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Prudential Annuities Life Assurance

Filed: 12 Aug 21, 4:41pm
0000881453us-gaap:EquitySecuritiesMembercik881453:IncludedinothercomprehensiveincomelossMember2020-01-012020-06-30
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________
FORM 10-Q
_________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
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 August 12, 2021, 25,000 shares of the registrant’s Common Stock (par value $100) consisting of 100 voting shares and 24,900 non-voting shares were outstanding. As of such date, Prudential Annuities, Inc., an indirect wholly-owned subsidiary of Prudential Financial, Inc., a New Jersey corporation, owned all of the registrant’s Common Stock.
Prudential Annuities Life Assurance Corporation meets the conditions set
forth in General Instruction (H) (1) (a) and (b) on Form 10-Q and
is therefore filing this Form 10-Q in the reduced disclosure format.


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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 the Annual Report on Form 10-K for the year ended December 31, 2020 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
June 30, 2021 and December 31, 2020 (in thousands, except share amounts)
June 30, 2021December 31, 2020
ASSETS
Fixed maturities, available-for-sale, at fair value (allowance for credit losses: 2021-$335; 2020-$686) (amortized cost: 2021-$12,587,739; 2020-$16,177,891)$13,222,809 $18,584,685 
Fixed maturities, trading, at fair value (amortized cost: 2021-$4,077,340; 2020-$1,017,771)3,873,595 1,114,142 
Equity securities, at fair value (cost: 2021-$242,455; 2020-$279,096)242,464 288,082 
Commercial mortgage and other loans (net of $5,583 and $7,382 allowance for credit losses at June 30, 2021 and December 31, 2020, respectively)2,153,735 1,765,770 
Policy loans11,679 11,806 
Short-term investments76,759 318,161 
Other invested assets (includes $315,990 and $204,863 of assets measured at fair value at June 30, 2021 and December 31, 2020, respectively)919,415 818,810 
Total investments20,500,456 22,901,456 
Cash and cash equivalents2,090,514 1,069,211 
Deferred policy acquisition costs4,214,451 4,237,780 
Accrued investment income110,380 121,604 
Reinsurance recoverables567,185 694,040 
Income taxes1,706,951 1,448,714 
Value of business acquired28,479 27,247 
Deferred sales inducements692,177 714,598 
Receivables from parent and affiliates114,230 87,620 
Other assets543,529 767,540 
Separate account assets32,934,232 32,205,296 
TOTAL ASSETS$63,502,584 $64,275,106 
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits$13,706,520 $18,560,891 
Policyholders’ account balances12,617,404 9,181,459 
Payables to parent and affiliates34,272 47,345 
Short-term debt119,671 
Long-term debt299,747 299,747 
Reinsurance payables147,807 178,860 
Other liabilities805,037 980,692 
Separate account liabilities32,934,232 32,205,296 
Total liabilities60,545,019 61,573,961 
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 10)00
EQUITY
Common stock, $100 par value; 25,000 shares authorized, issued and outstanding2,500 2,500 
Additional paid-in capital4,382,936 4,382,936 
Retained earnings / (accumulated deficit)(1,782,137)(3,217,350)
Accumulated other comprehensive income (loss)354,266 1,533,059 
Total equity2,957,565 2,701,145 
TOTAL LIABILITIES AND EQUITY$63,502,584 $64,275,106 







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 Six Months Ended June 30, 2021 and 2020 (in thousands)
 Three Months Ended
June 30,
Six Months Ended
June 30,
 2021202020212020
REVENUES
Premiums$11,277 $15,013 $27,039 $31,592 
Policy charges and fee income514,148 455,682 1,021,731 952,551 
Net investment income145,948 158,426 285,207 281,463 
Asset management and service fees(1)106,050 91,640 209,571 189,489 
Other income (loss)(1)259,283 14,209 (514,009)61,493 
Realized investment gains (losses), net(836,964)(3,375,764)2,292,172 (4,133,455)
TOTAL REVENUES199,742 (2,640,794)3,321,711 (2,616,867)
BENEFITS AND EXPENSES
Policyholders’ benefits(3,611)(37,768)26,017 204,761 
Interest credited to policyholders’ account balances21,259 (33,254)169,169 79,716 
Amortization of deferred policy acquisition costs40,078 (194,304)382,654 235,214 
Commission expense165,572 191,055 330,887 409,129 
General, administrative and other expenses75,695 51,771 128,471 130,883 
TOTAL BENEFITS AND EXPENSES298,993 (22,500)1,037,198 1,059,703 
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES(99,251)(2,618,294)2,284,513 (3,676,570)
Income tax expense (benefit)(24,651)(862,080)469,300 (1,099,568)
NET INCOME (LOSS)$(74,600)$(1,756,214)$1,815,213 $(2,577,002)
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments17 66 (481)
Net unrealized investment gains (losses)296,315 247,379 (1,492,209)1,527,467 
Total296,332 247,381 (1,492,143)1,526,986 
Less: Income tax expense (benefit) related to other comprehensive income (loss)62,230 51,949 (313,350)320,666 
Other comprehensive income (loss), net of taxes234,102 195,432 (1,178,793)1,206,320 
Comprehensive income (loss)$159,502 $(1,560,782)$636,420 $(1,370,682)
(1) Prior period amounts have been reclassified to conform to current period presentation.






















