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Prudential Annuities Life Assurance

Filed: 12 Nov 20, 4:26pm
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
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from                      to                     
Commission File Number 033-44202
_________________________________________________________________ 
Prudential Annuities Life Assurance Corporation
(Exact Name of Registrant as Specified in its Charter)
Arizona 06-1241288
(State or Other Jurisdiction of
Incorporation or Organization)
 (I.R.S. Employer Identification Number)
One Corporate Drive
Shelton, 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 ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Not ApplicableNot ApplicableNot 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 FilerAccelerated Filer
Non-accelerated FilerSmaller 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 12, 2020, 25,000 shares of the registrant’s Common Stock (par value $100) consisting of 100 voting shares and 24,900 non-voting shares were outstanding. As of such date, Prudential Annuities, Inc., an indirect wholly-owned subsidiary of Prudential Financial, Inc., a New Jersey corporation, owned all of the registrant’s Common Stock.
Prudential Annuities Life Assurance Corporation meets the conditions set
forth in General Instruction (H) (1) (a) and (b) on Form 10-Q and
is therefore filing this Form 10-Q in the reduced disclosure format.


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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 for discussion of certain risks relating to our business and investment in our securities.

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PART I - Financial Information
Item 1. Financial Statements                                     
Prudential Annuities Life Assurance Corporation
Unaudited Interim Statements of Financial Position
September 30, 2020 and December 31, 2019 (in thousands, except share amounts)
September 30, 2020December 31, 2019
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 
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 
Policy loans11,916 12,366 
Short-term investments1,815,485 335,358 
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 
Total investments22,395,627 15,946,325 
Cash and cash equivalents5,501,936 2,795,163 
Deferred policy acquisition costs(1)4,106,676 4,455,683 
Accrued investment income117,166 102,724 
Reinsurance recoverables790,715 621,510 
Income taxes(1)1,512,403 1,202,714 
Value of business acquired26,818 30,025 
Deferred sales inducements700,553 812,724 
Receivables from parent and affiliates87,769 62,765 
Other assets428,808 139,933 
Separate account assets30,093,780 32,665,431 
TOTAL ASSETS$65,762,251 $58,834,997 
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits$22,616,570 $12,932,461 
Policyholders’ account balances7,708,608 6,180,359 
Payables to parent and affiliates384,715 185,156 
Short-term debt373,086 242,094 
Long-term debt299,747 419,418 
Reinsurance payables188,463 235,318 
Other liabilities(1)669,814 447,405 
Separate account liabilities30,093,780 32,665,431 
Total liabilities62,334,783 53,307,642 
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 10)
EQUITY
Common stock, $100 par value; 25,000 shares authorized, issued and outstanding2,500 2,500 
Additional paid-in capital4,570,936 5,142,936 
Retained earnings / (accumulated deficit)(2,807,247)(46,693)
Accumulated other comprehensive income (loss)1,661,279 428,612 
Total equity3,427,468 5,527,355 
TOTAL LIABILITIES AND EQUITY$65,762,251 $58,834,997 
(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
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Prudential Annuities Life Assurance Corporation
Unaudited Interim Statements of Operations and Comprehensive Income (Loss)
Three and Nine Months Ended September 30, 2020 and 2019 (in thousands)
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
REVENUES
Premiums$13,936 $12,506 $45,528 $48,242 
Policy charges and fee income489,440 527,152 1,441,991 1,559,874 
Net investment income144,669 149,367 426,132 406,408 
Asset administration fees and other income102,758 120,927 353,740 345,520 
Realized investment gains (losses), net(245,974)(537,267)(4,379,429)(2,773,701)
Total revenues504,829 272,685 (2,112,038)(413,657)
BENEFITS AND EXPENSES
Policyholders’ benefits43,824 69,833 248,585 125,673 
Interest credited to policyholders’ account balances81,284 56,947 161,000 100,729 
Amortization of deferred policy acquisition costs204,516 137,157 439,730 167,198 
Commission expense193,174 220,828 602,303 672,110 
General, administrative and other expenses29,604 74,008 160,487 193,981 
Total benefits and expenses552,402 558,773 1,612,105 1,259,691 
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES(47,573)(286,088)(3,724,143)(1,673,348)
Income tax expense (benefit)134,587 (58,576)(964,981)(377,042)
NET INCOME (LOSS)$(182,160)$(227,512)$(2,759,162)$(1,296,306)
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments327 (228)(154)(244)
Net unrealized investment gains (losses)33,026 628,916 1,560,493 1,336,746 
Total33,353 628,688 1,560,339 1,336,502 
Less: Income tax expense (benefit) related to other comprehensive income (loss)7,006 132,024 327,672 280,666 
Other comprehensive income (loss), net of taxes26,347 496,664 1,232,667 1,055,836 
Comprehensive income (loss)$(155,813)$269,152 $(1,526,495)$(240,470)























See Notes to Unaudited Interim Financial Statements
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Prudential Annuities Life Assurance Corporation
Unaudited Interim Statements of Equity
Three and Nine Months Ended September 30, 2020 and 2019 (in thousands)
  Common  
Stock
 Additional  
Paid-in
Capital
Retained EarningsAccumulated
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)
Return of capital(207,000)(207,000)
Comprehensive income (loss):
Net income (loss)(820,788)(820,788)
Other comprehensive income (loss), net of tax1,010,888 1,010,888 
Total comprehensive income (loss)190,100 
Balance, March 31, 2020$2,500 $4,935,936 $(868,873)$1,439,500 $5,509,063 
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 tax195,432 195,432 
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 tax26,347 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 


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  Common  
Stock
 Additional  
Paid-in
Capital
Retained EarningsAccumulated
Other
Comprehensive  
Income (Loss)
Total Equity  
Balance, December 31, 2018$2,500 $6,120,436 $943,005 $(324,373)$6,741,568 
Cumulative effect of adoption of accounting changes(2)(371)(371)
Return of capital(245,000)(245,000)
Comprehensive income (loss):
Net income (loss)(900,024)(900,024)
Other comprehensive income (loss), net of tax224,777 224,777 
Total comprehensive income (loss)(675,247)
Balance, March 31, 2019$2,500 $5,875,436 $42,610 $(99,596)$5,820,950 
Return of capital(246,500)(246,500)
Comprehensive income (loss):
Net income (loss)(168,770)(168,770)
Other comprehensive income (loss), net of tax334,395 334,395 
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 tax496,664 496,664 
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 Annual Report on Form 10-K for the year ended December 31, 2019 for additional information.

































See Notes to Unaudited Interim Financial Statements
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Prudential Annuities Life Assurance Corporation
Unaudited Interim Statements of Cash Flows
Nine Months Ended September 30, 2020 and 2019 (in thousands)
20202019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)$(2,759,162)$(1,296,306)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Policy charges and fee income(194)(854)
Realized investment (gains) losses, net4,379,429 2,773,701 
Depreciation and amortization1,288 453 
Interest credited to policyholders’ account balances161,000 100,729 
Change in:
Future policy benefits1,014,611 839,804 
Accrued investment income(14,442)(7,767)
Net receivables from/payables to parent and affiliates(12,673)3,589 
Deferred sales inducements(1,049)(568)
Deferred policy acquisition costs205,496 (155,778)
Income taxes(636,990)(693,049)
Reinsurance recoverables, net(37,789)(27,373)
Derivatives, net5,063,948 3,144,906 
Other, net(32,760)25,324 
Cash flows from (used in) operating activities7,330,713 4,706,811 
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale572,885 596,626 
Fixed maturities, trading159,732 111 
Equity securities29,057 2,534 
Commercial mortgage and other loans25,308 247,723 
Policy loans1,045 1,256 
Other invested assets27,263 23,072 
Short-term investments6,320,503 491,254 
Payments for the purchase/origination of:
Fixed maturities, available for sale(3,005,885)(2,646,186)
Fixed maturities, trading(543,613)(54,862)
Equity securities(16,019)(51,229)
Commercial mortgage and other loans(232,974)(239,275)
Policy loans(73)(288)
Other invested assets(147,298)(128,402)
Short-term investments(7,800,148)(1,071,423)
Notes receivable from parent and affiliates, net34,008 
Derivatives, net(774,629)(76,670)
Other, net
Cash flows from (used in) investing activities(5,384,846)(2,871,751)
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account deposits4,455,177 3,034,018 
Ceded policyholders' account deposits(33,061)(13,881)
Policyholders' account withdrawals(3,070,114)(2,452,263)
Ceded policyholders' account withdrawals29,759 28,760 
Cash collateral for loaned securities(384)
Repayments of debt (maturities longer than 90 days)(274,569)
Net increase/(decrease) in short-term borrowing11,322 
Drafts outstanding(12,968)(455)
Distribution to Parent(572,000)(736,500)
Other, net(47,209)
Cash flows from (used in) financing activities760,906 (415,274)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS2,706,773 1,419,786 
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR2,795,163 4,503,534 
CASH AND CASH EQUIVALENTS, END OF PERIOD$5,501,936 $5,923,320 
Significant Non-Cash Transactions
There were no significant non-cash transactions for the nine months ended September 30, 2020 and 2019.

See Notes to Unaudited Interim Financial Statements
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Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)

1.    BUSINESS AND BASIS OF PRESENTATION

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

The Company 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 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.

