~~0000881453us-gaap:ReinsuranceRecoverableMemberus-gaap:OtherIncomeMember2019-01-012019-09-30~~

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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 30, 2020~~March 31, 2021


☐			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~~May 12, ~~2020,~~2021, 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~~ ~~30, 2020~~March 31, 2021 and December 31, ~~2019~~2020	4
		Unaudited Interim Statements of Operations and Comprehensive Income (Loss) for the three ~~and~~ ~~nine~~months ended ~~September~~ ~~30,~~March 31, 2021 and 2020 ~~and 2019~~	5
		Unaudited Interim Statements of Equity for the three ~~and~~ ~~nine~~months ended ~~September~~ ~~30,~~March 31, 2021 and 2020 ~~and 2019~~	6
		Unaudited Interim Statements of Cash Flows for the ~~nine~~three months ended ~~September~~ ~~30,~~March 31, 2021 and 2020 ~~and 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	1511
		4. ~~Derivative Instruments~~Derivatives and Hedging	2522
		5. Fair Value of Assets and Liabilities	3127
		6. Reinsurance	4236
		7. Income Taxes	4439
		8. Equity	4439
		9. Related Party Transactions	4641
		10. Commitments and Contingent Liabilities	5144
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5346
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	6455
	Item 4.	Controls and Procedures	6455
PART II OTHER INFORMATION			6556
	Item 1.	Legal Proceedings	6556
	Item 1A.	Risk Factors	6556
	Item 6.	Exhibits	6757
SIGNATURES			6858

Table of Contents

FORWARD-LOOKING STATEMENTS

Certain of the statements included in this Quarterly Report on Form 10-Q 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; (3) losses on insurance products due to mortality experience or policyholder behavior experience that differs significantly from our expectations when we price our products; (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; (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; (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; (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 (d) reliance on third 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; (9) technological changes which may adversely impact companies in our investment portfolio or cause insurance experience to deviate from our assumptions; (10) ratings downgrades; (11) market conditions that may adversely affect the sales or persistency of our products; (12) competition; and (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 September 30, 2020 and~~ the Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 for discussion of certain risks relating to our business and investment in our securities.

Table of Contents

PART I - ~~Financial Information~~FINANCIAL INFORMATION

Item 1. Financial Statements

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Financial Position

~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 (in thousands, except share amounts)


		September 30, 2020		December 31, 2019			March 31, 2021		December 31, 2020
ASSETS	ASSETS					ASSETS
Fixed maturities, available-for-sale, at fair value (amortized cost, 2020: $14,916,971; 2019: $12,465,746; 2020-net of $568 allowance for credit losses)		$	17,398,916	$	13,202,365
Fixed maturities, trading, at fair value (amortized cost, 2020: $734,289; 2019: $349,428)		830,894		383,198
Fixed maturities, available-for-sale, at fair value (allowance for credit losses: 2021-$735; 2020-$686) (amortized cost: 2021-$11,178,085; 2020-$16,177,891)						Fixed maturities, available-for-sale, at fair value (allowance for credit losses: 2021-$735; 2020-$686) (amortized cost: 2021-$11,178,085; 2020-$16,177,891)	$	11,525,964	$	18,584,685
Fixed maturities, trading, at fair value (amortized cost: 2021-$4,002,146; 2020-$1,017,771)						Fixed maturities, trading, at fair value (amortized cost: 2021-$4,002,146; 2020-$1,017,771)	3,546,185		1,114,142

Equity securities, at fair value (cost, 2020: $53,892; 2019: $63,647)		59,855		67,503
Commercial mortgage and other loans (net of $7,633 and $2,663 allowance for credit losses at September 30, 2020 and December 31, 2019, respectively)(1)		1,677,951		1,471,522
Equity securities, at fair value (cost: 2021-$283,560; 2020-$279,096)						Equity securities, at fair value (cost: 2021-$283,560; 2020-$279,096)	276,886		288,082
Commercial mortgage and other loans (net of $7,001 and $7,382 allowance for credit losses at March 31, 2021 and December 31, 2020, respectively)						Commercial mortgage and other loans (net of $7,001 and $7,382 allowance for credit losses at March 31, 2021 and December 31, 2020, respectively)	1,794,798		1,765,770
Policy loans	Policy loans	11,916		12,366		Policy loans	11,659		11,806
Short-term investments	Short-term investments	1,815,485		335,358		Short-term investments	13,393		318,161
Other invested assets (includes $15,247 and $10,492 of assets measured at fair value at September 30, 2020 and December 31, 2019, respectively)		600,610		474,013
Other invested assets (includes $90,283 and $204,863 of assets measured at fair value at March 31, 2021 and December 31, 2020, respectively)						Other invested assets (includes $90,283 and $204,863 of assets measured at fair value at March 31, 2021 and December 31, 2020, respectively)	710,252		818,810
Total investments	Total investments	22,395,627		15,946,325		Total investments	17,879,137		22,901,456
Cash and cash equivalents	Cash and cash equivalents	5,501,936		2,795,163		Cash and cash equivalents	1,809,484		1,069,211
Deferred policy acquisition costs~~(1)~~	Deferred policy acquisition costs~~(1)~~	4,106,676		4,455,683		Deferred policy acquisition costs~~(1)~~	4,161,890		4,237,780
Accrued investment income	Accrued investment income	117,166		102,724		Accrued investment income	99,519		121,604
Reinsurance recoverables	Reinsurance recoverables	790,715		621,510		Reinsurance recoverables	543,849		694,040
Income taxes~~(1)~~	Income taxes~~(1)~~	1,512,403		1,202,714		Income taxes~~(1)~~	1,330,481		1,448,714
Value of business acquired	Value of business acquired	26,818		30,025		Value of business acquired	27,126		27,247
Deferred sales inducements	Deferred sales inducements	700,553		812,724		Deferred sales inducements	674,311		714,598
Receivables from parent and affiliates	Receivables from parent and affiliates	87,769		62,765		Receivables from parent and affiliates	88,712		87,620
Other assets	Other assets	428,808		139,933		Other assets	583,922		767,540
Separate account assets	Separate account assets	30,093,780		32,665,431		Separate account assets	32,146,468		32,205,296
TOTAL ASSETS	TOTAL ASSETS	$	65,762,251	$	58,834,997	TOTAL ASSETS	$	59,344,899	$	64,275,106
LIABILITIES AND EQUITY	LIABILITIES AND EQUITY					LIABILITIES AND EQUITY
LIABILITIES	LIABILITIES					LIABILITIES
Future policy benefits	Future policy benefits	$	22,616,570	$	12,932,461	Future policy benefits	$	11,712,823	$	18,560,891
Policyholders’ account balances	Policyholders’ account balances	7,708,608		6,180,359		Policyholders’ account balances	10,958,077		9,181,459
Payables to parent and affiliates	Payables to parent and affiliates	384,715		185,156		Payables to parent and affiliates	243,276		47,345

Short-term debt	Short-term debt	373,086		242,094		Short-term debt	119,671		119,671
Long-term debt	Long-term debt	299,747		419,418		Long-term debt	299,747		299,747
Reinsurance payables	Reinsurance payables	188,463		235,318		Reinsurance payables	160,279		178,860
Other liabilities~~(1)~~	Other liabilities~~(1)~~	669,814		447,405		Other liabilities~~(1)~~	718,495		980,692
Separate account liabilities	Separate account liabilities	30,093,780		32,665,431		Separate account liabilities	32,146,468		32,205,296
Total liabilities	Total liabilities	62,334,783		53,307,642		Total liabilities	56,358,836		61,573,961
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 10)	COMMITMENTS AND CONTINGENT LIABILITIES (See Note 10)					COMMITMENTS AND CONTINGENT LIABILITIES (See Note 10)	0		0
EQUITY	EQUITY					EQUITY
Common stock, $100 par value; 25,000 shares authorized, issued and outstanding	Common stock, $100 par value; 25,000 shares authorized, issued and outstanding	2,500		2,500		Common stock, $100 par value; 25,000 shares authorized, issued and outstanding	2,500		2,500
Additional paid-in capital	Additional paid-in capital	4,570,936		5,142,936		Additional paid-in capital	4,382,936		4,382,936
Retained earnings / (accumulated deficit)	Retained earnings / (accumulated deficit)	(2,807,247)		(46,693)		Retained earnings / (accumulated deficit)	(1,519,537)		(3,217,350)
Accumulated other comprehensive income (loss)	Accumulated other comprehensive income (loss)	1,661,279		428,612		Accumulated other comprehensive income (loss)	120,164		1,533,059
Total equity	Total equity	3,427,468		5,527,355		Total equity	2,986,063		2,701,145
TOTAL LIABILITIES AND EQUITY	TOTAL LIABILITIES AND EQUITY	$	65,762,251	$	58,834,997	TOTAL LIABILITIES AND EQUITY	$	59,344,899	$	64,275,106

~~(1) September 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~~ Months Ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ (in thousands)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2020		2019		2020		2019				2021		2020
REVENUES	REVENUES									REVENUES
Premiums	Premiums	$	13,936	$	12,506	$	45,528	$	48,242	Premiums		$	15,762	$	16,579
Policy charges and fee income	Policy charges and fee income	489,440		527,152		1,441,991		1,559,874		Policy charges and fee income		507,583		496,869
Net investment income	Net investment income	144,669		149,367		426,132		406,408		Net investment income		139,259		123,037
Asset administration fees and other income		102,758		120,927		353,740		345,520
Asset management and service fees(1)										Asset management and service fees(1)		103,521		97,850
Other income (loss)(1)										Other income (loss)(1)		(773,292)		47,283

Realized investment gains (losses), net	Realized investment gains (losses), net	(245,974)		(537,267)		(4,379,429)		(2,773,701)		Realized investment gains (losses), net		3,129,136		(757,691)
Total revenues		504,829		272,685		(2,112,038)		(413,657)
TOTAL REVENUES										TOTAL REVENUES		3,121,969		23,927
BENEFITS AND EXPENSES	BENEFITS AND EXPENSES									BENEFITS AND EXPENSES
Policyholders’ benefits	Policyholders’ benefits	43,824		69,833		248,585		125,673		Policyholders’ benefits		29,628		242,529
Interest credited to policyholders’ account balances	Interest credited to policyholders’ account balances	81,284		56,947		161,000		100,729		Interest credited to policyholders’ account balances		147,910		112,970
Amortization of deferred policy acquisition costs	Amortization of deferred policy acquisition costs	204,516		137,157		439,730		167,198		Amortization of deferred policy acquisition costs		342,576		429,518
Commission expense	Commission expense	193,174		220,828		602,303		672,110		Commission expense		165,315		218,074
General, administrative and other expenses	General, administrative and other expenses	29,604		74,008		160,487		193,981		General, administrative and other expenses		52,776		79,112
Total benefits and expenses		552,402		558,773		1,612,105		1,259,691
TOTAL BENEFITS AND EXPENSES										TOTAL BENEFITS AND EXPENSES		738,205		1,082,203
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES	INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES	(47,573)		(286,088)		(3,724,143)		(1,673,348)		INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES		2,383,764		(1,058,276)
Income tax expense (benefit)	Income tax expense (benefit)	134,587		(58,576)		(964,981)		(377,042)		Income tax expense (benefit)		493,951		(237,488)
NET INCOME (LOSS)	NET INCOME (LOSS)	$	(182,160)	$	(227,512)	$	(2,759,162)	$	(1,296,306)	NET INCOME (LOSS)		$	1,889,813	$	(820,788)
Other comprehensive income (loss), before tax:	Other comprehensive income (loss), before tax:									Other comprehensive income (loss), before tax:
Foreign currency translation adjustments	Foreign currency translation adjustments	327		(228)		(154)		(244)		Foreign currency translation adjustments		49		(483)
Net unrealized investment gains (losses)	Net unrealized investment gains (losses)	33,026		628,916		1,560,493		1,336,746		Net unrealized investment gains (losses)		(1,788,524)		1,280,088

Total	Total	33,353		628,688		1,560,339		1,336,502		Total		(1,788,475)		1,279,605
Less: Income tax expense (benefit) related to other comprehensive income (loss)	Less: Income tax expense (benefit) related to other comprehensive income (loss)	7,006		132,024		327,672		280,666		Less: Income tax expense (benefit) related to other comprehensive income (loss)		(375,580)		268,717

Other comprehensive income (loss), net of taxes	Other comprehensive income (loss), net of taxes	26,347		496,664		1,232,667		1,055,836		Other comprehensive income (loss), net of taxes		(1,412,895)		1,010,888
Comprehensive income (loss)	Comprehensive income (loss)	$	(155,813)	$	269,152	$	(1,526,495)	$	(240,470)	Comprehensive income (loss)		$	476,918	$	190,100

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

See Notes to Unaudited Interim Financial Statements

Table of Contents

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Equity

Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2021 and 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 Deficit)		Accumulated Other Comprehensive Income (Loss)		Total Equity
Balance, December 31, 2019		$	2,500	$	5,142,936	$	(46,693)	$	428,612	$	5,527,355
Cumulative effect of adoption of accounting changes(1)						(1,392)				(1,392)
Balance, December 31, 2020												Balance, December 31, 2020	$	2,500	$	4,382,936	$	(3,217,350)	$	1,533,059	$	2,701,145

Return of capital	Return of capital			(207,000)						(207,000)		Return of capital			0						0

Dividend to parent												Dividend to parent					(192,000)				(192,000)

Comprehensive income (loss):	Comprehensive income (loss):											Comprehensive income (loss):
Net income (loss)	Net income (loss)					(820,788)				(820,788)		Net income (loss)					1,889,813				1,889,813
Other comprehensive income (loss), net of tax	Other comprehensive income (loss), net of tax							1,010,888		1,010,888		Other comprehensive income (loss), net of tax							(1,412,895)		(1,412,895)
Total comprehensive income (loss)	Total comprehensive income (loss)									190,100		Total comprehensive income (loss)									476,918
Balance, March 31, 2020		$	2,500	$	4,935,936	$	(868,873)	$	1,439,500	$	5,509,063
Balance, March 31, 2021												Balance, March 31, 2021	$	2,500	$	4,382,936	$	(1,519,537)	$	120,164	$	2,986,063

Return of capital				(173,000)						(173,000)

Comprehensive income (loss):
Net income (loss)						(1,756,214)				(1,756,214)
Other comprehensive income (loss), net of tax								195,432		195,432
Total comprehensive income (loss)										(1,560,782)
Balance, June 30, 2020		$	2,500	$	4,762,936	$	(2,625,087)	$	1,634,932	$	3,775,281

Return of capital				(192,000)						(192,000)

Comprehensive income (loss):
Net income (loss)						(182,160)				(182,160)
Other comprehensive income (loss), net of tax								26,347		26,347
Total comprehensive income (loss)										(155,813)
Balance, September 30, 2020		$	2,500	$	4,570,936	$	(2,807,247)	$	1,661,279	$	3,427,468

~~Table of Contents~~


		Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Equity			Common Stock		Additional Paid-in Capital		Retained Earnings/(Accumulated Deficit)		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												Balance, December 31, 2019	$	2,500	$	5,142,936	$	(46,693)	$	428,612	$	5,527,355
Cumulative effect of adoption of accounting changes~~(2)~~(1)	Cumulative effect of adoption of accounting changes~~(2)~~(1)					(371)				(371)		Cumulative effect of adoption of accounting changes~~(2)~~(1)					(1,392)				(1,392)

Return of capital	Return of capital			(245,000)						(245,000)		Return of capital			(207,000)						(207,000)

Dividend to parent												Dividend to parent					0				0

Comprehensive income (loss):	Comprehensive income (loss):											Comprehensive income (loss):
Net income (loss)	Net income (loss)					(900,024)				(900,024)		Net income (loss)					(820,788)				(820,788)
Other comprehensive income (loss), net of tax	Other comprehensive income (loss), net of tax							224,777		224,777		Other comprehensive income (loss), net of tax							1,010,888		1,010,888
Total comprehensive income (loss)	Total comprehensive income (loss)									(675,247)		Total comprehensive income (loss)									190,100
Balance, March 31, 2019		$	2,500	$	5,875,436	$	42,610	$	(99,596)	$	5,820,950
Balance, March 31, 2020												Balance, March 31, 2020	$	2,500	$	4,935,936	$	(868,873)	$	1,439,500	$	5,509,063

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

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

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

~~(2) Includes the impact from the adoption of ASU 2017-08 and 2017-12. See Note~~ 2 to the Financial Statements included in the ~~Company’s~~Company's Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 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~~Three Months Ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ (in thousands)


		2020		2019			2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES:	CASH FLOWS FROM OPERATING ACTIVITIES:					CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	Net income (loss)	$	(2,759,162)	$	(1,296,306)	Net income (loss)	$	1,889,813	$	(820,788)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:	Adjustments to reconcile net income (loss) to net cash provided by operating activities:					Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Policy charges and fee income	Policy charges and fee income	(194)		(854)		Policy charges and fee income	(331)		(31)
Realized investment (gains) losses, net	Realized investment (gains) losses, net	4,379,429		2,773,701		Realized investment (gains) losses, net	(3,129,136)		757,691
Depreciation and amortization	Depreciation and amortization	1,288		453		Depreciation and amortization	5,669		145

Interest credited to policyholders’ account balances	Interest credited to policyholders’ account balances	161,000		100,729		Interest credited to policyholders’ account balances	147,910		112,970
Change in:	Change in:					Change in:
Future policy benefits	Future policy benefits	1,014,611		839,804		Future policy benefits	289,900		498,277
Accrued investment income	Accrued investment income	(14,442)		(7,767)		Accrued investment income	22,085		(4,676)

Net receivables from/payables to parent and affiliates	Net receivables from/payables to parent and affiliates	(12,673)		3,589		Net receivables from/payables to parent and affiliates	(10,134)		8,112

Deferred sales inducements	Deferred sales inducements	(1,049)		(568)		Deferred sales inducements	(965)		(582)
Deferred policy acquisition costs	Deferred policy acquisition costs	205,496		(155,778)		Deferred policy acquisition costs	243,468		340,757
Income taxes	Income taxes	(636,990)		(693,049)		Income taxes	493,813		(237,653)
Reinsurance recoverables, net	Reinsurance recoverables, net	(37,789)		(27,373)		Reinsurance recoverables, net	(12,290)		(7,176)

Derivatives, net	Derivatives, net	5,063,948		3,144,906		Derivatives, net	(4,325,229)		12,740,695

Other, net	Other, net	(32,760)		25,324		Other, net	753,618		4,824
Cash flows from (used in) operating activities	Cash flows from (used in) operating activities	7,330,713		4,706,811		Cash flows from (used in) operating activities	(3,631,809)		13,392,565
CASH FLOWS FROM INVESTING ACTIVITIES:	CASH FLOWS FROM INVESTING ACTIVITIES:					CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity/prepayment of:	Proceeds from the sale/maturity/prepayment of:					Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale	Fixed maturities, available-for-sale	572,885		596,626		Fixed maturities, available-for-sale	7,898,232		267,555
Fixed maturities, trading	Fixed maturities, trading	159,732		111		Fixed maturities, trading	2,015,501		38
Equity securities	Equity securities	29,057		2,534		Equity securities	1,333		1,026
Commercial mortgage and other loans	Commercial mortgage and other loans	25,308		247,723		Commercial mortgage and other loans	20,850		7,953

Policy loans	Policy loans	1,045		1,256		Policy loans	292		307
Other invested assets	Other invested assets	27,263		23,072		Other invested assets	5,058		12,759
Short-term investments	Short-term investments	6,320,503		491,254		Short-term investments	307,947		374,890
Payments for the purchase/origination of:	Payments for the purchase/origination of:					Payments for the purchase/origination of:
Fixed maturities, available for sale	Fixed maturities, available for sale	(3,005,885)		(2,646,186)		Fixed maturities, available for sale	(1,847,341)		(686,699)
Fixed maturities, trading	Fixed maturities, trading	(543,613)		(54,862)		Fixed maturities, trading	(5,201,320)		0
Equity securities	Equity securities	(16,019)		(51,229)		Equity securities	(5,730)		(11,648)
Commercial mortgage and other loans	Commercial mortgage and other loans	(232,974)		(239,275)		Commercial mortgage and other loans	(56,582)		(60,454)

Policy loans	Policy loans	(73)		(288)		Policy loans	(30)		(70)
Other invested assets	Other invested assets	(147,298)		(128,402)		Other invested assets	(4,799)		(45,053)
Short-term investments	Short-term investments	(7,800,148)		(1,071,423)		Short-term investments	(3,194)		(2,057,951)
Notes receivable from parent and affiliates, net		0		34,008

Derivatives, net	Derivatives, net	(774,629)		(76,670)		Derivatives, net	(34,308)		(232,861)
Other, net		0		0

Cash flows from (used in) investing activities	Cash flows from (used in) investing activities	(5,384,846)		(2,871,751)		Cash flows from (used in) investing activities	3,095,909		(2,430,208)
CASH FLOWS FROM FINANCING ACTIVITIES:	CASH FLOWS FROM FINANCING ACTIVITIES:					CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account deposits	Policyholders' account deposits	4,455,177		3,034,018		Policyholders' account deposits	2,503,057		1,478,968
Ceded policyholders' account deposits	Ceded policyholders' account deposits	(33,061)		(13,881)		Ceded policyholders' account deposits	(3,536)		(26,187)
Policyholders' account withdrawals	Policyholders' account withdrawals	(3,070,114)		(2,452,263)		Policyholders' account withdrawals	(1,029,911)		(1,029,198)
Ceded policyholders' account withdrawals	Ceded policyholders' account withdrawals	29,759		28,760		Ceded policyholders' account withdrawals	4,072		9,447
Cash collateral for loaned securities		0		(384)

Repayments of debt (maturities longer than 90 days)		0		(274,569)

Net increase/(decrease) in short-term borrowing	Net increase/(decrease) in short-term borrowing	11,322		0		Net increase/(decrease) in short-term borrowing	0		(7,916)
Drafts outstanding	Drafts outstanding	(12,968)		(455)		Drafts outstanding	(3,171)		(10,701)
Distribution to Parent		(572,000)		(736,500)
Distribution to parent						Distribution to parent	(192,000)		(207,000)

Other, net	Other, net	(47,209)		0		Other, net	(2,338)		(19,573)
Cash flows from (used in) financing activities	Cash flows from (used in) financing activities	760,906		(415,274)		Cash flows from (used in) financing activities	1,276,173		187,840
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	2,706,773		1,419,786		NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	740,273		11,150,197
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	2,795,163		4,503,534		CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	1,069,211		2,795,163
CASH AND CASH EQUIVALENTS, END OF PERIOD	CASH AND CASH EQUIVALENTS, END OF PERIOD	$	5,501,936	$	5,923,320	CASH AND CASH EQUIVALENTS, END OF PERIOD	$	1,809,484	$	13,945,360

Significant Non-Cash Transactions

There were no significant non-cash transactions for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 and ~~2019.~~2020.