See Notes to Unaudited Interim Financial Statements
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Prudential Annuities Life Assurance Corporation
Unaudited Interim Statements of Equity
Three and Six Months Ended June 30, 2021 and 2020 (in thousands)
  Common  
Stock
 Additional  
Paid-in
Capital
Retained Earnings/(Accumulated Deficit)Accumulated
Other
Comprehensive  
Income (Loss)
Total Equity  
Balance, December 31, 2020$2,500 $4,382,936 $(3,217,350)$1,533,059 $2,701,145 
Return of capital
Dividend to parent(192,000)(192,000)
Comprehensive income (loss):
Net income (loss)1,889,813 1,889,813 
Other comprehensive income (loss), net of tax(1,412,895)(1,412,895)
Total comprehensive income (loss)476,918 
Balance, March 31, 2021$2,500 $4,382,936 $(1,519,537)$120,164 $2,986,063 
Return of capital
Dividend to parent(188,000)(188,000)
Comprehensive income (loss):
Net income (loss)(74,600)(74,600)
Other comprehensive income (loss), net of tax234,102 234,102 
Total comprehensive income (loss)159,502 
Balance, June 30, 2021$2,500 $4,382,936 $(1,782,137)$354,266 $2,957,565 

  Common  
Stock
 Additional  
Paid-in
Capital
Retained Earnings/(Accumulated Deficit)Accumulated
Other
Comprehensive  
Income (Loss)
Total Equity  
Balance, December 31, 2019$2,500 $5,142,936 $(46,693)$428,612 $5,527,355 
Cumulative effect of adoption of accounting changes(1)(1,392)(1,392)
Return of capital(207,000)(207,000)
Dividend to parent00
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)
Dividend to parent00
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 

(1) Includes the impact from the adoption of ASU 2016-13. See Note 2 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020 for additional information.




See Notes to Unaudited Interim Financial Statements
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Prudential Annuities Life Assurance Corporation
Unaudited Interim Statements of Cash Flows
Six Months Ended June 30, 2021 and 2020 (in thousands)
20212020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)$1,815,213 $(2,577,002)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Policy charges and fee income(523)59 
Realized investment (gains) losses, net(2,292,172)4,133,455 
Depreciation and amortization4,249 (327)
Interest credited to policyholders’ account balances169,169 79,716 
Change in:
Future policy benefits548,675 709,681 
Accrued investment income11,224 (13,593)
Net receivables from/payables to parent and affiliates(41,143)(12,182)
Deferred sales inducements(868)(847)
Deferred policy acquisition costs186,790 79,404 
Income taxes55,114 (883,346)
Reinsurance recoverables, net(20,522)(27,746)
Derivatives, net(3,580,033)8,242,322 
Other, net517,894 (12,169)
Cash flows from (used in) operating activities(2,626,933)9,717,425 
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale8,460,048 464,413 
Fixed maturities, trading2,038,422 70,843 
Equity securities45,500 14,369 
Commercial mortgage and other loans64,005 21,007 
Policy loans511 529 
Other invested assets27,731 13,743 
Short-term investments320,450 2,829,379 
Payments for the purchase/origination of:
Fixed maturities, available for sale(3,711,861)(2,399,294)
Fixed maturities, trading(5,301,687)(243,881)
Equity securities(6,367)(15,863)
Commercial mortgage and other loans(462,526)(207,350)
Policy loans(45)(73)
Other invested assets(26,922)(72,413)
Short-term investments(79,094)(6,134,853)
Derivatives, net(64,330)(626,097)
Cash flows from (used in) investing activities1,303,835 (6,285,541)
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account deposits4,981,857 2,768,113 
Ceded policyholders' account deposits(4,947)(30,493)
Policyholders' account withdrawals(2,125,609)(2,155,125)
Ceded policyholders' account withdrawals7,834 22,107 
Net increase/(decrease) in short-term borrowing(119,671)(7,916)
Drafts outstanding(14,690)137,072 
Distribution to parent(380,000)(380,000)
Other, net(373)(25,949)
Cash flows from (used in) financing activities2,344,401 327,809 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS1,021,303 3,759,693 
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR1,069,211 2,795,163 
CASH AND CASH EQUIVALENTS, END OF PERIOD$2,090,514 $6,554,856 
Significant Non-Cash Transactions
There were no significant non-cash transactions for the six months ended June 30, 2021 and 2020.




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

1.    BUSINESS AND BASIS OF PRESENTATION

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

Effective April 1, 2016, the Company reinsured the variable annuity base contracts, along with the living benefit guarantees, from Pruco Life Insurance Company ("Pruco Life"), excluding the Pruco Life Insurance Company of New Jersey ("PLNJ") business which was reinsured to The Prudential Insurance Company of America (“Prudential Insurance”), in each case under a coinsurance and modified coinsurance agreement. This reinsurance agreement covers new and in force business and excludes business reinsured externally. As of December 31, 2020, Pruco Life discontinued the sales of traditional variable annuities with guaranteed living benefit riders. The discontinuation has no impact on the reinsurance agreement between Pruco Life and the Company. In addition, the living benefit hedging program related to the living benefit guarantees as well as the product risks for retained and reinsured businesses are being managed within the Company and Prudential Insurance, as applicable.