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

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Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
Reclassifications

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

2.    SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS

Recent Accounting Pronouncements
Changes to U.S. GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of Accounting Standards Updates ("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, 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.
StandardDescriptionEffective date and method of adoptionEffect 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 — 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. ASU 2018-12 will impact, at least to some extent, the accounting and disclosure requirements for all long-duration insurance and investment contracts issued by the Company. Outlined below are four key areas of change, although there are other changes not noted below. In addition to the impacts to the balance sheet upon adoption, the Company also expects an impact to how earnings emerge thereafter.
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Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
ASU 2018-12 Amended TopicDescriptionMethod of adoptionEffect 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 productsRequires 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 productsRequires 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 balancesRequires 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)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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Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
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
 Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Allowance for Credit LossesFair
Value
 (in thousands)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies$7,203,259 $1,928,710 $12,705 $$9,119,264 
Obligations of U.S. states and their political subdivisions259,429 17,032 256 276,205 
Foreign government bonds160,922 21,978 19 182,881 
U.S. public corporate securities2,691,422 278,335 7,392 2,962,365 
U.S. private corporate securities1,509,192 111,697 6,114 217 1,614,558 
Foreign public corporate securities329,721 24,333 7,032 347,022 
Foreign private corporate securities1,233,676 77,343 11,890 351 1,298,778 
Asset-backed securities(1)804,636 8,765 3,950 809,451 
Commercial mortgage-backed securities649,810 57,148 19 706,939 
Residential mortgage-backed securities(2)74,904 6,552 81,453 
Total fixed maturities, available-for-sale$14,916,971 $2,531,893 $49,380 $568 $17,398,916 

(1)Includes credit-tranched securities collateralized by loan obligations, sub-prime mortgages, auto loans, equipment leases and education loans.
(2)Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.

 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 $
Obligations of U.S. states and their political subdivisions252,304 7,814 436 259,682 
Foreign government bonds203,386 19,518 20 222,884 
U.S. public corporate securities1,615,060 126,947 1,331 1,740,676 
U.S. private corporate securities1,159,962 50,720 3,343 1,207,339 
Foreign public corporate securities321,111 16,989 113 337,987 
Foreign private corporate securities1,171,411 50,069 7,995 1,213,485 
Asset-backed securities(1)443,767 3,405 2,734 444,438 (20)
Commercial mortgage-backed securities557,584 20,941 236 578,289 
Residential mortgage-backed securities(2)73,814 3,960 13 77,761 
Total fixed maturities, available-for-sale$12,465,746 $792,306 $55,687 $13,202,365 $(20)

(1)Includes credit-tranched securities collateralized by loan obligations, sub-prime mortgages, auto loans, equipment leases and education loans.
(2)Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
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Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
(3)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 securities relating to changes in the value of such securities subsequent to the impairment measurement date.
 
The following table sets forth the fair value and gross unrealized losses on available-for-sale fixed maturity securities without an allowance for credit losses aggregated by investment category and length of time that individual fixed maturity securities had been in a continuous unrealized loss position, as of the date indicated:
 September 30, 2020
Less Than Twelve MonthsTwelve Months or MoreTotal
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 $$$536,328 $12,705 
Obligations of U.S. states and their political subdivisions13,690 256 13,690 256 
Foreign government bonds252 79 13 331 19 
U.S. public corporate securities264,213 7,027 2,562 365 266,775 7,392 
U.S. private corporate securities73,223 4,579 6,684 1,535 79,907 6,114 
Foreign public corporate securities76,443 7,032 76,443 7,032 
Foreign private corporate securities176,274 5,588 75,774 6,286 252,048 11,874 
Asset-backed securities223,101 1,247 272,737 2,703 495,838 3,950 
Commercial mortgage-backed securities7,252 19 7,252 19 
Residential mortgage-backed securities82 82 
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
Less Than Twelve MonthsTwelve Months or MoreTotal
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$1,336,007 $39,456 $5,855 $10 $1,341,862 $39,466 
Obligations of U.S. states and their political subdivisions97,752 436 97,752 436 
Foreign government bonds804 13 132 936 20 
U.S. public corporate securities93,147 870 15,491 461 108,638 1,331 
U.S. private corporate securities82,709 2,111 59,797 1,232 142,506 3,343 
Foreign public corporate securities50,150 113 50,150 113 
Foreign private corporate securities97,414 1,652 91,863 6,343 189,277 7,995 
Asset-backed securities103,911 717 235,759 2,017 339,670 2,734 
Commercial mortgage-backed securities66,071 236 66,071 236 
Residential mortgage-backed securities633 12 640 13 
Total fixed maturities, available-for-sale$1,928,598 $45,616 $408,904 $10,071 $2,337,502 $55,687 
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Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)

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

In accordance with its policy described in Note 2, 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 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, 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.

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
Amortized CostFair Value
 (in thousands)
Fixed maturities, available-for-sale:
Due in one year or less$202,191 $204,939 
Due after one year through five years1,184,697 1,244,727 
Due after five years through ten years2,323,234 2,502,344 
Due after ten years9,677,499 11,849,063 
Asset-backed securities804,636 809,451 
Commercial mortgage-backed securities649,810 706,939 
Residential mortgage-backed securities74,904 81,453 
Total fixed maturities, available-for-sale$14,916,971 $17,398,916 

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.

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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,
 2020201920202019
 (in thousands)
Fixed maturities, available-for-sale:
Proceeds from sales(1)$20,268 $77,697 $352,945 $231,106 
Proceeds from maturities/prepayments88,208 125,432 220,109 379,849 
Gross investment gains from sales and maturities24 15 18,279 982 
Gross investment losses from sales and maturities(366)(445)(1,856)(3,086)
OTTI recognized in earnings(2)N/A(769)N/A(2,794)
Write-downs recognized in earnings(3)N/A(693)N/A
(Addition to) release of allowance for credit losses(4)414 N/A(568)N/A

(1)Includes $0.2 million and $14.3 million of non-cash related proceeds due to the timing of trade settlements for the nine months ended September 30, 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 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.”

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
U.S. Treasury Securities and Obligations of U.S. StatesForeign Government BondsU.S. and Foreign Corporate SecuritiesAsset-Backed SecuritiesCommercial Mortgage-Backed SecuritiesResidential Mortgage-Backed SecuritiesTotal
(in thousands)
Fixed maturities, available-for-sale:
Balance, beginning of period$$$982 $$$$982 
Additions to allowance for credit losses not previously recorded216 216 
Reductions for securities sold during the period
Addition (reductions) on securities with previous allowance(630)(630)
Balance, end of period$$$568 $$$$568 


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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. StatesForeign Government BondsU.S. and Foreign Corporate SecuritiesAsset-Backed SecuritiesCommercial Mortgage-Backed SecuritiesResidential Mortgage-Backed SecuritiesTotal
(in thousands)
Fixed maturities, available-for-sale:
Balance, beginning of year$$$$$$$
Additions to allowance for credit losses not previously recorded1,384 1,384 
Reductions for securities sold during the period(2)(2)
Addition (reductions) on securities with previous allowance(814)(814)
Balance, end of period$$$568 $$$$568 


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

For the nine months ended September 30, 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, 2020.

Equity Securities

The net change in unrealized gains (losses) from equity securities still held at period end, recorded within “Asset administration fees and other income,” was $0.4 million and $0.3 million during the three months ended September 30, 2020 and 2019, respectively, and $2.1 million and $1.7 million during 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)
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, 2020December 31, 2019
 Amount
(in thousands)
% of
Total
Amount
(in thousands)
% of
Total
Commercial mortgage and agricultural property loans by property type:
Apartments/Multi-Family$371,216 22.0 %$272,150 18.5 %
Hospitality16,745 1.0 16,819 1.1 
Industrial520,721 30.9 464,528 31.5 
Office365,535 21.7 372,823 25.3 
Other187,116 11.1 156,768 10.6 
Retail130,462 7.7 131,051 8.9 
Total commercial mortgage loans1,591,795 94.4 1,414,139 95.9 
Agricultural property loans93,789 5.6 60,046 4.1 
Total commercial mortgage and agricultural property loans1,685,584 100.0 %1,474,185 100.0 %
Allowance for credit losses(7,633)(2,663)
Total net commercial mortgage and agricultural property loans1,677,951 1,471,522 
Other loans:
Other collateralized loans
Allowance for credit losses
Total net other loans
Total net commercial mortgage and other loans$1,677,951 $1,471,522 

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

The following tables set 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 LoansAgricultural Property LoansOther Collateralized LoansTotal
(in thousands)
Balance, beginning of period$6,701 $178 $$6,879 
Addition to (release of) allowance for expected losses646 108 754 
Balance, end of period$7,347 $286 $$7,633 

Nine Months Ended September 30, 2020
Commercial Mortgage LoansAgricultural Property LoansOther Collateralized LoansTotal
(in thousands)
Balance at December 31, 2019$2,622 $41 $$2,663 
Cumulative effect of adoption of ASU 2016-133,118 39 3,157 
Addition to (release of) allowance for expected losses1,607 206 1,813 
Balance at September 30, 2020$7,347 $286 $$7,633 
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Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)

