an income tax expense of $57~~$(318) million, or ~~4.38%~~22.96%, in the first ~~nine~~six months of ~~2018.~~2019. The Company’s current and prior effective tax rates differed from the U.S. statutory tax rate of 21% primarily due to non-taxable investment income and tax credits. ~~In addition,~~

On March 27, 2020, the ~~first nine months of 2018 includes a $0.5 million increase in income tax expense primarily related to refinement~~Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted into law. One provision of the ~~Company’s provisional estimates related to~~CARES Act amends the ~~U.S.~~ Tax Cuts and Jobs Act (“TCJA”) and allows companies with net operating losses (“NOLs”) originating in 2018, 2019 or 2020 to carry back those losses for five years. The Company has incorporated into the full year projected effective tax rate an income tax benefit of ~~2017 and the item described below that was recorded in the period in which it occurred.~~

2018 Industry Issue Resolution (IIR) - In August 2018, the Internal Revenue Service released an IIR to provide guidance on the tax reserving for guaranteed benefits within variable annuity contracts and principle-based reserves on certain life insurance contracts. Adopting the IIR methodology resulted in an accelerated deduction for the Company’s 2017 tax return$305 million that would result from carrying the estimated 2020 NOL back to tax years that have ~~otherwise been deductible in future years. Prior to the adoption of this IIR, the Company accounted for these future deductions as deferred tax assets measured using the current 21% corporate income~~a 35% tax rate. ~~Upon adoption~~This amount is an estimate and will change if the amount of, ~~the IIR, the tax benefits were revalued using the 35% tax rate applicable for the 2017 tax year in which they will now be recognized resulting in a reduction in~~and sources of, 2020 net taxable income ~~tax expense of $193 million for the first nine months of 2018.~~are different from forecast.

8. EQUITY

Accumulated Other Comprehensive Income (Loss)

AOCI represents the cumulative OCI items that are reported separate from net income and detailed on the Statements of Comprehensive Income. The balance of and changes in each component of AOCI as of and for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 are as follows:


	Accumulated Other Comprehensive Income (Loss)									Accumulated Other Comprehensive Income (Loss)
	Foreign Currency Translation Adjustment			Net Unrealized Investment Gains (Losses)(1)			Total Accumulated Other Comprehensive Income (Loss)			Foreign Currency Translation Adjustment			Net Unrealized Investment Gains (Losses)(1)			Total Accumulated Other Comprehensive Income (Loss)
	(in thousands)									(in thousands)
Balance, December 31, 2018	$	(1,078	)	$	(323,295	)	$	(324,373	)
Balance, December 31, 2019										$	(934	)	$	429,546		$	428,612
Change in OCI before reclassifications	(244		)	1,316,155			1,315,911			(481		)	1,563,347			1,562,866
Amounts reclassified from AOCI	0			20,591			20,591			0			(35,880		)	(35,880		)
Income tax benefit (expense)	51			(280,717		)	(280,666		)	101			(320,767		)	(320,666		)
Balance, September 30, 2019	$	(1,271	)	$	732,734		$	731,463
Balance, June 30, 2020										$	(1,314	)	$	1,636,246		$	1,634,932



	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, 2018	$	(1,078	)	$	(323,295	)	$	(324,373	)
Change in OCI before reclassifications	(16		)	698,743			698,727
Amounts reclassified from AOCI	0			9,087			9,087
Income tax benefit (expense)	3			(148,645		)	(148,642		)
Balance, June 30, 2019	$	(1,091	)	$	235,890		$	234,799


(1)	Includes cash flow hedges of $68 million and $0 million as of June 30, 2020 and December 31, 2019, respectively, and $0 millionand$(4) million as of June 30, 2019 and December 31, 2018, respectively.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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, 2017 $ (7 ) $ (90,117 ) $ (90,124 )
Change in OCI before reclassifications (1,192 ) (438,304 ) (439,496 )
Amounts reclassified from AOCI 0
54,870
54,870
Income tax benefit (expense) 251
80,522
80,773
Cumulative effect of adoption of ASU 2016-01 0
(3 ) (3 )
Cumulative effect of adoption of ASU 2018-02 (2 ) (36,712 ) (36,714 )
Balance, September 30, 2018 $ (950 ) $ (429,744 ) $ (430,694 )


~~(1)~~	~~Includes cash flow hedges of $27 million and $(4) million as of September 30, 2019 and December 31, 2018, respectively, and $(24) millionand$(26) million as of September 30, 2018 and December 31, 2017, respectively~~.

Reclassifications out of Accumulated Other Comprehensive Income (Loss)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018			2020			2019			2020		2019
	(in thousands)												(in thousands)
Amounts reclassified from AOCI(1)(2):
Net unrealized investment gains (losses):
Cash flow hedges—Currency/ Interest rate(3)	$	(10,305	)	$	4,339		$	(15,693	)	$	13,850		$	(2,267	)	$	(4,535	)	$	20,790	$	(5,388	)
Net unrealized investment gains (losses) on available-for-sale securities	(1,199		)	(10,755		)	(4,898		)	(68,720		)	8,668			(2,968		)	15,090		(3,699		)
Total net unrealized investment gains (losses)(4)	(11,504		)	(6,416		)	(20,591		)	(54,870		)	6,401			(7,503		)	35,880		(9,087		)
Total reclassifications for the period	$	(11,504	)	$	(6,416	)	$	(20,591	)	$	(54,870	)	$	6,401		$	(7,503	)	$	35,880	$	(9,087	)


(1)	All amounts are shown before tax.


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


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


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

Net Unrealized Investment Gains (Losses)

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

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

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

Net Unrealized Investment Gains (Losses) on Available-for-Sale Fixed Maturity Securities on which an ~~OTTI loss~~allowance for credit losses has been recognized

Net Unrealized
Gains (Losses)
on Investments
Deferred Policy Acquisition Costs and Other Costs(2) Future Policy Benefits and Other Liabilities(3)
Deferred
Income Tax
(Liability)
Benefit

Accumulated Other Comprehensive
Income (Loss) Related To Net Unrealized Investment Gains (Losses)
(in thousands)
Balance, December 31, 2018 $ (3,334 ) $ (1,119 ) $ (68 ) $ 27
$ (4,494 )
Net investment gains (losses) on investments arising during the period 17,051
0
0
(3,581 ) 13,470
Reclassification adjustment for (gains) losses included in net income (41 ) 0
0
9
(32 )
Reclassification adjustment for OTTI (gains) losses excluded from net income(1) (92 ) 0
0
19
(73 )
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs 0
(181 ) 0
38
(143 )
Impact of net unrealized investment (gains) losses on future policy benefits and other liabilities 0
0
(69 ) 14
(55 )
Balance, September 30, 2019 $ 13,584
$ (1,300 ) $ (137 ) $ (3,474 ) $ 8,673



	Net Unrealized Gains (Losses) on Investments			DAC and Other Costs(2)		Future Policy Benefits and Other Liabilities(3)		Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses)
	(in thousands)
Balance, December 31, 2019(1)	$	0		$	0	$	0	$	0		$	0
Net investment gains (losses) on investments arising during the period	15			0		0		(3		)	12
Reclassification adjustment for (gains) losses included in net income	0			0		0		0			0
Increase (decrease) due to non-credit related losses recognized in AOCI during the period	(62		)	0		0		14			(48		)
Impact of net unrealized investment (gains) losses on DAC and other costs	0			868		0		(180		)	688
Impact of net unrealized investment (gains) losses on future policy benefits and other liabilities	0			0		157		(33		)	124
Balance, June 30, 2020	$	(47	)	$	868	$	157	$	(202	)	$	776


(1)	~~Represents "transfers in" related to the portion of OTTI~~Allowance for credit losses ~~recognized during the period that were not recognized in earnings for~~on available-for-sale fixed maturity securities ~~with no prior OTTI loss.~~effective January 1, 2020.


(2)	"Other costs" primarily includes reinsurance recoverables, DSI and VOBA.


(3)	"Other liabilities" primarily includes reinsurance payables and deferred reinsurance gains.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim 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(3) Future Policy Benefits and Other Liabilities(4)
Deferred
Income Tax
(Liability)
Benefit
Accumulated Other Comprehensive
Income (Loss) Related To Net Unrealized Investment Gains (Losses)
(in thousands)
Balance, December 31, 2018 $ (413,575 ) $ 8,505
$ 1,113
$ 85,156
$ (318,801 )
Net investment gains (losses) on investments arising during the period 1,503,365
0
0
(315,707 ) 1,187,658
Reclassification adjustment for (gains) losses included in net income 20,632
0
0
(4,333 ) 16,299
Reclassification adjustment for OTTI (gains) losses excluded from net income(2) 92
0
0
(19 ) 73
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs 0
(180,113 ) 0
37,824
(142,289 )
Impact of net unrealized investment (gains) losses on future policy benefits and other liabilities 0
0
(23,898 ) 5,019
(18,879 )
Balance, September 30, 2019 $ 1,110,514
$ (171,608 ) $ (22,785 ) $ (192,060 ) $ 724,061



	Net Unrealized Gains (Losses) on Investments(1)			DAC and Other Costs(3)			Future Policy Benefits and Other Liabilities(4)			Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses)
	(in thousands)
Balance, December 31, 2019(2)	$	736,930		$	(156,175	)	$	(35,983	)	$	(115,226	)	$	429,546
Net investment gains (losses) on investments arising during the period	1,749,271			0			0			(367,349		)	1,381,922
Reclassification adjustment for (gains) losses included in net income	(35,880		)	0			0			7,535			(28,345		)
Reclassification due to allowance for credit losses recorded during the period	62			0			0			(13		)	49
Impact of net unrealized investment (gains) losses on DAC and other costs	0			(183,205		)	0			38,473			(144,732		)
Impact of net unrealized investment (gains) losses on future policy benefits and other liabilities	0			0			(3,759		)	789			(2,970		)
Balance, June 30, 2020	$	2,450,383		$	(339,380	)	$	(39,742	)	$	(435,791	)	$	1,635,470


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


(2)	~~Represents "transfers out" related to the portion of~~Includes net unrealized gains (losses) for which an OTTI ~~losses recognized during the period that were not recognized in earnings for securities with no prior OTTI loss.~~loss had been previously recognized.