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.

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 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. As of December 31, 2020, Pruco Life discontinued the sales of traditional variable annuities with guaranteed living benefit riders. The discontinuation has no impact on the reinsurance agreement between Pruco Life and the Company. 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.

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.

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 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 generally accepted 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, ~~2019.~~2020.

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; 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. While markets ~~and~~have rebounded, the pandemic has adversely impacted, and may continue to adversely impact, ~~our~~the Company's 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~~the Company's 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 and policyholder behavior which are reflected in our insurance liabilities and certain related balances (e.g., DAC, VOBA, etc.). WeThe Company cannot predict what impact the COVID-19 pandemic will ultimately have on ~~the global economy, markets or our~~its 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 ("ASUs") to the FASB Accounting Standards Codification ("ASC"). The Company considers the applicability and impact of all 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 ~~September 30, 2020,~~March 31, 2021, and as of the date of this filing. 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 Recoverables~~

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 months ended September 30, 2020.~~

~~Standard~~

~~Description~~

~~Effective date and method of adoption~~

~~Effect on the financial statements or other significant matters~~

~~ASU 2020-04,~~ ~~Reference Rate Reform (Topic 848): Facilitation~~

~~of the Effects of Reference Rate Reform on Financial Reporting~~

This ASU provides optional relief for certain contracts impacted by reference rate reform. The standard permits an entity to consider contract modification due to reference rate reform to be 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 prospective method.~~

This ASU did not have a significant impact on the Company’s Financial Statements and Notes to the Financial Statements. The Company made the election under ASU 2020-04 for all applicable contracts as they converted from the current reference rate to the new reference rate.

ASU issued but not yet adopted as of ~~September 30, 2020~~March 31, 2021 — 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 issued ASU 2019-09, Financial Services - Insurance (Topic 944): Effective Date to affirm its decision to defer the effective date of 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, in November 2020, the FASB issued ASU 2020-11, Financial Services-Insurance (Topic 944): Effective Date and Early Application to defer for an additional one year the 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. The transition relief would allow large calendar-year public companies that early adopt ASU 2018-12 to apply the guidance either as of January 1, 2020 or January 1, 2021 (and record transition adjustments as of January 1, 2020 or January 1, 2021, respectively) in the 2022 financial statements. Companies that do not early adopt ASU 2018-12 would apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2023 financial statements. The Company currently intends to adopt ASU 2018-12 effective January 1, 2023. 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 less significant changes not noted below. In addition to the impacts to the balance sheet upon ~~adoption,~~transition, the Company also expects an impact to ~~how~~the pattern of earnings ~~emerge thereafter.~~emergence following the transition date.

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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 may choose to apply the amendments to contracts in force as of the beginning of the prior year (if early adoption is elected) or 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 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, which will be updated each quarter with the impact recorded through OCI. An entity shall maximize the use of relevant observable information and minimize the use of unobservable information in determining the discount rate assumptions.

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 either the beginning of the prior year (if early adoption is elected)or 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 discount rates 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 may choose to apply the amendments to contracts in force as of the beginning of the prior year (if early adoption is elected) or 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 full 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 ~~(MRB)~~("MRB")

Requires an entity to measure all market risk benefits (e.g., living benefit and death benefit guarantees associated with variable annuities) at fair value, and record MRB 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 in MRB liabilities attributable to changes in an entity’s non-performance risk ("NPR"), which is recognized in OCI.

An entity shall adopt the guidance for market risk benefits using the retrospective transition method, which includes a cumulative-effect adjustment on the balance sheet as of either the beginning of prior year (if early adoption is elected) or the beginning 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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Notes to Unaudited Interim Financial Statements—(Continued)

Modifications related to COVID-19

We assess modifications to certain fixed income instruments on a case-by-case basis to evaluate whether a troubled debt restructuring ("TDR") has occurred. In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") provides a temporary suspension of TDR accounting for certain COVID-19 related modifications where the investment was not more than 30 days past due as of December 31, 2019 (“TDR Relief”). The TDR Relief was set to expire on December 31, 2020, but was extended through December 31, 2021 by the Consolidated Appropriations Act of 2021. The Company elected to apply the TDR Relief beginning in the first quarter of 2021. The TDR Relief does not apply to modifications completed 60 days after the national emergency related to COVID-19 ends, or December 31, 2021, whichever comes earlier. As of March 31, 2021, any such modifications did not have a material impact on the Company's results of operations. For additional information regarding the Company’s policies for troubled debt restructurings, see Note 2 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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, 2020											March 31, 2021
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Fair Value			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Fair Value
		(in thousands)											(in thousands)
Fixed maturities, available-for-sale:	Fixed maturities, available-for-sale:											Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	7,203,259	$	1,928,710	$	12,705	$	0	$	9,119,264	U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	914,937	$	30,951	$	10,334	$	0	$	935,554
Obligations of U.S. states and their political subdivisions	Obligations of U.S. states and their political subdivisions	259,429		17,032		256		0		276,205		Obligations of U.S. states and their political subdivisions	302,372		12,297		2,340		0		312,329
Foreign government bonds	Foreign government bonds	160,922		21,978		19		0		182,881		Foreign government bonds	172,078		16,143		896		0		187,325
U.S. public corporate securities	U.S. public corporate securities	2,691,422		278,335		7,392		0		2,962,365		U.S. public corporate securities	3,785,253		167,327		71,551		0		3,881,029
U.S. private corporate securities	U.S. private corporate securities	1,509,192		111,697		6,114		217		1,614,558		U.S. private corporate securities	1,767,324		88,125		14,741		720		1,839,988
Foreign public corporate securities	Foreign public corporate securities	329,721		24,333		7,032		0		347,022		Foreign public corporate securities	902,623		18,051		14,049		0		906,625
Foreign private corporate securities	Foreign private corporate securities	1,233,676		77,343		11,890		351		1,298,778		Foreign private corporate securities	1,457,455		102,363		11,411		15		1,548,392
Asset-backed securities(1)	Asset-backed securities(1)	804,636		8,765		3,950		0		809,451		Asset-backed securities(1)	975,298		9,902		212		0		984,988
Commercial mortgage-backed securities	Commercial mortgage-backed securities	649,810		57,148		19		0		706,939		Commercial mortgage-backed securities	835,555		35,109		10,722		0		859,942
Residential mortgage-backed securities(2)	Residential mortgage-backed securities(2)	74,904		6,552		3		0		81,453		Residential mortgage-backed securities(2)	65,190		4,635		33		0		69,792
Total fixed maturities, available-for-sale	Total fixed maturities, available-for-sale	$	14,916,971	$	2,531,893	$	49,380	$	568	$	17,398,916	Total fixed maturities, available-for-sale	$	11,178,085	$	484,903	$	136,289	$	735	$	11,525,964

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

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

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.~~other asset types.

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

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Notes to Unaudited Interim Financial Statements—(Continued)

~~(3)~~


	December 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Fair Value
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	7,283,403	$	1,631,715	$	12,686	$	0	$	8,902,432
Obligations of U.S. states and their political subdivisions	258,135		19,512		156		0		277,491
Foreign government bonds	153,009		24,378		4		0		177,383
U.S. public corporate securities	3,112,420		339,348		1,361		0		3,450,407
U.S. private corporate securities	1,736,035		155,943		4,706		209		1,887,063
Foreign public corporate securities	513,204		29,029		408		0		541,825
Foreign private corporate securities	1,338,936		158,227		2,851		477		1,493,835
Asset-backed securities(1)	984,318		9,870		1,605		0		992,583
Commercial mortgage-backed securities	728,522		57,522		102		0		785,942
Residential mortgage-backed securities(2)	69,909		5,818		3		0		75,724
Total fixed maturities, available-for-sale	$	16,177,891	$	2,431,362	$	23,882	$	686	$	18,584,685

(1)~~Represents the amount of unrealized losses remaining in AOCI, from the impairment measurement date. Amount excludes $14.3 million of net unrealized gains on impaired available-for-sale~~Includes credit-tranched securities ~~relating to changes in the value of such~~collateralized by loan obligations, auto loans, education loans, equipment leases and sub-prime mortgages.

(2)Includes publicly-traded agency pass-through securities ~~subsequent to the impairment measurement date.~~and collateralized mortgage obligations.

The following ~~table sets~~tables set 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~~dates indicated:

September 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 $ 536,328 $ 12,705 $ 0 $ 0 $ 536,328 $ 12,705
Obligations of U.S. states and their political subdivisions 13,690 256 0 0 13,690 256
Foreign government bonds 252 6 79 13 331 19
U.S. public corporate securities 264,213 7,027 2,562 365 266,775 7,392
U.S. private corporate securities 73,223 4,579 6,684 1,535 79,907 6,114
Foreign public corporate securities 76,443 7,032 0 0 76,443 7,032
Foreign private corporate securities 176,274 5,588 75,774 6,286 252,048 11,874
Asset-backed securities 223,101 1,247 272,737 2,703 495,838 3,950
Commercial mortgage-backed securities 7,252 19 0 0 7,252 19
Residential mortgage-backed securities 0 0 82 3 82 3
Total fixed maturities, available-for-sale $ 1,370,776 $ 38,459 $ 357,918 $ 10,905 $ 1,728,694 $ 49,364

The following 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 date indicated:


		December 31, 2019													March 31, 2021
		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:	Fixed maturities, available-for-sale:													Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	1,336,007	$	39,456	$	5,855	$	10	$	1,341,862	$	39,466	U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	144,565	$	10,334	$	0	$	0	$	144,565	$	10,334
Obligations of U.S. states and their political subdivisions	Obligations of U.S. states and their political subdivisions	97,752		436		0		0		97,752		436		Obligations of U.S. states and their political subdivisions	79,297		2,340		0		0		79,297		2,340
Foreign government bonds	Foreign government bonds	804		13		132		7		936		20		Foreign government bonds	18,554		884		78		12		18,632		896
U.S. public corporate securities	U.S. public corporate securities	93,147		870		15,491		461		108,638		1,331		U.S. public corporate securities	1,864,779		70,888		15,462		663		1,880,241		71,551
U.S. private corporate securities	U.S. private corporate securities	82,709		2,111		59,797		1,232		142,506		3,343		U.S. private corporate securities	319,025		12,473		16,442		2,266		335,467		14,739
Foreign public corporate securities	Foreign public corporate securities	50,150		113		0		0		50,150		113		Foreign public corporate securities	608,178		13,056		31,663		993		639,841		14,049
Foreign private corporate securities	Foreign private corporate securities	97,414		1,652		91,863		6,343		189,277		7,995		Foreign private corporate securities	212,996		8,010		43,527		3,401		256,523		11,411
Asset-backed securities	Asset-backed securities	103,911		717		235,759		2,017		339,670		2,734		Asset-backed securities	99,710		189		33,668		23		133,378		212
Commercial mortgage-backed securities	Commercial mortgage-backed securities	66,071		236		0		0		66,071		236		Commercial mortgage-backed securities	202,581		10,722		0		0		202,581		10,722
Residential mortgage-backed securities	Residential mortgage-backed securities	633		12		7		1		640		13		Residential mortgage-backed securities	5,271		30		78		3		5,349		33
Total fixed maturities, available-for-sale	Total fixed maturities, available-for-sale	$	1,928,598	$	45,616	$	408,904	$	10,071	$	2,337,502	$	55,687	Total fixed maturities, available-for-sale	$	3,554,956	$	128,926	$	140,918	$	7,361	$	3,695,874	$	136,287

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Notes to Unaudited Interim Financial Statements—(Continued)


	December 31, 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	$	244,507	$	12,686	$	0	$	0	$	244,507	$	12,686
Obligations of U.S. states and their political subdivisions	9,440		156		0		0		9,440		156
Foreign government bonds	257		1		87		3		344		4
U.S. public corporate securities	117,755		1,335		2,185		26		119,940		1,361
U.S. private corporate securities	35,411		2,614		16,071		2,092		51,482		4,706
Foreign public corporate securities	69,610		408		0		0		69,610		408
Foreign private corporate securities	11,679		188		50,809		2,663		62,488		2,851
Asset-backed securities	219,535		320		246,535		1,285		466,070		1,605
Commercial mortgage-backed securities	45,617		102		0		0		45,617		102
Residential mortgage-backed securities	0		0		80		3		80		3
Total fixed maturities, available-for-sale	$	753,811	$	17,810	$	315,767	$	6,072	$	1,069,578	$	23,882

As of ~~September 30,~~March 31, 2021 and December 31, 2020, the gross unrealized losses on fixed maturity available-for-sale securities without an allowance were composed of ~~$31.3~~$128.7 million and $17.4 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 ~~$18.1~~$7.6 million and $6.5 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. As of ~~September 30, 2020,~~March 31, 2021, the $10.9 million of gross unrealized losses of twelve months or more were concentrated in asset-backed securities and in the Company’s corporate securities within the consumer non-cyclical, utility and industrial other sectors.

As of December 31, 2019, the 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$7.4 million of gross unrealized losses of twelve months or more were concentrated in the Company’s corporate securities within the transportation, consumer non-cyclical, ~~utility~~energy and industrial other sectors. As of December 31, 2020, the $6.1 million of gross unrealized losses of twelve months or more were concentrated in the Company’s corporate securities within the transportation, consumer ~~cyclical~~non-cyclical and energy sectors and in asset-backed securities.

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, 2020, the Company concluded that an adjustment to earnings for credit losses related to these fixed maturity securities was not warranted at ~~September 30, 2020. These conclusions were~~March 31, 2021. This conclusion was 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, foreign currency exchange rate movements and the financial condition or near-term prospects of the issuer. As of ~~September 30, 2020,~~March 31, 2021, 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, 2020					March 31, 2021
		Amortized Cost		Fair Value			Amortized Cost		Fair Value
		(in thousands)					(in thousands)
Fixed maturities, available-for-sale:	Fixed maturities, available-for-sale:					Fixed maturities, available-for-sale:
Due in one year or less	Due in one year or less	$	202,191	$	204,939	Due in one year or less	$	303,632	$	307,998
Due after one year through five years	Due after one year through five years	1,184,697		1,244,727		Due after one year through five years	2,815,832		2,890,358
Due after five years through ten years	Due after five years through ten years	2,323,234		2,502,344		Due after five years through ten years	2,566,636		2,671,469
Due after ten years	Due after ten years	9,677,499		11,849,063		Due after ten years	3,615,942		3,741,417
Asset-backed securities	Asset-backed securities	804,636		809,451		Asset-backed securities	975,298		984,988
Commercial mortgage-backed securities	Commercial mortgage-backed securities	649,810		706,939		Commercial mortgage-backed securities	835,555		859,942
Residential mortgage-backed securities	Residential mortgage-backed securities	74,904		81,453		Residential mortgage-backed securities	65,190		69,792
Total fixed maturities, available-for-sale	Total fixed maturities, available-for-sale	$	14,916,971	$	17,398,916	Total fixed maturities, available-for-sale	$	11,178,085	$	11,525,964

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.

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

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

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 March 31,
		2020		2019		2020		2019				2021		2020
		(in thousands)										(in thousands)
Fixed maturities, available-for-sale:	Fixed maturities, available-for-sale:									Fixed maturities, available-for-sale:
Proceeds from sales(1)	Proceeds from sales(1)	$	20,268	$	77,697	$	352,945	$	231,106	Proceeds from sales(1)		$	7,557,132	$	195,978
Proceeds from maturities/prepayments	Proceeds from maturities/prepayments	88,208		125,432		220,109		379,849		Proceeds from maturities/prepayments		138,524		78,080
Gross investment gains from sales and maturities	Gross investment gains from sales and maturities	24		15		18,279		982		Gross investment gains from sales and maturities		1,136,902		7,480
Gross investment losses from sales and maturities	Gross investment losses from sales and maturities	(366)		(445)		(1,856)		(3,086)		Gross investment losses from sales and maturities		(55,349)		(180)
OTTI recognized in earnings(2)		N/A		(769)		N/A		(2,794)

Write-downs recognized in earnings~~(3)~~(2)	Write-downs recognized in earnings~~(3)~~(2)	0		N/A		(693)		N/A		Write-downs recognized in earnings~~(3)~~(2)		0		(693)
(Addition to) release of allowance for credit losses~~(4)~~	(Addition to) release of allowance for credit losses~~(4)~~	414		N/A		(568)		N/A		(Addition to) release of allowance for credit losses~~(4)~~		(49)		(186)

(1)Includes ~~$0.2~~$(202.6) million and ~~$14.3~~$6.5 million of non-cash related proceeds due to the timing of trade settlements for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively.

(2)For the three and nine months ended September 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 impairment.

~~(3)For the three and nine months ended September 30, 2020, amounts~~Amounts represent write-downs on securities ~~approaching maturity related to foreign exchange movements, securities~~ actively marketed for ~~sale and write-downs of credit adverse securities.~~

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

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

The following tables set forth the activity in the allowance for credit losses for fixed maturity securities, as of the dates indicated:


		Three Months Ended September 30, 2020															Three Months Ended March 31, 2021
		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			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)															(in thousands)
Fixed maturities, available-for-sale:	Fixed maturities, available-for-sale:															Fixed maturities, available-for-sale:
Balance, beginning of period	Balance, beginning of period	$	0	$	0	$	982	$	0	$	0	$	0	$	982	Balance, beginning of period	$	0	$	0	$	686	$	0	$	0	$	0	$	686
Additions to allowance for credit losses not previously recorded	Additions to allowance for credit losses not previously recorded	0		0		216		0		0		0		216		Additions to allowance for credit losses not previously recorded	0		0		432		0		0		0		432

Reductions for securities sold during the period	Reductions for securities sold during the period	0		0		0		0		0		0		0		Reductions for securities sold during the period	0		0		(6)		0		0		0		(6)

Addition (reductions) on securities with previous allowance	Addition (reductions) on securities with previous allowance	0		0		(630)		0		0		0		(630)		Addition (reductions) on securities with previous allowance	0		0		(377)		0		0		0		(377)

Balance, end of period	Balance, end of period	$	0	$	0	$	568	$	0	$	0	$	0	$	568	Balance, end of period	$	0	$	0	$	735	$	0	$	0	$	0	$	735

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

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

For the three months ended September 30, 2020, the decrease in the allowance for credit losses on available-for-sale securities was primarily related to recoveries in the energy sector within corporate securities.