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

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

The following tables set forth key credit quality indicators based upon the recorded investment gross of allowance for credit losses, as of the date indicated:
September 30, 2020
Amortized Cost by Origination Year
20202019201820172016PriorRevolving LoansTotal
(in thousands)
Commercial Mortgage Loans
Loan-to-Value Ratio:
0%-59.99%$$116,872 $26,733 $83,965 $195,585 $255,804 $$678,959 
60%-69.99%140,998 172,412 32,176 139,016 61,536 96,476 642,614 
70%-79.99%51,766 72,514 47,798 60,980 29,388 7,776 270,222 
80% or greater
Total$192,764 $361,798 $106,707 $283,961 $286,509 $360,056 $$1,591,795 
Debt Service Coverage Ratio:
Greater or Equal to 1.2x$192,764 $338,722 $90,462 $283,961 $282,478 $347,475 $$1,535,862 
1.0 - 1.2x023,076 16,245 04,031 9,804 53,156 
Less than 1.0x000002,777 2,777 
Total$192,764 $361,798 $106,707 $283,961 $286,509 $360,056 $$1,591,795 
Agricultural Property Loans
Loan-to-Value Ratio:
0%-59.99%$34,465 $13,769 $1,261 $8,265 $1,180 $32,549 $$91,489 
60%-69.99%2,300 2,300 
70%-79.99%
80% or greater
Total$36,765 $13,769 $1,261 $8,265 $1,180 $32,549 $$93,789 
Debt Service Coverage Ratio:
Greater or Equal to 1.2x$36,765 $13,769 $1,261 $4,277 $1,180 $28,957 $$86,209 
1.0 - 1.2x000000
Less than 1.0x0003,988 03,592 7,580 
Total$36,765 $13,769 $1,261 $8,265 $1,180 $32,549 $$93,789 

21

Table of Contents                                         
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< 1.0XTotal
  (in thousands) 
Loan-to-Value Ratio:
0%-59.99%$659,217 $6,641 $$665,858 
60%-69.99%499,493 14,078 513,571 
70%-79.99%203,158 30,555 233,713 
80% or greater997 997 
Total commercial mortgage loans$1,361,868 $52,271 $$1,414,139 





Agricultural property loans
December 31, 2019
 Debt Service Coverage Ratio
  
> 1.2X
1.0X to <1.2X< 1.0XTotal
  (in thousands) 
Loan-to-Value Ratio:
0%-59.99%$56,437 $$3,609 $60,046 
60%-69.99%
70%-79.99%
80% or greater
Total agricultural property loans$56,437 $$3,609 $60,046 

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

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
Current30-59 Days Past Due60-89 Days Past Due90 Days or More Past Due(1)Total LoansNon-Accrual Status(2)
(in thousands)
Commercial mortgage loans$1,591,795 $$$$1,591,795 $
Agricultural property loans93,789 93,789 3,988 
Other collateralized loans
Total$1,685,584 $$$$1,685,584 $3,988 

(1)As of September 30, 2020, there were 0 loans in this category accruing interest.
(2)For additional information regarding the Company's policies for accruing interest on loans, see Note 2 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
22

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Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
December 31, 2019
Current30-59 Days Past Due60-89 Days Past Due90 Days or More Past Due(1)Total LoansNon-Accrual Status(2)
(in thousands)
Commercial mortgage loans$1,414,139 $$$$1,414,139 $
Agricultural property loans60,046 60,046 
Total$1,474,185 $$$$1,474,185 $

(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.

There were $4.0 million of loans on non-accrual status which did not have a related allowance for credit losses as of September 30, 2020, and those loans recognized interest income of $0.2 million for both the three and nine months ended September 30, 2020.

For both the three and nine months ended September 30, 2020, there were 0 commercial mortgage and other loans acquired, other than those through direct origination, and there were 0 commercial mortgage and other loans sold. For the three and nine 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, of commercial mortgage and other loans sold.

The Company did 0t have any commercial mortgage and other loans purchased with credit deterioration as of September 30, 2020.

Other Invested Assets

The following table sets forth the composition of “Other invested assets,” as of the dates indicated:
September 30, 2020December 31, 2019
 (in thousands)
LPs/LLCs:
Equity method:
Private equity$22,719 $23,414 
Hedge funds333,340 273,615 
Real estate-related229,304 166,492 
Subtotal equity method585,363 463,521 
Fair value:
Private equity4,095 4,115 
Hedge funds172 194 
Real estate-related6,211 6,181 
Subtotal fair value10,478 10,490 
Total LPs/LLCs595,841 474,011 
Derivative instruments4,769 
Total other invested assets$600,610 $474,013 

23

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 indicated:
September 30, 2020
(in thousands)
Fixed maturities$111,603 
Equity securities60 
Commercial mortgage and other loans4,835 
Policy loans11 
Short-term investments and cash equivalents388 
Other(1)269 
Total accrued investment income$117,166 

(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, 2020.


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,
 2020201920202019
 (in thousands)
Fixed maturities, available-for-sale$113,538 $100,249 $323,737 $289,289 
Fixed maturities, trading3,972 2,579 9,474 7,497 
Equity securities63 67 194 213 
Commercial mortgage and other loans13,898 12,761 42,517 37,661 
Policy loans182 153 538 430 
Other invested assets15,102 7,083 20,968 23,690 
Short-term investments and cash equivalents4,601 31,807 48,569 62,313 
Gross investment income151,356 154,699 445,997 421,093 
Less: investment expenses(6,687)(5,332)(19,865)(14,685)
Net investment income$144,669 $149,367 $426,132 $406,408 

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,
 2020201920202019
 (in thousands)
Fixed maturities(1)$72 $(1,199)$15,162 $(4,898)
Commercial mortgage and other loans(753)950 (2,489)(292)
Derivatives(246,742)(537,079)(4,397,341)(2,768,959)
Other invested assets1,405 2,875 
Short-term investments and cash equivalents44 61 2,364 448 
Realized investment gains (losses), net$(245,974)$(537,267)$(4,379,429)$(2,773,701)
24

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Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)

(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, 2020December 31, 2019
(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/A722,310 
Fixed maturity securities, available-for-sale with an allowance(14)N/A
Fixed maturity securities, available-for-sale without an allowance2,482,527 N/A
Derivatives designated as cash flow hedges(2)22,677 (287)
Affiliated notes4,931 598 
Net unrealized gains (losses) on investments$2,510,121 $736,930 

(1)Effective January 1, 2020, per ASU 2016-13, fixed maturity securities, available-for-sale are no longer required to be disclosed “with OTTI” and “all other”.
(2)For more information on cash flow hedges, see Note 4.

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 and December 31, 2019, the Company had 0 repurchase agreements or securities lending transactions.


4.    DERIVATIVE INSTRUMENTS

Types of Derivative Instruments and Derivative Strategies

The Company utilizes various derivative instruments and strategies to manage its risk. Commonly used derivative instruments include but are not necessarily limited to:
Interest rate contracts: futures, swaps, forwards, options, caps and floors
Equity contracts: futures, options and total return swaps
Foreign exchange contracts: futures, options, forwards and swaps
Credit contracts: single and index reference credit default swaps

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

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

25

Table of Contents                                         
Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
Primary Risks Managed by Derivatives

The table below provides a summary of the gross notional amount and 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, 2020December 31, 2019
Primary Underlying Risk/Instrument TypeGross
Notional
Fair ValueGross
Notional
Fair Value
AssetsLiabilitiesAssetsLiabilities
 (in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Currency/Interest Rate
Foreign Currency Swaps$1,280,579 $53,859 $(16,348)$1,172,899 $39,019 $(26,511)
Total Derivatives Designated as Hedge Accounting Instruments$1,280,579 $53,859 $(16,348)$1,172,899 $39,019 $(26,511)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Futures$5,244,900 $5,018 $(10,520)$3,857,700 $638 $(5,872)
Interest Rate Swaps103,756,250 14,717,201 (6,135,811)88,557,425 6,598,625 (1,997,944)
Interest Rate Options10,618,000 1,195,646 (188,397)12,583,000 283,386 (172,085)
Interest Rate Forwards257,000 173 (185)959,772 24,487 (4,185)
Foreign Currency
Foreign Currency Forwards19,028 126 (125)16,683 (394)
Currency/Interest Rate
Foreign Currency Swaps216,304 17,007 (557)234,767 11,482 (663)
Credit
Credit Default Swaps275,173 6,782 (472)
Equity
Equity Futures7,412,980 6,130 (30,119)1,191,237 (2,638)
Total Return Swaps24,495,921 151,598 (397,196)16,314,165 36,692 (573,957)
Equity Options36,849,348 814,373 (431,728)12,866,043 329,722 (422,700)
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(1)(2)$190,425,483 $16,967,913 $(7,211,458)$137,753,691 $7,324,051 $(3,206,949)

(1)Excludes embedded derivatives and associated reinsurance recoverables which contain multiple underlying risks. The fair value of these embedded derivatives was a net liability of $21,326 million and $11,823 million as of September 30, 2020 and December 31, 2019, respectively included in “Future policy benefits” and $303 million and $197 million as of September 30, 2020 and December 31, 2019, respectively included in “Policyholders’ account balances". Other assets included $41 million and $8 million as of September 30, 2020 and December 31, 2019, respectively. Other liabilities included $18 million and $0 million as of September 30, 2020 and December 31, 2019, respectively. The fair value of the related reinsurance, included in "Reinsurance recoverables" and/or "Reinsurance payables" was an asset of $546 million and $350 million as of September 30, 2020 and December 31, 2019, respectively.
(2)Recorded in “Other invested assets”, “Other liabilities”, and "Payables to parent and affiliates" on the Unaudited Interim Statements of Financial Position.