(3)	"Other costs" primarily includes reinsurance recoverables, DSI and VOBA.


(4)	"Other liabilities" primarily includes reinsurance payables and deferred reinsurance gains.

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

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

9. RELATED PARTY TRANSACTIONS

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

Expense Charges and Allocations

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

The Company’s general and administrative expenses are charged to the Company using allocation methodologies based on business production processes. Management believes that the methodology is reasonable and reflects costs incurred by Prudential Insurance to process transactions on behalf of the Company. The Company operates under service and lease agreements whereby services of officers and employees, supplies, use of equipment and office space are provided by Prudential Insurance. The Company reviews its allocation methodology periodically which it may adjust accordingly. General and administrative expenses include allocations of stock compensation expenses related to a stock-based awards program and a deferred compensation program issued by Prudential Financial. The expense charged to the Company for the stock-based awards program was $0.0 million and $0.1 million for ~~both~~ the three months ended ~~September~~June 30, 2020 and 2019, ~~and 2018,~~respectively, and $0.1 million for both the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019. The expense charged to the Company for the deferred compensation program was $0.0 million and $0.2 million for the three months ended ~~September~~June 30, 2020 and 2019, respectively, and ~~2018, respectively,~~$0.3 million and $0.5 million for ~~both~~ the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, ~~and 2018.~~respectively.

The Company is charged for its share of employee benefit expenses. These expenses include costs for funded and non-funded, non-contributory defined benefit pension plans. Some of these benefits are based on final earnings and length of service while others are based on an account balance, which takes into consideration age, service and earnings during a career. The Company’s share of net expense for the pension plans was $0.5 million and ~~$0.4~~$0.6 million for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~$2 million and $1~~$1.1 million for both the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018, respectively.~~2019.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

The Company is also charged for its share of the costs associated with welfare plans issued by Prudential Insurance. These expenses include costs related to medical, dental, life insurance and disability. The Company's share of net expense for the welfare plans was $0.4 million and $0.5 million for ~~both~~ the three months ended ~~September~~June 30, 2020 and 2019, respectively, and ~~2018,~~$1.0 million and $2$1.1 million for ~~both~~ the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, ~~and 2018.~~respectively.

Prudential Insurance sponsors voluntary savings plans for its employee 401(k) plans. The plans provide for salary reduction contributions by employees and matching contributions by the Company of up to 4% of annual salary. The Company's expense for its share of the voluntary savings plan was $0.2 million and $0.3 million for ~~both~~ the three months ended ~~September~~June 30, 2020 and 2019, ~~and 2018, and $0.7 million~~respectively, and $0.5 million for both the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018, respectively.~~2019.

The Company pays commissions and certain other fees to ~~PAD~~Prudential Annuities Distributors, Inc ("PAD") in consideration for PAD’s marketing and underwriting of the Company’s products. Commissions and fees are paid by PAD to broker-dealers who sell the Company’s products. Commissions and fees paid by the Company to PAD was ~~$24~~$29 million and ~~$32~~$25 million for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~$74~~$52 million and ~~$91~~$49 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively.

The Company is charged for its share of corporate expenses incurred by Prudential Financial to benefit its businesses, such as advertising, executive oversight, external affairs and philanthropic activity. The Company’s share of corporate expenses was $2 million and $4 million for ~~both~~ the three months ended ~~September~~June 30, 2020 and 2019, respectively, and ~~2018,~~$6 million and ~~$12~~$8 million for ~~both~~ the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, ~~and 2018.~~

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

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

respectively.

Affiliated Investment Management Expenses

In accordance with an agreement with PGIM, Inc. (“PGIM”), the Company pays investment management expenses to PGIM who acts as investment manager to certain Company general account and separate account assets. Investment management expenses paid to PGIM related to this agreement were $4$5 million and $3$4 million for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~$12~~$10 million and $9$8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. These expenses are recorded as “Net investment income” in the Company's Unaudited Interim Statements of Operations and Comprehensive Income (Loss).

Derivative Trades

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

Joint Ventures

The Company has made investments in joint ventures with certain subsidiaries of Prudential Financial. "Other invested assets" includes ~~$346~~$444 million and ~~$228~~$391 million as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. "Net investment income" related to these ventures includes $3a gain of $15 million and $2$4 million for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~$11~~a loss of $3 million and $4a gain of $9 million for the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, ~~and 2018,~~ 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 ~~$24~~$21 million and ~~$26~~$24 million for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~$72~~$43 million and ~~$80~~$48 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. These revenues are recorded as “Asset administration fees and other income” in the Company's Unaudited Interim Statements of Operations and Comprehensive Income (Loss).

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Affiliated Notes Receivable

Affiliated notes receivable included in "Receivables from parent and affiliates" at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 were as follows:


	Maturity Dates	Interest Rates				September 30, 2019		December 31, 2018		Maturity Dates	Interest Rates				June 30, 2020		December 31, 2019
						(in thousands)									(in thousands)
U.S. dollar floating rate notes	2028	3.83%	-	4.25	%	$	0	$	34,008
U.S. dollar fixed rate notes	2027	8.15%	-	14.85	%	3,166		3,184		2026 - 2027	2.62%	-	14.85	%	$	55,789	$	52,573
Total notes receivable - affiliated(1)						$	3,166	$	37,192						$	55,789	$	52,573


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

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

Accrued interest receivable related to these loans was ~~$0.2~~$0.1 million and ~~$0.3~~$0.0 million at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, and is included in “Other assets”. Revenues related to these assets were a gain of $0.4 million and $0.1 million for ~~both~~ the three months ended ~~September~~June 30, 2020 and 2019, respectively, and ~~2018,~~a gain of $0.8 million and a loss of ~~$0.1~~$0.2 million for the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, ~~and a gain of $0.3 million for the nine months ended September 30, 2018,~~respectively, and are included in “Asset administration fees and other income”.

Affiliated Commercial Mortgage Loan

The affiliated commercial mortgage loan included in "Commercial mortgage and other loans" at June 30, 2020 was as follow:



	Maturity Date	Interest Rate	June 30, 2020
			(in thousands)
Affiliated Commercial Mortgage Loan	2025	4.67%	$	74,005

The Company did not have any affiliated commercial mortgage loans outstanding at December 31, 2019.

The commercial mortgage loan shown above is carried at unpaid principal balance, net of unamortized deferred loan origination fees and expenses, and net of an allowance for losses. The Company reviews the performance and credit quality of the commercial mortgage on an on-going basis.

Accrued interest receivable related to the loan was $0.2 million at June 30, 2020 and is included in "Accrued investment income". Investment income was $0.3 million for the three and six months ended June 30, 2020 and is included in "Net investment income".

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Affiliated Asset Transfers

The Company participates in affiliated asset trades with parent and sister companies. Book and market value differences for trades with a parent and sister are recognized within "Additional paid in capital" ("APIC") and "Realized investment gains (losses), net", respectively. The table below shows affiliated asset trades for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and for the year ended December 31, ~~2018.~~2019.