Effective July 1, 2021, Pruco Life recaptured the risks related to its business, as discussed above, that had previously been reinsured to the Company from April 1, 2016 through June 30, 2021. The recapture does not impact PLNJ, which will continue to reinsure its new and in force business to Prudential Insurance. The product risks related to the previously reinsured business that were being managed in the Company, were transferred to Pruco Life. In addition, the living benefit hedging program related to the previously reinsured living benefit riders will be managed within Pruco Life.

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.

Basis of Presentation

The Unaudited Interim Financial Statements have been prepared in accordance with generally accepted accounting principles 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, 2020.

Use of Estimates

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

The most significant estimates include those used in determining deferred policy acquisition costs ("DAC") and related amortization; policyholders' account balances related to the fair value of embedded derivative instruments associated with the index-linked features of certain annuity products; value of business acquired ("VOBA") and its amortization; amortization of deferred sales inducements ("DSI"); valuation of investments including derivatives, measurement of allowance for credit losses, and the recognition of other-than-temporary impairments (“OTTI”); future policy benefits including guarantees; provision for income taxes and valuation of deferred tax assets; and accruals for contingent liabilities, including estimates for losses in connection with unresolved legal and regulatory matters.

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Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
COVID-19

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

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 June 30, 2021, and as of the date of this filing. ASUs not listed below were assessed and determined to be either not applicable or not material.

ASU issued but not yet adopted as of June 30, 2021 — ASU 2018-12

ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the FASB on August 15, 2018 and is expected to have a significant impact on the Financial Statements and Notes to the Financial Statements. In October 2019, the FASB issued ASU 2019-09, Financial Services - Insurance (Topic 944): Effective Date to affirm its decision to defer the effective date of ASU 2018-12 to January 1, 2022 (with early adoption permitted), representing a one year extension from the original effective date of January 1, 2021. As a result of the COVID-19 pandemic, in November 2020, the FASB issued ASU 2020-11, Financial Services-Insurance (Topic 944): Effective Date and Early Application to defer for an additional one year the effective date of ASU 2018-12 from January 1, 2022 to January 1, 2023, and to provide transition relief to facilitate the early adoption of the ASU. The transition relief would allow large calendar-year public companies that early adopt ASU 2018-12 to apply the guidance either as of January 1, 2020 or January 1, 2021 (and record transition adjustments as of January 1, 2020 or January 1, 2021, respectively) in the 2022 financial statements. Companies that do not early adopt ASU 2018-12 would apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2023 financial statements. The Company currently intends to adopt ASU 2018-12 effective January 1, 2023 using the modified retrospective transition method where permitted. ASU 2018-12 will impact, at least to some extent, the accounting and disclosure requirements for all long-duration insurance and investment contracts issued by the Company. Outlined below are four key areas of change, although there are other less significant changes not noted below. In addition to the impacts to the balance sheet upon adoption, the Company also expects an impact to the pattern of earnings emergence following the transition date.

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Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
ASU 2018-12 Amended 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 Company currently intends to adopt this guidance effective January 1, 2023 using the modified retrospective transition method. The impacts of electing such method are currently 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.As noted above, the Company currently intends to adopt the guidance for the liability for future policy benefits effective January 1, 2023 using the modified retrospective transition method. Upon adoption, 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 Company currently intends to adopt this guidance effective January 1, 2023 using the modified retrospective transition method. 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.The Company currently intends to adopt this guidance effective January 1, 2023 using the retrospective transition method. 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)
Modifications related to COVID-19

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

3.    INVESTMENTS

Fixed Maturity Securities

The following tables set forth the composition of fixed maturity securities (excluding investments classified as trading), as of the dates indicated:
 June 30, 2021
 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$951,522 $79,339 $97 $$1,030,764 
Obligations of U.S. states and their political subdivisions299,602 18,137 705 317,034 
Foreign government bonds178,724 17,534 517 195,741 
U.S. public corporate securities4,044,844 246,589 12,631 4,278,802 
U.S. private corporate securities2,078,322 115,053 4,114 335 2,188,926 
Foreign public corporate securities974,009 23,647 3,268 994,388 
Foreign private corporate securities1,861,002 115,322 7,408 1,968,916 
Asset-backed securities(1)1,306,017 7,926 891 1,313,052 
Commercial mortgage-backed securities823,769 42,667 5,319 861,117 
Residential mortgage-backed securities(2)69,928 4,144 74,069 
Total fixed maturities, available-for-sale$12,587,739 $670,358 $34,953 $335 $13,222,809 

(1)Includes credit-tranched securities collateralized by loan obligations, auto loans, education loans, equipment leases, home equity loans and other asset types.
(2)Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
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Notes to Unaudited Interim Financial Statements—(Continued)

 December 31, 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$7,283,403 $1,631,715 $12,686 $$8,902,432 
Obligations of U.S. states and their political subdivisions258,135 19,512 156 277,491 
Foreign government bonds153,009 24,378 177,383 
U.S. public corporate securities3,112,420 339,348 1,361 3,450,407 
U.S. private corporate securities1,736,035 155,943 4,706 209 1,887,063 
Foreign public corporate securities513,204 29,029 408 541,825 
Foreign private corporate securities1,338,936 158,227 2,851 477 1,493,835 
Asset-backed securities(1)984,318 9,870 1,605 992,583 
Commercial mortgage-backed securities728,522 57,522 102 785,942 
Residential mortgage-backed securities(2)69,909 5,818 75,724 
Total fixed maturities, available-for-sale$16,177,891 $2,431,362 $23,882 $686 $18,584,685 