26

Table of Contents                                         
Prudential Annuities Life Assurance Corporation
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
 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)
Offsetting of Financial Assets:
Derivatives(1)$16,967,913 $(16,963,144)$4,769 $$4,769 
Securities purchased under agreements to resell
Total Assets$16,967,913 $(16,963,144)$4,769 $$4,769 
Offsetting of Financial Liabilities:
Derivatives(1)$7,211,458 $(6,835,378)$376,080 $(38,706)$337,374 
Securities sold under agreements to repurchase
Total Liabilities$7,211,458 $(6,835,378)$376,080 $(38,706)$337,374 
 December 31, 2019
 Gross
Amounts of
Recognized
Financial
Instruments
Gross Amounts
Offset in the
Statements of
Financial
Position
Net
Amounts
Presented in
the Statements
of Financial
Position
Financial
Instruments/
Collateral(1)
Net
Amount
 (in thousands)
Offsetting of Financial Assets:
Derivatives(1)$7,324,051 $(7,324,049)$$$
Securities purchased under agreements to resell302,000 302,000 (302,000)
Total Assets$7,626,051 $(7,324,049)$302,002 $(302,000)$
Offsetting of Financial Liabilities:
Derivatives(1)$3,206,949 $(3,053,132)$153,817 $(820)$152,997 
Securities sold under agreements to repurchase
Total Liabilities$3,206,949 $(3,053,132)$153,817 $(820)$152,997 

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

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

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.
27

Table of Contents                                         
Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)

The following tables provide the financial statement classification and impact of derivatives used in qualifying and non-qualifying hedge relationships, excluding the offset of the hedged item in an effective hedge relationship.
Three Months Ended September 30, 2020
 Realized
Investment
Gains (Losses)
Net
Investment
Income
Other IncomeAOCI(1)
 (in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate$(194)$4,581 $(13,989)$(45,498)
Total cash flow hedges(194)4,581 (13,989)(45,498)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate(995,815)
Currency(837)
Currency/Interest Rate(17,813)(105)
Credit(344)
Equity(2,116,755)
Embedded Derivatives2,885,016 
Total Derivatives Not Qualifying as Hedge Accounting Instruments:(246,548)(105)
Total$(246,742)$4,581 $(14,094)$(45,498)

Nine Months Ended September 30, 2020
 Realized
Investment
Gains (Losses)
Net
Investment
Income
Other IncomeAOCI(1)
 (in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate$4,373 $13,509 $(6,694)$22,964 
Total cash flow hedges4,373 13,509 (6,694)22,964 
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate5,974,212 
Currency250 
Currency/Interest Rate12,270 (36)
Credit(5,872)
Equity(1,931,846)
Embedded Derivatives(8,450,728)
Total Derivatives Not Qualifying as Hedge Accounting Instruments:(4,401,714)(36)
Total$(4,397,341)$13,509 $(6,730)$22,964 
28

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 IncomeAOCI(1)
 (in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate$(130)$2,665 $7,771 $27,184 
Total cash flow hedges(130)2,665 7,771 27,184 
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate2,571,885 
Currency681 
Currency/Interest Rate17,781 76 
Credit198 
Equity(145,305)
Embedded Derivatives(2,982,189)
Total Derivatives Not Qualifying as Hedge Accounting Instruments:(536,949)76 
Total$(537,079)$2,665 $7,847 $27,184 
Nine Months Ended September 30, 2019
 Realized
Investment
Gains (Losses)
Net
Investment
Income
Other IncomeAOCI(1)
 (in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate$(850)$8,375 $8,168 $30,689 
Total cash flow hedges(850)8,375 8,168 30,689 
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate5,328,630 
Currency930 
Currency/Interest Rate26,397 97 
Credit1,775 
Equity(2,378,529)
Embedded Derivatives(5,747,312)
Total Derivatives Not Qualifying as Hedge Accounting Instruments:(2,768,109)97 
Total$(2,768,959)$8,375 $8,265 $30,689 

(1)Net change in AOCI.

29

Table of Contents                                         
Prudential Annuities Life Assurance Corporation
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$(287)
Amount recorded in AOCI
Currency/Interest Rate34,152 
Total amount recorded in AOCI34,152 
Amount reclassified from AOCI to income
Currency/Interest Rate(11,188)
Total amount reclassified from AOCI to income(11,188)
Balance, September 30, 2020$22,677 

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 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.

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 million and $0 million as of September 30, 2020 and December 31, 2019, respectively. These credit derivatives are reported at fair value as an asset of $7 million and $0 million as of September 30, 2020 and December 31, 2019, respectively. As of September 30, 2020, the notional amount of these credit derivatives had the following NAIC rating: $248 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 million and $0 million reported as of September 30, 2020 and December 31, 2019, respectively with a fair value of $0 million for both periods.

Credit Risk

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

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

30

Table of Contents                                         
Prudential Annuities Life Assurance Corporation
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.

31

Table of Contents                                         
Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
Assets and Liabilities by Hierarchy Level – The tables below present the balances of assets and liabilities reported at fair value on a recurring basis, as of the dates indicated.
 As of September 30, 2020
 Level 1Level 2Level 3Netting(1)Total
 (in thousands)
Fixed maturities, available-for-sale:
U.S Treasury securities and obligations of U.S. government authorities and agencies$$9,106,048 $13,216 $$9,119,264 
Obligations of U.S. states and their political subdivisions276,205 276,205 
Foreign government bonds182,881 182,881 
U.S. corporate public securities2,954,347 8,018 2,962,365 
U.S. corporate private securities1,546,023 68,535 1,614,558 
Foreign corporate public securities346,837 185 347,022 
Foreign corporate private securities1,238,125 60,653 1,298,778 
Asset-backed securities(2)789,844 19,607 809,451 
Commercial mortgage-backed securities706,637 302 706,939 
Residential mortgage-backed securities81,453 81,453 
Subtotal17,228,400 170,516 17,398,916 
Fixed maturities, trading826,228 4,666 830,894 
Equity securities4,794 38,881 6,180 49,855 
Short-term investments539,918 852,067 1,391,985 
Cash equivalents1,489,884 3,034,241 4,524,125 
Other invested assets(3)11,858 16,956,055 (16,963,144)4,769 
Other assets40,765 40,765 
Reinsurance recoverables57,746 488,335 546,081 
Receivables from parent and affiliates56,906 56,906 
Subtotal excluding separate account assets2,046,454 39,050,524 710,462 (16,963,144)24,844,296 
Separate account assets(4)30,093,780 30,093,780 
Total assets$2,046,454 $69,144,304 $710,462 $(16,963,144)$54,938,076 
Future policy benefits(5)$$$21,325,619 $$21,325,619 
Policyholders' account balances303,060 303,060 
Payables to parent and affiliates7,170,819 (6,828,288)342,531 
Other liabilities40,639 17,888 (7,090)51,437 
Total liabilities$40,639 $7,188,707 $21,628,679 $(6,835,378)$22,022,647 
32

Table of Contents                                         
Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
 As of December 31, 2019
 Level 1Level 2Level 3Netting(1)Total
 (in thousands)
Fixed maturities, available-for-sale:
U.S Treasury securities and obligations of U.S. government authorities and agencies$$7,109,277 $10,547 $$7,119,824 
Obligations of U.S. states and their political subdivisions259,682 259,682 
Foreign government bonds222,884 222,884 
U.S. corporate public securities1,732,632 8,044 1,740,676 
U.S. corporate private securities1,155,464 51,875 1,207,339 
Foreign corporate public securities337,800 187 337,987 
Foreign corporate private securities1,169,324 44,161 1,213,485 
Asset-backed securities(2)425,613 18,825 444,438 
Commercial mortgage-backed securities578,289 578,289 
Residential mortgage-backed securities77,761 77,761 
Subtotal13,068,726 133,639 13,202,365 
Fixed maturities, trading378,734 4,464 383,198 
Equity securities5,314 46,942 5,247 57,503 
Short-term investments260,354 260,354 
Cash equivalents150,631 1,654,974 1,805,605 
Other invested assets(3)639 7,323,412 (7,324,049)
Other assets8,059 8,059 
Reinsurance recoverables47,006 302,814 349,820 
Receivables from parent and affiliates2,573 2,573 
Subtotal excluding separate account assets156,584 22,782,721 454,223 (7,324,049)16,069,479 
Separate account assets(4)32,665,431 32,665,431 
Total assets$156,584 $55,448,152 $454,223 $(7,324,049)$48,734,910 
Future policy benefits(5)$$$11,822,998 $$11,822,998 
Policyholders' account balances196,892 196,892 
Payables to parent and affiliates3,198,440 (3,052,493)145,947 
Other liabilities8,509 260 (639)8,130 
Total liabilities$8,509 $3,198,700 $12,019,890 $(3,053,132)$12,173,967 
 

(1)“Netting” amounts represent cash collateral of $10,128 million and $4,271 million as of September 30, 2020 and December 31, 2019, respectively.
(2)Includes credit-tranched securities collateralized by syndicated bank loans, sub-prime mortgages, auto loans, credit cards, education loans and other asset types.
(3)Other invested assets excluded from the fair value hierarchy include certain hedge funds, private equity funds and other funds for which fair value is measured at net asset value ("NAV") per share (or its equivalent) as a practical expedient. As of both September 30, 2020 and December 31, 2019, the fair values of such investments were $10.5 million.
(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, the net embedded derivative liability position of $21,326 million includes $289 million of embedded derivatives in an asset position and $21,615 million of embedded derivatives in a liability position. As of December 31, 2019, the net embedded derivative liability position of $11,823 million includes $583 million of embedded derivatives in an asset position and $12,406 million of embedded derivatives in a liability position.