Affiliate	Date	Transaction	Security Type	Fair Value		Book Value		APIC, Net of Tax Increase/(Decrease)		Realized Investment Gain (Loss)			Date	Transaction	Security Type	Fair Value		Book Value		APIC, Net of Tax Increase/(Decrease)		Realized Investment Gain (Loss)
				(in thousands)												(in thousands)
Prudential Insurance	February 2018	Purchase	Fixed Maturities	$	136,963	$	136,963	$	0	$	0
Pruco Life Insurance Company of Arizona	April 2018	Sale	Fixed Maturities	$	64,313	$	64,514	$	0	$	(159	)
Prudential Insurance	April 2018	Sale	Fixed Maturities	$	57,747	$	43,434	$	0	$	11,308
Prudential Insurance	May 2018	Sale	Fixed Maturity & Commercial Mortgages	$	162,111	$	159,237	$	0	$	2,271
Passaic Fund LLC	June 2018	Transfer Out	Other Invested Assets - Privates	$	15,281	$	15,281	$	0	$	0
Prudential Insurance	July 2018	Sale	Fixed Maturities	$	11,160	$	9,277	$	0	$	1,488
Prudential Insurance	August 2018	Sale	Commercial Mortgages	$	13,414	$	13,165	$	0	$	196
Prudential Insurance	December 2018	Purchase	Fixed Maturities	$	33,256	$	33,166	$	0	$	(71	)
Prudential Agricultural Investors LP	December 2018	Transfer Out	Other Invested Assets - Privates	$	7,324	$	7,324	$	0	$	0
Prudential Insurance	January 2019	Sale	Fixed Maturities	$	20,504	$	20,781	$	0	$	(277	)	January 2019	Sale	Fixed Maturities	$	20,504	$	20,781	$	0	$	(277	)
Prudential Insurance	February 2019	Sale	Commercial Mortgages	$	97,953	$	98,506	$	0	$	(554	)	February 2019	Sale	Commercial Mortgages	$	97,953	$	98,506	$	0	$	(554	)
Prudential Insurance	March 2019	Purchase	Fixed Maturities	$	141,476	$	141,476	$	0	$	7,776		March 2019	Purchase	Fixed Maturities	$	141,476	$	141,476	$	0	$	7,776
Prudential Insurance	April 2019	Purchase	Equity Securities	$	4,300	$	4,300	$	0	$	0		April 2019	Purchase	Equity Securities	$	4,300	$	4,300	$	0	$	0
Prudential Retirement Insurance and Annuity Company	April 2019	Purchase	Equity Securities	$	1,258	$	1,258	$	0	$	0		April 2019	Purchase	Equity Securities	$	1,258	$	1,258	$	0	$	0
Pruco Life Insurance Company	April 2019	Purchase	Equity Securities	$	14,525	$	14,525	$	0	$	0		April 2019	Purchase	Equity Securities	$	14,525	$	14,525	$	0	$	0
Prudential Insurance	June 2019	Transfer out	Fixed Maturities	$	23,066	$	23,002	$	0	$	64		June 2019	Transfer out	Fixed Maturities	$	23,066	$	23,002	$	0	$	64
Prudential Insurance	June 2019	Transfer In	Fixed Maturities	$	19,919	$	19,919	$	0	$	0		June 2019	Transfer In	Fixed Maturities	$	19,919	$	19,919	$	0	$	0
Prudential Insurance	August 2019	Sale	Fixed Maturities	$	66,346	$	64,735	$	0	$	1,611		August 2019	Sale	Fixed Maturities	$	66,346	$	64,735	$	0	$	1,611
Prudential Insurance	August 2019	Sale	Commercial Mortgages	$	106,307	$	104,733	$	0	$	1,574		August 2019	Sale	Commercial Mortgages	$	106,307	$	104,733	$	0	$	1,574
Prudential Insurance													November 2019	Sale	Other Invested Assets	$	2,289	$	2,362	$	0	$	(73	)
Prudential Insurance													November 2019	Sale	Fixed Maturities	$	6,517	$	8,550	$	0	$	(2,033	)
Prudential Insurance													December 2019	Purchase	Fixed Maturities	$	5,271	$	5,271	$	0	$	0
Prudential Insurance													December 2019	Purchase	Fixed Maturities	$	85,261	$	85,261	$	0	$	0
Prudential Insurance													December 2019	Sale	Fixed Maturities	$	21,425	$	20,628	$	0	$	797
Prudential International Insurance Service Company													March 2020	Purchase	Fixed Maturities	$	107,014	$	107,014	$	0	$	0
Prudential Insurance													March 2020	Purchase	Fixed Maturities	$	258,885	$	258,885	$	0	$	0
Prudential Insurance													April 2020	Purchase	Fixed Maturities	$	91,131	$	91,131	$	0	$	0
Prudential Insurance													June 2020	Sale	Fixed Maturities	$	65,646	$	57,699	$	0	$	7,947
Gibraltar Life Insurance Company													June 2020	Purchase	Fixed Maturities	$	222,091	$	222,091	$	0	$	0

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Debt Agreements

The Company is authorized to borrow funds up to $9 billion from Prudential Financial and its affiliates to meet its capital and other funding needs. The following table provides the breakout of the Company's short and long-term debt to affiliates as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


Affiliate	Date Issued	Amount of Notes - September 30, 2019		Amount of Notes - December 31, 2018		Interest Rate			Date of Maturity		Date Issued	Amount of Notes - June 30, 2020		Amount of Notes - December 31, 2019		Interest Rate			Date of Maturity
		(in thousands)										(in thousands)
Prudential Insurance	4/20/2016	$	0	$	46,835		2.80	%		6/20/2019	4/20/2016	$	37,468	$	37,468		3.64	%		12/6/2020
Prudential Insurance	4/20/2016	0		18,734			2.80	%		6/20/2019	4/20/2016	103,039		103,039			3.64	%		12/15/2020
Prudential Insurance	4/20/2016	37,468		37,468			3.64	%		12/6/2020	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	4/20/2016	93,671		93,671			3.47	%		6/20/2021
Prudential Insurance	4/20/2016	93,671		93,671			3.64	%		12/15/2020	4/20/2016	93,671		93,671			4.39	%		12/15/2023
Prudential Insurance	4/20/2016	93,671		93,671			3.47	%		6/20/2021	4/20/2016	28,102		28,102			4.39	%		12/15/2023
Prudential Insurance	4/20/2016	93,671		93,671			4.39	%		12/15/2023	4/20/2016	93,671		93,671			3.95	%		6/20/2024
Prudential Insurance	4/20/2016	28,102		28,102			4.39	%		12/15/2023	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	4/20/2016	46,835		46,835			3.95	%		6/20/2024
Prudential Insurance	4/20/2016	37,468		37,468			3.95	%		6/20/2024	6/28/2016	26,000		26,000			2.59	%		6/28/2021
Prudential Insurance	4/20/2016	46,835		46,835			3.95	%		6/20/2024
Prudential Insurance	6/28/2016	0		20,000			2.08	%		6/28/2019
Prudential Insurance	6/28/2016	0		30,000			2.08	%		6/28/2019
Prudential Insurance	6/28/2016	0		25,000			2.08	%		6/28/2019
Prudential Insurance	6/28/2016	26,000		26,000			2.59	%		6/28/2021
Prudential Insurance	6/28/2016	0		50,000			3.49	%		6/28/2026
Prudential Insurance	6/28/2016	0		25,000			3.49	%		6/28/2026
Prudential Insurance	6/28/2016	0		25,000			3.49	%		6/28/2026
Prudential Retirement Insurance & Annuity Company	6/28/2016	0		34,000			3.09	%		6/28/2023
Prudential Funding LLC											12/16/2019	0		1,298			2.02	%		1/16/2020
Prudential Funding LLC											12/17/2019	0		1,478			2.02	%		1/15/2020
Prudential Funding LLC											12/17/2019	0		502			2.02	%		1/16/2020
Prudential Funding LLC											12/18/2019	0		4,638			2.02	%		1/16/2020
Total Loans Payable to Affiliates		$	653,596	$	928,165							$	653,596	$	661,512

The total interest expense to the Company related to loans and other payables to affiliates was ~~$38~~$8 million and ~~$14~~$24 million for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~$78~~$36 million and ~~$44~~$40 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively.

Contributed Capital and Dividends

Through ~~September of 2019~~June 2020 and December ~~of 2018,~~2019, the Company did 0t receive any capital contributions.

In March and June ~~and September of 2019,~~2020, there was a ~~$245 million, $247~~$207 million and ~~$245~~$173 million return of capital, respectively, to PAI. In March, June, September and December ~~of 2018,~~2019, there was a ~~$300~~$245 million, ~~$250~~$247 million, ~~$250~~$245 million and ~~$225~~$241 million return of capital, respectively, to PAI.

Reinsurance with Affiliates

As discussed in Note 6, the Company participates in reinsurance transactions with certain affiliates.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

10. COMMITMENTS AND CONTINGENT LIABILITIES

Commitments

The Company has made commitments to fund commercial mortgage ~~loans~~loans. As of ~~$71~~June 30, 2020 and December 31, 2019, theoutstanding balances on these commitments were $25 million and $4$43 million, respectively. The above amount includes unfunded commitments that are not unconditionally cancellable. For related credit exposure, there was an allowance for credit losses of $0.0 million as of ~~September~~June 30, ~~2019~~2020, which is a change of $0.0 million for the three and ~~December 31, 2018, respectively.~~six months ended June 30, 2020. The Company also made commitments to purchase or fund investments, mostly private fixed ~~maturities,~~maturities. As of ~~$205 million and $271 million as of September~~June 30, ~~2019~~2020 and December 31, ~~2018, respectively.~~2019, $195 million and $207 million, respectively, of these commitments were outstanding. The above amount includes unfunded commitments that are not unconditionally cancellable. There were 0 related charges for credit losses for both the three and six months ended June 30, 2020.

Contingent Liabilities

On an ongoing basis, the Company and its regulators review its operations including, but not limited to, sales and other customer interface procedures and practices, and procedures for meeting obligations to ~~our~~its customers and other parties. These reviews may result in the modification or enhancement of processes or the imposition of other action plans, including concerning management oversight, sales and other customer interface procedures and practices, and the timing or computation of payments to 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 flows of the Company in a particular quarterly or annual period could be materially affected as a result of payments in connection with the matters discussed above or other matters depending, in part, upon the results of operations or cash flows for such period. Management believes, however, that ultimate payments in connection with these matters, after consideration of applicable reserves and rights to indemnification, should not have a material adverse effect on the Company’s financial position.

Litigation and Regulatory Matters

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

The Company establishes accruals for litigation and regulatory matters when it is probable that a loss has been incurred and the amount of that loss can be reasonably estimated. For litigation and regulatory matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but the matter, if material, is disclosed. The Company estimates that as of ~~September~~June 30, ~~2019,~~2020, the aggregate range of reasonably possible losses in excess of accruals established for those litigation and regulatory matters for which such an estimate currently can be made is less than $150 million. This estimate is not an indication of expected loss, if any, or the Company’s maximum possible loss exposure on such matters. The Company reviews relevant information with respect to its litigation and regulatory matters on a quarterly and annual basis and updates its accruals, disclosures and estimates of reasonably possible loss based on such reviews.