Nine Months Ended September 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 1,384 0 0 0 1,384
Reductions for securities sold during the period 0 0 (2) 0 0 0 (2)
Addition (reductions) on securities with previous allowance 0 0 (814) 0 0 0 (814)
Balance, end of period $ 0 $ 0 $ 568 $ 0 $ 0 $ 0 $ 568


	Three Months Ended March 31, 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 period	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Additions to allowance for credit losses not previously recorded	0		0		186		0		0		0		186






Balance, end of period	$	0	$	0	$	186	$	0	$	0	$	0	$	186

See Note 2 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 for additional information about the Company’s methodology for developing our allowance ~~and expected~~for credit losses.

For the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, the increase in 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 0t have any fixed maturity securities purchased with credit deterioration, as of ~~September 30,~~both March 31, 2021 and December 31, 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~~“Other income (loss),” was ~~$0.4~~$(15.7) million and ~~$0.3~~$(1.6) million during the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, and $2.1 million and $1.7 million during the nine months ended September 30, 2020 and 2019,~~ respectively.

1915

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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, 2020				December 31, 2019					March 31, 2021				December 31, 2020
		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:	Commercial mortgage and agricultural property loans by property type:									Commercial mortgage and agricultural property loans by property type:
Apartments/Multi-Family	Apartments/Multi-Family	$	371,216	22.0	%	$	272,150	18.5	%	Apartments/Multi-Family	$	363,747	20.2	%	$	369,764	20.9	%
Hospitality	Hospitality	16,745		1.0		16,819		1.1		Hospitality	18,064		1.0		16,679		0.9
Industrial	Industrial	520,721		30.9		464,528		31.5		Industrial	607,002		33.7		590,231		33.3
Office	Office	365,535		21.7		372,823		25.3		Office	362,173		20.1		374,107		21.1
Other	Other	187,116		11.1		156,768		10.6		Other	224,733		12.5		187,643		10.6
Retail	Retail	130,462		7.7		131,051		8.9		Retail	129,817		7.2		130,154		7.3
Total commercial mortgage loans	Total commercial mortgage loans	1,591,795		94.4		1,414,139		95.9		Total commercial mortgage loans	1,705,536		94.7		1,668,578		94.1
Agricultural property loans	Agricultural property loans	93,789		5.6		60,046		4.1		Agricultural property loans	96,263		5.3		104,574		5.9
Total commercial mortgage and agricultural property loans	Total commercial mortgage and agricultural property loans	1,685,584		100.0	%	1,474,185		100.0	%	Total commercial mortgage and agricultural property loans	1,801,799		100.0	%	1,773,152		100.0	%
Allowance for credit losses	Allowance for credit losses	(7,633)				(2,663)				Allowance for credit losses	(7,001)				(7,382)
Total net commercial mortgage and agricultural property loans	Total net commercial mortgage and agricultural property loans	1,677,951				1,471,522				Total net commercial mortgage and agricultural property loans	$	1,794,798			$	1,765,770
Other loans:
Other collateralized loans		0				0
Allowance for credit losses		0				0
Total net other loans		0				0
Total net commercial mortgage and other loans		$	1,677,951			$	1,471,522

As of ~~September 30, 2020,~~March 31, 2021, the commercial mortgage and agricultural property loans were secured by properties geographically dispersed throughout the United States ~~with~~(with the largest concentrations in California (24%), Texas ~~(12%~~(14%) and New York ~~(11%~~(10%)) and included loans secured by properties in Europe ~~(16%~~(15%) and Australia (3%).

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

Three Months Ended September 30, 2020
Commercial Mortgage Loans Agricultural Property Loans Other Collateralized Loans Total
(in thousands)
Balance, beginning of period $ 6,701 $ 178 $ 0 $ 6,879
Addition to (release of) allowance for expected losses 646 108 0 754
Balance, end of period $ 7,347 $ 286 $ 0 $ 7,633

Nine Months Ended September 30, 2020
Commercial Mortgage Loans Agricultural Property Loans Other Collateralized Loans Total
(in thousands)
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 1,607 206 0 1,813
Balance at September 30, 2020 $ 7,347 $ 286 $ 0 $ 7,633

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~~Prudential Annuities Life Assurance Corporation~~

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


	Three Months Ended March 31,
	2021						2020
	Commercial Mortgage Loans		Agricultural Property Loans		Total		Commercial Mortgage Loans		Agricultural Property Loans		Total
	(in thousands)
Allowance, beginning of period	$	7,116	$	266	$	7,382	$	2,622	$	41	$	2,663
Cumulative effect of adoption of ASU 2016-13	0		0		0		3,118		39		3,157
Addition to (release of) allowance for expected losses	(379)		(2)		(381)		363		99		462




Allowance, end of period	$	6,737	$	264	$	7,001	$	6,103	$	179	$	6,282

See Note 2 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 for additional information about the Company's methodology for developing our allowance and expected losses.

For the ~~nine~~three months ended ~~September 30,~~March 31, 2021, the decrease in the allowance for credit losses on commercial mortgage and other loans was reflecting the improving credit environment. For the three months ended March 31, 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.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

The following tables set forth key credit quality indicators based upon the recorded investment gross of allowance for credit losses, as of the ~~date~~dates indicated:


		September 30, 2020																	March 31, 2021
		Amortized Cost by Origination Year																	Amortized Cost by Origination Year
		2020		2019		2018		2017		2016		Prior		Revolving Loans		Total			2021		2020		2019		2018		2017		Prior		Total
		(in thousands)																	(in thousands)
Commercial Mortgage Loans	Commercial Mortgage Loans																	Commercial Mortgage Loans
Loan-to-Value Ratio:	Loan-to-Value Ratio:																	Loan-to-Value Ratio:
0%-59.99%	0%-59.99%	$	0	$	116,872	$	26,733	$	83,965	$	195,585	$	255,804	$	0	$	678,959	0%-59.99%	$	38,560	$	0	$	113,410	$	43,037	$	115,447	$	427,874	$	738,328
60%-69.99%	60%-69.99%	140,998		172,412		32,176		139,016		61,536		96,476		0		642,614		60%-69.99%	14,075		175,627		201,021		52,873		116,336		103,477		663,409
70%-79.99%	70%-79.99%	51,766		72,514		47,798		60,980		29,388		7,776		0		270,222		70%-79.99%	0		80,023		51,172		10,745		53,558		107,204		302,702
80% or greater	80% or greater	0		0		0		0		0		0		0		0		80% or greater	0		0		0		0		0		1,097		1,097
Total	Total	$	192,764	$	361,798	$	106,707	$	283,961	$	286,509	$	360,056	$	0	$	1,591,795	Total	$	52,635	$	255,650	$	365,603	$	106,655	$	285,341	$	639,652	$	1,705,536
Debt Service Coverage Ratio:	Debt Service Coverage Ratio:																	Debt Service Coverage Ratio:
Greater or Equal to 1.2x	Greater or Equal to 1.2x	$	192,764	$	338,722	$	90,462	$	283,961	$	282,478	$	347,475	$	0	$	1,535,862	Greater or Equal to 1.2x	$	52,635	$	255,650	$	342,820	$	106,655	$	285,341	$	589,367	$	1,632,468
1.0 - 1.2x	1.0 - 1.2x	0		23,076		16,245		0		4,031		9,804		0		53,156		1.0 - 1.2x	0		0		22,783		0		0		22,084		44,867
Less than 1.0x	Less than 1.0x	0		0		0		0		0		2,777		0		2,777		Less than 1.0x	0		0		0		0		0		28,201		28,201
Total	Total	$	192,764	$	361,798	$	106,707	$	283,961	$	286,509	$	360,056	$	0	$	1,591,795	Total	$	52,635	$	255,650	$	365,603	$	106,655	$	285,341	$	639,652	$	1,705,536
Agricultural Property Loans	Agricultural Property Loans																	Agricultural Property Loans
Loan-to-Value Ratio:	Loan-to-Value Ratio:																	Loan-to-Value Ratio:
0%-59.99%	0%-59.99%	$	34,465	$	13,769	$	1,261	$	8,265	$	1,180	$	32,549	$	0	$	91,489	0%-59.99%	$	3,750	$	47,126	$	13,740	$	1,249	$	0	$	28,213	$	94,078
60%-69.99%	60%-69.99%	2,300		0		0		0		0		0		0		2,300		60%-69.99%	0		2,185		0		0		0		0		2,185
70%-79.99%	70%-79.99%	0		0		0		0		0		0		0		0		70%-79.99%	0		0		0		0		0		0		0
80% or greater	80% or greater	0		0		0		0		0		0		0		0		80% or greater	0		0		0		0		0		0		0
Total	Total	$	36,765	$	13,769	$	1,261	$	8,265	$	1,180	$	32,549	$	0	$	93,789	Total	$	3,750	$	49,311	$	13,740	$	1,249	$	0	$	28,213	$	96,263
Debt Service Coverage Ratio:	Debt Service Coverage Ratio:																	Debt Service Coverage Ratio:
Greater or Equal to 1.2x	Greater or Equal to 1.2x	$	36,765	$	13,769	$	1,261	$	4,277	$	1,180	$	28,957	$	0	$	86,209	Greater or Equal to 1.2x	$	3,750	$	49,311	$	13,740	$	1,249	$	0	$	24,632	$	92,682
1.0 - 1.2x	1.0 - 1.2x	0		0		0		0		0		0		0		0		1.0 - 1.2x	0		0		0		0		0		0		0
Less than 1.0x	Less than 1.0x	0		0		0		3,988		0		3,592		0		7,580		Less than 1.0x	0		0		0		0		0		3,581		3,581
Total	Total	$	36,765	$	13,769	$	1,261	$	8,265	$	1,180	$	32,549	$	0	$	93,789	Total	$	3,750	$	49,311	$	13,740	$	1,249	$	0	$	28,213	$	96,263

2117

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

~~Commercial mortgage loans~~

December 31, 2019
Debt Service Coverage Ratio

> 1.2X
1.0X to <1.2X < 1.0X Total
(in thousands)
Loan-to-Value Ratio:
0%-59.99% $ 659,217 $ 6,641 $ 0 $ 665,858
60%-69.99% 499,493 14,078 0 513,571
70%-79.99% 203,158 30,555 0 233,713
80% or greater 0 997 0 997
Total commercial mortgage loans $ 1,361,868 $ 52,271 $ 0 $ 1,414,139

~~Agricultural property loans~~


		December 31, 2019									December 31, 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		Total
				(in thousands)							(in thousands)
Commercial Mortgage Loans										Commercial Mortgage Loans
Loan-to-Value Ratio:	Loan-to-Value Ratio:									Loan-to-Value Ratio:
0%-59.99%	0%-59.99%	$	56,437	$	0	$	3,609	$	60,046	0%-59.99%	$	0	$	114,636	$	36,423	$	116,130	$	175,740	$	255,848	$	698,777
60%-69.99%	60%-69.99%	0		0		0		0		60%-69.99%	174,507		204,112		59,935		90,954		57,569		54,530		641,607
70%-79.99%	70%-79.99%	0		0		0		0		70%-79.99%	81,671		51,333		10,806		80,257		56,169		46,855		327,091
80% or greater	80% or greater	0		0		0		0		80% or greater	0		0		0		0		0		1,103		1,103
Total agricultural property loans		$	56,437	$	0	$	3,609	$	60,046
Total										Total	$	256,178	$	370,081	$	107,164	$	287,341	$	289,478	$	358,336	$	1,668,578
Debt Service Coverage Ratio:										Debt Service Coverage Ratio:
Greater or Equal to 1.2x										Greater or Equal to 1.2x	$	256,178	$	347,151	$	107,164	$	287,341	$	274,124	$	323,060	$	1,595,018
1.0 - 1.2x										1.0 - 1.2x	0		22,930		0		0		3,969		18,420		45,319
Less than 1.0x										Less than 1.0x	0		0		0		0		11,385		16,856		28,241
Total										Total	$	256,178	$	370,081	$	107,164	$	287,341	$	289,478	$	358,336	$	1,668,578
Agricultural Property Loans										Agricultural Property Loans
Loan-to-Value Ratio:										Loan-to-Value Ratio:
0%-59.99%										0%-59.99%	$	47,245	$	13,769	$	1,255	$	7,493	$	1,180	$	31,370	$	102,312
60%-69.99%										60%-69.99%	2,262		0		0		0		0		0		2,262
70%-79.99%										70%-79.99%	0		0		0		0		0		0		0
80% or greater										80% or greater	0		0		0		0		0		0		0
Total										Total	$	49,507	$	13,769	$	1,255	$	7,493	$	1,180	$	31,370	$	104,574
Debt Service Coverage Ratio:										Debt Service Coverage Ratio:
Greater or Equal to 1.2x										Greater or Equal to 1.2x	$	49,507	$	13,769	$	1,255	$	4,277	$	1,180	$	27,783	$	97,771
1.0 - 1.2x										1.0 - 1.2x	0		0		0		0		0		0		0
Less than 1.0x										Less than 1.0x	0		0		0		3,216		0		3,587		6,803
Total										Total	$	49,507	$	13,769	$	1,255	$	7,493	$	1,180	$	31,370	$	104,574

See Note 2 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 for additional information about the Company’s commercial mortgage and other loans credit quality monitoring process.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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, 2020													March 31, 2021
		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	Commercial mortgage loans	$	1,591,795	$	0	$	0	$	0	$	1,591,795	$	0	Commercial mortgage loans	$	1,705,536	$	0	$	0	$	0	$	1,705,536	$	0
Agricultural property loans	Agricultural property loans	93,789		0		0		0		93,789		3,988		Agricultural property loans	96,263		0		0		0		96,263		0
Other collateralized loans		0		0		0		0		0		0

Total	Total	$	1,685,584	$	0	$	0	$	0	$	1,685,584	$	3,988	Total	$	1,801,799	$	0	$	0	$	0	$	1,801,799	$	0

(1)As of ~~September 30,~~March 31, 2021, 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, 2020.


	December 31, 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)
	(in thousands)
Commercial mortgage loans	$	1,668,578	$	0	$	0	$	0	$	1,668,578	$	0
Agricultural property loans	104,574		0		0		0		104,574		0

Total	$	1,773,152	$	0	$	0	$	0	$	1,773,152	$	0

(1)As of December 31, 2020, there were 0 loans in this category accruing interest.

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

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

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, 2019.2020.

~~There were $4.0 million of~~The Company did 0t have any commercial mortgage and other loans ~~on non-accrual status which did not have a related allowance for~~purchased with credit ~~losses~~deterioration as of ~~September 30, 2020,~~both March 31, 2021 and ~~those loans recognized interest income of $0.2 million for both the three and nine months ended September 30,~~December 31, 2020.

For both the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 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 months ended September 30, 2019, there were 0 commercial mortgage and other loans acquired, other than those through direct origination, and there were $105 million and $206 million, respectively,

Table of ~~commercial mortgage and other loans sold.~~

Contents

~~The Company did 0t have any commercial mortgage and other loans purchased with credit deterioration as of September 30, 2020.~~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, 2020		December 31, 2019			March 31, 2021		December 31, 2020
		(in thousands)					(in thousands)

LPs/LLCs:	LPs/LLCs:					LPs/LLCs:
Equity method:	Equity method:					Equity method:
Private equity	Private equity	$	22,719	$	23,414	Private equity	$	31,864	$	28,955
Hedge funds	Hedge funds	333,340		273,615		Hedge funds	343,299		340,951
Real estate-related	Real estate-related	229,304		166,492		Real estate-related	244,806		244,041
Subtotal equity method	Subtotal equity method	585,363		463,521		Subtotal equity method	619,969		613,947
Fair value:	Fair value:					Fair value:
Private equity	Private equity	4,095		4,115		Private equity	3,696		4,220
Hedge funds	Hedge funds	172		194		Hedge funds	139		172
Real estate-related	Real estate-related	6,211		6,181		Real estate-related	6,295		6,220
Subtotal fair value	Subtotal fair value	10,478		10,490		Subtotal fair value	10,130		10,612
Total LPs/LLCs	Total LPs/LLCs	595,841		474,011		Total LPs/LLCs	630,099		624,559

Derivative instruments	Derivative instruments	4,769		2		Derivative instruments	80,153		194,251
Total other invested assets	Total other invested assets	$	600,610	$	474,013	Total other invested assets	$	710,252	$	818,810

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

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

Accrued Investment Income

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


	~~September 30, 2020~~
	~~(in thousands)~~
~~Fixed maturities~~	$	~~111,603~~
~~Equity securities~~	60
~~Commercial mortgage and other loans~~	~~4,835~~
~~Policy loans~~	11

~~Short-term investments and cash equivalents~~	~~388~~
~~Other(1)~~	~~269~~
~~Total accrued investment income~~	$	~~117,166~~


	March 31, 2021		December 31, 2020
	(in thousands)
Fixed maturities	$	93,436	$	116,342
Equity securities	60		1
Commercial mortgage and other loans	5,091		4,828
Policy loans	11		11

Short-term investments and cash equivalents	649		158
Other(1)	272		264
Total accrued investment income	$	99,519	$	121,604

(1)Primarily includes affiliated accrued income.

There were 0 write-downs on accrued investment income for both the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020.

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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 March 31,
		2020		2019		2020		2019				2021		2020
		(in thousands)										(in thousands)
Fixed maturities, available-for-sale	Fixed maturities, available-for-sale	$	113,538	$	100,249	$	323,737	$	289,289	Fixed maturities, available-for-sale		$	109,041	$	100,734
Fixed maturities, trading	Fixed maturities, trading	3,972		2,579		9,474		7,497		Fixed maturities, trading		6,480		2,581
Equity securities	Equity securities	63		67		194		213		Equity securities		952		67
Commercial mortgage and other loans	Commercial mortgage and other loans	13,898		12,761		42,517		37,661		Commercial mortgage and other loans		15,269		13,182
Policy loans	Policy loans	182		153		538		430		Policy loans		(20)		127
Other invested assets	Other invested assets	15,102		7,083		20,968		23,690		Other invested assets		14,091		(12,713)
Short-term investments and cash equivalents	Short-term investments and cash equivalents	4,601		31,807		48,569		62,313		Short-term investments and cash equivalents		442		25,452
Gross investment income	Gross investment income	151,356		154,699		445,997		421,093		Gross investment income		146,255		129,430
Less: investment expenses	Less: investment expenses	(6,687)		(5,332)		(19,865)		(14,685)		Less: investment expenses		(6,996)		(6,393)
Net investment income	Net investment income	$	144,669	$	149,367	$	426,132	$	406,408	Net investment income		$	139,259	$	123,037

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,
2020 2019 2020 2019
(in thousands)
Fixed maturities(1) $ 72 $ (1,199) $ 15,162 $ (4,898)
Commercial mortgage and other loans (753) 950 (2,489) (292)
Derivatives (246,742) (537,079) (4,397,341) (2,768,959)
Other invested assets 1,405 0 2,875 0
Short-term investments and cash equivalents 44 61 2,364 448
Realized investment gains (losses), net $ (245,974) $ (537,267) $ (4,379,429) $ (2,773,701)

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

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


	Three Months Ended March 31,
		2021		2020
	(in thousands)
Fixed maturities(1)		$	1,081,504	$	6,422

Commercial mortgage and other loans		300		(342)

Derivatives		2,045,560		(764,540)
Other invested assets		1,745		500
Short-term investments and cash equivalents		27		269
Realized investment gains (losses), net		$	3,129,136	$	(757,691)

(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, 2020		December 31, 2019			March 31, 2021		December 31, 2020
		(in thousands)					(in thousands)
Fixed maturity securities, available-for-sale — with OTTI(1)		$ N/A		$	14,309
Fixed maturity securities, available-for-sale — all other(1)		N/A		722,310

Fixed maturity securities, available-for-sale with an allowance	Fixed maturity securities, available-for-sale with an allowance	(14)		N/A		Fixed maturity securities, available-for-sale with an allowance	$	45	$	2
Fixed maturity securities, available-for-sale without an allowance	Fixed maturity securities, available-for-sale without an allowance	2,482,527		N/A		Fixed maturity securities, available-for-sale without an allowance	348,569		2,407,478
Derivatives designated as cash flow hedges~~(2)~~(1)	Derivatives designated as cash flow hedges~~(2)~~(1)	22,677		(287)		Derivatives designated as cash flow hedges~~(2)~~(1)	(40,003)		(43,000)
Affiliated notes		4,931		598
Affiliated notes, available-for-sale						Affiliated notes, available-for-sale	2,751		4,629

Net unrealized gains (losses) on investments	Net unrealized gains (losses) on investments	$	2,510,121	$	736,930	Net unrealized gains (losses) on investments	$	311,362	$	2,369,109

(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 both ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the Company had 0 repurchase agreements or securities lending transactions.