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

The following tables set forth the fair value and gross unrealized losses on available-for-sale fixed maturity securities without an allowance for credit losses aggregated by investment category and length of time that individual fixed maturity securities had been in a continuous unrealized loss position, as of the dates indicated:
 June 30, 2021
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$74,672 $97 $$$74,672 $97 
Obligations of U.S. states and their political subdivisions8,890 705 8,890 705 
Foreign government bonds19,170 510 83 19,253 517 
U.S. public corporate securities784,696 12,563 1,974 68 786,670 12,631 
U.S. private corporate securities156,480 4,065 2,482 46 158,962 4,111 
Foreign public corporate securities331,329 3,268 331,329 3,268 
Foreign private corporate securities350,529 7,300 2,914 108 353,443 7,408 
Asset-backed securities319,038 874 24,904 17 343,942 891 
Commercial mortgage-backed securities225,557 5,319 225,557 5,319 
Residential mortgage-backed securities33 76 109 
Total fixed maturities, available-for-sale$2,270,394 $34,702 $32,433 $248 $2,302,827 $34,950 



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Notes to Unaudited Interim Financial Statements—(Continued)

 December 31, 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$244,507 $12,686 $$$244,507 $12,686 
Obligations of U.S. states and their political subdivisions9,440 156 9,440 156 
Foreign government bonds257 87 344 
U.S. public corporate securities117,755 1,335 2,185 26 119,940 1,361 
U.S. private corporate securities35,411 2,614 16,071 2,092 51,482 4,706 
Foreign public corporate securities69,610 408 69,610 408 
Foreign private corporate securities11,679 188 50,809 2,663 62,488 2,851 
Asset-backed securities219,535 320 246,535 1,285 466,070 1,605 
Commercial mortgage-backed securities45,617 102 45,617 102 
Residential mortgage-backed securities80 80 
Total fixed maturities, available-for-sale$753,811 $17,810 $315,767 $6,072 $1,069,578 $23,882 

As of June 30, 2021 and December 31, 2020, the gross unrealized losses on fixed maturity available-for-sale securities without an allowance were composed of $31.1 million and $17.4 million, respectively, related to “1” highest quality or “2” high quality securities based on the National Association of Insurance Commissioners (“NAIC”) or equivalent rating and $3.8 million and $6.5 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. As of June 30, 2021, the $0.2 million of gross unrealized losses of twelve months or more were concentrated in the Company’s corporate securities within the utility, energy, and transportation sectors. As of December 31, 2020, the $6.1 million of gross unrealized losses of twelve months or more were concentrated in the Company’s corporate securities within the transportation, consumer non-cyclical and energy sectors and in asset-backed securities.

In accordance with its policy described in Note 2 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, the Company concluded that an adjustment to earnings for credit losses related to these fixed maturity securities was not warranted at June 30, 2021. This conclusion was based on a detailed analysis of the underlying credit and cash flows on each security. Gross unrealized losses are primarily attributable to increases in interest rates, general credit spread widening, foreign currency exchange rate movements and the financial condition or near-term prospects of the issuer. As of June 30, 2021, the Company did not intend to sell these securities, and it was not more likely than not that the Company would be required to sell these securities before the anticipated recovery of the remaining amortized cost basis.
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Notes to Unaudited Interim Financial Statements—(Continued)

The following table sets forth the amortized cost and fair value of fixed maturities by contractual maturities, as of the date indicated:
 June 30, 2021
Amortized CostFair Value
 (in thousands)
Fixed maturities, available-for-sale:
Due in one year or less$264,241 $270,212 
Due after one year through five years2,979,491 3,083,315 
Due after five years through ten years3,386,537 3,544,241 
Due after ten years3,757,756 4,076,803 
Asset-backed securities1,306,017 1,313,052 
Commercial mortgage-backed securities823,769 861,117 
Residential mortgage-backed securities69,928 74,069 
Total fixed maturities, available-for-sale$12,587,739 $13,222,809 

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

The following table sets forth the sources of fixed maturity proceeds and related investment gains (losses), as well as losses on write-downs and the allowance for credit losses of fixed maturities, for the periods indicated:
 Three Months Ended
June 30,
Six Months Ended
June 30,
 2021202020212020
 (in thousands)
Fixed maturities, available-for-sale:
Proceeds from sales(1)$236,301 $136,699 $7,793,433 $332,677 
Proceeds from maturities/prepayments272,769 53,821 411,293 131,901 
Gross investment gains from sales and maturities1,728 10,774 1,138,630 18,255 
Gross investment losses from sales and maturities(5,268)(1,310)(60,617)(1,490)
Write-downs recognized in earnings(2)(22,619)(22,619)(693)
(Addition to) release of allowance for credit losses400 (796)351 (982)

(1)Includes $(255.3) million and $0.2 million of non-cash related proceeds due to the timing of trade settlements for the six months ended June 30, 2021 and 2020, respectively.
(2)Amounts represent write-downs on securities actively marketed for sale.