The following discussion of litigation and regulatory matters provides an update of those matters discussed in Note 15 to the Company's Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018, and should be read in conjunction with the complete descriptions provided in the Form 10-K.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

~~Securities Lending~~For a discussion of the Company's litigation and ~~Foreign Tax Reclaim Matter~~

~~In 2016, Prudential Financial self-reported~~regulatory matters, see Note 15 to the ~~SEC and~~Company's Financial Statements included in the ~~U.S. Department of Labor ("DOL"), and notified other regulators, that in some cases it failed to maximize securities lending income~~Company's Annual Report on Form 10-K for the ~~benefit~~year ended December 31, 2019. There are no material developments in previously reported matters disclosed as of certain separate account investments due to a long-standing restriction benefiting Prudential Financial that limited the availability of loanable securities. Prudential Financial has removed the restriction and implemented a remediation plan for the benefit of customers. As part of Prudential Financial’s review of this matter, in 2018 it further self-reported to the SEC, and notified other regulators, that in some cases it failed to timely process foreign tax reclaims for the separate account investments. Prudential Financial has corrected the foreign tax reclaim process and has implemented a remediation plan for the benefit of customers.

~~The DOL’s review of the securities lending matter is closed. In September 2019, Prudential Financial reached a settlement of these~~

matters with the SEC. As part of the settlement Prudential Financial agreed to pay a fine of $5 million and disgorgement of $27.6 million, and consented to the entry of an Administrative Order containing findings that two of its subsidiaries violated certain sections of the Investment Advisers Act of 1940 and the Investment Advisers Act Rules and ordering the subsidiaries to cease and desist from committing or causing any violations and any future violations of those provisions. In reaching this settlement, Prudential Financial neither admitted nor denied the SEC’s findings.December 31, 2019.

Summary

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

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) addresses the financial condition of Prudential Annuities Life Assurance Corporation (“PALAC” or the “Company”) as of ~~September~~June 30, ~~2019,~~2020, compared with December 31, ~~2018,~~2019, and its results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019. You should read the following analysis of our financial condition and results of operations in conjunction with the MD&A, the “Risk Factors” section, and the audited Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, as well as the statements under “Forward-Looking Statements”, the "Risk Factors" section and the Unaudited Interim Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Overview

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

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

~~selling such products in March 2010.~~

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

2010. In 2018, the Company resumed offering annuity products to new investors (except in New York). ~~It launched a new fixed indexed annuity in January 2018 and a new deferred income annuity in March 2018.~~

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

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COVID-19

Beginning in the first quarter of 2020, the outbreak of the 2019 novel coronavirus (“COVID-19”) created extreme stress and disruption in the global economy and financial markets and elevated mortality and morbidity experience for the global population. These events impacted our results of operations in the current period and are expected to drive future impacts to our results of operations. The Company has taken several measures to manage the impacts of this crisis. The actual and expected impacts of these events and other items are included in the following update:

•

Outlook. In our Individual Annuities business, we expect account values and fee income will be impacted by market volatility. We have taken pricing and product actions to ensure we realize appropriate returns for the current economic environment, and to diversify our product mix to further limit our sensitivity to interest rates, while maintaining a solid value proposition for our customers. In addition, while our distribution platforms include a suite of digital, hybrid advisory, and in-person advisory options, mandated social distancing has limited in-person engagement between customers and advisors. Collectively, we expect the product actions we have taken and the constrained distribution environment to adversely impact our sales prospects in the near-term. In addition, we expect account values and fee income will be impacted by market volatility.


•	Results of Operations. For the three months and six months ended June 30, 2020 we reported a net loss of $1,756 million and $2,577 million, respectively, as unfavorable financial market conditions had a substantial negative effect on reported results. See “Results of Operations” for a discussion of results for second quarter and first half of the year.

•

Liquidity. The impact of COVID-19 and related market dislocations could strain our existing liquidity and cause us to increase the use of our alternative sources of liquidity, which could result in increased financial leverage on our balance sheet and negatively impact our credit and financial strength ratings or ratings outlooks. See “Liquidity and Capital Resources-Liquidity” for a discussion of our liquidity.

•

Capital Resources. Market conditions could negatively impact our statutory capital and constrain our overall capital flexibility. Adverse market conditions could require us to take additional management actions to maintain capital consistent with our ratings objectives, which may include redeploying financial resources from internal sources, or using available affiliate sources of capital or seeking additional sources. See “Liquidity and Capital Resources-Capital” for a discussion of our capital resources.


•	Risk Factors. The COVID-19 pandemic has adversely impacted our results of operations, financial position, investment portfolio, new business opportunities and operations, and these impacts are expected to continue. For additional information on the risks to our business posed by the COVID-19 pandemic, see “Risk Factors.”


•	Business Continuity. One of the main impacts of the COVID-19 pandemic has been executing our business continuity protocols to ensure our employees are safe and able to serve our customers. This included effectively transitioning the vast majority of our employees to remote work arrangements.

We believe we can sustain remote work and social distancing for an indefinite period while ensuring that critical business operations are sustained. In addition, we are managing COVID-19-related impacts on third-party provided services, and do not anticipate significant interruption in critical operations.

•

CARES Act and Other Regulatory Developments. In March 2020 Congress enacted the Coronavirus Aid, Relief, and Economic Security Act ("the CARES Act"), which provides $2 trillion in economic stimulus to taxpayers, small businesses, and corporations through various grant and loan programs, tax provisions and regulatory relief. One provision of the CARES Act amends the Tax Cuts and Jobs Act (“TCJA”) and allows companies with net operating losses (“NOLs”) originating in 2018, 2019 or 2020 to carry back those losses for five years. See Note 7 to the Unaudited Interim Financial Statements for more information. We are continuing to analyze the CARES Act and its potential impact on the Company, and implementing operational changes necessary to accommodate the CARES Act.

Other governments and regulators, including the NAIC and state insurance regulators, have implemented, or are considering, a number of actions in response to the crisis, including delaying implementation of certain regulatory changes, temporarily waiving certain regulatory requirements and requiring or requesting insurers to waive premium payments and policy provisions and exclusions for certain periods of time.

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The Company is not aware of any new or proposed government mandates that could materially impact the Company’s solvency or liquidity position.

Regulatory Developments

~~SEC Best Interest Regulation~~

DOL Fiduciary Rules

In June ~~2019,~~2020, the ~~SEC adopted~~Department of Labor ("DOL") announced that it is proposing a ~~package of rulemakings and interpretative guidance that, among other things, requires broker-dealers~~new exemption to ~~act in~~replace the ~~best~~previously vacated “best interest ~~of retail customers when recommending securities transactions or investment strategies to them. The guidance also clarifies~~contract exemption." This proposed exemption would allow fiduciaries meeting the ~~SEC’s views~~requirements of the ~~fiduciary duty that~~exemption to receive compensation, including as a result of advice to roll over assets from a qualified plan to an Individual Retirement Account (“IRA”), and to purchase from or sell certain investments to qualified plans and IRAs. The DOL also reinstated the prior investment ~~advisers owe to their clients. The new best interest standards will become effective on June 30, 2020. We are evaluating the impacts~~advice regulation and other existing exemptions and provided its current interpretation of the new standards and have begun to implement them. We believe that the new standards will apply to recommendations to purchase certain of our products, and will result in increased compliance costs, in particular in our Prudential Advisors distribution system.

~~SECURE Act~~

In May 2019, the U.S. House of Representatives passed the Setting Every Community up for Retirement Enhancement (“SECURE”) Act. If enacted into law in its current form, the SECURE Act would help promote retirement plan coverage by expanding access to and use of Multiple Employer Plans; facilitate access to lifetime income disclosures for plan participants to better understand how their retirement savings translate into monthly lifetime income in retirement; improve upon the current annuity selection safe harbor; and provide lifetime income portability.pre-2016 fiduciary investment advice regulation. We cannot predict ~~whether~~what impact the ~~SECURE Act~~newly proposed exemption or interpretative guidance will ~~ultimately be adopted, or its impact on our business.~~

~~For additional information~~have on the ~~potential impacts of regulation on the Company see “Business—Regulation” and “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.~~

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Company.

Impact of a Low Interest Rate Environment

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

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

new money rates, mortgage loan prepayments and bond redemptions;

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

(“DAC”) ~~and~~ /value of business acquired (“VOBA”); /deferred sales inducements ("DSI"); and market experience true-ups;

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

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

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

• policyholder behavior, including surrender or withdrawal activity.

~~Interest rates in the U.S. have experienced a period of historically low levels in large part due to Federal Reserve efforts to assist~~

with the economic recovery subsequent to the financial crisis of 2008. While market conditions and events make uncertain the timing, amount and impact of any monetary policy decisions by the Federal Reserve, changes in interest rates may impact our reinvestment yields, primarily for our investments in fixed maturity securities and commercial mortgage loans. As interest rates rise, our reinvestment yield may exceed the overall portfolio yield resulting in a favorable impact to earnings. Conversely, if interest rates were to decline, our reinvestment yield may be below our overall portfolio yield, resulting in an unfavorable impact to earnings.

For more information on interest rate risks, see "Risk Factors" in this Quarterly Report on Form 10-Q and “Risk Factors—Market Risk” included in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Revenues and Expenses

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

~~Profitability~~

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

See “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 for a discussion of risks that have materially affected and may affect in the future the Company’s business, results of operations or financial condition, or cause the Company’s actual results to differ materially from those expected or those expressed in any forward-looking statements made by or on behalf of the Company.