4. ~~DERIVATIVE INSTRUMENTS~~DERIVATIVES AND HEDGING

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, ~~2019.~~2020.

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Notes to Unaudited Interim Financial Statements—(Continued)

Primary Risks Managed by Derivatives

The table below provides a summary of the gross notional amount and 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.


		September 30, 2020								December 31, 2019											March 31, 2021								December 31, 2020
Primary Underlying Risk/Instrument Type	Primary Underlying Risk/Instrument Type	Gross Notional			Fair Value					Gross Notional			Fair Value					Primary Underlying Risk/Instrument Type			Gross Notional			Fair Value					Gross Notional		Fair Value
				Assets			Liabilities					Assets			Liabilities					Assets				Liabilities				Assets			Liabilities
				(in thousands)																			(in thousands)
Derivatives Designated as Hedge Accounting Instruments:	Derivatives Designated as Hedge Accounting Instruments:																		Derivatives Designated as Hedge Accounting Instruments:
Currency/Interest Rate	Currency/Interest Rate																	Currency/Interest Rate
Foreign Currency Swaps	Foreign Currency Swaps	$	1,280,579		$	53,859		$	(16,348)	$	1,172,899		$	39,019		$	(26,511)	Foreign Currency Swaps			$	1,403,565		$	24,141	$	(71,345)		$	1,376,290	$	23,167	$	(82,625)
Total Derivatives Designated as Hedge Accounting Instruments	Total Derivatives Designated as Hedge Accounting Instruments	$	1,280,579		$	53,859		$	(16,348)	$	1,172,899		$	39,019		$	(26,511)	Total Derivatives Designated as Hedge Accounting Instruments			$	1,403,565		$	24,141	$	(71,345)		$	1,376,290	$	23,167	$	(82,625)
Derivatives Not Qualifying as Hedge Accounting Instruments:	Derivatives Not Qualifying as Hedge Accounting Instruments:																	Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	Interest Rate																	Interest Rate
Interest Rate Futures	Interest Rate Futures	$	5,244,900		$	5,018		$	(10,520)	$	3,857,700		$	638		$	(5,872)	Interest Rate Futures			$	4,713,300		$	3,401	$	(7,564)		$	4,597,200	$	2,755	$	(1,621)
Interest Rate Swaps	Interest Rate Swaps	103,756,250			14,717,201			(6,135,811)		88,557,425			6,598,625			(1,997,944)		Interest Rate Swaps			154,911,591			6,599,563		(12,720,544)			131,129,200		12,448,036		(9,540,941)
Interest Rate Options	Interest Rate Options	10,618,000			1,195,646			(188,397)		12,583,000			283,386			(172,085)		Interest Rate Options			10,148,000			111,391		(166,887)			10,198,000		608,538		(178,563)
Interest Rate Forwards	Interest Rate Forwards	257,000			173			(185)		959,772			24,487			(4,185)		Interest Rate Forwards			505,000			3,337		(24,254)			75,000		464		0
Foreign Currency	Foreign Currency																	Foreign Currency
Foreign Currency Forwards	Foreign Currency Forwards	19,028			126			(125)		16,683			0			(394)		Foreign Currency Forwards			36,228			200		(100)			34,988		4		(557)
Currency/Interest Rate	Currency/Interest Rate																	Currency/Interest Rate
Foreign Currency Swaps	Foreign Currency Swaps	216,304			17,007			(557)		234,767			11,482			(663)		Foreign Currency Swaps			253,453			7,818		(7,457)			228,117		7,939		(8,440)
Credit	Credit																	Credit
Credit Default Swaps	Credit Default Swaps	275,173			6,782			(472)		0			0			0		Credit Default Swaps			1,095,000			25,852		(19)			1,574,173		38,875		(52)
Equity	Equity																	Equity
Equity Futures	Equity Futures	7,412,980			6,130			(30,119)		1,191,237			0			(2,638)		Equity Futures			4,459,416			20,678		(2,374)			5,558,882		9,424		(24,688)
Total Return Swaps	Total Return Swaps	24,495,921			151,598			(397,196)		16,314,165			36,692			(573,957)		Total Return Swaps			19,541,904			121,378		(450,633)			22,121,729		62,362		(1,162,907)
Equity Options	Equity Options	36,849,348			814,373			(431,728)		12,866,043			329,722			(422,700)		Equity Options			41,210,913			508,706		(855,838)			23,856,379		1,617,672		(952,452)
Total Derivatives Not Qualifying as Hedge Accounting Instruments	Total Derivatives Not Qualifying as Hedge Accounting Instruments	$	189,144,904		$	16,914,054		$	(7,195,110)	$	136,580,792		$	7,285,032		$	(3,180,438)	Total Derivatives Not Qualifying as Hedge Accounting Instruments			$	236,874,805		$	7,402,324	$	(14,235,670)		$	199,373,668	$	14,796,069	$	(11,870,221)
Total Derivatives(1)(2)	Total Derivatives(1)(2)	$	190,425,483		$	16,967,913		$	(7,211,458)	$	137,753,691		$	7,324,051		$	(3,206,949)	Total Derivatives(1)(2)			$	238,278,370		$	7,426,465	$	(14,307,015)		$	200,749,958	$	14,819,236	$	(11,952,846)

(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 ~~$21,326~~$10,512 million and ~~$11,823~~$17,314 million as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively included in “Future policy benefits” and ~~$303~~$986 million and ~~$197~~$580 million as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively included in “Policyholders’ account balances". Other assets included ~~$41~~$63 million and $8$54 million as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. Other liabilities included ~~$18~~$21 million and $0$35 million as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. The fair value of the related reinsurance, included in "Reinsurance recoverables" and/or "Reinsurance payables" was an asset of ~~$546~~$332 million and ~~$350~~$471 million as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively.

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

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Notes to Unaudited Interim Financial Statements—(Continued)

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, 2020											March 31, 2021
		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:	Offsetting of Financial Assets:											Offsetting of Financial Assets:
Derivatives(1)	Derivatives(1)	$	16,967,913	$	(16,963,144)	$	4,769	$	0	$	4,769	Derivatives(1)	$	7,426,465	$	(7,346,312)	$	80,153	$	0	$	80,153
Securities purchased under agreements to resell	Securities purchased under agreements to resell	0		0		0		0		0		Securities purchased under agreements to resell	260,000		0		260,000		(260,000)		0
Total Assets	Total Assets	$	16,967,913	$	(16,963,144)	$	4,769	$	0	$	4,769	Total Assets	$	7,686,465	$	(7,346,312)	$	340,153	$	(260,000)	$	80,153
Offsetting of Financial Liabilities:	Offsetting of Financial Liabilities:											Offsetting of Financial Liabilities:
Derivatives(1)	Derivatives(1)	$	7,211,458	$	(6,835,378)	$	376,080	$	(38,706)	$	337,374	Derivatives(1)	$	14,307,015	$	(14,099,180)	$	207,835	$	(207,835)	$	0
Securities sold under agreements to repurchase	Securities sold under agreements to repurchase	0		0		0		0		0		Securities sold under agreements to repurchase	0		0		0		0		0
Total Liabilities	Total Liabilities	$	7,211,458	$	(6,835,378)	$	376,080	$	(38,706)	$	337,374	Total Liabilities	$	14,307,015	$	(14,099,180)	$	207,835	$	(207,835)	$	0


		December 31, 2019											December 31, 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:	Offsetting of Financial Assets:											Offsetting of Financial Assets:
Derivatives(1)	Derivatives(1)	$	7,324,051	$	(7,324,049)	$	2	$	0	$	2	Derivatives(1)	$	14,819,236	$	(14,624,985)	$	194,251	$	0	$	194,251
Securities purchased under agreements to resell	Securities purchased under agreements to resell	302,000		0		302,000		(302,000)		0		Securities purchased under agreements to resell	150,000		0		150,000		(150,000)		0
Total Assets	Total Assets	$	7,626,051	$	(7,324,049)	$	302,002	$	(302,000)	$	2	Total Assets	$	14,969,236	$	(14,624,985)	$	344,251	$	(150,000)	$	194,251
Offsetting of Financial Liabilities:	Offsetting of Financial Liabilities:											Offsetting of Financial Liabilities:
Derivatives(1)	Derivatives(1)	$	3,206,949	$	(3,053,132)	$	153,817	$	(820)	$	152,997	Derivatives(1)	$	11,952,846	$	(11,936,059)	$	16,787	$	(16,787)	$	0
Securities sold under agreements to repurchase	Securities sold under agreements to repurchase	0		0		0		0		0		Securities sold under agreements to repurchase	0		0		0		0		0
Total Liabilities	Total Liabilities	$	3,206,949	$	(3,053,132)	$	153,817	$	(820)	$	152,997	Total Liabilities	$	11,952,846	$	(11,936,059)	$	16,787	$	(16,787)	$	0

(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, ~~2019.~~2020.

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

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Notes to Unaudited Interim Financial Statements—(Continued)

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


		Three Months Ended September 30, 2020									Three Months Ended March 31, 2021
		Realized Investment Gains (Losses)		Net Investment Income		Other Income		AOCI(1)			Realized Investment Gains (Losses)		Net Investment Income		Other Income (Loss)		AOCI(1)
		(in thousands)									(in thousands)
Derivatives Designated as Hedge Accounting Instruments:	Derivatives Designated as Hedge Accounting Instruments:									Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges	Cash flow hedges									Cash flow hedges
Currency/Interest Rate	Currency/Interest Rate	$	(194)	$	4,581	$	(13,989)	$	(45,498)	Currency/Interest Rate	$	1,405	$	4,339	$	6,572	$	2,997
Total cash flow hedges	Total cash flow hedges	(194)		4,581		(13,989)		(45,498)		Total cash flow hedges	1,405		4,339		6,572		2,997
Derivatives Not Qualifying as Hedge Accounting Instruments:	Derivatives Not Qualifying as Hedge Accounting Instruments:									Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	Interest Rate	(995,815)		0		0		0		Interest Rate	(3,744,843)		0		0		0
Currency	Currency	(837)		0		0		0		Currency	45		0		0		0
Currency/Interest Rate	Currency/Interest Rate	(17,813)		0		(105)		0		Currency/Interest Rate	3,227		0		(16)		0
Credit	Credit	(344)		0		0		0		Credit	2,323		0		0		0
Equity	Equity	(2,116,755)		0		0		0		Equity	(929,620)		0		0		0
Embedded Derivatives	Embedded Derivatives	2,885,016		0		0		0		Embedded Derivatives	6,713,023		0		0		0
Total Derivatives Not Qualifying as Hedge Accounting Instruments:	Total Derivatives Not Qualifying as Hedge Accounting Instruments:	(246,548)		0		(105)		0		Total Derivatives Not Qualifying as Hedge Accounting Instruments:	2,044,155		0		(16)		0
Total	Total	$	(246,742)	$	4,581	$	(14,094)	$	(45,498)	Total	$	2,045,560	$	4,339	$	6,556	$	2,997

Nine Months Ended September 30, 2020
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 $ 4,373 $ 13,509 $ (6,694) $ 22,964
Total cash flow hedges 4,373 13,509 (6,694) 22,964
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate 5,974,212 0 0 0
Currency 250 0 0 0
Currency/Interest Rate 12,270 0 (36) 0
Credit (5,872) 0 0 0
Equity (1,931,846) 0 0 0
Embedded Derivatives (8,450,728) 0 0 0
Total Derivatives Not Qualifying as Hedge Accounting Instruments: (4,401,714) 0 (36) 0
Total $ (4,397,341) $ 13,509 $ (6,730) $ 22,964

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

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

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


		Nine Months Ended September 30, 2019									Three Months Ended March 31, 2020
		Realized Investment Gains (Losses)		Net Investment Income		Other Income		AOCI(1)			Realized Investment Gains (Losses)		Net Investment Income		Other Income (Loss)		AOCI(1)
		(in thousands)									(in thousands)
Derivatives Designated as Hedge Accounting Instruments:	Derivatives Designated as Hedge Accounting Instruments:									Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges	Cash flow hedges									Cash flow hedges
Currency/Interest Rate	Currency/Interest Rate	$	(850)	$	8,375	$	8,168	$	30,689	Currency/Interest Rate	$	1,855	$	4,259	$	16,943	$	102,856
Total cash flow hedges	Total cash flow hedges	(850)		8,375		8,168		30,689		Total cash flow hedges	1,855		4,259		16,943		102,856
Derivatives Not Qualifying as Hedge Accounting Instruments:	Derivatives Not Qualifying as Hedge Accounting Instruments:									Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	Interest Rate	5,328,630		0		0		0		Interest Rate	7,049,901		0		0		0
Currency	Currency	930		0		0		0		Currency	1,030		0		0		0
Currency/Interest Rate	Currency/Interest Rate	26,397		0		97		0		Currency/Interest Rate	41,849		0		72		0
Credit	Credit	1,775		0		0		0		Credit	(7,157)		0		0		0
Equity	Equity	(2,378,529)		0		0		0		Equity	5,015,288		0		0		0
Embedded Derivatives	Embedded Derivatives	(5,747,312)		0		0		0		Embedded Derivatives	(12,867,306)		0		0		0
Total Derivatives Not Qualifying as Hedge Accounting Instruments:	Total Derivatives Not Qualifying as Hedge Accounting Instruments:	(2,768,109)		0		97		0		Total Derivatives Not Qualifying as Hedge Accounting Instruments:	(766,395)		0		72		0
Total	Total	$	(2,768,959)	$	8,375	$	8,265	$	30,689	Total	$	(764,540)	$	4,259	$	17,015	$	102,856

(1)Net change in AOCI.

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Notes to Unaudited Interim Financial Statements—(Continued)

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


	(in thousands)
Balance, December 31, ~~2019~~2020	$	~~(287)~~(43,000)
Amount recorded in AOCI


Currency/Interest Rate	~~34,152~~15,313
Total amount recorded in AOCI	~~34,152~~15,313
Amount reclassified from AOCI to income


Currency/Interest Rate	~~(11,188)~~(12,316)
Total amount reclassified from AOCI to income	~~(11,188)~~(12,316)
Balance, ~~September 30, 2020~~March 31, 2021	$	~~22,677~~ (40,003)

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 30, 2020~~March 31, 2021 values, it is estimated that a pre-tax gain of $16 million is expected to be reclassified from AOCI to earnings during the subsequent twelve months ending ~~September 30, 2021.~~March 31, 2022.

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.

Credit Derivatives

Credit derivatives, where the Company has written credit protection on certain index references, had outstanding notional amounts of ~~$248~~$1,094 million and $0$1,568 million as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. These credit derivatives are reported at fair value as an asset of $7$26 million and $0$39 million as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. As of ~~September 30,~~March 31, 2021 and December 31, 2020, the notional amount of these credit derivatives had the following NAIC rating: ~~$248~~$1,094 million and $1,568 million in NAIC 3.

The Company has 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 ~~$27~~$1 million and $0$6 million reported as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively, with a fair value of $0 million for both periods.

Counterparty Credit Risk

The Company is exposed to credit-related losses in the event of non-performance by ~~a counterparty~~counterparties 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.

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Notes to Unaudited Interim Financial Statements—(Continued)

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, ~~2019.~~2020.

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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, 2020											March 31, 2021
		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:	Fixed maturities, available-for-sale:											Fixed maturities, available-for-sale:
U.S Treasury securities and obligations of U.S. government authorities and agencies	U.S Treasury securities and obligations of U.S. government authorities and agencies	$	0	$	9,106,048	$	13,216	$	0	$	9,119,264	U.S Treasury securities and obligations of U.S. government authorities and agencies	$	0	$	920,554	$	15,000	$		$	935,554
Obligations of U.S. states and their political subdivisions	Obligations of U.S. states and their political subdivisions	0		276,205		0		0		276,205		Obligations of U.S. states and their political subdivisions	0		312,329		0				312,329
Foreign government bonds	Foreign government bonds	0		182,881		0		0		182,881		Foreign government bonds	0		187,325		0				187,325
U.S. corporate public securities	U.S. corporate public securities	0		2,954,347		8,018		0		2,962,365		U.S. corporate public securities	0		3,881,029		0				3,881,029
U.S. corporate private securities	U.S. corporate private securities	0		1,546,023		68,535		0		1,614,558		U.S. corporate private securities	0		1,754,631		85,357				1,839,988
Foreign corporate public securities	Foreign corporate public securities	0		346,837		185		0		347,022		Foreign corporate public securities	0		906,422		203				906,625
Foreign corporate private securities	Foreign corporate private securities	0		1,238,125		60,653		0		1,298,778		Foreign corporate private securities	0		1,468,042		80,350				1,548,392
Asset-backed securities(2)	Asset-backed securities(2)	0		789,844		19,607		0		809,451		Asset-backed securities(2)	0		968,032		16,956				984,988
Commercial mortgage-backed securities	Commercial mortgage-backed securities	0		706,637		302		0		706,939		Commercial mortgage-backed securities	0		859,942		0				859,942
Residential mortgage-backed securities	Residential mortgage-backed securities	0		81,453		0		0		81,453		Residential mortgage-backed securities	0		69,792		0				69,792
Subtotal	Subtotal	0		17,228,400		170,516		0		17,398,916		Subtotal	0		11,328,098		197,866				11,525,964
Fixed maturities, trading	Fixed maturities, trading	0		826,228		4,666		0		830,894		Fixed maturities, trading	0		3,541,058		5,127				3,546,185
Equity securities	Equity securities	4,794		38,881		6,180		0		49,855		Equity securities	220,575		42,145		4,166				266,886
Short-term investments	Short-term investments	539,918		852,067		0		0		1,391,985		Short-term investments	0		1,044		12,349				13,393
Cash equivalents	Cash equivalents	1,489,884		3,034,241		0		0		4,524,125		Cash equivalents	94,999		975,703		100				1,070,802
Other invested assets(3)	Other invested assets(3)	11,858		16,956,055		0		(16,963,144)		4,769		Other invested assets(3)	83,490		7,342,975		0		(7,346,312)		80,153
Other assets	Other assets	0		0		40,765		0		40,765		Other assets	0		0		63,072				63,072
Reinsurance recoverables	Reinsurance recoverables	0		57,746		488,335		0		546,081		Reinsurance recoverables	0		60,799		271,390				332,189
Receivables from parent and affiliates	Receivables from parent and affiliates	0		56,906		0		0		56,906		Receivables from parent and affiliates	0		54,147		0				54,147
Subtotal excluding separate account assets	Subtotal excluding separate account assets	2,046,454		39,050,524		710,462		(16,963,144)		24,844,296		Subtotal excluding separate account assets	399,064		23,345,969		554,070		(7,346,312)		16,952,791
Separate account assets(4)	Separate account assets(4)	0		30,093,780		0		0		30,093,780		Separate account assets(4)	0		32,146,468		0				32,146,468
Total assets	Total assets	$	2,046,454	$	69,144,304	$	710,462	$	(16,963,144)	$	54,938,076	Total assets	$	399,064	$	55,492,437	$	554,070	$	(7,346,312)	$	49,099,259
Future policy benefits(5)	Future policy benefits(5)	$	0	$	0	$	21,325,619	$	0	$	21,325,619	Future policy benefits(5)	$	0	$	0	$	10,511,815	$		$	10,511,815
Policyholders' account balances	Policyholders' account balances	0		0		303,060		0		303,060		Policyholders' account balances	0		0		986,479				986,479
Payables to parent and affiliates	Payables to parent and affiliates	0		7,170,819		0		(6,828,288)		342,531		Payables to parent and affiliates	0		14,283,188		0		(14,079,986)		203,202

Other liabilities	Other liabilities	40,639		17,888		0		(7,090)		51,437		Other liabilities	23,827		21,162		0		(19,194)		25,795
Total liabilities	Total liabilities	$	40,639	$	7,188,707	$	21,628,679	$	(6,835,378)	$	22,022,647	Total liabilities	$	23,827	$	14,304,350	$	11,498,294	$	(14,099,180)	$	11,727,291