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Notes to Unaudited Interim Financial Statements—(Continued)
The following tables set forth the activity in the allowance for credit losses for fixed maturity securities, as of the dates indicated:
Three Months Ended June 30, 2021
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$$$735 $$$$735 
Additions to allowance for credit losses not previously recorded
Reductions for securities sold during the period(7)(7)
Addition (reductions) on securities with previous allowance(393)(393)
Balance, end of period$$$335 $$$$335 

Three Months Ended June 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$$$186 $$$$186 
Additions to allowance for credit losses not previously recorded982 982 
Reductions for securities sold during the period(2)(2)
Addition (reductions) on securities with previous allowance(184)(184)
Balance, end of period$$$982 $$$$982 



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Notes to Unaudited Interim Financial Statements—(Continued)
Six Months Ended June 30, 2021
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$$$686 $$$$686 
Additions to allowance for credit losses not previously recorded432 432 
Reductions for securities sold during the period(13)(13)
Addition (reductions) on securities with previous allowance(770)(770)
Balance, end of period$$$335 $$$$335 

Six Months Ended June 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$$$$$$$
Additions to allowance for credit losses not previously recorded1,168 1,168 
Reductions for securities sold during the period(2)(2)
Addition (reductions) on securities with previous allowance(184)(184)
Balance, end of period$$$982 $$$$982 

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

For the three months ended June 30, 2021, the net decrease in the allowance for credit losses on available-for-sale securities was primarily related to the improving credit environment in the utility and energy sectors within private corporate securities. For the three months ended June 30, 2020, the net increase in the allowance for credit losses on available-for-sale securities was primarily related to adverse projected cash flows in the capital goods and energy sectors within private corporate securities.

For the six months ended June 30, 2021, the net decrease in the allowance for credit losses on available-for-sale securities was primarily related to the improving credit environment in the capital goods and utility sectors within private corporate securities. For the six months ended June 30, 2020, the net increase in the allowance for credit losses on available-for-sale securities was primarily related to adverse projected cash flows in the capital goods and energy sectors within private corporate securities.

The Company did 0t have any fixed maturity securities purchased with credit deterioration, as of both June 30, 2021 and December 31, 2020.
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Notes to Unaudited Interim Financial Statements—(Continued)


Fixed Maturities, Trading

The net change in unrealized gains (losses) from fixed maturities, trading still held at period end, recorded within “Other income (loss),” was $252.2 million and $10.5 million during the three months ended June 30, 2021 and 2020, respectively, and $(300.1) million and $61.6 million during the six months ended June 30, 2021 and 2020, respectively.

Equity Securities

The net change in unrealized gains (losses) from equity securities still held at period end, recorded within “Other income (loss),” was $6.7 million and $3.3 million during the three months ended June 30, 2021 and 2020, respectively, and $(9.0) million and $1.7 million during the six months ended June 30, 2021 and 2020, respectively.

Commercial Mortgage and Other Loans

The following table sets forth the composition of “Commercial mortgage and other loans,” as of the dates indicated:
 June 30, 2021December 31, 2020
 Amount
(in thousands)
% of
Total
Amount
(in thousands)
% of
Total
Commercial mortgage and agricultural property loans by property type:
Apartments/Multi-Family$498,244 23.1 %$369,764 20.9 %
Hospitality35,600 1.6 16,679 0.9 
Industrial762,823 35.3 590,231 33.3 
Office388,260 18.0 374,107 21.1 
Other231,623 10.7 187,643 10.6 
Retail136,975 6.4 130,154 7.3 
Total commercial mortgage loans2,053,525 95.1 1,668,578 94.1 
Agricultural property loans105,793 4.9 104,574 5.9 
Total commercial mortgage and agricultural property loans2,159,318 100.0 %1,773,152 100.0 %
Allowance for credit losses(5,583)(7,382)
Total net commercial mortgage and agricultural property loans$2,153,735 $1,765,770 

As of June 30, 2021, the commercial mortgage and agricultural property loans were secured by properties geographically dispersed throughout the United States with the largest concentrations in California (27%), Texas (13%) and New York (10%) and included loans secured by properties in Europe (13%) and Australia (3%).

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Notes to Unaudited Interim Financial Statements—(Continued)
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 June 30,
20212020
Commercial Mortgage LoansAgricultural Property LoansTotalCommercial Mortgage LoansAgricultural Property LoansTotal
(in thousands)
Allowance, beginning of period$6,737 $264 $7,001 $6,103 $179 $6,282 
Addition to (release of) allowance for expected losses(1,345)(73)(1,418)598 (1)597 
Allowance, end of period$5,392 $191 $5,583 $6,701 $178 $6,879 

Six Months Ended June 30,
20212020
Commercial Mortgage LoansAgricultural Property LoansTotalCommercial Mortgage LoansAgricultural Property LoansTotal
(in thousands)
Allowance, beginning of period$7,116 $266 $7,382 $2,622 $41 $2,663 
Cumulative effect of adoption of ASU 2016-133,118 39 3,157 
Addition to (release of) allowance for expected losses(1,724)(75)(1,799)961 98 1,059 
Allowance, end of period$5,392 $191 $5,583 $6,701 $178 $6,879 

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

For the three months ended June 30, 2021, the net decrease in the allowance for credit losses on commercial mortgage and other loans was primarily related to the improving credit environment. For the three months ended June 30, 2020, the net increase in the allowance for credit losses on commercial mortgage and other loans was primarily related to new loan originations.

For the six months ended June 30, 2021, the net decrease in the allowance for credit losses on commercial mortgage and other loans was primarily related to the improving credit environment. For the six months ended June 30, 2020, the net increase in the allowance for credit losses on commercial mortgage and other loans was primarily related to the cumulative effect of adoption of ASU 2016-13.