Accounting Policies & Pronouncements

Application of Critical Accounting Estimates

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

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

DAC, DSI and VOBA;

Policyholder liabilities;

Valuation of investments, including derivatives, measurement of allowance for credit losses, and ~~the~~ recognition of ~~other-than-temporary~~other-than temporary impairments ("OTTI");

Reinsurance recoverables;

Taxes on income; and

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

Market Performance - Equity and Interest Assumptions

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

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

The weighted average rate of return assumptions used in developing estimated market returns consider many factors, including asset durations, asset allocations and other factors. With regard to equity market assumptions, the near-term future rate of return assumption used in evaluating DAC, DSI, VOBA and liabilities for future policy benefits for certain of our products, primarily our domestic variable annuity products, is generally updated each quarter and is derived using a reversion to the mean approach, a common industry practice. Under this approach, we consider historical equity returns and adjust projected equity returns over an initial future period of five years (the “near-term”) so that equity returns converge to the long-term expected rate of return. If the near-term projected future rate of return is greater than our near-term maximum future rate of return of 15.0%, we use our maximum future rate of return. As of ~~September~~June 30, ~~2019,~~2020, we assume an 8.0% long-term equity expected rate of return and a ~~4.6%~~5.1% near-term mean reversion equity expected rate of return.

With regard to interest rate assumptions used in evaluating DAC, DSI and VOBA and liabilities for future policy benefits for certain of our products, we generally update the long-term and near-term future rates used to project fixed income returns annually and quarterly, respectively. As a result of our ~~2019~~2020 annual reviews and update of assumptions and other refinements, we ~~kept~~reduced our long-term expectation of the 10-year U.S. Treasury rate ~~unchanged~~by 50 basis points and ~~continue to~~ grade to a rate of ~~3.75%~~3.25% over ten years. As part of our quarterly market experience updates, we update our near-term projections of interest rates to reflect changes in current rates.

For a discussion of the impact that could result from changes in certain key assumptions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Accounting Policies and Pronouncements—Sensitivities for Insurance Assets and Liabilities” in our Annual Report on Form 10-K for the year ended December 31, 2019

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Future Adoption of New Accounting Pronouncements

ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the ~~FASB~~Financial Accounting Standards Board ("FASB") on August 15, 2018 and is expected to have a significant impact on the Company's Financial Statements and Notes to the Financial Statements. In October 2019, the FASB ~~affirmed~~issued ASU 2019-09, Financial Services - Insurance (Topic 944): Effective Date to affirm its decision to defer the effective date of ~~the~~ ASU 2018-12 to January 1, 2022 (with early adoption permitted), representing a one year extension from the original effective date of January 1, 2021. As a result of the COVID-19 pandemic, the FASB voted in June 2020 to tentatively defer for an additional one year the current effective date of ASU 2018-12 from January 1, 2022 to January 1, 2023, and to provide transition relief to facilitate the early adoption of the ASU. Subsequently in July 2020, the FASB issued a proposed ASU with comment deadline of August 24, 2020 to obtain additional feedback on the tentative decisions, which are expected to be finalized during the third quarter of 2020. The transition relief would allow large calendar-year public companies that early adopt ASU 2018-12 to apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2022 financial statements. Companies that do not early adopt ASU 2018-12 would also apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2023 financial statements. ASU 2018-12 will impact, at least to some extent, the accounting and disclosure requirements for all long-duration insurance and investment contracts issued by the Company. In addition to the impacts to the balance sheet upon adoption, the Company also expects an impact to how earnings emerge thereafter. See Note 2 to ~~our~~the Unaudited Interim Financial Statements for a more detailed discussion of ASU 2018-12, as well as other accounting pronouncements issued but not yet adopted and newly adopted accounting pronouncements.

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Changes in Financial Position

Total assets increased ~~$6.9~~$9 billion from ~~$54.7~~$59 billion at December 31, ~~2018~~2019 to ~~$61.6~~$68 billion at ~~September~~June 30, ~~2019.~~2020. Significant components were:

Total investments and Cash and cash equivalents increased ~~$5.7~~$11 billion primarily driven by derivative collateral postings, cash flows from insurance operations and unrealized gains on investments due to declining interest rates, partially offset by a return of ~~capital, net investment acquisitions and debt repayments; and~~capital;

Partially offset by:

Separate account assets ~~increased $0.8~~decreased $3 billion primarily driven by ~~favorable~~net unfavorable market ~~performance, partially offset by~~conditions and net ~~outflows and policy charges.~~

outflows.

Total liabilities increased ~~$8.0~~$11 billion from ~~$47.9~~$53 billion at December 31, ~~2018~~2019 to ~~$55.9~~$64 billion at ~~September~~June 30, ~~2019.~~2020. Significant components were:

Future policy benefits increased ~~$6.8~~$12 billion primarily driven by an increase in reserves related to our variable annuity living benefit guarantees due to declining interest rates and the widening of credit spreads, partially offset by a favorable ~~equity markets;~~NPR adjustment;

Partially offset by:

Separate account liabilities ~~increased $0.8~~decreased $3 billion, corresponding to the ~~increase~~decrease in ~~separate~~Separate account assets ~~described above;~~

~~Policyholders' account balances increased $0.7 billion primarily driven by general account product sales; and~~

~~Partially offset by a decrease in short-term and long-term debts of $0.3 billion driven by maturities and debt repayments.~~

as discussed above.

Total equity decreased ~~$0.9~~$1.7 billion from ~~$6.7~~$5.5 billion at December 31, ~~2018~~2019 to ~~$5.8~~$3.8 billion at ~~September~~June 30, ~~2019,~~2020, primarily driven by an after-tax net loss of ~~$1.3~~$2.6 billion, ~~for the nine months ended September 30, 2019~~ and a return of capital of ~~$0.7~~$0.3 billion, partially offset by unrealized gains on investments of ~~$1.1~~$1.7 billion, as discussed above.

Results of Operations

Income (loss) from Operations before Income Taxes

Three Months Comparison

~~Income (loss)~~Losses from operations before income taxes ~~decreased $0.6 billion~~increased $2,110 million from ~~income~~a loss of ~~$0.3 billion~~$508 million for the three months ended ~~September~~June 30, ~~2018~~2019 to a loss of ~~$0.3 billion~~$2,618 million for the three months ended ~~September~~June 30, 2019 driven by unfavorable living benefit results reflecting declining interest rates, partially offset by credit spread widening in the current quarter as well as an unfavorable impact from duration management swaps due to declining interest rates in the current quarter compared to rising interest rates in the prior period quarter. These losses were partially offset by2020. Excluding a favorable comparative impact of ~~mark to market losses related to our capital hedge program.~~

~~Nine Months Comparison~~

Income (loss) from operations before income taxes decreased $3.0 billion from income of $1.3 billion for the nine months ended September 30, 2018 to a loss of $1.7 billion for the nine months ended September 30, 2019, which includes a favorable comparative net impact from our annual reviews and update of assumptions and other ~~refinements. Results from this annual review included net charges of $11 million and $160 million in the second quarter of 2019 and 2018, respectively. Excluding this item, income (loss)~~refinements, losses from operations ~~before income taxes decreased $2.8 billion~~increased $2,208 million primarily driven by an unfavorable impact from living benefit results in the current period as a result of declining interest rates and credit spread tightening in comparison to a favorable impact from rising interest rates and credit spread widening in the prior period. Also contributing to the decrease was an unfavorable comparative impact of realized gains (losses) related to duration management swaps driven by declining interest rates and our capital hedge program driven by more favorable equity markets in 2019. Capital hedge impacts are excluded from the table below.

by:

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Unfavorable NPR adjustment and unfavorable hedge breakage as a result of the tightening of credit spreads, partially offset by tightening of credit spreads used in measuring our living benefit guarantees liability. Refer to our changes in the U.S. GAAP embedded derivative liability and hedge positions under the Asset Liability Management ("ALM") strategy table below for further details;

Partially offset by:

Favorable comparative impact of Amortization of deferred policy acquisition costs and Interest credited to policyholders' account balances driven by changes to expected gross profits reflecting change in market conditions.

Six Months Comparison

Losses from operations before income taxes increased $2,290 million from a loss of $1,387 million for the six months ended June 30, 2019 to a loss of $3,677 million for the six months ended June 30, 2020. Excluding a favorable comparative impact of our annual reviews and update of assumptions and other refinements, losses from operations increased $2,387 million primarily driven by:

Unfavorable comparative impact of our duration management swaps due to more significant declines in interest rates in the current period compared to prior period;

Declining interest rates, widening of credit spreads and unfavorable hedge breakage, partially offset by favorable NPR adjustment used in measuring our living benefit guarantees liability; and

Higher Amortization of deferred policy acquisition costs and higher Policyholders' benefits as a result of similar drivers, as discussed above.