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Notes to Unaudited Interim Financial Statements—(Continued)


		As of December 31, 2019											December 31, 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:	Fixed maturities, available-for-sale:											Fixed maturities, available-for-sale:
U.S Treasury securities and obligations of U.S. government authorities and agencies	U.S Treasury securities and obligations of U.S. government authorities and agencies	$	0	$	7,109,277	$	10,547	$	0	$	7,119,824	U.S Treasury securities and obligations of U.S. government authorities and agencies	$	0	$	8,887,432	$	15,000	$		$	8,902,432
Obligations of U.S. states and their political subdivisions	Obligations of U.S. states and their political subdivisions	0		259,682		0		0		259,682		Obligations of U.S. states and their political subdivisions	0		277,491		0				277,491
Foreign government bonds	Foreign government bonds	0		222,884		0		0		222,884		Foreign government bonds	0		177,383		0				177,383
U.S. corporate public securities	U.S. corporate public securities	0		1,732,632		8,044		0		1,740,676		U.S. corporate public securities	0		3,450,407		0				3,450,407
U.S. corporate private securities	U.S. corporate private securities	0		1,155,464		51,875		0		1,207,339		U.S. corporate private securities	0		1,804,855		82,208				1,887,063
Foreign corporate public securities	Foreign corporate public securities	0		337,800		187		0		337,987		Foreign corporate public securities	0		541,644		181				541,825
Foreign corporate private securities	Foreign corporate private securities	0		1,169,324		44,161		0		1,213,485		Foreign corporate private securities	0		1,427,537		66,298				1,493,835
Asset-backed securities(2)	Asset-backed securities(2)	0		425,613		18,825		0		444,438		Asset-backed securities(2)	0		974,041		18,542				992,583
Commercial mortgage-backed securities	Commercial mortgage-backed securities	0		578,289		0		0		578,289		Commercial mortgage-backed securities	0		785,942		0				785,942
Residential mortgage-backed securities	Residential mortgage-backed securities	0		77,761		0		0		77,761		Residential mortgage-backed securities	0		75,724		0				75,724
Subtotal	Subtotal	0		13,068,726		133,639		0		13,202,365		Subtotal	0		18,402,456		182,229				18,584,685
Fixed maturities, trading	Fixed maturities, trading	0		378,734		4,464		0		383,198		Fixed maturities, trading	0		1,109,097		5,045				1,114,142
Equity securities	Equity securities	5,314		46,942		5,247		0		57,503		Equity securities	234,452		39,477		4,153				278,082
Short-term investments	Short-term investments	0		260,354		0		0		260,354		Short-term investments	0		143,161		10,000				153,161
Cash equivalents	Cash equivalents	150,631		1,654,974		0		0		1,805,605		Cash equivalents	0		533,133		0				533,133
Other invested assets(3)	Other invested assets(3)	639		7,323,412		0		(7,324,049)		2		Other invested assets(3)	39,906		14,779,330		0		(14,624,985)		194,251
Other assets	Other assets	0		0		8,059		0		8,059		Other assets	0		0		53,980				53,980
Reinsurance recoverables	Reinsurance recoverables	0		47,006		302,814		0		349,820		Reinsurance recoverables	0		62,232		409,013				471,245
Receivables from parent and affiliates	Receivables from parent and affiliates	0		2,573		0		0		2,573		Receivables from parent and affiliates	0		56,026		0				56,026
Subtotal excluding separate account assets	Subtotal excluding separate account assets	156,584		22,782,721		454,223		(7,324,049)		16,069,479		Subtotal excluding separate account assets	274,358		35,124,912		664,420		(14,624,985)		21,438,705
Separate account assets(4)	Separate account assets(4)	0		32,665,431		0		0		32,665,431		Separate account assets(4)	0		32,205,296		0				32,205,296
Total assets	Total assets	$	156,584	$	55,448,152	$	454,223	$	(7,324,049)	$	48,734,910	Total assets	$	274,358	$	67,330,208	$	664,420	$	(14,624,985)	$	53,644,001
Future policy benefits(5)	Future policy benefits(5)	$	0	$	0	$	11,822,998	$	0	$	11,822,998	Future policy benefits(5)	$	0	$	0	$	17,314,004	$		$	17,314,004
Policyholders' account balances	Policyholders' account balances	0		0		196,892		0		196,892		Policyholders' account balances	0		0		580,184				580,184
Payables to parent and affiliates	Payables to parent and affiliates	0		3,198,440		0		(3,052,493)		145,947		Payables to parent and affiliates	0		11,926,536		0		(11,926,536)		0
Other liabilities	Other liabilities	8,509		260		0		(639)		8,130		Other liabilities	26,309		33,416		0		(9,523)		50,202
Total liabilities	Total liabilities	$	8,509	$	3,198,700	$	12,019,890	$	(3,053,132)	$	12,173,967	Total liabilities	$	26,309	$	11,959,952	$	17,894,188	$	(11,936,059)	$	17,944,390

(1)“Netting” amounts represent cash collateral of ~~$10,128~~$(6,753) million and ~~$4,271~~$2,689 million as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, 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 both September 30, 2020~~At March 31, 2021 and December 31, ~~2019,~~2020, the fair values of such investments were ~~$10.5 million.~~$10.1 million and $10.6 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 30, 2020,~~March 31, 2021, the net embedded derivative liability position of ~~$21,326~~$10,512 million includes ~~$289~~$746 million of embedded derivatives in an asset position and ~~$21,615~~$11,258 million of embedded derivatives in a liability position. As of December 31, ~~2019,~~2020, the net embedded derivative liability position of ~~$11,823~~$17,314 million includes ~~$583~~$455 million of embedded derivatives in an asset position and ~~$12,406~~$17,769 million of embedded derivatives in a liability position.

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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, 2020												March 31, 2021
		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:	Assets:												Assets:
Corporate securities(2)	Corporate securities(2)	$	54,937	Discounted cash flow	Discount rate	1.30	%	25	%	6.24	%	Decrease	Corporate securities(2)	$	99,645	Discounted cash flow	Discount rate	1.37	%	20.25	%	6.60	%	Decrease

																Liquidation	Liquidation value	71.23	%	71.23	%	71.23	%	Increase
Reinsurance recoverables	Reinsurance recoverables	$	488,335	Fair values are determined using the same unobservable inputs as future policy benefits.									Reinsurance recoverables	$	271,390	Fair values are determined using the same unobservable inputs as future policy benefits.
Liabilities:	Liabilities:												Liabilities:
Future policy benefits~~(4)~~(3)	Future policy benefits~~(4)~~(3)	$	21,325,619	Discounted cash flow	Lapse rate(6)	1	%	20	%			Decrease	Future policy benefits~~(4)~~(3)	$	10,511,815	Discounted cash flow	Lapse rate(5)	1	%	20	%			Decrease
					Spread over LIBOR(7)	0.09	%	1.59	%			Decrease					Spread over LIBOR(6)	0.09	%	1.14	%			Decrease
					Utilization rate(8)	39	%	96	%			Increase					Utilization rate(7)	39	%	96	%			Increase
					Withdrawal rate	See table footnote (9) below.											Withdrawal rate	See table footnote (8) below.
					Mortality rate(10)	0	%	15	%			Decrease					Mortality rate(9)	0	%	15	%			Decrease
					Equity volatility curve	18	%	26	%			Increase					Equity volatility curve	17	%	25	%			Increase
Policyholders' account balances~~(5)~~(4)	Policyholders' account balances~~(5)~~(4)	$	303,060	Discounted cash flow	Lapse rate(6)	1	%	42	%			Decrease	Policyholders' account balances~~(5)~~(4)	$	986,479	Discounted cash flow	Lapse rate(5)	1	%	42	%			Decrease
					Spread over LIBOR(7)	0.09	%	1.59	%			Decrease					Spread over LIBOR(6)	0.09	%	1.14	%			Decrease
					Equity volatility curve	6	%	38	%			Increase					Equity volatility curve	6	%	42	%			Increase


		As of December 31, 2019												December 31, 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:	Assets:												Assets:
Corporate securities(2)	Corporate securities(2)	$	17,149	Discounted cash flow	Discount rate	4.79	%	20	%	8.66	%	Decrease	Corporate securities(2)	$	59,960	Discounted cash flow	Discount rate	0.99	%	20	%	6.53	%	Decrease
				Market Comparables	EBITDA multiples(3)	6.7	X	6.7	X	6.7	X	Increase

Reinsurance recoverables	Reinsurance recoverables	$	302,814	Fair values are determined using the same unobservable inputs as future policy benefits.									Reinsurance recoverables	$	409,013	Fair values are determined using the same unobservable inputs as future policy benefits.
Liabilities:	Liabilities:												Liabilities:
Future policy benefits(4)		$	11,822,998	Discounted cash flow	Lapse rate(6)	1	%	18	%			Decrease
Future policy benefits(3)													Future policy benefits(3)	$	17,314,004	Discounted cash flow	Lapse rate(5)	1	%	20	%			Decrease
					Spread over LIBOR(7)	0.10	%	1.23	%			Decrease					Spread over LIBOR(6)	0.06	%	1.17	%			Decrease
					Utilization rate(8)	43	%	97	%			Increase					Utilization rate(7)	39	%	96	%			Increase
					Withdrawal rate	See table footnote (9) below.											Withdrawal rate	See table footnote (8) below.
					Mortality rate(10)	0	%	15	%			Decrease					Mortality rate(9)	0	%	15	%			Decrease
					Equity volatility curve	13	%	23	%			Increase					Equity volatility curve	18	%	26	%			Increase
Policyholders' account balances(5)		$	196,892	Discounted cash flow	Lapse rate(6)	1	%	42	%			Decrease
Policyholders' account balances(4)													Policyholders' account balances(4)	$	580,184	Discounted cash flow	Lapse rate(5)	1	%	40	%			Decrease
					Spread over LIBOR(7)	0.10	%	1.23	%			Decrease					Spread over LIBOR(6)	0.06	%	1.17	%			Decrease
					Equity volatility curve	6	%	25	%			Increase					Equity volatility curve(10)	6	%	42	%			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)~~(4)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.

~~(6)~~Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

(5)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)~~(6)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)~~(7)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~~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)~~(8)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 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the minimum withdrawal rate assumption is 76% and~~78% respectively. As of September 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)~~(9)The range reflects the mortality rates for the vast majority of business with living benefits, 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.

(10)Prior period amount has been updated.

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

Corporate Securities – The rate used to discount future cash flows reflects current risk-free rates plus credit and liquidity spread requirements that market participants would use to value an asset. The discount rate may be influenced by many factors, including market cycles, expectations of default, collateral, term and asset complexity. Each of these factors can influence discount rates, either in isolation, or in response to other factors. 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 generally highly dependent on the facts and circumstances surrounding the individual contractholder, such as their liquidity needs or tax situation, which could drive lapse behavior independent of other contractholder behavior assumptions. To the extent more efficient contractholder behavior results in greater in-the-moneyness at the contract level, lapse rates may decline for those contracts. Similarly, to the extent that increases in equity volatility are correlated with overall declines in the capital markets, lapse rates may decline as contracts become more in-the-money.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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


	Three Months Ended March 31, 2021
	Fair Value, beginning of period		Total realized and unrealized gains (losses)(1)		Purchases		Sales		Issuances		Settlements		Other		Transfers into Level 3		Transfers out of Level 3		Fair Value, end of period		Unrealized gains (losses) for assets still held(2)
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Government	$	15,000	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	15,000	$	0

Corporate Securities(3)	148,687		(931)		10,634		0		0		(7,627)		0		15,147		0		165,910		(1,031)
Structured Securities(4)	18,542		(107)		0		0		0		(1,479)		0		0		0		16,956		(106)
Other assets:
Fixed maturities, trading	5,045		82		0		0		0		0		0		0		0		5,127		87
Equity securities	4,153		13		0		0		0		0		0		0		0		4,166		13

Short term investments	10,000		0		2,349		0		0		0		0		0		0		12,349		0
Cash equivalents	0		0		100		0		0		0		0		0		0		100		0
Other assets	53,980		8,572		2,653		0		0		(2,133)		0		0		0		63,072		6,439
Reinsurance recoverables	409,013		(141,885)		4,262		0		0		0		0		0		0		271,390		(135,675)

Liabilities:
Future policy benefits	(17,314,004)		7,093,338		0		0		(291,149)		0		0		0		0		(10,511,815)		6,900,120
Policyholders' account balances(5)	(580,184)		(267,770)		0		0		(138,525)		0		0		0		0		(986,479)		(252,703)

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)


		Three Months Ended September 30, 2020																							Three Months Ended March 31, 2021
		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)			Total realized and unrealized gains (losses)								Unrealized gains (losses) for assets still held(2)
		(in thousands)																							Realized investment gains (losses), net(1)		Other income (loss)		Included in other comprehensive income (loss)		Net investment income			Realized investment gains (losses), net		Other income (loss)		Included in other comprehensive income (loss)
Fixed maturities, available-for-sale:
U.S. Government		$	12,216	$	0	$	1,000	$	0	$	0	$	0	$	0	$	0	$	0	$	13,216	$	0
																									(in thousands)
Corporate Securities(4)		123,389		1,827		13,775		7,775		0		(8,624)		(7,775)		7,819		(795)		137,391		1,689
Structured Securities(5)		18,128		169		1,899		0		0		(599)		0		312		0		19,909		157
Fixed maturities, available-for-sale																								Fixed maturities, available-for-sale	$	(44)	$	0	$	(987)	$	(7)		$	(37)	$	0	$	(1,100)
Other assets:	Other assets:																							Other assets:
Fixed maturities, trading	Fixed maturities, trading	4,301		365		0		0		0		0		0		0		0		4,666		371		Fixed maturities, trading	0		88		0		(6)			0		87		0
Equity securities	Equity securities	5,242		938		0		0		0		0		0		0		0		6,180		939		Equity securities	0		13		0		0			0		13		0

Short term investments																								Short term investments	0		0		0		0			0		0		0
Cash equivalents																								Cash equivalents	0		0		0		0			0		0		0
Other assets	Other assets	27,136		2,844		10,789		0		0		(4)		0		0		0		40,765		2,840		Other assets	8,572		0		0		0			6,439		0		0
Reinsurance recoverables	Reinsurance recoverables	539,123		(55,075)		4,287		0		0		0		0		0		0		488,335		(51,944)		Reinsurance recoverables	(141,885)		0		0		0			(135,675)		0		0

Liabilities:	Liabilities:																							Liabilities:
Future policy benefits	Future policy benefits	(23,998,671)		2,964,808		0		0		(291,756)		0		0		0		0		(21,325,619)		2,776,482		Future policy benefits	7,093,338		0		0		0			6,900,120		0		0
Policyholders' account balances(6)		(226,072)		(34,565)		0		0		(42,423)		0		0		0		0		(303,060)		(22,855)
Policyholders' account balances																								Policyholders' account balances	(267,770)		0		0		0			(252,703)		0		0


	Three Months Ended March 31, 2020
	Fair Value, beginning of period		Total realized and unrealized gains (losses)(1)		Purchases		Sales		Issuances		Settlements		Other		Transfers into Level 3		Transfers out of Level 3		Fair Value, end of period		Unrealized gains (losses) for assets still held(2)
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Government	$	10,547	$	0	$	911	$	0	$	0	$	0	$	0	$	0	$	0	$	11,458	$	0

Corporate Securities(3)	104,267		(14,767)		11,277		(1,155)		0		(2,365)		0		14,349		0		111,606		(15,781)
Structured Securities(4)	18,825		(288)		6,145		0		0		(455)		0		0		0		24,227		(286)
Other assets:
Fixed maturities, trading	4,464		(871)		0		0		0		0		0		0		0		3,593		(866)
Equity securities	5,247		(261)		0		0		0		0		0		0		0		4,986		(261)

Short term investments	0		0		0		0		0		0		0		0		0		0		0
Cash equivalents	0		0		0		0		0		0		0		0		0		0		0
Other assets	8,059		(3,613)		7,796		0		0		0		0		0		0		12,242		(3,613)
Reinsurance recoverables	302,814		257,953		4,323		0		0		0		0		0		0		565,090		260,722

Liabilities:
Future policy benefits	(11,822,998)		(13,197,472)		0		0		(282,184)		0		0		0		0		(25,302,654)		(13,329,640)
Policyholders' account balances(5)	(196,892)		60,429		0		0		(22,457)		0		0		0		0		(158,920)		53,957

Three Months Ended September 30, 2020
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 Included in other comprehensive income (loss)(7)
(in thousands)
Fixed maturities, available-for-sale $ 254 $ 0 $ 1,683 $ 59 $ 414 $ 0 $ 1,432
Other assets:
Fixed maturities, trading 0 371 0 (6) 0 371 0
Equity securities 0 938 0 0 0 939 0
Other assets 2,844 0 0 0 2,840 0 0
Reinsurance recoverables (55,075) 0 0 0 (51,944) 0 0
Liabilities:
Future policy benefits 2,964,808 0 0 0 2,776,482 0 0
Policyholders' account balances (34,565) 0 0 0 (22,855) 0 0

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Notes to Unaudited Interim Financial Statements—(Continued)

Nine Months Ended September 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)
(in thousands)
Fixed maturities, available-for-sale:
U.S. Government $ 10,547 $ 0 $ 2,669 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 13,216 $ 0
Corporate Securities(4) 104,267 (4,337) 28,948 (1,190) 0 (14,434) (7,775) 32,951 (1,039) 137,391 (6,353)
Structured Securities(5) 18,825 38 8,044 0 0 (1,674) 0 312 (5,636) 19,909 26
Other assets:
Fixed maturities, trading 4,464 202 0 0 0 0 0 0 0 4,666 218
Equity securities 5,247 933 0 0 0 0 0 0 0 6,180 934
Other assets 8,059 3,789 28,923 0 0 (6) 0 0 0 40,765 3,784
Reinsurance recoverables 302,814 172,671 12,850 0 0 0 0 0 0 488,335 178,844
Liabilities:
Future policy benefits (11,822,998) (8,644,255) 0 0 (858,366) 0 0 0 0 (21,325,619) (8,923,218)
Policyholders' account balances(6) (196,892) (13,231) 0 0 (92,937) 0 0 0 0 (303,060) 9,727

Nine Months Ended September 30, 2020
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 Included in other comprehensive income (loss)(7)
(in thousands)
Fixed maturities, available-for-sale $ 87 $ 0 $ (4,442) $ 56 $ (567) $ 0 $ (5,760)
Other assets:
Fixed maturities, trading 0 218 0 (16) 0 218 0
Equity securities 0 933 0 0 0 934 0
Other assets 3,789 0 0 0 3,784 0 0
Reinsurance recoverables 172,671 0 0 0 178,844 0 0
Liabilities:
Future policy benefits (8,644,255) 0 0 0 (8,923,218) 0 0
Policyholders' account balances (13,231) 0 0 0 9,727 0 0

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

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

Three Months Ended September 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 $ 9,380 $ 0 $ 503 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 9,883 $ 0
Corporate Securities(4) 71,071 (361) 10,340 0 0 (8,016) 0 0 0 73,034 (769)
Structured Securities(5) 19,725 296 0 0 0 (338) 0 0 0 19,683 0
Other assets:
Fixed maturities, trading 4,044 (84) 0 0 0 0 0 0 0 3,960 (79)
Equity securities 5,363 (254) 0 0 0 0 0 0 0 5,109 (254)
Other assets 0 0 0 0 0 0 0 0 0 0 0
Reinsurance recoverables 339,744 67,909 4,446 0 0 0 0 0 0 412,099 70,279
Liabilities:
Future policy benefits (11,738,480) (3,069,876) 0 0 (277,769) 0 0 0 0 (15,086,125) (3,187,867)
Policyholders' account balances(6) (121,102) 274 0 0 (33,107) 0 0 0 0 (153,935) 2,610

Three Months Ended September 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 $ (630) $ 0 $ 515 $ 50 $ (769) $ 0
Other assets:
Fixed maturities, trading 0 (79) 0 (5) 0 (79)
Equity securities 0 (254) 0 0 0 (254)
Other assets 0 0 0 0 0 0
Reinsurance recoverables 67,909 0 0 0 70,279 0
Liabilities:
Future policy benefits (3,069,876) 0 0 0 (3,187,867) 0
Policyholders' account balances 274 0 0 0 2,610 0

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

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

Nine Months Ended September 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 $ 8,132 $ 0 $ 1,751 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 9,883 $ 0
Corporate Securities(4) 85,452 262 17,653 0 0 (30,105) 0 1,790 (2,018) 73,034 (2,765)
Structured Securities(5) 9,336 825 44,273 0 0 (4,724) 0 551 (30,578) 19,683 (2)
Other assets:
Fixed maturities, trading 0 (1,061) 0 0 0 0 0 5,021 0 3,960 (1,051)
Equity securities 5,705 333 0 (929) 0 0 0 0 0 5,109 344
Other assets 0 0 0 0 0 0 0 0 0 0 0
Reinsurance recoverables 239,911 136,770 13,523 0 0 0 21,895 0 0 412,099 142,329
Liabilities:
Future policy benefits (8,332,474) (5,954,076) 0 0 (799,575) 0 0 0 0 (15,086,125) (6,177,050)
Policyholders' account balances(6) (42,350) (12,804) 0 0 (98,781) 0 0 0 0 (153,935) (8,672)


		Nine Months Ended September 30, 2019													Three Months Ended March 31, 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(2)
		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				Realized investment gains (losses), net(1)		Other income (loss)(6)		Included in other comprehensive income (loss)		Net investment income		Realized investment gains (losses), net		Other income (loss)(6)		Included in other comprehensive income (loss)
		(in thousands)													(in thousands)
Fixed maturities, available-for-sale	Fixed maturities, available-for-sale	$	(2,530)	$	0	$	3,429	$	188		$	(2,767)	$	0		Fixed maturities, available-for-sale	$	(110)	$	0	$	(14,924)	$	(21)	$	0	$	0	$	(16,067)
Other assets:	Other assets:															Other assets:
Fixed maturities, trading	Fixed maturities, trading	0		(1,051)		0		(10)			0		(1,051)			Fixed maturities, trading	0		(866)		0		(5)		0		(866)		0
Equity securities	Equity securities	0		333		0		0			0		344			Equity securities	0		(261)		0		0		0		(261)		0

Short term investments																Short term investments	0		0		0		0		0		0		0
Cash equivalents																Cash equivalents	0		0		0		0		0		0		0
Other assets	Other assets	0		0		0		0			0		0			Other assets	(3,613)		0		0		0		(3,613)		0		0
Reinsurance recoverables	Reinsurance recoverables	136,770		0		0		0			142,329		0			Reinsurance recoverables	257,953		0		0		0		260,722		0		0

Liabilities:	Liabilities:															Liabilities:
Future policy benefits	Future policy benefits	(5,954,076)		0		0		0			(6,177,050)		0			Future policy benefits	(13,197,472)		0		0		0		(13,329,640)		0		0
Policyholders' account balances	Policyholders' account balances	(12,804)		0		0		0			(8,672)		0			Policyholders' account balances	60,429		0		0		0		53,957		0		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)~~(3)Includes U.S. corporate public, U.S. corporate private, foreign corporate public and foreign corporate private securities.