33

Table of Contents                                         
Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
Quantitative Information Regarding Internally Priced Level 3 Assets and Liabilities – The tables below present quantitative information on significant internally-priced Level 3 assets and liabilities.
 As of September 30, 2020
 Fair
Value    
Valuation
Techniques    
Unobservable    
Inputs
Minimum    Maximum    Weighted    
Average
Impact of
Increase in
Input on Fair    
Value(1)
 (in thousands)
Assets:
Corporate securities(2)$54,937 Discounted cash flowDiscount rate1.30 %25 %6.24 %Decrease
Reinsurance recoverables$488,335 Fair values are determined using the same unobservable inputs as future policy benefits. 
Liabilities:
Future policy benefits(4)$21,325,619 Discounted cash flowLapse rate(6)%20 %Decrease
Spread over LIBOR(7)0.09 %1.59 %Decrease
Utilization rate(8)39 %96 %Increase
Withdrawal rateSee table footnote (9) below.
Mortality rate(10)%15 %Decrease
   Equity volatility curve18 %26 % Increase
Policyholders' account balances(5)$303,060 Discounted cash flowLapse rate(6)%42 %Decrease
Spread over LIBOR(7)0.09 %1.59 %Decrease
Equity volatility curve%38 %Increase
 
 As of December 31, 2019
 Fair
Value    
Valuation
Techniques    
Unobservable    
Inputs
Minimum    Maximum    Weighted    
Average
Impact of
Increase in
Input on Fair    
Value(1)
 (in thousands)
Assets:
Corporate securities(2)$17,149 Discounted cash flowDiscount rate4.79 %20 %8.66 %Decrease
Market ComparablesEBITDA multiples(3)6.7 X6.7 X6.7 XIncrease
Reinsurance recoverables$302,814 Fair values are determined using the same unobservable inputs as future policy benefits. 
Liabilities:
Future policy benefits(4)$11,822,998 Discounted cash flowLapse rate(6)%18 %Decrease
Spread over LIBOR(7)0.10 %1.23 %Decrease
Utilization rate(8)43 %97 %Increase
Withdrawal rateSee table footnote (9) below.
Mortality rate(10)%15 %Decrease
   Equity volatility curve13 %23 %Increase
Policyholders' account balances(5)$196,892 Discounted cash flowLapse rate(6)%42 %Decrease
Spread over LIBOR(7)0.10 %1.23 %Decrease
Equity volatility curve%25 %Increase

(1)Conversely, the impact of a decrease in input would have the opposite impact on fair value as that presented in the table.
(2)Includes assets classified as fixed maturities, available-for-sale and fixed maturities trading.
(3)Represents multiples of earnings before interest, taxes, depreciation and amortization ("EBITDA"), and are amounts used when the Company has determined that market participants would use such multiples when valuing the investments.
(4)Future policy benefits primarily represent general account liabilities for the living benefit features of the Company’s variable annuity contracts which are accounted for as embedded derivatives. Since the valuation methodology for these liabilities uses a range of inputs that vary at the contract level over the cash flow projection period, presenting a range, rather than a weighted average, is a more meaningful representation of the unobservable inputs used in the valuation.
34

Table of Contents                                         
Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
(5)Policyholders’ account balances primarily represent general account liabilities for the index-linked interest credited on certain of the Company’s annuity products that are accounted for as embedded derivatives. Since the valuation methodology for these liabilities uses a range of inputs that vary at the contract level over the cash flow projection period, presenting a range, rather than a weighted average, is a more meaningful representation of the unobservable inputs used in the valuation.
(6)Lapse rates for contracts with living benefit guarantees are adjusted at the contract level based on the in-the-moneyness of the living benefit and reflect other factors, such as the applicability of any surrender charges. Lapse rates are reduced when contracts are more in-the-money. Lapse rates for contracts with index-linked crediting guarantees may be adjusted at the contract level based on the applicability of any surrender charges, product type, and market related factors such as interest rates. Lapse rates are also generally assumed to be lower for the period where surrender charges apply. For any given contract, lapse rates vary throughout the period over which cash flows are projected for the purposes of valuing these embedded derivatives.
(7)The spread over the London Inter-Bank Offered Rate ("LIBOR") swap curve represents the premium added to the proxy for the risk-free rate (LIBOR) to reflect the Company's estimates of rates that a market participant would use to value the living benefits in both the accumulation and payout phases and index-linked interest crediting guarantees. This spread includes an estimate of NPR, which is the risk that the obligation will not be fulfilled by the Company. NPR is primarily estimated by utilizing the credit spreads associated with issuing funding agreements, adjusted for any illiquidity risk premium. In order to reflect the financial strength ratings of the Company, credit spreads associated with funding agreements, as opposed to credit spread associated with debt, are utilized in developing this estimate because funding agreements, living benefit guarantees, and index-linked interest crediting guarantees are insurance liabilities and are therefore senior to debt.
(8)The utilization rate assumption estimates the percentage of contracts that will utilize the benefit during the contract duration and begin lifetime withdrawals at various time intervals from contract inception. The remaining contractholders are assumed to either begin lifetime withdrawals immediately or never utilize the benefit. Utilization assumptions may vary by product type, tax status and age. The impact of changes in these assumptions is highly dependent on the product type, the age of the contractholder at the time of the sale, and the timing of the first lifetime income withdrawal. Range reflects the utilization rate for the vast majority of business with living benefits.
(9)The withdrawal rate assumption estimates the magnitude of annual contractholder withdrawals relative to the maximum allowable amount under the contract. These assumptions vary based on the age of the contractholder, the tax status of the contract and the duration since the contractholder began lifetime withdrawals. As of September 30, 2020 and December 31, 2019, 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)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.

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 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.

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.
35

Table of Contents                                         
Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
Three Months Ended September 30, 2020
Fair Value, beginning of periodTotal realized and unrealized gains (losses)(1)PurchasesSalesIssuancesSettlementsOther(2)Transfers into Level 3Transfers out of Level 3Fair Value, end of periodUnrealized gains (losses) for assets still held(3)
(in thousands)
Fixed maturities, available-for-sale:
U.S. Government$12,216 $$1,000 $$$$$$$13,216 $
Corporate Securities(4)123,389 1,827 13,775 7,775 (8,624)(7,775)7,819 (795)137,391 1,689 
Structured Securities(5)18,128 169 1,899 (599)312 19,909 157 
Other assets:
Fixed maturities, trading4,301 365 4,666 371 
Equity securities5,242 938 6,180 939 
Other assets27,136 2,844 10,789 (4)40,765 2,840 
Reinsurance recoverables539,123 (55,075)4,287 488,335 (51,944)
Liabilities:
Future policy benefits(23,998,671)2,964,808 (291,756)(21,325,619)2,776,482 
Policyholders' account balances(6)(226,072)(34,565)(42,423)(303,060)(22,855)


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 incomeIncluded in other comprehensive income (loss)Net investment incomeRealized investment gains (losses), netAsset administration fees and other incomeIncluded in other comprehensive income (loss)(7)
(in thousands)
Fixed maturities, available-for-sale$254 $$1,683 $59 $414 $$1,432 
Other assets:
Fixed maturities, trading371 (6)371 
Equity securities938 939 
Other assets2,844 2,840 
Reinsurance recoverables(55,075)(51,944)
Liabilities:
Future policy benefits2,964,808 2,776,482 
Policyholders' account balances(34,565)(22,855)

36

Table of Contents                                         
Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
Nine Months Ended September 30, 2020
Fair Value, beginning of periodTotal realized and unrealized gains (losses)(1)PurchasesSalesIssuancesSettlementsOther(2)Transfers into Level 3Transfers out of Level 3Fair Value, end of periodUnrealized gains (losses) for assets still held(3)
(in thousands)
Fixed maturities, available-for-sale:
U.S. Government$10,547 $$2,669 $$$$$$$13,216 $
Corporate Securities(4)104,267 (4,337)28,948 (1,190)(14,434)(7,775)32,951 (1,039)137,391 (6,353)
Structured Securities(5)18,825 38 8,044 (1,674)312 (5,636)19,909 26 
Other assets:
Fixed maturities, trading4,464 202 4,666 218 
Equity securities5,247 933 6,180 934 
Other assets8,059 3,789 28,923 (6)40,765 3,784 
Reinsurance recoverables302,814 172,671 12,850 488,335 178,844 
Liabilities:
Future policy benefits(11,822,998)(8,644,255)(858,366)(21,325,619)(8,923,218)
Policyholders' account balances(6)(196,892)(13,231)(92,937)(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 incomeIncluded in other comprehensive income (loss)Net investment incomeRealized investment gains (losses), netAsset administration fees and other incomeIncluded in other comprehensive income (loss)(7)
(in thousands)
Fixed maturities, available-for-sale$87 $$(4,442)$56 $(567)$$(5,760)
Other assets:
Fixed maturities, trading218 (16)218 
Equity securities933 934 
Other assets3,789 3,784 
Reinsurance recoverables172,671 178,844 
Liabilities:
Future policy benefits(8,644,255)(8,923,218)
Policyholders' account balances(13,231)9,727 