The following table ~~illustrates~~provides the net impact ~~on our results~~to the Unaudited Interim Statements of ~~operations~~Operations from changes in the U.S. GAAP embedded derivative liability and hedge positions under the ALM strategy, and the related amortization of DAC and other costs, for the periods indicated:

Three Months Ended Nine Months Ended
September 30, 2019
September 30, 2018 September 30, 2019 September 30, 2018
(in millions)(1) (in millions)(1)
Excluding impact of assumption updates and other refinements:
Net hedging impact(2) $ (8 ) $ (42 ) $ (145 ) $ (154 )
Change in portions of U.S. GAAP liability, before NPR(3) (1,273 ) 562
(1,704 ) 1,011
Change in the NPR adjustment 1,071
(258 ) 315
(144 )
Net impact from changes in the U.S. GAAP embedded derivative and hedge positions (210 ) 262
(1,534 ) 713
Related benefit (charge) to amortization of DAC and other costs (17 ) (60 ) 214
(215 )
Net impact of assumption updates and other refinements 0
0
13
(159 )
Net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs. $ (227 ) $ 202
$ (1,307 ) $ 339



	Three Months Ended						Six Months Ended
	June 30, 2020			June 30, 2019			June 30, 2020			June 30, 2019
	(in millions)(1)
U.S. GAAP embedded derivative and hedging positions(2)
Net hedging impact(3)	$	(878	)	$	(54	)	$	(1,008	)	$	(137	)
Change in portions of U.S. GAAP liability, before NPR(4)	2,449			(737		)	(4,462		)	(431		)
Change in the NPR adjustment	(3,225		)	207			2,733			(756		)
Net impact from changes in the U.S. GAAP embedded derivative and hedge positions	(1,654		)	(584		)	(2,737		)	(1,324		)
Related benefit (charge) to amortization of DAC and other costs	523			80			355			231
Net impact of assumption updates and other refinements	199			13			199			13
Net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs	$	(932	)	$	(491	)	$	(2,183	)	$	(1,080	)


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


(2)	Excluding impact of assumption updates and other refinements.


(3)	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)~~(4)	Represents risk margins and valuation methodology differences between the economic liability managed by the ~~Asset Liability Management ("ALM")~~ALM Strategy and the U.S. GAAP liability.

For the three months ended ~~September~~June 30, ~~2019,~~2020, the loss of $932 million primarily reflected the impact of a $1,654 million net ~~impact~~charge from the changes in the U.S. GAAP embedded derivative and hedge ~~positions, after~~positions. This net charge was primarily driven by an unfavorable NPR adjustment and unfavorable hedge breakage driven by credit spreads tightening. Partially offsetting these charges is the impact of ~~nonperformance risk ("NPR"),~~the tightening of credit spreads on the portions of our U.S. GAAP liability before NPR, that are excluded from our hedge target, a benefit related to the amortization of DAC and other costs ~~was a net charge~~ of ~~$227~~$523 million ~~which primarily reflects~~as well as the impact of a $199 million net benefit from our annual reviews and update of assumptions and other refinements.

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For the six months ended June 30, 2020, the loss of $2,183 million primarily reflected the impact of a $2,737 million net charge ~~of $210 million due to~~from the changes in the U.S. GAAP embedded derivative and hedge ~~positions as a result~~positions. This net charge was primarily driven by the impact of declining interest rates and widening of credit spreads on the portions of our U.S. GAAP liability before NPR, that are excluded from our hedge target and unfavorable breakage as discussed above. This decrease was partially offset by ~~credit spread widening used in measuring~~a favorable NPR adjustment, a benefit related to the amortization of DAC and other costs of $355 million, as well as the impact of a $199 million net benefit from our ~~living benefit contracts.~~annual reviews and update of assumptions and other refinements.

For the ~~nine~~three months ended ~~September~~June 30, 2019, the loss of $491 million primarily reflected the impact of a net ~~impact~~charge of $584 million from the changes in the U.S. GAAP embedded derivative and hedge ~~positions, after~~positions. This net charge was primarily driven by the impact of NPR, DAC and other costs, was a net charge of $1,307 million, which primarily reflects the impact of a net charge of $1,534 million due to changes in the U.S. GAAP embedded derivative and hedge positions as a result of declining interest rates ~~and credit spread tightening,~~on the portions of our U.S. GAAP liability before NPR, that are excluded from our hedge target, partially offset by ~~favorable equity markets used in measuring our living benefit contracts. The results for the nine months ended September 30, 2019 had partial offsets in the $214~~$80 million of a related ~~benefits~~benefit to amortization of DAC and other costs as well as the impact of a $13 million net benefit from our annual reviews and update of assumptions and other refinements.

For the ~~three~~six months ended ~~September~~June 30, ~~2018,~~2019, the loss of $1,080 million primarily reflected the impact of a net ~~impact~~charge of $1,324 million from changes in the U.S. GAAP embedded derivative and hedge ~~positions, after~~positions. This net charge was primarily driven by the impact on the portions of our U.S. GAAP liability before NPR, ~~DAC~~that are excluded from our hedge target and ~~other costs, was a~~due to declining interest rates, tightening of credit spreads and an unfavorable NPR adjustment. Partially offsetting this net ~~benefit of $202~~charge is $231 million ~~which primarily reflects the impact~~ of a ~~net~~related benefit of $262 million due to changes in the U.S. GAAP embedded derivative and hedge positions as a result of rising interest rates used in measuring our living benefit contracts partially offset by $60 million of related charges to amortization of DAC and other costs.

For the nine months ended September 30, 2018, the net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs, was a net benefit of $339 million, which primarily reflects a $713 million net impact from changes in the U.S. GAAP embedded derivative and hedge positions as a result of rising interest rates, favorable equity markets and credit spread widening used in measuring our living benefit contracts. Partial offsets include $215 million of related charges to amortization of DAC and other costs ~~and~~as well as the impact of a ~~$159~~$13 million net ~~charge~~benefit from our annual reviews and update of assumptions and other refinements.

Revenues, Benefits and Expenses

Three Months Comparison

Revenues decreased $2,537 million from a loss of $104 million for the three months ended June 30, 2019 to a loss of $2,641 million for the three months ended June 30, 2020. Excluding a favorable comparative impact of our annual reviews and update of our assumptions and other refinements, ~~including updates~~Revenues decreased $2,637 million primarily driven by Realized investment gains (losses) net resulting from:

Unfavorable NPR adjustment and unfavorable hedge breakage as a result of the tightening of credit spreads;

Partially offset by:

Favorable impact related to the portions of the U.S. GAAP liability before NPR, that are excluded from our hedge target driven by the tightening of credit spreads.

Benefits and expenses decreased $427 million from an expense of $404 million for the three months ended June 30, 2019 to income of $23 million for the three months ended June 30, 2020. Excluding the comparative impact of our annual reviews and update of our assumptions and refinements, which was relatively flat, Benefits and expenses decreased driven by:

Lower Amortization of deferred policy acquisition costs and Interest credited to policyholders' account balances driven by changes to expected ~~withdrawal rates as well as economic assumptions.~~gross profits reflecting change in market conditions.

Six Months Comparison

Revenues decreased $1,931 million from a loss of $686 million for the six months ended June 30, 2019 to a loss of $2,617 million for the six months ended June 30, 2020. Excluding the favorable comparative impacts of our annual reviews and update to our assumptions and other refinements, Revenues decreased by $2,030 million primarily driven by:

Unfavorable comparative impact of our duration management swaps due to more significant declines in interest rates in the current period compared to the prior year period; and

Unfavorable impact related to the portions of the U.S. GAAP liability before NPR, that are excluded from our hedge target driven by declining interest rates, widening of credit spreads, and unfavorable hedge breakage, partially offset by a favorable NPR adjustment.

Benefits and expenses increased $359 million from $701 million for the six months ended June 30, 2019 to $1,060 million for the six months ended June 30, 2020. Excluding the impacts of our annual reviews and update to our assumptions and other refinements, which was relatively flat, the increase is primarily driven by:

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~~Revenues, Benefits~~Higher Amortization of deferred policy acquisition costs driven by changes to expected gross profits reflecting change in market conditions; and ~~Expenses~~

Higher Policyholders' benefits driven by our guaranteed minimum death benefits due to unfavorable market conditions, resulting in higher reserve provisions.

~~Three Months Comparison~~

Revenues decreased $0.5 billion from $0.8 billion for the three months ended September 30, 2018 to $0.3 billion for the three months ended September 30, 2019 driven by a decrease in Total realized investment gains (losses), net as a result of unfavorable living benefit results and duration management swaps due to the impact from declining interest rates partially offset by favorable comparative results from our capital hedge program, as discussed above.

Benefits and expenses remained flat from $0.6 billion for the three months ended September 30, 2018 to $0.6 billion for the three months ended September 30, 2019 primarily driven by a decrease related to the amortization of DAC and other costs due to lower gross profits, partially offset by higher commissions and expenses assumed.

~~Nine Months Comparison~~

Revenues decreased $3.3 billion from $2.9 billion for the nine months ended September 30, 2018 to a loss of $0.4 billion for the nine months ended September 30, 2019. Excluding the impacts of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $3.2 billion primarily driven by a decrease of $3.1 billion in Realized investment gains (losses) as a result of unfavorable living benefit and duration management results due to the impact from declining interest rates and unfavorable comparative results related to our capital hedge program, as discussed above.

Benefits and expenses decreased $0.3 billion from $1.6 billion for the nine months ended September 30, 2018 to $1.3 billion for the nine months ended September 30, 2019. Excluding the impacts of our annual reviews and update of assumptions and other refinements, as discussed above, expenses decreased $0.4 billion primarily driven by amortization of DAC and other costs due to changes in the living benefit reserves, as discussed above.