~~(5)~~(4)Includes asset-backed ~~commercial mortgage-backed~~ and residential mortgage-backed securities.

~~(6)~~(5)Issuances and settlements for Policyholders' account balances are presented net in the rollforward.

~~(7)~~(6)~~Effective January 1, 2020, the changes in unrealized gains and losses for the~~Retitled to "Other income (loss)" to conform to current period ~~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 adoption of ASU 2018-13.~~ presentation.

~~Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement~~

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Notes to Unaudited Interim Financial Statements—(Continued)

Fair Value of Financial Instruments

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


		September 30, 2020											March 31, 2021
		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:	Assets:											Assets:
Commercial mortgage and other loans	Commercial mortgage and other loans	$	0	$	0	$	1,745,034	$	1,745,034	$	1,677,951	Commercial mortgage and other loans	$	0	$	0	$	1,861,808	$	1,861,808	$	1,794,798
Policy loans	Policy loans	0		0		11,916		11,916		11,916		Policy loans	0		0		11,659		11,659		11,659

Short-term investments	Short-term investments	423,500		0		0		423,500		423,500		Short-term investments	0		0		0		0		0
Cash and cash equivalents	Cash and cash equivalents	977,811		0		0		977,811		977,811		Cash and cash equivalents	478,682		260,000		0		738,682		738,682
Accrued investment income	Accrued investment income	0		117,166		0		117,166		117,166		Accrued investment income	0		99,519		0		99,519		99,519
Reinsurance recoverables	Reinsurance recoverables	0		0		52,422		52,422		51,665		Reinsurance recoverables	0		0		51,462		51,462		50,695
Receivables from parent and affiliates	Receivables from parent and affiliates	0		30,863		0		30,863		30,863		Receivables from parent and affiliates	0		34,565		0		34,565		34,565
Other assets	Other assets	0		2,143		340,274		342,417		342,417		Other assets	0		72,976		410,020		482,996		482,996
Total assets	Total assets	$	1,401,311	$	150,172	$	2,149,646	$	3,701,129	$	3,633,289	Total assets	$	478,682	$	467,060	$	2,334,949	$	3,280,691	$	3,212,914
Liabilities:	Liabilities:											Liabilities:
Policyholders’ account balances - investment contracts	Policyholders’ account balances - investment contracts	$	0	$	0	$	2,226,866	$	2,226,866	$	2,208,818	Policyholders’ account balances - investment contracts	$	0	$	0	$	2,515,936	$	2,515,936	$	2,502,017
Cash collateral for loaned securities		0		0		0		0		0

Short-term debt	Short-term debt	0		379,137		0		379,137		373,086		Short-term debt	0		120,394		0		120,394		119,671
Long-term debt	Long-term debt	0		335,225		0		335,225		299,747		Long-term debt	0		328,773		0		328,773		299,747
Reinsurance payables	Reinsurance payables	0		0		45,400		45,400		45,400		Reinsurance payables	0		0		43,550		43,550		43,550
Payables to parent and affiliates	Payables to parent and affiliates	0		42,184		0		42,184		42,184		Payables to parent and affiliates	0		40,074		0		40,074		40,074
Other liabilities	Other liabilities	0		437,817		0		437,817		437,817		Other liabilities	0		537,517		0		537,517		537,517
Separate account liabilities - investment contracts	Separate account liabilities - investment contracts	0		33		0		33		33		Separate account liabilities - investment contracts	0		24		0		24		24
Total liabilities	Total liabilities	$	0	$	1,194,396	$	2,272,266	$	3,466,662	$	3,407,085	Total liabilities	$	0	$	1,026,782	$	2,559,486	$	3,586,268	$	3,542,600

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)


		December 31, 2019											December 31, 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:	Assets:											Assets:
Commercial mortgage and other loans	Commercial mortgage and other loans	$	0	$	0	$	1,512,283	$	1,512,283	$	1,471,522	Commercial mortgage and other loans	$	0	$	0	$	1,836,633	$	1,836,633	$	1,765,770
Policy loans	Policy loans	0		0		12,366		12,366		12,366		Policy loans	0		0		11,806		11,806		11,806
Short-term investments	Short-term investments	75,004		0		0		75,004		75,004		Short-term investments	165,000		0		0		165,000		165,000
Cash and cash equivalents	Cash and cash equivalents	687,558		302,000		0		989,558		989,558		Cash and cash equivalents	386,078		150,000		0		536,078		536,078
Accrued investment income	Accrued investment income	0		102,724		0		102,724		102,724		Accrued investment income	0		121,604		0		121,604		121,604
Reinsurance recoverables	Reinsurance recoverables	0		0		56,171		56,171		55,796		Reinsurance recoverables	0		0		51,225		51,225		50,484
Receivables from parent and affiliates	Receivables from parent and affiliates	0		10,192		50,587		60,779		60,192		Receivables from parent and affiliates	0		31,594		0		31,594		31,594
Other assets	Other assets	0		1,893		63,106		64,999		64,999		Other assets	0		278,355		394,069		672,424		672,424
Total assets	Total assets	$	762,562	$	416,809	$	1,694,513	$	2,873,884	$	2,832,161	Total assets	$	551,078	$	581,553	$	2,293,733	$	3,426,364	$	3,354,760
Liabilities:	Liabilities:											Liabilities:
Policyholders’ account balances - investment contracts	Policyholders’ account balances - investment contracts	$	0	$	0	$	1,445,486	$	1,445,486	$	1,438,742	Policyholders’ account balances - investment contracts	$	0	$	0	$	2,426,471	$	2,426,471	$	2,406,100
Cash collateral for loaned securities		0		0		0		0		0

Short-term debt	Short-term debt	0		245,617		0		245,617		242,094		Short-term debt	0		121,205		0		121,205		119,671
Long-term debt	Long-term debt	0		446,105		0		446,105		419,418		Long-term debt	0		332,451		0		332,451		299,747
Reinsurance payables	Reinsurance payables	0		0		50,035		50,035		50,035		Reinsurance payables	0		0		44,446		44,446		44,446
Payables to parent and affiliates	Payables to parent and affiliates	0		39,209		0		39,209		39,209		Payables to parent and affiliates	0		47,345		0		47,345		47,345
Other liabilities	Other liabilities	0		205,988		0		205,988		205,988		Other liabilities	0		757,968		0		757,968		757,968
Separate account liabilities - investment contracts	Separate account liabilities - investment contracts	0		54		0		54		54		Separate account liabilities - investment contracts	0		30		0		30		30
Total liabilities	Total liabilities	$	0	$	936,973	$	1,495,521	$	2,432,494	$	2,395,540	Total liabilities	$	0	$	1,258,999	$	2,470,917	$	3,729,916	$	3,675,307

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

~~Table of Contents~~

~~Prudential Annuities Life Assurance Corporation~~

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

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. As of December 31, 2020, Pruco Life discontinued the sales of traditional variable annuities with guaranteed living benefit riders. This discontinuation has no impact on the reinsurance agreement between Pruco Life and the Company.

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. 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 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 were as follows:


		September 30, 2020		December 31, 2019			March 31, 2021		December 31, 2020
		(in thousands)					(in thousands)
Reinsurance recoverables~~(1)~~	Reinsurance recoverables~~(1)~~	$	790,715	$	621,510	Reinsurance recoverables~~(1)~~	$	543,849	$	694,040
Deferred policy acquisition costs	Deferred policy acquisition costs	3,382,501		3,725,719		Deferred policy acquisition costs	3,282,938		3,414,620
Deferred sales inducements	Deferred sales inducements	368,470		437,594		Deferred sales inducements	354,475		374,631
Value of business acquired	Value of business acquired	(2,120)		(2,275)		Value of business acquired	(2,101)		(2,124)
Other assets~~(2)~~	Other assets~~(2)~~	43,804		65,819		Other assets~~(2)~~	59,572		61,471
Policyholders’ account balances	Policyholders’ account balances	3,301,271		3,253,474		Policyholders’ account balances	3,238,339		3,273,863
Future policy benefits	Future policy benefits	15,676,899		8,328,777		Future policy benefits	7,457,026		12,610,942
Reinsurance payables~~(3)~~(1)	Reinsurance payables~~(3)~~(1)	188,463		235,318		Reinsurance payables~~(3)~~(1)	160,279		178,860
Other liabilities~~(4)~~	Other liabilities~~(4)~~	582,105		337,909		Other liabilities~~(4)~~	243,013		262,462

(1)Includes ~~$0.5~~$0.4 million and ~~$0.2~~$2.3 million of unaffiliated activity as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019, respectively.~~

~~(2)Includes $(19.6) million and $(3.9) million of unaffiliated activity as of September 30,~~ 2020, ~~and December 31, 2019, respectively.~~

~~(3)Includes $1.5 million of unaffiliated activity at both September 30, 2020 and December 31, 2019.~~

~~(4)Includes $318.3 million and $60.4 million of unaffiliated activity as of September 30, 2020 and December 31, 2019,~~ respectively.

~~Reinsurance~~

The reinsurance recoverables by counterparty are broken out below:


		September 30, 2020		December 31, 2019			March 31, 2021		December 31, 2020
		(in thousands)					(in thousands)
Prudential Insurance	Prudential Insurance	$	579,379	$	387,355	Prudential Insurance	$	356,434	$	494,611
Pruco Life	Pruco Life	210,835		233,933		Pruco Life	187,113		198,547
Unaffiliated	Unaffiliated	501		222		Unaffiliated	302		882
Total reinsurance recoverables	Total reinsurance recoverables	$	790,715	$	621,510	Total reinsurance recoverables	$	543,849	$	694,040

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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~~ months ended ~~September 30,~~March 31, were as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
		(in thousands)									(in thousands)
Premiums:	Premiums:									Premiums:
Direct	Direct	$	6,161	$	6,522	$	20,376	$	22,957	Direct	$	6,137	$	6,498
Assumed	Assumed	8,630		6,355		27,060		25,848		Assumed	10,076		10,427
Ceded	Ceded	(855)		(371)		(1,908)		(563)		Ceded	(451)		(346)
Net premiums	Net premiums	13,936		12,506		45,528		48,242		Net premiums	15,762		16,579
Policy charges and fee income:	Policy charges and fee income:									Policy charges and fee income:
Direct	Direct	102,669		119,509		304,593		363,540		Direct	107,332		106,254
Assumed	Assumed	395,381		416,389		1,161,236		1,222,535		Assumed	407,138		398,661
Ceded(1)	Ceded(1)	(8,610)		(8,746)		(23,838)		(26,201)		Ceded(1)	(6,887)		(8,046)
Net policy charges and fee income	Net policy charges and fee income	489,440		527,152		1,441,991		1,559,874		Net policy charges and fee income	507,583		496,869
Asset administration fees and other income:
Asset management and service fees(2):										Asset management and service fees(2):
Direct	Direct	26,244		44,616		132,081		124,587		Direct	23,916		23,048
Assumed	Assumed	78,547		78,408		227,511		227,182		Assumed	81,622		76,781
Ceded	Ceded	(2,033)		(2,097)		(5,852)		(6,249)		Ceded	(2,017)		(1,979)
Net asset administration fees and other income		102,758		120,927		353,740		345,520
Net asset management and service fees										Net asset management and service fees	103,521		97,850
Realized investment gains (losses), net:	Realized investment gains (losses), net:									Realized investment gains (losses), net:
Direct	Direct	(2,520,872)		1,644,998		1,878,766		1,404,528		Direct	(2,106,085)		9,042,990
Assumed	Assumed	2,332,646		(2,243,942)		(6,422,045)		(4,290,175)		Assumed	5,377,897		(10,060,454)
Ceded	Ceded	(57,748)		61,677		163,850		111,946		Ceded	(142,676)		259,773
Realized investment gains (losses), net	Realized investment gains (losses), net	(245,974)		(537,267)		(4,379,429)		(2,773,701)		Realized investment gains (losses), net	3,129,136		(757,691)
Policyholders' benefits (including change in reserves):	Policyholders' benefits (including change in reserves):									Policyholders' benefits (including change in reserves):
Direct	Direct	14,018		22,680		73,651		47,399		Direct	17,289		59,166
Assumed	Assumed	30,844		48,154		181,079		82,130		Assumed	12,390		188,524
Ceded~~(2)~~(3)	Ceded~~(2)~~(3)	(1,038)		(1,001)		(6,145)		(3,856)		Ceded~~(2)~~(3)	(51)		(5,161)
Net policyholders' benefits (including change in reserves)	Net policyholders' benefits (including change in reserves)	43,824		69,833		248,585		125,673		Net policyholders' benefits (including change in reserves)	29,628		242,529
Interest credited to policyholders’ account balances:	Interest credited to policyholders’ account balances:									Interest credited to policyholders’ account balances:
Direct	Direct	40,428		27,944		73,983		49,289		Direct	81,621		45,839
Assumed	Assumed	43,457		30,959		89,311		55,053		Assumed	70,946		68,415
Ceded	Ceded	(2,601)		(1,956)		(2,294)		(3,613)		Ceded	(4,657)		(1,284)
Net interest credited to policyholders’ account balances	Net interest credited to policyholders’ account balances	81,284		56,947		161,000		100,729		Net interest credited to policyholders’ account balances	147,910		112,970
Reinsurance expense allowances and general and administrative expenses, net of capitalization and amortization	Reinsurance expense allowances and general and administrative expenses, net of capitalization and amortization	307,043		298,565		890,849		738,045		Reinsurance expense allowances and general and administrative expenses, net of capitalization and amortization	339,711		545,464

(1)Includes ~~$(1.7)~~$(0.3) million of unaffiliated activity for both the three months ended March 31, 2021 and 2020.

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

(3)Includes $(0.1) million and ~~$(1.0)~~$0.1 million of unaffiliated activity for the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, and $(2.4) million and $(1.0) million for the nine months ended September 30, 2020 and 2019, respectively.~~

~~(2)~~Includes $0.1 million and $0.0 million of unaffiliated activity for the three months ended September 30, 2020 and 2019, respectively, and $(0.3) million and $0.0 million for the nine months ended September 30, 2020 and 2019, respectively.

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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~~expense of ~~$(965)~~$494 million, or ~~25.91%~~20.72% of income (loss) from operations before income taxes in the first ~~nine~~three months of ~~2020,~~2021, compared to ~~$(377)~~an income tax benefit of $(237) million, or ~~22.53%~~22.44%, in the first ~~nine~~three months of ~~2019.~~2020. 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, and the item discussed below.~~

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted into law. 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. The Company has incorporated into the full year projected effective tax rate an income tax benefit of $156 million that would result from carrying the estimated 2020 NOL back to tax years that have a 35% tax rate. This amount is an estimate and will change if the amount of, and sources of, 2020 net taxable income are different from forecast.credits.

8. EQUITY

Accumulated Other Comprehensive Income (Loss)

AOCI represents the cumulative OCI items that are reported separate from net income and detailed on the Unaudited Interim Statements of Operations and Comprehensive ~~Income.~~Income (Loss). The balance of and changes in each component of AOCI as of and for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 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, 2019		$	(934)	$	429,546	$	428,612
Balance, December 31, 2020								Balance, December 31, 2020	$	(708)	$	1,533,767	$	1,533,059
Change in OCI before reclassifications	Change in OCI before reclassifications	(154)		1,586,843		1,586,689		Change in OCI before reclassifications	49		(694,704)		(694,655)
Amounts reclassified from AOCI	Amounts reclassified from AOCI	0		(26,350)		(26,350)		Amounts reclassified from AOCI	0		(1,093,820)		(1,093,820)
Income tax benefit (expense)	Income tax benefit (expense)	32		(327,704)		(327,672)		Income tax benefit (expense)	(10)		375,590		375,580
Balance, September 30, 2020		$	(1,056)	$	1,662,335	$	1,661,279
Balance, March 31, 2021								Balance, March 31, 2021	$	(669)	$	120,833	$	120,164


		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								Balance, December 31, 2019	$	(934)	$	429,546	$	428,612
Change in OCI before reclassifications	Change in OCI before reclassifications	(244)		1,316,155		1,315,911		Change in OCI before reclassifications	(483)		1,309,567		1,309,084
Amounts reclassified from AOCI	Amounts reclassified from AOCI	0		20,591		20,591		Amounts reclassified from AOCI	0		(29,479)		(29,479)
Income tax benefit (expense)	Income tax benefit (expense)	51		(280,717)		(280,666)		Income tax benefit (expense)	102		(268,819)		(268,717)
Balance, September 30, 2019		$	(1,271)	$	732,734	$	731,463
Balance, March 31, 2020								Balance, March 31, 2020	$	(1,315)	$	1,440,815	$	1,439,500

(1)Includes cash flow hedges of ~~$23~~$(40) million and $0$(43) million as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively, and ~~$27~~$103 million and $~~(4)~~0 million as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Reclassifications out of Accumulated Other Comprehensive Income (Loss)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2020		2019		2020		2019				2021		2020
		(in thousands)										(in thousands)
Amounts reclassified from AOCI(1)(2):	Amounts reclassified from AOCI(1)(2):									Amounts reclassified from AOCI(1)(2):
Net unrealized investment gains (losses):	Net unrealized investment gains (losses):									Net unrealized investment gains (losses):
Cash flow hedges—Currency/ Interest rate(3)	Cash flow hedges—Currency/ Interest rate(3)	$	(9,602)	$	(10,305)	$	11,188	$	(15,693)	Cash flow hedges—Currency/ Interest rate(3)		$	12,316	$	23,057
Net unrealized investment gains (losses) on available-for-sale securities	Net unrealized investment gains (losses) on available-for-sale securities	73		(1,199)		15,162		(4,898)		Net unrealized investment gains (losses) on available-for-sale securities		1,081,504		6,422
Total net unrealized investment gains (losses)(4)	Total net unrealized investment gains (losses)(4)	(9,529)		(11,504)		26,350		(20,591)		Total net unrealized investment gains (losses)(4)		1,093,820		29,479
Total reclassifications for the period	Total reclassifications for the period	$	(9,529)	$	(11,504)	$	26,350	$	(20,591)	Total reclassifications for the period		$	1,093,820	$	29,479

(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 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 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 net unrealized investment gains (losses) on available-for-sale fixed maturity securities on which an allowance for credit losses has been recognized, and all other net unrealized investment gains (losses), are as follows:

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


		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)			Net Unrealized Gains (Losses) on Investments on Available-for-Sale Fixed Maturity Securities on which an allowance for credit losses has been recognized		Net Unrealized Gains (Losses) on All Other Investments(1)		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)											(in thousands)
Balance, December 31, 2019(1)		$	0	$	0	$	0	$	0	$	0
Balance, December 31, 2020												Balance, December 31, 2020	$	2	$	2,369,107	$	(363,429)	$	(63,159)	$	(408,754)	$	1,533,767
Net investment gains (losses) on investments arising during the period	Net investment gains (losses) on investments arising during the period	46		0		0		(10)		36		Net investment gains (losses) on investments arising during the period	8		(963,933)		0		0		202,424		(761,501)

Increase (decrease) due to non-credit related losses recognized in AOCI during the period		(60)		0		0		13		(47)
Reclassification adjustment for (gains) losses included in net income												Reclassification adjustment for (gains) losses included in net income	0		(1,093,820)		0		0		229,702		(864,118)
Reclassification due to allowance for credit losses recorded during the period												Reclassification due to allowance for credit losses recorded during the period	35		(35)		0		0		0		0
Impact of net unrealized investment (gains) losses on DAC and other costs	Impact of net unrealized investment (gains) losses on DAC and other costs	0		693		0		(146)		547		Impact of net unrealized investment (gains) losses on DAC and other costs	0		0		233,899		0		(49,119)		184,780
Impact of net unrealized investment (gains) losses on future policy benefits and other liabilities	Impact of net unrealized investment (gains) losses on future policy benefits and other liabilities	0		0		121		(25)		96		Impact of net unrealized investment (gains) losses on future policy benefits and other liabilities	0		0		0		35,322		(7,417)		27,905
Balance, September 30, 2020		$	(14)	$	693	$	121	$	(168)	$	632
Balance, March 31, 2021												Balance, March 31, 2021	$	45	$	311,319	$	(129,530)	$	(27,837)	$	(33,164)	$	120,833

(1)~~Allowance~~Includes cash flow hedges. See Note 4 for ~~credit losses~~information on ~~available-for-sale fixed maturity securities effective January 1, 2020.~~cash flow hedges.