37

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 periodTotal realized and unrealized gains (losses)(1)PurchasesSalesIssuancesSettlementsOther (2)Transfers into Level 3Transfers out of Level 3Fair Value, end of periodUnrealized gains (losses) for assets still held(3)
(in thousands)
Fixed maturities, available-for-sale:
U.S. Government$9,380 $$503 $$$$$$$9,883 $
Corporate Securities(4)71,071 (361)10,340 (8,016)73,034 (769)
Structured Securities(5)19,725 296 (338)19,683 
Other assets:
Fixed maturities, trading4,044 (84)3,960 (79)
Equity securities5,363 (254)5,109 (254)
Other assets
Reinsurance recoverables339,744 67,909 4,446 412,099 70,279 
Liabilities:
Future policy benefits(11,738,480)(3,069,876)(277,769)(15,086,125)(3,187,867)
Policyholders' account balances(6)(121,102)274 (33,107)(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 incomeIncluded in other comprehensive income (loss)Net investment incomeRealized investment gains (losses), netAsset administration fees and other income
(in thousands)
Fixed maturities, available-for-sale$(630)$$515 $50 $(769)$
Other assets:
Fixed maturities, trading(79)(5)(79)
Equity securities(254)(254)
Other assets
Reinsurance recoverables67,909 70,279 
Liabilities:
Future policy benefits(3,069,876)(3,187,867)
Policyholders' account balances274 2,610 
38

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 periodTotal realized and unrealized gains (losses)(1)PurchasesSalesIssuancesSettlementsOther (2)Transfers into Level 3Transfers out of Level 3Fair Value, end of periodUnrealized gains (losses) for assets still held(3)
(in thousands)
Fixed maturities, available-for-sale:
U.S. Government$8,132 $$1,751 $$$$$$$9,883 $
Corporate Securities(4)85,452 262 17,653 (30,105)1,790 (2,018)73,034 (2,765)
Structured Securities(5)9,336 825 44,273 (4,724)551 (30,578)19,683 (2)
Other assets:
Fixed maturities, trading(1,061)5,021 3,960 (1,051)
Equity securities5,705 333 (929)5,109 344 
Other assets
Reinsurance recoverables239,911 136,770 13,523 21,895 412,099 142,329 
Liabilities:
Future policy benefits(8,332,474)(5,954,076)(799,575)(15,086,125)(6,177,050)
Policyholders' account balances(6)(42,350)(12,804)(98,781)(153,935)(8,672)


Nine 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 incomeIncluded in other comprehensive income (loss)Net investment incomeRealized investment gains (losses), netAsset administration fees and other income
(in thousands)
Fixed maturities, available-for-sale$(2,530)$$3,429 $188 $(2,767)$
Other assets:
Fixed maturities, trading(1,051)(10)(1,051)
Equity securities333 344 
Other assets
Reinsurance recoverables136,770 142,329 
Liabilities:
Future policy benefits(5,954,076)(6,177,050)
Policyholders' account balances(12,804)(8,672)

(1)Realized investment gains (losses) on future policy benefits and reinsurance recoverables primarily represent the change in the fair value of the Company's living benefit guarantees on certain of its variable annuity contracts.
(2)Other includes reclassifications of certain assets and liabilities between reporting categories.
(3)Unrealized gains or losses related to assets still held at the end of the period do not include amortization or accretion of premiums and discounts.
(4)Includes U.S. corporate public, U.S. corporate private, foreign corporate public and foreign corporate private securities.
(5)Includes asset-backed, commercial mortgage-backed and residential mortgage-backed securities.
(6)Issuances and settlements for Policyholders' account balances are presented net in the rollforward.
(7)Effective January 1, 2020, the changes in unrealized gains and losses for the 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. Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.
39

Table of Contents                                         
Prudential Annuities Life Assurance Corporation
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
Fair ValueCarrying
Amount(1)
Level 1Level 2Level 3TotalTotal
 (in thousands)
Assets:
Commercial mortgage and other loans$$$1,745,034 $1,745,034 $1,677,951 
Policy loans11,916 11,916 11,916 
Short-term investments423,500 423,500 423,500 
Cash and cash equivalents977,811 977,811 977,811 
Accrued investment income117,166 117,166 117,166 
Reinsurance recoverables52,422 52,422 51,665 
Receivables from parent and affiliates30,863 30,863 30,863 
Other assets2,143 340,274 342,417 342,417 
Total assets$1,401,311 $150,172 $2,149,646 $3,701,129 $3,633,289 
Liabilities:
Policyholders’ account balances - investment contracts$$$2,226,866 $2,226,866 $2,208,818 
Cash collateral for loaned securities
Short-term debt379,137 379,137 373,086 
Long-term debt335,225 335,225 299,747 
Reinsurance payables45,400 45,400 45,400 
Payables to parent and affiliates42,184 42,184 42,184 
Other liabilities437,817 437,817 437,817 
Separate account liabilities - investment contracts33 33 33 
Total liabilities$$1,194,396 $2,272,266 $3,466,662 $3,407,085 
40

Table of Contents                                         
Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
 December 31, 2019
Fair ValueCarrying
Amount(1)
Level 1Level 2Level 3TotalTotal
 (in thousands)
Assets:
Commercial mortgage and other loans$$$1,512,283 $1,512,283 $1,471,522 
Policy loans12,366 12,366 12,366 
Short-term investments75,004 75,004 75,004 
Cash and cash equivalents687,558 302,000 989,558 989,558 
Accrued investment income102,724 102,724 102,724 
Reinsurance recoverables56,171 56,171 55,796 
Receivables from parent and affiliates10,192 50,587 60,779 60,192 
Other assets1,893 63,106 64,999 64,999 
Total assets$762,562 $416,809 $1,694,513 $2,873,884 $2,832,161 
Liabilities:
Policyholders’ account balances - investment contracts$$$1,445,486 $1,445,486 $1,438,742 
Cash collateral for loaned securities
Short-term debt245,617 245,617 242,094 
Long-term debt446,105 446,105 419,418 
Reinsurance payables50,035 50,035 50,035 
Payables to parent and affiliates39,209 39,209 39,209 
Other liabilities205,988 205,988 205,988 
Separate account liabilities - investment contracts54 54 54 
Total liabilities$$936,973 $1,495,521 $2,432,494 $2,395,540 

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

41

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.

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.

Reinsurance amounts included in the Company's Unaudited Interim Statements of Financial Position as of September 30, 2020 and December 31, 2019 were as follows:
September 30, 2020December 31, 2019
 (in thousands)
Reinsurance recoverables(1)$790,715 $621,510 
Deferred policy acquisition costs3,382,501 3,725,719 
Deferred sales inducements368,470 437,594 
Value of business acquired(2,120)(2,275)
Other assets(2)43,804 65,819 
Policyholders’ account balances3,301,271 3,253,474 
Future policy benefits15,676,899 8,328,777 
Reinsurance payables(3)188,463 235,318 
Other liabilities(4)582,105 337,909 

(1)Includes $0.5 million and $0.2 million of unaffiliated activity as of September 30, 2020 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 recoverables by counterparty are broken out below:
September 30, 2020December 31, 2019
 (in thousands)
Prudential Insurance$579,379 $387,355 
Pruco Life210,835 233,933 
Unaffiliated501 222 
Total reinsurance recoverables$790,715 $621,510 
42

Table of Contents                                         
Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
Reinsurance amounts, included in the Company’s Unaudited Interim Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, were as follows:
 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (in thousands)
Premiums:
Direct$6,161 $6,522 $20,376 $22,957 
Assumed8,630 6,355 27,060 25,848 
Ceded(855)(371)(1,908)(563)
Net premiums13,936 12,506 45,528 48,242 
Policy charges and fee income:
Direct102,669 119,509 304,593 363,540 
Assumed395,381 416,389 1,161,236 1,222,535 
Ceded(1)(8,610)(8,746)(23,838)(26,201)
Net policy charges and fee income489,440 527,152 1,441,991 1,559,874 
Asset administration fees and other income:
Direct26,244 44,616 132,081 124,587 
Assumed78,547 78,408 227,511 227,182 
Ceded(2,033)(2,097)(5,852)(6,249)
Net asset administration fees and other income102,758 120,927 353,740 345,520 
Realized investment gains (losses), net:
Direct(2,520,872)1,644,998 1,878,766 1,404,528 
Assumed2,332,646 (2,243,942)(6,422,045)(4,290,175)
Ceded(57,748)61,677 163,850 111,946 
Realized investment gains (losses), net(245,974)(537,267)(4,379,429)(2,773,701)
Policyholders' benefits (including change in reserves):
Direct14,018 22,680 73,651 47,399 
Assumed30,844 48,154 181,079 82,130 
Ceded(2)(1,038)(1,001)(6,145)(3,856)
Net policyholders' benefits (including change in reserves)43,824 69,833 248,585 125,673 
Interest credited to policyholders’ account balances:
Direct40,428 27,944 73,983 49,289 
Assumed43,457 30,959 89,311 55,053 
Ceded(2,601)(1,956)(2,294)(3,613)
Net interest credited to policyholders’ account balances81,284 56,947 161,000 100,729 
Reinsurance expense allowances and general and administrative expenses, net of capitalization and amortization307,043 298,565 890,849 738,045 

(1)Includes $(1.7) million and $(1.0) million of unaffiliated activity for the three months ended September 30, 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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Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
7.    INCOME TAXES

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

The Company's income tax provision amounted to an income tax benefit of $(965) million, or 25.91% of income (loss) from operations before income taxes in the first nine months of 2020, compared to $(377) million, or 22.53%, in the first nine months of 2019. The Company’s current and prior effective tax rates differed from the U.S. statutory tax rate of 21% primarily due to non-taxable investment income, 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.