~~Variable Annuity~~ Risks and Risk Mitigants

The following is a summary ~~of: (i)~~of certain risks associated with Individual ~~Annuities'~~Annuities’ products, ~~and (ii)~~ certain strategies in mitigating those risks including any updates to those strategies since the previous year-end, and ~~(iii)~~ the related financial results. For a more detailed description of these items and their related accounting treatment, refer to the complete descriptions provided in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Fixed Annuity Risks and Risk Mitigants. The primary risk exposures of our fixed annuity products relate to investment risks we bear for providing customers a minimum guaranteed interest rate or an index-linked interest rate required to be credited to the customer’s account value, including interest rate fluctuations and/or sustained periods of low interest rates, and credit risk related to the underlying investments. We manage these risk exposures primarily through our investment strategies and product design features, which include credit rate resetting subject to the minimum guaranteed interest rate, as well as surrender charges applied during the early years of the contract that help to provide protection for premature withdrawals. In addition, a portion of our fixed annuity products have a market value adjustment provision that provides protection of lapse in the case of rising interest rates. We also manage these risk exposures through external reinsurance for certain of our fixed annuity products.

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 markets assumptions such as equity market returns, interest rates and market volatility, along with actuarial assumptions such as contractholder mortality, the timing and amount of annuitization and withdrawals, and contract lapses. For these risk exposures, achievement of our expected returns is subject to the risk that actual experience will differ from the assumptions used in the original pricing of these products. We ~~currently~~ manage our exposure to certain risks driven by fluctuations in capital markets primarily through a combination of i) Product Design Features, ~~an ALM~~ii) Asset Liability Management Strategy, and aiii) Capital Hedge ~~Program.~~Program as discussed below. We also manage these risk exposures through external reinsurance for certain of our variable annuity products.

i. Product Design ~~Features~~Features:

A portion of the variable annuity contracts that we ~~have~~ offered include an asset transfer feature. This feature is implemented at the contract level, and transfers assets between certain variable investment sub-accounts selected by the annuity contractholder and, depending on the benefit feature, a fixed-rate account in the general account or a bond fund sub-account within the separate account. The objective of the asset transfer feature is to reduce our exposure to equity market risk and market volatility. The transfers are based on a static mathematical formula used with the particular benefit which considers 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.~~purchase payments. We continue to introduce products that diversify our risk profile and have incorporated provisions in product design allowing frequent revisions of key pricing elements for certain of ~~these~~our products. In addition, there is diversity in our fee arrangements, as certain fees are primarily based on the benefit guarantee amount, the contractholder account value and/or premiums, which helps preserve certain revenue streams when market fluctuations cause account values to decline.

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

~~Our current~~We employ an ALM strategy that utilizes a combination of both traditional fixed income instruments and derivatives to help defray potential claims associated with ~~the~~our variable annuity living benefit guarantees. The economic liability we manage with this ALM strategy consists of expected living benefit claims under less severe market conditions, which are managed using ~~a traditional~~an ALM strategy through the accumulation of fixed income and derivative instruments, and potential living benefit claims resulting from more severe market conditions, which are hedged using derivative instruments. For the portion of our ALM strategy executed with derivatives, we enter into a range of exchange-traded, ~~cleared,~~ and over-the-counter ("OTC") equity and interest rate derivatives, including, but not limited to: equity and treasury futures; total return and interest rate swaps; and options including equity options, swaptions, and floors and caps. The intent of this strategy is to more efficiently manage the capital and liquidity associated with these products while continuing to mitigate fluctuations in net income due to movements in capital markets.

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The valuation of the economic liability we seek to defray 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) and valuation methodology differences. The following table provides a reconciliation between the liability reported under U.S. GAAP and the economic liability ~~the Company intends to~~we manage through our ALM strategy as of the ~~dates~~periods indicated:

As of September 30, 2019 As of December 31, 2018
(in millions) (in millions)
U.S. GAAP liability (including non-performance risk) $ 15,086
$ 8,332
Non-performance risk adjustment 4,552
4,275
Subtotal 19,638
12,608
Adjustments including risk margins and valuation methodology differences (5,575 ) (3,831 )
Economic liability managed by ALM strategy $ 14,063
$ 8,777



	As of June 30, 2020			As of December 31, 2019
	(in millions)
U.S. GAAP liability (including NPR)	$	23,052		$	11,823
NPR adjustment	6,010			3,245
Subtotal	29,062			15,068
Adjustments including risk margins and valuation methodology differences	(8,161		)	(4,111		)
Economic liability managed through the ALM strategy	$	20,901		$	10,957

As of ~~September~~June 30, ~~2019, we have sufficient~~2020, our fixed income instruments and derivative assets ~~to cover~~exceed our economic liability.

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

Capital Hedge Program

We employ a capital hedge program within the Company ~~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.

Income Taxes

For information regarding income taxes, see Note 7 to the Unaudited Interim Financial Statements.

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Liquidity and Capital Resources

This section supplements and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” included in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Overview

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

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

Our businesses are subject to comprehensive regulation and supervision by domestic and international regulators. These regulations currently include, or may include ~~in the future~~ requirements ~~and limitations~~ (many of which are the subject of ongoing rule-making) relating to capital, leverage, liquidity, stress-testing, overall risk management, credit exposure reporting and credit concentration. For information on these regulatory initiatives and their potential impact on us, see “Business—Regulation" and “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

COVID-19 and Related Market Disruptions

Beginning in the first quarter of 2020, broad market concerns over the impact of COVID-19 have led to significant volatility and disruptions in the global economy and financial markets. Given this macro environment and the global pandemic, as examined through our stress testing, in the first half of the year we took the following significant management actions to enhance our liquidity and capital position:

We executed additional capital hedges that protect a portion of the capital position against additional declines in the equity markets; and

We accelerated our product diversification strategy and repriced certain products, which are expected to support the capital position over time.

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Liquidity. The Company continues to operate with significant liquid resources. Nevertheless, adverse developments related to COVID-19 and associated market dislocations could strain our existing liquidity. Any need to increase the use of our alternative sources of liquidity, may result in increased financial leverage on our balance sheet and negatively impact our credit and financial strength ratings or ratings outlooks.

Capital. As of June 30, 2020, the Company maintained capital levels consistent with its ratings targets. However, market conditions could negatively impact the statutory capital and constrain our overall capital flexibility. For example, adverse market conditions may lead to increased defaults and/or further deterioration in the credit quality or fair value of our investment portfolio, which would negatively impact our statutory capital. Adverse market conditions could require us to take additional management actions to maintain capital consistent with ratings objectives, which may include redeploying financial resources from internal sources or, using available external sources of capital or seeking additional sources.

Liquidity and Capital Risk Management. Effective and prudent liquidity and capital management is a priority across the organization. Management monitors the liquidity of the Company on a daily basis and projects borrowing and capital needs over a multi-year time horizon. We use a Risk Appetite Framework (“RAF”) to ensure that all risks taken by the Company aligns with our capacity and willingness to take those risks. The RAF provides a dynamic assessment of capital and liquidity stress impacts, including scenarios similar to, and more severe than, those occurring due to COVID-19, and is intended to ensure that sufficient resources are available to absorb those impacts. We believe that our capital and liquidity resources are sufficient to satisfy the capital and liquidity requirements of the Company.

Capital

~~Our~~We manage PALAC to regulatory capital ~~management framework is primarily based on statutory Risk-Based Capital ("RBC"~~levels consistent with our “AA” ratings targets. We utilized the risk-based capital (“RBC”) ~~measures. The RBC~~ ratio isas a primary measure of ~~the~~ capital ~~adequacy of the Company.~~adequacy. RBC is calculated based on statutory financial statements and risk formulas consistent with the practices of the 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 Company’s capital levels substantially exceed the minimum level required by applicable insurance regulations. Our regulatory capital levels may be affected in the future by changes to the applicable regulations, proposals for which are currently under consideration by both domestic and international insurance regulators.

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

The Company has returned capital to its parent, PAI for the periods indicated below.



	Return of Capital
	(in millions)
June 30, 2020	$	173
March 31, 2020	$	207
December 31, 2019	$	241
September 30, 2019	$	245
June 30, 2019	$	247

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~~The Company has returned capital to its parent, PAI for the periods indicated below.~~

Return of Capital
(in millions)
September 30, 2019 $ 245
June 30, 2019 $ 247
March 31, 2019 $ 245
December 31, 2018 $ 225
September 30, 2018 $ 250
June 30, 2018 $ 250
March 31, 2018 $ 300

~~Risk Appetite Framework~~

Prudential Financial manages capital consistent with our Risk Appetite Framework (“RAF”) to determine the amount of capital it needs to hold given its risk profile. The RAF is designed to ensure that all risks taken across the enterprise align with our capacity and willingness to take those risks. It allows for a cohesive assessment of risk and available resources and supports management’s decision-making. The RAF is supported by our comprehensive stress testing framework to provide a dynamic assessment of stress impacts and the resources available to absorb those impacts under stress scenarios. It incorporates the objectives of what we previously referred to as our Capital Protection Framework.

Liquidity

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

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

~~Cash Flow~~

The principal sources of the Company’s liquidity are premiums and certain annuity considerations, investment and fee income, investment maturities, sales of investments 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~~returns of capital to the parent company, hedging and reinsurance activity and payments in connection with financing activities.

In managing 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.

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Liquid Assets

Liquid assets include cash and cash equivalents, short-term investments, U.S. Treasury fixed maturities and fixed maturities that are not designated as held-to-maturity, and public equity securities. As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had liquid assets of ~~$20.2~~$28 billion and ~~$14.6~~$17 billion, respectively. The portion of liquid assets comprised of cash and cash equivalents and short-term investments was ~~$6.5~~$10 billion and ~~$4.5~~$3 billion as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. As of ~~September~~June 30, ~~2019, $13.1~~2020, $16 billion, or ~~97%~~96%, of the fixed maturity investments in the Company's general account portfolios, were rated high or highest quality based on NAIC or equivalent rating.