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

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

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Notes to Unaudited Interim Financial Statements—(Continued)

~~All Other Net Unrealized Investment Gains (Losses) in AOCI~~

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 1,799,495 0 0 (377,895) 1,421,600
Reclassification adjustment for (gains) losses included in net income (26,350) 0 0 5,534 (20,816)
Reclassification due to allowance for credit losses recorded during the period 60 0 0 (13) 47
Impact of net unrealized investment (gains) losses on DAC and other costs 0 (197,485) 0 41,472 (156,013)
Impact of net unrealized investment (gains) losses on future policy benefits and other liabilities 0 0 (16,027) 3,366 (12,661)
Balance, September 30, 2020 $ 2,510,135 $ (353,660) $ (52,010) $ (442,762) $ 1,661,703

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

~~(2)Includes net unrealized gains (losses) for which an OTTI 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.~~

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

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 for both the three months ended ~~September 30, 2020~~March 31, 2021 and ~~2019, and $0.1 million for both the nine months ended September 30, 2020 and 2019.~~2020. The expense charged to the Company for the deferred compensation program was ~~$0.2~~$0.7 million and ~~$0.0~~$0.2 million for the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, and $0.5 million for both the nine months ended September 30, 2020 and 2019.~~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 ~~$0.9~~$2.3 million and ~~$0.5~~$0.7 million for the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, and $2.0 million and $1.5 million for the nine months ended September 30, 2020 and 2019,~~ respectively.

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~~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 ~~$0.6~~$1.1 million and ~~$0.5~~$0.6 million for the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, and $1.6 million and $1.5 million for the nine months ended September 30, 2020 and 2019,~~ 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 ~~$0.3~~$0.9 million and ~~$0.2~~$0.3 million for the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, and $0.8 million and $0.7 million for the nine months ended September 30, 2020 and 2019,~~ respectively.

The Company pays commissions and certain other fees to 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 ~~$61~~$120 million and ~~$24~~$23 million for the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, and $113 million and $74 million for the nine months ended September 30, 2020 and 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 $5$8 million and $4$5 million for the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, and $11 million and $12 million for the nine months ended September 30, 2020 and 2019,~~ 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 $6 million and $4$5 million for the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, and $16 million and $12 million for the nine months ended September 30, 2020 and 2019,~~ respectively. These expenses are recorded as “Net investment income” in the Company's Unaudited Interim Statements of Operations and Comprehensive Income (Loss).

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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 ~~$514~~$535 million and ~~$391~~$534 million as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. "Net investment income" related to these ventures includes a gain of $8$4 million and $3a loss of $18 million for the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, and a gain of $5 million and $11 million for the nine months ended September 30, 2020 and 2019,~~ respectively.

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~~Prudential Annuities Life Assurance Corporation~~

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

Affiliated Asset ~~Administration Fee Income~~Management and Service Fees

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 $23 million ~~and $24 million~~ for both the three months ended ~~September 30, 2020~~March 31, 2021 and ~~2019, respectively, and $66 million and $72 million for the nine months ended September 30, 2020 and 2019, respectively.~~2020. These revenues are recorded as ~~“Asset administration fees~~“Asset management and ~~other income”~~service fees” in the Company's Unaudited Interim Statements of Operations and Comprehensive Income (Loss).

Affiliated Notes Receivable

Affiliated notes receivable included in "Receivables from parent and affiliates" at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 were as follows:


		Maturity Dates	Interest Rates				September 30, 2020		December 31, 2019			Maturity Dates	Interest Rates				March 31, 2021		December 31, 2020
							(in thousands)										(in thousands)

U.S. dollar fixed rate notes	U.S. dollar fixed rate notes	2026 - 2027	2.62%	-	14.85	%	$	56,906	$	52,573	U.S. dollar fixed rate notes	2026 - 2027	2.62%	-	14.85	%	$	54,147	$	56,025
Total notes receivable - affiliated(1)							$	56,906	$	52,573
Total long-term notes receivable - affiliated(1)											Total long-term notes receivable - affiliated(1)						$	54,147	$	56,025

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

The affiliated notes receivable shown above are classified as available-for-sale securities 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 million and~~ $0.0 million at ~~September 30, 2020~~both March 31, 2021 and December 31, ~~2019, respectively,~~2020, and is included in “Other assets”. ~~Revenues~~Revenues related to these ~~assets~~loans were ~~a gain of $0.3~~$0.4 million ~~and $0.1 million~~ for both the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, and a gain of $1.1 million and a loss of $0.1 million for the nine months ended September 30, 2020 and 2019, respectively,~~ and are included in “Asset ~~administration fees~~management and ~~other income”~~service fees”.

Affiliated Commercial Mortgage Loan

The affiliated commercial mortgage loan included in "Commercial mortgage and other loans" at ~~September 30,~~March 31, 2021 and December 31, 2020 was as ~~follow:~~follows:

Maturity Date Interest Rate September 30, 2020
(in thousands)
Affiliated Commercial Mortgage Loan 2025 4.66% $ 74,005

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


	Maturity Date	Interest Rate	March 31, 2021		December 31, 2020
			(in thousands)
Affiliated Commercial Mortgage Loan	2025	4.60%	$	74,005	$	74,005

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.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Accrued interest receivable related to the loan was ~~$0.2~~$0.3 million at ~~September 30,~~both March 31, 2021 and December 31, 2020, and is included in "Accrued investment income". Revenues were $0.9 million for the three months ended ~~September 30, 2020~~March 31, 2021 and ~~$1.2 million for the nine months ended September 30, 2020 and is~~are 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~~three months ended ~~September 30, 2020~~March 31, 2021 and for the year ended December 31, ~~2019.~~2020.


Affiliate	Affiliate	Date	Transaction	Security Type	Fair Value		Book Value		APIC, Net of Tax Increase/(Decrease)		Realized Investment Gain (Loss)		Affiliate	Date	Transaction	Security Type	Fair Value		Book Value		APIC, Net of Tax Increase/(Decrease)		Realized Investment Gain (Loss)
					(in thousands)												(in thousands)
Prudential Insurance		January 2019	Sale	Fixed Maturities	$	20,504	$	20,781	$	0	$	(277)
Prudential Insurance		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
Prudential Insurance		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
Pruco Life Insurance Company		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
Prudential Insurance		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
Prudential Insurance		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	Prudential International Insurance Service Company	March 2020	Purchase	Fixed Maturities	$	107,014	$	107,014	$	0	$	0	Prudential International Insurance Service Company	March 2020	Purchase	Fixed Maturities	$	107,014	$	107,014	$	0	$	0
Prudential Insurance	Prudential Insurance	March 2020	Purchase	Fixed Maturities	$	258,885	$	258,885	$	0	$	0	Prudential Insurance	March 2020	Purchase	Fixed Maturities	$	258,885	$	258,885	$	0	$	0
Prudential Insurance	Prudential Insurance	April 2020	Purchase	Fixed Maturities	$	91,131	$	91,131	$	0	$	0	Prudential Insurance	April 2020	Purchase	Fixed Maturities	$	91,131	$	91,131	$	0	$	0
Prudential Insurance	Prudential Insurance	June 2020	Sale	Fixed Maturities	$	65,646	$	57,699	$	0	$	7,947	Prudential Insurance	June 2020	Sale	Fixed Maturities	$	65,646	$	57,699	$	0	$	7,947
Gibraltar Life Insurance Company	Gibraltar Life Insurance Company	June 2020	Purchase	Fixed Maturities	$	222,091	$	222,091	$	0	$	0	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 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


Affiliate	Affiliate	Date Issued	Amount of Notes - September 30, 2020		Amount of Notes - December 31, 2019		Interest Rate			Date of Maturity		Affiliate	Date Issued	Amount of Notes - March 31, 2021		Amount of Notes - December 31, 2020		Interest Rate			Date of Maturity
			(in thousands)											(in thousands)
Prudential Insurance	Prudential Insurance	4/20/2016	$	37,468	$	37,468		3.64	%		12/6/2020	Prudential Insurance	4/20/2016	$	93,671	$	93,671		3.47	%		6/20/2021
Prudential Insurance	Prudential Insurance	4/20/2016	103,039		103,039			3.64	%		12/15/2020	Prudential Insurance	4/20/2016	93,671		93,671			4.39	%		12/15/2023
Prudential Insurance	Prudential Insurance	4/20/2016	93,671		93,671			3.64	%		12/15/2020	Prudential Insurance	4/20/2016	28,102		28,102			4.39	%		12/15/2023
Prudential Insurance	Prudential Insurance	4/20/2016	93,671		93,671			3.47	%		6/20/2021	Prudential Insurance	4/20/2016	93,671		93,671			3.95	%		6/20/2024
Prudential Insurance	Prudential Insurance	4/20/2016	93,671		93,671			4.39	%		12/15/2023	Prudential Insurance	4/20/2016	37,468		37,468			3.95	%		6/20/2024
Prudential Insurance	Prudential Insurance	4/20/2016	28,102		28,102			4.39	%		12/15/2023	Prudential Insurance	4/20/2016	46,835		46,835			3.95	%		6/20/2024
Prudential Insurance	Prudential Insurance	4/20/2016	93,671		93,671			3.95	%		6/20/2024	Prudential Insurance	6/28/2016	26,000		26,000			2.59	%		6/28/2021
Prudential Insurance		4/20/2016	37,468		37,468			3.95	%		6/20/2024
Prudential Insurance		4/20/2016	46,835		46,835			3.95	%		6/20/2024
Prudential Insurance		6/28/2016	26,000		26,000			2.59	%		6/28/2021
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
Prudential Funding LLC		9/25/2020	387		0			0.26	%		10/26/2020
Prudential Funding LLC		9/25/2020	2,962		0			0.26	%		10/26/2020
Prudential Funding LLC		9/28/2020	4,014		0			0.26	%		10/23/2020
Prudential Funding LLC		9/28/2020	325		0			0.26	%		10/23/2020
Prudential Funding LLC		9/29/2020	194		0			0.26	%		10/30/2020
Prudential Funding LLC		9/30/2020	11,355		0			0.26	%		10/30/2020

Total Loans Payable to Affiliates	Total Loans Payable to Affiliates		$	672,833	$	661,512						Total Loans Payable to Affiliates		$	419,418	$	419,418

The total interest expense to the Company related to affiliated loans and ~~other payables to affiliates~~cash collateral with PGF was $9$4 million and ~~$38~~$28 million for the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, and $45 million and $78 million for the nine months ended September 30, 2020 and 2019,~~ respectively.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

Contributed Capital and Dividends

Through ~~September 2020~~March 2021 and December ~~2019,~~2020, the Company did 0t receive any capital contributions.

Through March 2021, the Company did 0t return capital to PAI. In March, June, September and ~~September~~December 2020, there was a $207 million, $173 million, ~~and~~ $192 million ~~return of capital, respectively, to PAI. In March, June, September~~ and ~~December 2019, there was a $245 million, $247 million, $245 million and $241~~$188 million return of capital, respectively, to PAI.

In March 2021, the Company paid a dividend of $192 million to PAI. In 2020, the Company did 0t pay any dividends 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. As of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the outstanding balances on these commitments were $3 $74 million and ~~$43~~$48 million, respectively. ~~The above amount includes~~These amounts include unfunded commitments that are not unconditionally cancellable. For related credit exposure, there was an allowance for credit losses ofof $0.0 million as of ~~September 30, 2020, which is~~March 31, 2021 and December 31, 2020. There was a change in allowance of $0.0 million for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020. The Company also made commitments to purchase or fund investments, mostly private fixed maturities. As of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019, $279~~2020, $293 million and ~~$207~~$305 million, respectively, of these commitments were outstanding. ~~The above amount includes~~These amounts include unfunded commitments that are not unconditionally cancellable. There were 0 related charges for credit losses for ~~both~~either the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 or 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 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.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements—(Continued)

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 30, 2020,~~March 31, 2021, 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.

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~~Prudential Annuities Life Assurance Corporation~~

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

~~For a~~The following discussion of ~~the Company's~~ litigation and regulatory matters ~~see~~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, ~~2019. There are no material developments~~2020, and should be read in ~~previously reported matters disclosed as~~conjunction with the complete descriptions provided in the Form 10-K.

Regulatory

Variable Products

The Company has received regulatory inquiries and requests for information from state and federal regulators, including a subpoena from the U.S. Securities and Exchange Commission, concerning the appropriateness of ~~December 31, 2019.~~variable product sales and replacement activity. The Company is cooperating with regulators and may become subject to additional regulatory inquiries and other actions related to this matter.

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.~~statements. 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.~~statements.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) addresses the financial condition of Prudential Annuities Life Assurance Corporation (“PALAC” or the “Company”) as of ~~September 30, 2020,~~March 31, 2021, compared with December 31, ~~2019,~~2020, and its results of operations for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019.~~2020. 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, ~~2019,~~2020, 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 subject to a limited market value adjustment or no market value adjustment and not registered with the SEC. The Company ceased offering these products in March 2010. In 2018, the Company resumed offering annuity products to new investors (except in New York).

Effective 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 Pruco Life Insurance Company of New Jersey ("PLNJ") business which was reinsured to the 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. As of December 31, 2020, Pruco Life discontinued the sales of traditional variable annuities with guaranteed living benefit riders. The discontinuation has no impact on the reinsurance agreement between Pruco Life and the Company. 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.

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~~The pandemic continues to impact our results of operations in the current period and ~~are~~is expected to ~~drive~~continue to be a driver of 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 continue to be impacted by capital market movements. 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. These actions included a pivot to less rate-sensitive products ~~with the decision to discontinue sales of traditional variable annuities with guaranteed living benefits effective December 31, 2020.~~ In addition, while our distribution platforms include a suite of digital, hybrid, and in-person options, mandated social distancing has limited in-person engagement between customers and financial professionals. 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 nine months~~ ended ~~September 30, 2020~~March 31, 2021 we reported a net ~~loss~~income of ~~$182 million and $2,759 million, respectively, as unfavorable financial market conditions had a substantial negative effect on reported results.~~$1,890 million. See “Results of Operations” for a discussion of results for the ~~third~~first quarter ~~and the first nine months~~ of ~~2020.~~

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•~~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~~. As of September 30, 2020, we maintained capital levels consistent with our ratings targets. However, 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.2021.

•Risk ~~Factors~~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.”~~Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

•Business ~~Continuity~~Continuity.~~. One of the main impacts of~~ Throughout the COVID-19 pandemic, ~~has~~we have been executing Prudential Financial Inc.'s ("Prudential Financial") and 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.

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.

~~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~~

~~DOL Fiduciary Rules~~

In June 2020, the Department of Labor ("DOL") announced that it is proposing a new exemption to replace the previously vacated “best interest contract exemption." This proposed exemption would allow fiduciaries meeting the requirements of the 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 advice regulation and other existing exemptions and provided its current interpretation of the pre-2016 fiduciary investment advice regulation. We cannot predict what impact the newly proposed exemption or interpretative guidance will have on the Company.

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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;

•hedging costs and other risk mitigation activities;

•insurance reserve levels, amortization of deferred policy acquisition costs (“DAC”)/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.

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, ~~2019.~~2020.

Revenues and Expenses

The Company earns revenues principally from contract ~~charges,~~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~~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.

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. 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.

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 recognition of other-than temporary impairments ("OTTI");

•Reinsurance recoverables;

•Taxes on income; and

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

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Market Performance - Equity and Interest Rate 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 specific to each product type, 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, and 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. If the near-term projected future rate of return is lower than our near-term minimum future rate of return of 0%, we use our minimum future rate of return. As of ~~September 30, 2020,~~March 31, 2021, we assume an 8.0% long-term equity expected rate of return and a ~~3.5%~~0.7% 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 2020 annual reviews and update of assumptions and other refinements, which were performed in the second quarter, we reduced our long-term expectation of the 10-year U.S. Treasury rate by 50 basis points and now grade to a rate of 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.~~2020.

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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 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 issued ASU 2019-09, Financial Services - Insurance (Topic 944): Effective Dateto affirm its decision to defer the effective date of 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, in November 2020 the FASB issued ASU 2020-11, Financial ~~Services -~~ Services—Insurance (Topic 944): Effective Date and Early ~~Applicatio~~nApplication to defer for an additional one year the 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. The transition relief would allow large calendar-year public companies that early adopt ASU 2018-12 to apply the guidance either as of January 1, 2020 or January 1, 2021 (and record transition adjustments as of January 1, 2020 or January 1, 2021, respectively) in the 2022 financial statements. Companies that do not early adopt ASU 2018-12 would apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2023 financial statements. The Company currently intends to adopt ASU 2018-12 effective January 1, 2023. 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,~~transition, the Company also expects an impact to ~~how~~the pattern of earnings ~~emerge thereafter.~~emergence following the transition date. See Note 2 to 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.

Changes in Financial Position

Total assets ~~increased $7~~decreased $5 billion from ~~$59~~$64 billion at December 31, ~~2019~~2020 to ~~$66~~$59 billion at ~~September 30, 2020.~~March 31, 2021. Significant ~~components were:~~component was:

•$4 billion decrease in Total investments and Cash and cash equivalents ~~increased $9 billion~~ primarily driven by ~~derivative collateral postings,~~unrealized losses on investments due to rising interest rates, cash flows from insurance operations and ~~unrealized gains on investments due to declining interest rates, partially offset by return of capital;~~

~~Partially offset by:~~

•~~Separate account assets decreased $3 billion primarily driven by net outflows and policy charges, largely offset by market appreciation driven by favorable equity markets.~~dividend distribution.