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Notes to Unaudited Interim Financial Statements—(Continued)
The following tables set forth key credit quality indicators based upon the recorded investment gross of allowance for credit losses, as of the dates indicated:
June 30, 2021
Amortized Cost by Origination Year
20212020201920182017PriorTotal
(in thousands)
Commercial Mortgage Loans
Loan-to-Value Ratio:
0%-59.99%$72,985 $3,800 $131,266 $42,789 $119,973 $469,790 $840,603 
60%-69.99%99,026 171,906 232,198 52,478 134,709 121,830 812,147 
70%-79.99%112,128 80,070 51,003 10,683 53,865 91,936 399,685 
80% or greater1,090 1,090 
Total$284,139 $255,776 $414,467 $105,950 $308,547 $684,646 $2,053,525 
Debt Service Coverage Ratio:
Greater or Equal to 1.2x$284,139 $255,776 $391,833 $105,950 $296,139 $635,450 $1,969,287 
1.0 - 1.2x022,634 12,408 21,483 56,525 
Less than 1.0x027,713 27,713 
Total$284,139 $255,776 $414,467 $105,950 $308,547 $684,646 $2,053,525 
Agricultural Property Loans
Loan-to-Value Ratio:
0%-59.99%$8,135 $47,138 $13,741 $1,244 $2,708 $30,642 $103,608 
60%-69.99%2,185 2,185 
70%-79.99%
80% or greater
Total$8,135 $49,323 $13,741 $1,244 $2,708 $30,642 $105,793 
Debt Service Coverage Ratio:
Greater or Equal to 1.2x$8,135 $49,323 $13,741 $1,244 $2,708 $27,203 $102,354 
1.0 - 1.2x
Less than 1.0x3,439 3,439 
Total$8,135 $49,323 $13,741 $1,244 $2,708 $30,642 $105,793 

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Notes to Unaudited Interim Financial Statements—(Continued)

December 31, 2020
Amortized Cost by Origination Year
20202019201820172016PriorTotal
(in thousands)
Commercial Mortgage Loans
Loan-to-Value Ratio:
0%-59.99%$$114,636 $36,423 $116,130 $175,740 $255,848 $698,777 
60%-69.99%174,507 204,112 59,935 90,954 57,569 54,530 641,607 
70%-79.99%81,671 51,333 10,806 80,257 56,169 46,855 327,091 
80% or greater1,103 1,103 
Total$256,178 $370,081 $107,164 $287,341 $289,478 $358,336 $1,668,578 
Debt Service Coverage Ratio:
Greater or Equal to 1.2x$256,178 $347,151 $107,164 $287,341 $274,124 $323,060 $1,595,018 
1.0 - 1.2x22,930 3,969 18,420 45,319 
Less than 1.0x11,385 16,856 28,241 
Total$256,178 $370,081 $107,164 $287,341 $289,478 $358,336 $1,668,578 
Agricultural Property Loans
Loan-to-Value Ratio:
0%-59.99%$47,245 $13,769 $1,255 $7,493 $1,180 $31,370 $102,312 
60%-69.99%2,262 2,262 
70%-79.99%
80% or greater
Total$49,507 $13,769 $1,255 $7,493 $1,180 $31,370 $104,574 
Debt Service Coverage Ratio:
Greater or Equal to 1.2x$49,507 $13,769 $1,255 $4,277 $1,180 $27,783 $97,771 
1.0 - 1.2x
Less than 1.0x3,216 3,587 6,803 
Total$49,507 $13,769 $1,255 $7,493 $1,180 $31,370 $104,574 

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

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:
June 30, 2021
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$2,053,525 $$$$2,053,525 $
Agricultural property loans83,562 22,231 105,793 
Total$2,137,087 $22,231 $$$2,159,318 $

(1)As of June 30, 2021, there were 0 loans in this category accruing interest.
(2)For additional information regarding the Company's policies for accruing interest on loans, see Note 2 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.
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Notes to Unaudited Interim Financial Statements—(Continued)
December 31, 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$1,668,578 $$$$1,668,578 $
Agricultural property loans104,574 104,574 
Total$1,773,152 $$$$1,773,152 $

(1)As of December 31, 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, 2020.

The Company did 0t have any commercial mortgage and other loans purchased with credit deterioration as of both June 30, 2021 and December 31, 2020.

For the three months ended June 30, 2021 and 2020, there were $167 million and $0 million, respectively, of commercial mortgage loans acquired, other than those through direct origination. For both the three months ended June 30, 2021 and 2020, there were 0 commercial mortgage and other loans sold.

For the six months ended June 30, 2021 and 2020, there were $167 million and $0 million, respectively, of commercial mortgage loans acquired, other than those through direct origination. For both the six months ended June 30, 2021 and 2020, there were 0 commercial mortgage and other loans sold.

Other Invested Assets

The following table sets forth the composition of “Other invested assets,” as of the dates indicated:
June 30, 2021December 31, 2020
 (in thousands)
LPs/LLCs:
Equity method:
Private equity$25,844 $28,955 
Hedge funds330,572 340,951 
Real estate-related247,009 244,041 
Subtotal equity method603,425 613,947 
Fair value:
Private equity3,672 4,220 
Hedge funds152 172 
Real estate-related6,616 6,220 
Subtotal fair value10,440 10,612 
Total LPs/LLCs613,865 624,559 
Derivative instruments305,550 194,251 
Total other invested assets$919,415 $818,810 

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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 dates indicated:
June 30, 2021December 31, 2020
(in thousands)
Fixed maturities$104,552 $116,342 
Equity securities
Commercial mortgage and other loans5,484 4,828 
Policy loans12 11 
Short-term investments and cash equivalents81 158 
Other(1)250 264 
Total accrued investment income$110,380 $121,604 

(1)Primarily includes affiliated accrued income.