~~Hedging~~Financing activities

Prudential Funding, LLC

Prudential Financial and Prudential Funding 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

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

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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of fluctuations in the value of financial instruments as a result of absolute or relative changes in interest rates, foreign currency exchange rates, equity prices or commodity prices. To varying degrees, our products and services, and the investment activities supporting them, generate exposure to market risk. The market risk incurred, and our strategies for managing this risk, vary by product. As of ~~September~~June 30, ~~2019,~~2020, there have been no material changes in our economic exposure to market risk from December 31, ~~2018,~~2019, a description of which may be found in our Annual Report on Form 10-K, for the year ended December 31, ~~2018,~~2019, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” filed with the ~~SEC.~~Securities and Exchange Commission. See “Risk Factors” in this Quarterly Report on Form 10-Q and Item 1A, “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, for a discussion of how difficult conditions in the financial markets and the economy generally may materially adversely affect our business and results of our operations.

Item 4. Controls and Procedures

In order to ensure that the information we must disclose in our filings with the SEC is recorded, processed, summarized and reported on a timely basis, the Company’s management, including our Chief Executive Officer and Chief Financial Officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Securities Exchange Act of 1934, as amended (“Exchange Act”) Rule 13a-15(e), as of ~~September~~June 30, ~~2019.~~2020. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of ~~September~~June 30, ~~2019,~~2020, our disclosure controls and procedures were effective. No change in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), occurred during the quarter ended ~~September~~June 30, ~~2019~~2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

You should carefully consider the risks described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019. These risks could materially affect our business, results of operations or financial condition, or cause our actual results to differ materially from those expected or those expressed in any forward-looking statements made by or on behalf of the Company. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” above and the risks of our business described elsewhere in this Quarterly Report on Form 10-Q. The following should be read in conjunction with and supplements and amends the section titled “Risk Factors” in our Annual Report on Form 10-K.

The COVID-19 pandemic has resulted in extreme stress and disruption in the global economy and financial markets, and has adversely impacted, and may continue to adversely impact, our results of operations, financial condition and prospects.

During the first half of 2020, the COVID-19 crisis (i) caused unfavorable financial market conditions which had a substantial negative effect on reported results and market values in our investment portfolio, (ii) negatively impacted our statutory capital and constrained our overall capital flexibility primarily due to asset value declines and the need to strengthen reserves, and (iii) caused us to lower our outlook for the future, as described further under “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Overview-COVID-19.”

We cannot predict what impact the COVID-19 pandemic will ultimately have on the global economy, markets or our business. The pandemic could exacerbate existing areas of concern, such as the pace of economic growth, equity market performance, and continued low interest rates, among others. Changes in consumer spending, business investment, and government debt and spending as a result of the crisis may negatively impact our business.

These risks may have manifested, and may continue to manifest, in our business in the following areas, among others:

Investment Risk. The COVID-19 pandemic and its impact on the global economy has increased the risk of loss on our investments due to default or deterioration in credit quality or value.

Insurance Risk. We expect COVID-19 to drive elevated levels of mortality in the near-term. The COVID-19 pandemic may ultimately result in a mortality calamity, which is the risk that short-term mortality rates deviate adversely from what is expected as a result of pandemics or other disasters. Elevated losses will reduce our earnings and capital, and we may be forced to liquidate assets before maturity in order to pay the excess claims. The pandemic situation may worsen depending on the evolution of the virus’s transmissibility and virulence, effectiveness of public health measures and availability of potential vaccines and treatments. Ultimate losses would depend on several factors, including the rates of mortality and morbidity among various segments of the insured population, age distribution of associated deaths, collectability of reinsurance, performance of our investment portfolio, effect on lapses and surrenders of existing policies, as well as sales of new policies and other variables.

The pandemic may also result in a change in policyholder behavior, such as policyholders choosing to defer or stop paying insurance premiums. It may also result in a lapse calamity, which is the risk that lapse rates over the short-term deviate adversely from what is expected. For example, surrenders of cash surrender value products by customers in need of liquidity can impact our liquidity, and it may be necessary in certain market conditions to sell assets to meet surrender demands. Lapse calamity can also impact our earnings through its impact on estimated future profits.

Finally, we cannot predict whether COVID-19 will ultimately lead to longer-term deviations from the mortality, policyholder behavior or morbidity assumptions we used to price our products.

Market Risk. Continued market disruptions and volatility may further negatively impact the profitability of many of our insurance and annuity products, which depends in part on the value of the separate accounts supporting these products which can fluctuate substantially depending on market conditions. Market volatility and reduced liquidity may reduce our ability to implement asset-liability management and hedging strategies. The decline in interest rates, in particular, may result in lower investment income, higher reserve levels and other consequences.

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Liquidity Risk. The impact of the COVID-19 crisis and related market dislocations could strain our existing liquidity and cause us to increase the use of our alternative sources of liquidity, which could result in increased financial leverage on our balance sheet and negatively impact our credit and financial strength ratings. Furthermore, certain sources of liquidity 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.

In particular, abrupt changes to interest rate, equity, and/or currency markets could lead to increased collateral requirements to counterparties, and cash demands due to severe mortality calamity, customer withdrawals or lapse events.

Operational Risk. One of the main impacts of the COVID-19 crisis has been executing our business continuity protocols to ensure our employees are safe and able to serve our customers. This included transitioning the vast majority of our employees to remote work arrangements. We have also made a number of operational changes to accommodate our customers.

In this environment, there is an elevated risk that weaknesses or failures in our business continuation plans could lead to disruption of our operations, liability to clients, exposure to disciplinary action or harm to our reputation. Furthermore, weaknesses or failures within a vendor’s business continuation plan can materially disrupt our business operations. Our information systems and those of our vendors and service providers may be more vulnerable to cyber-attacks, computer viruses or other computer related attacks, programming errors and similar disruptive problems during a business continuation event.

Strategic Risk. The COVID-19 pandemic could ultimately generate an economic downturn; higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending. In such an environment, the demand for our products and our investment returns could be materially adversely affected. In addition, we expect near-term sales to be slowed by the impact of social distancing and financial hardship on our customers.

Finally, we cannot predict what actions governments will take in response to the COVID-19 pandemic, and how any new laws, regulations, or state-sponsored programs may impact our business.

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Item 6. Exhibits

EXHIBIT INDEX

31.1 Section 302 Certification of the Chief Executive Officer

31.2 Section 302 Certification of the Chief Financial Officer

32.1 Section 906 Certification of the Chief Executive Officer

32.2 Section 906 Certification of the Chief Financial Officer

101.INS - XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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

104.Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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SIGNATURES

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



PRUDENTIAL ANNUITIES LIFE ASSURANCE CORPORATION

By:		/s/ ~~John Chieffo~~Susan M. Mann
Name		~~John Chieffo~~Susan M. Mann
		Executive Vice President and Chief Financial Officer
		(Authorized Signatory and Principal Financial Officer)

Date: ~~November 13, 2019~~August 12, 2020

6166



	September 30, 2019						December 31, 2018
	Remaining Contractual Maturities of the Agreements						Remaining Contractual Maturities of the Agreements
	Overnight & Continuous		Up to 30 Days		Total		Overnight & Continuous		Up to 30 Days		Total
	(in thousands)
Foreign government bonds	$	0	$	0	$	0	$	0	$	0	$	0
U.S. public corporate securities	0		0		0		384		0		384
Total cash collateral for loaned securities(1)	$	0	$	0	$	0	$	384	$	0	$	384



	Net Unrealized Gains (Losses) on Investments			Deferred Policy Acquisition Costs and Other Costs(2)			Future Policy Benefits and Other Liabilities(3)			Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses)
	(in thousands)
Balance, December 31, 2018	$	(3,334	)	$	(1,119	)	$	(68	)	$	27		$	(4,494	)
Net investment gains (losses) on investments arising during the period	17,051			0			0			(3,581		)	13,470
Reclassification adjustment for (gains) losses included in net income	(41		)	0			0			9			(32		)
Reclassification adjustment for OTTI (gains) losses excluded from net income(1)	(92		)	0			0			19			(73		)
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs	0			(181		)	0			38			(143		)
Impact of net unrealized investment (gains) losses on future policy benefits and other liabilities	0			0			(69		)	14			(55		)
Balance, September 30, 2019	$	13,584		$	(1,300	)	$	(137	)	$	(3,474	)	$	8,673



	Three Months Ended						Nine Months Ended
	September 30, 2019			September 30, 2018			September 30, 2019			September 30, 2018
	(in millions)(1)						(in millions)(1)
Excluding impact of assumption updates and other refinements:
Net hedging impact(2)	$	(8	)	$	(42	)	$	(145	)	$	(154	)
Change in portions of U.S. GAAP liability, before NPR(3)	(1,273		)	562			(1,704		)	1,011
Change in the NPR adjustment	1,071			(258		)	315			(144		)
Net impact from changes in the U.S. GAAP embedded derivative and hedge positions	(210		)	262			(1,534		)	713
Related benefit (charge) to amortization of DAC and other costs	(17		)	(60		)	214			(215		)
Net impact of assumption updates and other refinements	0			0			13			(159		)
Net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs.	$	(227	)	$	202		$	(1,307	)	$	339

~~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 ASC 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 continues to test and refine its expected credit loss models and related systems, processes and controls for assets held on the Statement of Financial Position at amortized cost. We currently estimate the cumulative impact of the adoption to retained earnings, primarily attributable to the reserves for commercial mortgage and other loans, to be immaterial.