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 Comprehensive Income. The balance of and changes in each component of AOCI as of and for the nine months ended September 30, 2020 and 2019 are as follows:
 Accumulated Other Comprehensive Income (Loss)
 Foreign Currency Translation AdjustmentNet Unrealized
Investment Gains
(Losses)(1)
Total Accumulated Other Comprehensive Income (Loss)
 (in thousands)
Balance, December 31, 2019$(934)$429,546 $428,612 
Change in OCI before reclassifications(154)1,586,843 1,586,689 
Amounts reclassified from AOCI(26,350)(26,350)
Income tax benefit (expense)32 (327,704)(327,672)
Balance, September 30, 2020$(1,056)$1,662,335 $1,661,279 
 
 Accumulated Other Comprehensive Income (Loss)
 Foreign Currency Translation AdjustmentNet Unrealized
Investment Gains
(Losses)(1)
Total Accumulated Other Comprehensive Income (Loss)
 (in thousands)
Balance, December 31, 2018$(1,078)$(323,295)$(324,373)
Change in OCI before reclassifications(244)1,316,155 1,315,911 
Amounts reclassified from AOCI20,591 20,591 
Income tax benefit (expense)51 (280,717)(280,666)
Balance, September 30, 2019$(1,271)$732,734 $731,463 

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

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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,
2020201920202019
 (in thousands)
Amounts reclassified from AOCI(1)(2):
Net unrealized investment gains (losses):
Cash flow hedges—Currency/ Interest rate(3)$(9,602)$(10,305)$11,188 $(15,693)
Net unrealized investment gains (losses) on available-for-sale securities73 (1,199)15,162 (4,898)
Total net unrealized investment gains (losses)(4)(9,529)(11,504)26,350 (20,591)
Total reclassifications for the period$(9,529)$(11,504)$26,350 $(20,591)

(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 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)
 (in thousands)
Balance, December 31, 2019(1)$$$$$
Net investment gains (losses) on investments arising during the period46 (10)36 
Increase (decrease) due to non-credit related losses recognized in AOCI during the period(60)13 (47)
Impact of net unrealized investment (gains) losses on DAC and other costs693 (146)547 
Impact of net unrealized investment (gains) losses on future policy benefits and other liabilities121 (25)96 
Balance, September 30, 2020$(14)$693 $121 $(168)$632 

(1)Allowance for credit losses on available-for-sale fixed maturity securities effective January 1, 2020.
(2)"Other costs" primarily includes reinsurance recoverables, DSI and VOBA.
(3)"Other liabilities" primarily includes reinsurance payables and deferred reinsurance gains.

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Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
All Other Net Unrealized Investment Gains (Losses) in AOCI
Net Unrealized
Gains (Losses)
on Investments(1)
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 period1,799,495 (377,895)1,421,600 
Reclassification adjustment for (gains) losses included in net income(26,350)5,534 (20,816)
Reclassification due to allowance for credit losses recorded during the period60 (13)47 
Impact of net unrealized investment (gains) losses on DAC and other costs(197,485)41,472 (156,013)
Impact of net unrealized investment (gains) losses on future policy benefits and other liabilities(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 and 2019, and $0.1 million for both the nine months ended September 30, 2020 and 2019. The expense charged to the Company for the deferred compensation program was $0.2 million and $0.0 million for the three months ended September 30, 2020 and 2019, respectively, and $0.5 million for both the nine months ended September 30, 2020 and 2019.

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 million and $0.5 million for the three months ended September 30, 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 million and $0.5 million for the three months ended September 30, 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 million and $0.2 million for the three months ended September 30, 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 million and $24 million for the three months ended September 30, 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 million and $4 million for the three months ended September 30, 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 million for the three months ended September 30, 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).

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 million and $391 million as of September 30, 2020 and December 31, 2019, respectively. "Net investment income" related to these ventures includes a gain of $8 million and $3 million for the three months ended September 30, 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

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

Affiliated Notes Receivable

Affiliated notes receivable included in "Receivables from parent and affiliates" at September 30, 2020 and December 31, 2019 were as follows:
Maturity DatesInterest RatesSeptember 30, 2020December 31, 2019
(in thousands)
U.S. dollar fixed rate notes2026 - 20272.62%-14.85 %$56,906 $52,573 
Total notes receivable - affiliated(1)$56,906 $52,573 

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

The affiliated notes receivable shown above are classified as available-for-sale securities 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 and December 31, 2019, respectively, and is included in “Other assets”. Revenues related to these assets were a gain of $0.3 million and $0.1 million for the three months ended September 30, 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 and other income”.

Affiliated Commercial Mortgage Loan

The affiliated commercial mortgage loan included in "Commercial mortgage and other loans" at September 30, 2020 was as follow:
Maturity DateInterest RateSeptember 30, 2020
(in thousands)
Affiliated Commercial Mortgage Loan20254.66%$74,005 

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

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

Accrued interest receivable related to the loan was $0.2 million at September 30, 2020 and is included in "Accrued investment income". Revenues were $0.9 million for the three months ended September 30, 2020 and $1.2 million for the nine months ended September 30, 2020 and is included in "Net investment income".



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Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
Affiliated Asset Transfers

The Company participates in affiliated asset trades with parent and sister companies. Book and market value differences for trades with a parent and sister are recognized within "Additional paid in capital" ("APIC") and "Realized investment gains (losses), net", respectively. The table below shows affiliated asset trades for the nine months ended September 30, 2020 and for the year ended December 31, 2019.
AffiliateDateTransaction  Security Type  Fair Value  Book Value  APIC, Net of Tax Increase/(Decrease)Realized
Investment
Gain (Loss)
(in thousands)
Prudential InsuranceJanuary 2019SaleFixed Maturities$20,504 $20,781 $$(277)
Prudential InsuranceFebruary 2019SaleCommercial Mortgages$97,953 $98,506 $$(554)
Prudential InsuranceMarch 2019PurchaseFixed Maturities$141,476 $141,476 $$7,776 
Prudential InsuranceApril 2019PurchaseEquity Securities$4,300 $4,300 $$
Prudential Retirement Insurance and Annuity CompanyApril 2019PurchaseEquity Securities$1,258 $1,258 $$
Pruco Life Insurance CompanyApril 2019PurchaseEquity Securities$14,525 $14,525 $$
Prudential InsuranceJune 2019Transfer outFixed Maturities$23,066 $23,002 $$64 
Prudential InsuranceJune 2019Transfer InFixed Maturities$19,919 $19,919 $$
Prudential InsuranceAugust 2019SaleFixed Maturities$66,346 $64,735 $$1,611 
Prudential InsuranceAugust 2019SaleCommercial Mortgages$106,307 $104,733 $$1,574 
Prudential InsuranceNovember 2019SaleOther Invested Assets$2,289 $2,362 $$(73)
Prudential InsuranceNovember 2019SaleFixed Maturities$6,517 $8,550 $$(2,033)
Prudential InsuranceDecember 2019PurchaseFixed Maturities$5,271 $5,271 $$
Prudential InsuranceDecember 2019PurchaseFixed Maturities$85,261 $85,261 $$
Prudential InsuranceDecember 2019SaleFixed Maturities$21,425 $20,628 $$797 
Prudential International Insurance Service CompanyMarch 2020PurchaseFixed Maturities$107,014 $107,014 $$
Prudential InsuranceMarch 2020PurchaseFixed Maturities$258,885 $258,885 $$
Prudential InsuranceApril 2020PurchaseFixed Maturities$91,131 $91,131 $$
Prudential InsuranceJune 2020SaleFixed Maturities$65,646 $57,699 $$7,947 
Gibraltar Life Insurance CompanyJune 2020PurchaseFixed Maturities$222,091 $222,091 $$


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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 and December 31, 2019:
AffiliateDate
Issued
Amount of Notes - September 30, 2020Amount of Notes - December 31, 2019Interest Rate  Date of Maturity  
  (in thousands)  
Prudential Insurance4/20/2016$37,468 $37,468 3.64 %12/6/2020
Prudential Insurance4/20/2016103,039 103,039 3.64 %12/15/2020
Prudential Insurance4/20/201693,671 93,671 3.64 %12/15/2020
Prudential Insurance4/20/201693,671 93,671 3.47 %6/20/2021
Prudential Insurance4/20/201693,671 93,671 4.39 %12/15/2023
Prudential Insurance4/20/201628,102 28,102 4.39 %12/15/2023
Prudential Insurance4/20/201693,671 93,671 3.95 %6/20/2024
Prudential Insurance4/20/201637,468 37,468 3.95 %6/20/2024
Prudential Insurance4/20/201646,835 46,835 3.95 %6/20/2024
Prudential Insurance6/28/201626,000 26,000 2.59 %6/28/2021
Prudential Funding LLC12/16/20191,298 2.02 %1/16/2020
Prudential Funding LLC12/17/20191,478 2.02 %1/15/2020
Prudential Funding LLC12/17/2019502 2.02 %1/16/2020
Prudential Funding LLC12/18/20194,638 2.02 %1/16/2020
Prudential Funding LLC9/25/2020387 0.26 %10/26/2020
Prudential Funding LLC9/25/20202,962 0.26 %10/26/2020
Prudential Funding LLC9/28/20204,014 0.26 %10/23/2020
Prudential Funding LLC9/28/2020325 0.26 %10/23/2020
Prudential Funding LLC9/29/2020194 0.26 %10/30/2020
Prudential Funding LLC9/30/202011,355 0.26 %10/30/2020
Total Loans Payable to Affiliates$672,833 $661,512 

The total interest expense to the Company related to loans and other payables to affiliates was $9 million and $38 million for the three months ended September 30, 2020 and 2019, respectively, and $45 million and $78 million for the nine months ended September 30, 2020 and 2019, respectively.

Contributed Capital and Dividends

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

In March, June and September 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 million return of capital, respectively, to PAI.