There were 0 write-downs on accrued investment income for both the three months and six months ended June 30, 2021 and 2020.

Net Investment Income

The following table sets forth “Net investment income” by investment type, for the periods indicated:
 Three Months Ended June 30,Six Months Ended June 30,
 2021202020212020
 (in thousands)
Fixed maturities, available-for-sale$91,084 $109,465 $200,125 $210,199 
Fixed maturities, trading19,142 2,921 25,622 5,502 
Equity securities1,332 64 2,284 131 
Commercial mortgage and other loans16,857 15,437 32,126 28,619 
Policy loans260 229 240 356 
Other invested assets24,203 18,579 38,294 5,866 
Short-term investments and cash equivalents(81)18,516 361 43,968 
Gross investment income152,797 165,211 299,052 294,641 
Less: investment expenses(6,849)(6,785)(13,845)(13,178)
Net investment income$145,948 $158,426 $285,207 $281,463 

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 June 30,Six Months Ended June 30,
 2021202020212020
 (in thousands)
Fixed maturities(1)$(25,759)$8,668 $1,055,745 $15,090 
Commercial mortgage and other loans(758)(1,394)(458)(1,736)
Derivatives(812,224)(3,386,059)1,233,336 (4,150,599)
Other invested assets1,823 970 3,568 1,470 
Short-term investments and cash equivalents(46)2,051 (19)2,320 
Realized investment gains (losses), net$(836,964)$(3,375,764)$2,292,172 $(4,133,455)

(1)Includes fixed maturity securities classified as available-for-sale and excludes fixed maturity securities classified as trading.
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Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)

Net Unrealized Gains (Losses) on Investments within AOCI

The following table sets forth net unrealized gains (losses) on investments, as of the dates indicated:
June 30, 2021December 31, 2020
(in thousands)
Fixed maturity securities, available-for-sale with an allowance$1,990 $
Fixed maturity securities, available-for-sale without an allowance633,415 2,407,478 
Derivatives designated as cash flow hedges(1)(17,710)(43,000)
Affiliated notes, available-for-sale3,171 4,629 
Net unrealized gains (losses) on investments$620,866 $2,369,109 

(1)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 June 30, 2021 and December 31, 2020, the Company had 0 repurchase agreements or securities lending transactions.


4.    DERIVATIVES AND HEDGING

Types of Derivative Instruments and Derivative Strategies

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

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

For detailed information on these contracts and the related strategies, see Note 4 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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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.
 June 30, 2021December 31, 2020
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$1,776,996 $34,965 $(54,455)$1,376,290 $23,167 $(82,625)
Total Derivatives Designated as Hedge Accounting Instruments$1,776,996 $34,965 $(54,455)$1,376,290 $23,167 $(82,625)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Futures$3,704,500 $3,152 $(157)$4,597,200 $2,755 $(1,621)
Interest Rate Swaps145,129,090 6,729,984 (11,252,213)131,129,200 12,448,036 (9,540,941)
Interest Rate Options10,048,000 242,653 (164,917)10,198,000 608,538 (178,563)
Interest Rate Forwards115,000 (36)75,000 464 
Foreign Currency
Foreign Currency Forwards38,424 155 (93)34,988 (557)
Currency/Interest Rate
Foreign Currency Swaps315,652 9,050 (4,034)228,117 7,939 (8,440)
Credit
Credit Default Swaps1,562,750 45,970 1,574,173 38,875 (52)
Equity
Equity Futures4,236,011 5,994 (3,497)5,558,882 9,424 (24,688)
Total Return Swaps18,299,916 125,066 (414,104)22,121,729 62,362 (1,162,907)
Equity Options46,104,348 778,328 (1,255,690)23,856,379 1,617,672 (952,452)
Total Derivatives Not Qualifying as Hedge Accounting Instruments$229,553,691 $7,940,352 $(13,094,741)$199,373,668 $14,796,069 $(11,870,221)
Total Derivatives(1)(2)$231,330,687 $7,975,317 $(13,149,196)$200,749,958 $14,819,236 $(11,952,846)

(1)Excludes embedded derivatives and associated reinsurance recoverables which contain multiple underlying risks. The fair value of these embedded derivatives was a net liability of $12,530 million and $17,314 million as of June 30, 2021 and December 31, 2020, respectively included in “Future policy benefits” and $1,361 million and $580 million as of June 30, 2021 and December 31, 2020, respectively included in “Policyholders’ account balances". Other assets included $68 million and $54 million as of June 30, 2021 and December 31, 2020, respectively. Other liabilities included $31 million and $35 million as of June 30, 2021 and December 31, 2020, respectively. The fair value of the related reinsurance, included in "Reinsurance recoverables" and/or "Reinsurance payables" was an asset of $366 million and $471 million as of June 30, 2021 and December 31, 2020, respectively.
(2)Recorded in “Other invested assets”, “Other liabilities”, and "Payables to parent and affiliates" on the Unaudited Interim Statements of Financial Position.