Total liabilities ~~increased $9~~decreased by $6 billion from ~~$53~~$62 billion at December 31, ~~2019~~2020 to ~~$62~~$56 billion at ~~September 30, 2020.~~March 31, 2021. Significant components were:

•$7 billion decrease in Future policy benefits ~~increased $10 billion~~ primarily driven by ~~an increase~~a decrease in reserves related to our variable annuity living benefit guarantees due to ~~declining~~rising interest rates and ~~the widening of credit spreads, partially~~favorable equity market performance;

Partially offset ~~by a favorable non-performance risk ("NPR") adjustment; and~~by:

•$2 billion increase in Policyholders' account balances ~~increased $2 billion~~ primarily driven by incremental general account product ~~sales;~~

~~Partially offset by:~~

•~~Separate account liabilities decreased $3 billion, corresponding to the decrease in Separate account assets, as discussed above.~~sales.

Total equity ~~decreased $2.1~~increased $0.3 billion from ~~$5.5~~$2.7 billion at December 31, ~~2019~~2020 to ~~$3.4~~$3.0 billion at ~~September 30, 2020,~~March 31, 2021, primarily driven by an after-tax net ~~loss~~income of ~~$2.8 billion and return of capital of $0.6~~$1.9 billion, partially offset by a dividend distribution of $0.2 billion, and unrealized ~~gains~~losses on investments of ~~$1.8~~$2.6 billion, as discussed above.

Results of Operations

Income (loss) from Operations before Income Taxes

Three Months Comparison

~~Losses~~Income from operations before income taxes ~~decreased $238~~increased $3,442 million from a loss of ~~$286~~$1,058 million for the three months ended ~~September 30, 2019~~March 31, 2020 to ~~a loss~~income of ~~$48~~$2,384 million for the three months ended ~~September 30, 2020~~March 31, 2021 primarily driven by:

•Favorable impact related to the portions of our U.S. GAAP liability before non-performance risk ("NPR"), that are excluded from our hedge target driven by rising interest rates and favorable equity market performance. Prior year period reflected an increase in these reserves primarily driven by widening credit spreads, declining interest rates and unfavorable equity market performance, partially offset by an unfavorable NPR adjustment.

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•Unfavorable comparative impact on our capital hedge programs driven by incremental derivative positions added, partially offset by a favorable comparative impact on our duration management swaps as a result of rising rates in the current period compared to declining rates in prior period, offset by;

•Decrease in reserves on our variable annuity living benefit guarantees, net of DAC primarily driven by tightening of credit spreads, partially offset by an unfavorable NPR adjustment and unfavorable hedge breakage driven by tightening of credit spreads in the current quarter. Prior period quarter reflected an increase in these reserves primarily driven by declining interest rates, partially offset by a favorable NPR adjustment.

~~Nine Months Comparison~~

Losses from operations before income taxes increased $2,051 million from a loss of $1,673 million for the nine months ended September 30, 2019 to a loss of $3,724 million for the nine months ended September 30, 2020. ~~Excluding a favorable comparative impact of our annual reviews and update of assumptions and other refinements, losses from operations increased $2,148 million primarily driven by:~~

•~~Unfavorable comparative impact of our capital hedge programs driven by incremental derivative positions added;~~

•Increase in reserves related to our variable annuity living benefit guarantees, net of DAC primarily driven by declining interest rates, widening of credit spreads and unfavorable hedge breakage, partially offset by a favorable NPR adjustment in the current year. Prior year period reflected an increase in these primarily driven by declining interest rates and unfavorable NPR adjustment; and

•Higher Amortization of deferred acquisition costs due to changes to expected gross profits reflecting change in market conditions. Also contributing are higher Policyholders' benefits driven by our guaranteed minimum death benefits due to unfavorable market conditions, resulting in higher reserve provisions.

The following table provides the net impact to the Unaudited Interim Statements of Operations, ~~from~~which is primarily driven by the changes in the U.S. GAAP embedded derivative liability and hedge positions under the Asset Liability Management ("ALM") strategy, and the related amortization of DAC and other ~~costs, for the periods indicated:~~costs.

Three Months Ended Nine Months Ended
September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019
(in millions)(1)
U.S. GAAP embedded derivative and hedging positions(2)
Net hedging impact(3) $ (325) $ (8) $ (1,333) $ (145)
Change in portions of U.S. GAAP liability, before NPR(4) 1,303 (1,273) (3,159) (1,704)
Change in the NPR adjustment (541) 1,071 2,192 315
Net impact from changes in the U.S. GAAP embedded derivative and hedge positions 437 (210) (2,300) (1,534)
Related benefit (charge) to amortization of DAC and other costs (112) (17) 243 214
Net impact of assumption updates and other refinements 0 0 199 13
Net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs $ 325 $ (227) $ (1,858) $ (1,307)


	Three Months Ended
	March 31, 2021		March 31, 2020
	(in millions)(1)
U.S. GAAP embedded derivative and hedging positions
Change in value of U.S.GAAP liability, pre-NPR(2)	$	7,464	$	(19,178)
Change in the NPR adjustment	(799)		5,958
Change in fair value of hedge assets, excluding capital hedges(3)	(4,446)		10,849
Change in fair value of capital hedges(4)	(300)		947
Other	528		364
Realized investment gains (losses), net, and related adjustments	2,447		(1,060)
Market experience updates(5)	69		(258)
Charges related to realized investments gains (losses), net	(334)		(309)
Net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs(6)	$	2,182	$	(1,627)

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

(2)~~Excluding impact~~Represents the change in the liability (excluding NPR) for our variable annuities which is measured utilizing a valuation methodology that is required under U.S. GAAP. This liability includes such items as risk margins which are required by U.S. GAAP but not included in our best estimate of ~~assumption updates and other refinements.~~the liability.

(3)~~Net hedging impact represents~~Represents the ~~difference between the change in fair value of the risk we seek to hedge using derivatives and the change~~changes in fair value of the derivatives utilized to hedge potential claims associated with ~~respect to that risk.~~our variable annuity living benefit guarantees.

(4)Represents ~~risk margins and valuation methodology differences between~~ the ~~economic liability managed by~~changes in fair value of equity derivatives of the ~~ALM Strategy and~~capital hedge program intended to protect a portion of the ~~U.S. GAAP liability.~~overall capital position of our business against exposure to the equity markets.

(5)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability.

(6)Excludes amounts from the changes in unrealized gains and losses from fixed income instruments recorded in OCI (versus net income) of $(1,736) million and $1,607 million for the three months ended March 31, 2021 and 2020, respectively.

For the three months ended ~~September 30, 2020,~~March 31, 2021, the gain of ~~$325~~$2,182 million ~~primarily reflected the impact of a $437 million net benefit from the changes in the U.S. GAAP embedded derivative and hedge positions. This net benefit~~ was ~~primarily~~ driven by ~~the~~a favorable impact ~~of tightening of credit spreads on~~related to the ~~portions of our~~ U.S. GAAP liability before NPR, ~~that are excluded~~net of the change in fair value of hedge assets (excluding capital hedges) largely due to rising interest rates and favorable equity market performance, as well as favorable market experience updates from ~~our hedge target. Partially offsetting these benefits is~~the impact of favorable equity markets and rising interest rates. These impacts were partially offset by an unfavorable NPR adjustment ~~and hedge breakage~~ driven by ~~tightening~~rising interest rates and losses associated with our capital hedge program.

For the three months ended March 31, 2020, the loss of $1,627 million was driven by an unfavorable impact related to the U.S. GAAP liability before NPR, net of the change in fair value of hedge assets (excluding capital hedges) largely due to widening credit ~~spreads.~~spreads, declining interest rates, and unfavorable equity market performance, as well as unfavorable market experience updates from the impact of unfavorable equity markets and declining interest rates. These ~~net gains~~impacts were partially offset by a ~~charge~~favorable NPR adjustment driven by widening credit spreads and gains associated with our capital hedge program.

Revenues, Benefits and Expenses

Three Months Comparison

Revenues increased $3,098 million from a gain of $24 million for the three months ended March 31, 2020 to a gain of $3,122 million for the three months ended March 31, 2021 primarily driven by:

•Realized investment gains (losses), net increase reflecting favorable impact related to ~~the amortization of DAC and other costs of $112 million.~~

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For the nine months ended September 30, 2020, the loss of $1,858 million primarily reflected the impact of a $2,300 million net charge from the changes in the U.S. GAAP embedded derivative and hedge 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 a favorable NPR adjustment, a benefit related to the amortization of DAC and other costs of $243 million, as well as the impact of a $199 million net benefit from our annual reviews and update of assumptions and other refinements.

For the three months ended September 30, 2019, the loss of $227 million primarily reflected the impact of a $210 net charge from the changes in the U.S. GAAP embedded derivative and hedge positions. The net charge was primarily driven by ~~the impact of declining~~rising interest rates ~~on the portions of our U.S. GAAP liability before NPR, that are excluded from our hedge target, partially offset by a~~and favorable ~~NPR adjustment.~~

~~For the nine months ended September 30, 2019, the loss of $1,307 primarily reflected the impact of a $1,534 million net charge due to changes in the U.S. GAAP embedded derivative~~equity market performance, and hedge positions. The net charge was primarily driven by the impact of declining interest rates on the portions of our U.S. GAAP liability before NPR, that are excluded from our hedge target and unfavorable NPR adjustment.

~~Revenues, Benefits and Expenses~~

~~Three Months Comparison~~

Revenues increased $232 million from a gain of $273 million for the three months ended September 30, 2019 to a gain of $505 million for the three months ended September 30, 2020 primarily driven by Realized investment gains (losses), net resulting from:

•Decrease in reserves related to our variable annuity living benefit guarantees primarily driven by tightening of credit spreads, partially offset by an unfavorable NPR adjustment and unfavorable hedge breakage driven by tightening of credit spreads, as well as a favorable comparative impact on our ~~duration management~~interest rate swaps as a result of rising ~~rates in the current period compared to declining rates in prior period. Also contributing to this decrease is~~rates. These increases were partially offset by an unfavorable comparative impact on our capital hedge programs driven by ~~incremental derivative positions added in the current quarter. Prior period quarter reflected~~favorable equity market performance and an ~~increase in these reserves primarily driven by declining interest, partially offset by a favorable~~unfavorable NPR ~~adjustment;~~adjustment.

~~Partially offset by:~~

•Table of ContentsLower Policy charges and fee income reflecting certain products reaching contractual milestones for fee tier reduction and lower average account values resulting from net outflows, which were partially offset by market appreciation.

Benefits and expenses decreased $7$344 million from an expense of ~~$559~~$1,082 million for the three months ended ~~September 30, 2019~~March 31, 2020 to an expense of ~~$552~~$738 million for the three months ended ~~September 30, 2020~~March 31, 2021 driven by:

•Lower ~~Commission expense~~Policyholders' benefits driven by ~~less reinsurance commission and expense allowance incurred~~our guaranteed minimum death benefits due to favorable market conditions, resulting in lower ~~sales;~~reserve provisions; and

•Lower ~~General, administrative and other expenses primarily driven by lower short-term interest expense.~~

~~Partially offset by:~~

•~~Higher~~ Amortization of deferred policy acquisition costs driven by changes to expected gross profits reflecting change in market conditions.

~~Nine Months Comparison~~

Revenues decreased $1,698 million from a loss of $414 million for the nine months ended September 30, 2019 to a loss of $2,112 million for the nine months ended September 30, 2020. Excluding the favorable comparative impacts of our annual reviews and update to our assumptions and other refinements, Revenues decreased by $1,798 million primarily driven by:

•~~Realized investment gains (losses), net increased reflecting an unfavorable comparative impact on our capital hedge programs driven by incremental derivative positions added; and~~

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•Unfavorable impact due to an increase in reserves related to our variable annuity living benefit guarantees primarily driven by declining interest rates, widening of credit spreads and unfavorable hedge breakage, partially offset by a favorable NPR adjustment in the current year. Prior year period reflected an increase in these reserves primarily driven by declining interest rates and unfavorable NPR adjustment.

Benefits and expenses increased $352 million from $1,260 million for the nine months ended September 30, 2019 to $1,612 million for the nine months ended September 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:

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

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

Risks and Risk Mitigants

The following is a summary of certain risks associated with Individual Annuities’ products, certain strategies in mitigating those risks including any updates to those strategies since the previous year-end, and 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, 2019.

Fixed Annuity Risks and Risk Mitigants. The primary risk ~~exposures~~exposure of our fixed annuity ~~products relate~~product relates 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~~which include 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~~from premature withdrawals. In addition, a portion of our fixed annuity products ~~have~~has a market value adjustment provision that ~~provides~~affords 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.

Indexed Variable Annuity Risks and Risk Mitigants. The primary risk exposure of our indexed variable annuity product relates to the investment risks we bear in order to credit to the customer’s account balance the required crediting rate based on the performance of the elected indices at the end of each term. We manage this risk primarily through our investment strategies including derivatives and product design features, which include credit rate resetting subject to contractual minimums as well as surrender charges applied during the early years of the contract that help to provide protection from premature withdrawals. In addition, our indexed variable annuity strategies have an interim value provision that provides protection from lapse in the case of rising interest rates.

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 manage our exposure to certain risks driven by fluctuations in capital markets primarily through a combination of i) Product Design Features, ii) our Asset Liability Management Strategy, and iii) our Capital Hedge Program as discussed below. We also manage these risk exposures through external reinsurance for certain of our variable annuity products. Sales of traditional variable annuities with guaranteed living benefit riders have been discontinued as of December 31, 2020.

i. Product Design Features:

A portion of the variable annuity contracts that we ~~offer~~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 a number of factors, including, but not limited to, the impact of investment performance on the contractholder’s total account value. Other product design features we utilize include, among others, asset allocation restrictions, minimum issuance age requirements and certain limitations on the amount of contractholder purchase ~~payments.~~payments, as well as a required minimum allocation to our general account for certain of our products. 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 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):

We employ an ALM strategy that utilizes a combination of both traditional fixed income instruments and derivatives to ~~help defray potential claims~~meet expected liabilities associated with 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 ~~an ALM strategy through the accumulation of~~ fixed income ~~and derivative~~ instruments, derivatives, or a combination thereof, 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 and over-the-counter ("OTC") equity, ~~and~~ interest rate and credit derivatives, including, but not limited to: equity and treasury futures; total return, credit default 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.

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~~in order to maximize protection irrespective of the possibility of our own ~~default),~~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 we manage through our ALM strategy, net of reinsurance recoverables, as of the periods indicated:

As of September 30, 2020 As of December 31, 2019
(in millions)
U.S. GAAP liability (including NPR) $ 21,326 $ 11,823
NPR adjustment 5,459 3,245
Subtotal 26,785 15,068
Adjustments including risk margins and valuation methodology differences (6,850) (4,111)
Economic liability managed through the ALM strategy $ 19,935 $ 10,957


	As of March 31, 2021		As of December 31, 2020(1)
	(in millions)
U.S. GAAP Liability, including NPR	$	10,240	$	16,905
NPR Adjustment	2,906		3,705
Subtotal	13,146		20,610
Adjustments including risk margins and valuation methodology differences	(2,759)		(4,596)
Economic liability managed by ALM strategy	$	10,387	$	16,014

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

As of ~~September 30, 2020,~~March 31, 2021, the fair value of our fixed income instruments and derivative assets exceed our economic liability.

Under our ALM strategy, we expect differences in the U.S. GAAP net income impact between the changes in value of the fixed income instruments (either designated as available-for-sale or designated as trading) and derivatives as compared to the changes in the embedded derivative liability these assets support. These differences can be primarily attributed to three distinct areas:

•Different valuation methodologies in measuring the liability we intend to cover with fixed income instruments and derivatives versus the liability reported under U.S. GAAP. The valuation methodology utilized in estimating the economic liability we intend to defray with fixed income instruments (either designated as available-for-sale or designated as trading) and derivatives is different from that required to be utilized to measure the liability under U.S. GAAP. Additionally, the valuation of the economic liability excludes certain items that are included within the U.S. GAAP liability, such as NPR in order to maximize protection irrespective of the possibility of our own default and risk margins (required by U.S. GAAP but different from our best estimate).

•Different accounting treatment between liabilities and assets supporting those liabilities. Under U.S. GAAP, changes in value of the embedded derivative liability, derivative instruments and fixed income instruments designated as trading immediately reflected in net income, while changes in the fair value of fixed income instruments that are designated as available-for-sale are recorded as unrealized gains (losses) in other comprehensive income.

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

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

iii. Capital Hedge ~~Program~~

Program:

We employ a capital hedge program within the Company 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.

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, ~~2019.~~

2020.

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.

~~Table of Contents~~

Our businesses are subject to comprehensive regulation and supervision by domestic and international regulators. These regulations currently include requirements (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, 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 nine months 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.~~

~~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 September 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”)~~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

We manage PALAC to regulatory capital levels consistent with our “AA” ratings targets. We ~~utilized~~utilize the risk-based capital (“RBC”) ratio as a primary measure of capital 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.

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


	~~Return of Capital~~
	~~(in millions)~~
~~September 30, 2020~~	$	~~192~~
~~June 30, 2020~~	$	~~173~~
~~March 31, 2020~~	$	~~207~~
~~December 31, 2019~~	$	~~241~~
~~September 30, 2019~~	$	~~245~~


	Return of Capital		Dividends
	(in millions)
March 31, 2021	$	0	$	192
December 31, 2020	$	188	$	0
September 30, 2020	$	192	$	0
June 30, 2020	$	173	$	0
March 31, 2020	$	207	$	0

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.

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 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.

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 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the Company had liquid assets of ~~$26~~$17.2 billion and ~~$17~~$21.4 billion, respectively. The portion of liquid assets comprised cash and cash equivalents and short-term investments was $7$1.8 billion and $3$1.4 billion as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. As of ~~September 30, 2020, $17~~March 31, 2021, $11 billion, or ~~96%~~93%, of the fixed maturity investments in the Company's general account portfolios, were rated high or highest quality based on NAIC or equivalent rating.

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~~Funding’s positive tangible net worth at all times.

~~Hedging activities associated with living benefit guarantees~~

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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 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.

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 30, 2020,~~March 31, 2021, there have been no material changes in our economic exposure to market risk from December 31, ~~2019,~~2020, a description of which may be found in our Annual Report on Form 10-K, for the year ended December 31, ~~2019,~~2020, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” filed with the 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, ~~2019,~~2020, 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 30, 2020.~~March 31, 2021. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of ~~September 30, 2020,~~March 31, 2021, 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 30, 2020~~March 31, 2021 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, ~~2019.~~2020. These risks could materially affect our business, results of operations or financial condition, cause the trading price of our Common Stock to decline materially 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~~businesses 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 nine months of 2020, the COVID-19 crisis (i) caused unfavorable financial market conditions which had a substantial negative effect on reported results of our business, (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 or policyholder behavior 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.~~

~~Table of Contents~~

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/ Susan M. Mann
Name						Susan M. Mann
						Executive Vice President and Chief Financial Officer
						(Authorized Signatory and Principal Financial Officer)

Date: ~~November~~May 12, ~~2020~~2021

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	Nine Months Ended September 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		1,384		0		0		0		1,384

Reductions for securities sold during the period	0		0		(2)		0		0		0		(2)

Addition (reductions) on securities with previous allowance	0		0		(814)		0		0		0		(814)


Balance, end of period	$	0	$	0	$	568	$	0	$	0	$	0	$	568


	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


	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	1,799,495		0		0		(377,895)		1,421,600
Reclassification adjustment for (gains) losses included in net income	(26,350)		0		0		5,534		(20,816)
Reclassification due to allowance for credit losses recorded during the period	60		0		0		(13)		47
Impact of net unrealized investment (gains) losses on DAC and other costs	0		(197,485)		0		41,472		(156,013)
Impact of net unrealized investment (gains) losses on future policy benefits and other liabilities	0		0		(16,027)		3,366		(12,661)
Balance, September 30, 2020	$	2,510,135	$	(353,660)	$	(52,010)	$	(442,762)	$	1,661,703


	Three Months Ended				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
	(in millions)(1)
U.S. GAAP embedded derivative and hedging positions(2)
Net hedging impact(3)	$	(325)	$	(8)	$	(1,333)	$	(145)
Change in portions of U.S. GAAP liability, before NPR(4)	1,303		(1,273)		(3,159)		(1,704)
Change in the NPR adjustment	(541)		1,071		2,192		315
Net impact from changes in the U.S. GAAP embedded derivative and hedge positions	437		(210)		(2,300)		(1,534)
Related benefit (charge) to amortization of DAC and other costs	(112)		(17)		243		214
Net impact of assumption updates and other refinements	0		0		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	$	325	$	(227)	$	(1,858)	$	(1,307)