Reinsurance with Affiliates

As discussed in Note 6, the Company participates in reinsurance transactions with certain affiliates.
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Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
10.    COMMITMENTS AND CONTINGENT LIABILITIES

Commitments

The Company has made commitments to fund commercial mortgage loans. As of September 30, 2020 and December 31, 2019, the outstanding balances on these commitments were $3 million and $43 million, respectively. The above amount includes unfunded commitments that are not unconditionally cancellable. For related credit exposure, there was an allowance for credit losses of $0.0 million as of September 30, 2020, which is a change of $0.0 million for the three and nine months ended September 30, 2020. The Company also made commitments to purchase or fund investments, mostly private fixed maturities. As of September 30, 2020 and December 31, 2019, $279 million and $207 million, respectively, of these commitments were outstanding. The above amount includes unfunded commitments that are not unconditionally cancellable. There were 0 related charges for credit losses for both the three and nine months ended September 30, 2020.

Contingent Liabilities

On an ongoing basis, the Company and its regulators review its operations including, but not limited to, sales and other customer interface procedures and practices, and procedures for meeting obligations to its customers and other parties. These reviews may result in the modification or enhancement of processes or the imposition of other action plans, including concerning management oversight, sales and other customer interface procedures and practices, and the timing or computation of payments to customers and other parties. In certain cases, if appropriate, the Company may offer customers or other parties remediation and may incur charges, including the cost of such remediation, administrative costs and regulatory fines.

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

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

Litigation and Regulatory Matters

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

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

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Notes to Unaudited Interim Financial Statements—(Continued)
For a discussion of the Company's litigation and regulatory matters, see 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 in previously reported matters disclosed as of December 31, 2019.

Summary

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

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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, compared with December 31, 2019, and its results of operations for the three and nine months ended September 30, 2020 and 2019. You should read the following analysis of our financial condition and results of operations in conjunction with the MD&A, the “Risk Factors” section, and the audited Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as well as the statements under “Forward-Looking Statements”, the "Risk Factors" section and the Unaudited Interim Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Overview

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

The Company has sold a wide array of annuities, including deferred and immediate variable annuities with (1) fixed interest rate allocation options, subject to a market value adjustment, that are registered with the United States Securities and Exchange Commission (the “SEC”), and (2) fixed-rate allocation options 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 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 Prudential Insurance Company of America (“Prudential Insurance”), in each case under a coinsurance and modified coinsurance agreement. This reinsurance agreement covers new and in force business and excludes business reinsured externally. Additionally, the living benefit hedging program related to the living benefit guarantees as well as the product risks for retained and reinsured businesses are being managed within the Company and Prudential Insurance, as applicable.

COVID-19

Beginning in the first quarter of 2020, the outbreak of the 2019 novel coronavirus (“COVID-19”) created extreme stress and disruption in the global economy and financial markets and elevated mortality and morbidity experience for the global population. These events impacted our results of operations in the current period and are expected to drive future impacts to our results of operations. The Company has taken several measures to manage the impacts of this crisis. The actual and expected impacts of these events and other items are included in the following update:
Outlook. In our Individual Annuities business, we expect account values and fee income will 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 we reported a net loss of $182 million and $2,759 million, respectively, as unfavorable financial market conditions had a substantial negative effect on reported results. See “Results of Operations” for a discussion of results for the third 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.

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

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

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

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

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;
• 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.

Revenues and Expenses

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

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 Assumptions

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

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

The weighted average rate of return assumptions used in developing estimated market returns consider many factors, including asset durations, asset allocations and other factors. With regard to equity market assumptions, the near-term future rate of return assumption used in evaluating DAC, DSI, VOBA and liabilities for future policy benefits for certain of our products, primarily our domestic variable annuity products, is generally updated each quarter and is derived using a reversion to the mean approach, a common industry practice. Under this approach, we consider historical equity returns and adjust projected equity returns over an initial future period of five years (the “near-term”) so that equity returns converge to the long-term expected rate of return. If the near-term projected future rate of return is greater than our near-term maximum future rate of return of 15.0%, we use our maximum future rate of return. As of September 30, 2020, we assume an 8.0% long-term equity expected rate of return and a 3.5% 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, we reduced our long-term expectation of the 10-year U.S. Treasury rate by 50 basis points and 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.
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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 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. ASU 2018-12 will impact, at least to some extent, the accounting and disclosure requirements for all long-duration insurance and investment contracts issued by the Company. In addition to the impacts to the balance sheet upon adoption, the Company also expects an impact to how earnings emerge thereafter. See Note 2 to 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 billion from $59 billion at December 31, 2019 to $66 billion at September 30, 2020. Significant components were:
Total investments and Cash and cash equivalents increased $9 billion primarily driven by derivative collateral postings, cash flows from insurance operations and unrealized gains on investments due to declining interest rates, partially offset by 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.
Total liabilities increased $9 billion from $53 billion at December 31, 2019 to $62 billion at September 30, 2020. Significant components were:
Future policy benefits increased $10 billion primarily driven by an increase in reserves related to our variable annuity living benefit guarantees due to declining interest rates and the widening of credit spreads, partially offset by a favorable non-performance risk ("NPR") adjustment; and
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.
Total equity decreased $2.1 billion from $5.5 billion at December 31, 2019 to $3.4 billion at September 30, 2020, primarily driven by an after-tax net loss of $2.8 billion and return of capital of $0.6 billion, partially offset by unrealized gains on investments of $1.8 billion, as discussed above.

Results of Operations
Income (loss) from Operations before Income Taxes
Three Months Comparison

Losses from operations before income taxes decreased $238 million from a loss of $286 million for the three months ended September 30, 2019 to a loss of $48 million for the three months ended September 30, 2020 primarily driven by:
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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 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:
Three Months EndedNine Months Ended
September 30, 2020September 30, 2019September 30, 2020September 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 positions437 (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 refinements199 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)
(1)Positive amount represents income; negative amount represents a loss.
(2)Excluding impact of assumption updates and other refinements.
(3)Net hedging impact represents the difference between the change in fair value of the risk we seek to hedge using derivatives and the change in fair value of the derivatives utilized with respect to that risk.
(4)Represents risk margins and valuation methodology differences between the economic liability managed by the ALM Strategy and the U.S. GAAP liability.

For the three months ended September 30, 2020, the gain of $325 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 impact of tightening of credit spreads on the portions of our U.S. GAAP liability before NPR, that are excluded from our hedge target. Partially offsetting these benefits is an unfavorable NPR adjustment and hedge breakage driven by tightening of credit spreads. These net gains were partially offset by a charge 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 interest rates on the portions of our U.S. GAAP liability before NPR, that are excluded from our hedge target, partially offset by a 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 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 swaps as a result of rising rates in the current period compared to declining rates in prior period. Also contributing to this decrease is an unfavorable comparative impact on our capital hedge programs driven by incremental derivative positions added in the current quarter. Prior period quarter reflected an increase in these reserves primarily driven by declining interest, partially offset by a favorable NPR adjustment;
Partially offset by:
Lower 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 million from an expense of $559 million for the three months ended September 30, 2019 to an expense of $552 million for the three months ended September 30, 2020 driven by:
Lower Commission expense driven by less reinsurance commission and expense allowance incurred due to lower sales; 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 of our fixed annuity products relate to investment risks we bear for providing customers a minimum guaranteed interest rate or an index-linked interest rate required to be credited to the customer’s account value, including interest rate fluctuations and/or sustained periods of low interest rates, and credit risk related to the underlying investments. We manage these risk exposures primarily through our investment strategies and product design features, which include credit rate resetting subject to the minimum guaranteed interest rate, as well as surrender charges applied during the early years of the contract that help to provide protection for premature withdrawals. In addition, a portion of our fixed annuity products have a market value adjustment provision that provides protection of lapse in the case of rising interest rates. We also manage these risk exposures through external reinsurance for certain of our fixed annuity products.

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

i. Product Design Features:

A portion of the variable annuity contracts that we offer 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. 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. 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 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, 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 derivatives, including, but not limited to: equity and treasury futures; total return and interest rate swaps; and options including equity options, swaptions, and floors and caps. The intent of this strategy is to more efficiently manage the capital and liquidity associated with these products while continuing to mitigate fluctuations in net income due to movements in capital markets.

The valuation of the economic liability we seek to defray excludes certain items that are included within the U.S. GAAP liability, such as NPR (in order to maximize protection irrespective of the possibility of our own default), as well as risk margins (required by U.S. GAAP but different from our best estimate) and valuation methodology differences. The following table provides a reconciliation between the liability reported under U.S. GAAP and the economic liability we manage through our ALM strategy as of the periods indicated:
As of September 30, 2020As of December 31, 2019
(in millions)
U.S. GAAP liability (including NPR)$21,326 $11,823 
NPR adjustment5,459 3,245 
Subtotal26,785 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 September 30, 2020, the fair value of our fixed income instruments and derivative assets exceed our economic liability.

Capital Hedge 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.

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.

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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”) 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 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 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 

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

Financing activities

Prudential Funding, LLC

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

Hedging activities associated with living benefit guarantees

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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, there have been no material changes in our economic exposure to market risk from December 31, 2019, a description of which may be found in our Annual Report on Form 10-K, for the year ended December 31, 2019, 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, 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. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2020, our disclosure controls and procedures were effective. No change in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), occurred during the quarter ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

The COVID-19 pandemic has resulted in extreme stress and disruption in the global economy and financial markets, and has adversely impacted, and may continue to adversely impact, our results of operations, financial condition and prospects.
During the first 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.
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Item 6. Exhibits
EXHIBIT INDEX
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 12, 2020

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