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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.
 June 30, 2021
 Gross
Amounts of
Recognized
Financial
Instruments
Gross Amounts
Offset in the
 Statements of
Financial
Position
Net
Amounts
Presented in
the Statements
of Financial
Position
Financial
Instruments/
Collateral(1)
Net
Amount
 (in thousands)
Offsetting of Financial Assets:
Derivatives$7,975,317 $(7,669,767)$305,550 $$305,550 
Securities purchased under agreements to resell
Total Assets$7,975,317 $(7,669,767)$305,550 $$305,550 
Offsetting of Financial Liabilities:
Derivatives$13,149,196 $(13,147,675)$1,521 $(1,521)$
Securities sold under agreements to repurchase
Total Liabilities$13,149,196 $(13,147,675)$1,521 $(1,521)$
 December 31, 2020
 Gross
Amounts of
Recognized
Financial
Instruments
Gross Amounts
Offset in the
Statements of
Financial
Position
Net
Amounts
Presented in
the Statements
of Financial
Position
Financial
Instruments/
Collateral(1)
Net
Amount
 (in thousands)
Offsetting of Financial Assets:
Derivatives$14,819,236 $(14,624,985)$194,251 $$194,251 
Securities purchased under agreements to resell150,000 150,000 (150,000)
Total Assets$14,969,236 $(14,624,985)$344,251 $(150,000)$194,251 
Offsetting of Financial Liabilities:
Derivatives$11,952,846 $(11,936,059)$16,787 $(16,787)$
Securities sold under agreements to repurchase
Total Liabilities$11,952,846 $(11,936,059)$16,787 $(16,787)$

(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, 2020.

Cash Flow Hedges

The primary derivative instruments used by the Company in its cash flow hedge accounting relationships are currency swaps. These instruments are only designated for hedge accounting in instances where the appropriate criteria are met. The Company does not use futures, options, credit, or equity derivatives in any of its cash flow hedge accounting relationships.
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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 June 30, 2021
 Realized
Investment
Gains (Losses)
Net
Investment
Income
Other Income (Loss)AOCI(1)
 (in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate$2,837 $4,219 $(1,070)$22,293 
Total cash flow hedges2,837 4,219 (1,070)22,293 
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate1,955,222 
Currency109 
Currency/Interest Rate7,002 (20)
Credit7,036 
Equity(850,347)
Embedded Derivatives(1,934,083)
Total Derivatives Not Qualifying as Hedge Accounting Instruments:(815,061)(20)
Total$(812,224)$4,219 $(1,090)$22,293 

Six Months Ended June 30, 2021
 Realized
Investment
Gains (Losses)
Net
Investment
Income
Other Income (Loss)AOCI(1)
 (in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate$4,242 $8,558 $5,502 $25,290 
Total cash flow hedges4,242 8,558 5,502 25,290 
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate(1,789,620)
Currency154 
Currency/Interest Rate10,228 (36)
Credit9,360 
Equity(1,779,968)
Embedded Derivatives4,778,940 
Total Derivatives Not Qualifying as Hedge Accounting Instruments:1,229,094 (36)
Total$1,233,336 $8,558 $5,466 $25,290 

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Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
Three Months Ended June 30, 2020
 Realized
Investment
Gains (Losses)
Net
Investment
Income
Other Income (Loss)AOCI(1)
 (in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate$2,712 $4,668 $(9,648)$(34,394)
Total cash flow hedges2,712 4,668 (9,648)(34,394)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate(79,874)
Currency57 
Currency/Interest Rate(11,767)(2)
Credit1,629 
Equity(4,830,379)
Embedded Derivatives1,531,563 
Total Derivatives Not Qualifying as Hedge Accounting Instruments:(3,388,771)(2)
Total$(3,386,059)$4,668 $(9,650)$(34,394)

Six Months Ended June 30, 2020
 Realized
Investment
Gains (Losses)
Net
Investment
Income
Other Income (Loss)AOCI(1)
 (in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate$4,567 $8,928 $7,295 $68,462 
Total cash flow hedges4,567 8,928 7,295 68,462 
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate6,970,027 
Currency1,087 
Currency/Interest Rate30,082 69 
Credit(5,528)
Equity184,909 
Embedded Derivatives(11,335,743)
Total Derivatives Not Qualifying as Hedge Accounting Instruments:(4,155,166)69 
Total$(4,150,599)$8,928 $7,364 $68,462 

(1)Net change in AOCI.

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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, 2020$(43,000)
Amount recorded in AOCI
Currency/Interest Rate43,592 
Total amount recorded in AOCI43,592 
Amount reclassified from AOCI to income
Currency/Interest Rate(18,302)
Total amount reclassified from AOCI to income(18,302)
Balance, June 30, 2021$(17,710)

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 June 30, 2021 values, it is estimated that a pre-tax gain of $19 million is expected to be reclassified from AOCI to earnings during the subsequent twelve months ending June 30, 2022.

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

There were no material amounts reclassified from AOCI into earnings relating to instances in which the Company discontinued cash flow hedge accounting because the forecasted transaction did not occur by the anticipated date or within the additional time period permitted by the authoritative guidance for the accounting for derivatives and hedging.

Credit Derivatives

Credit derivatives, where the Company has written credit protection on certain index references, had outstanding notional amounts of $1,563 million and $1,568 million as of June 30, 2021 and December 31, 2020, respectively. These credit derivatives are reported at fair value as an asset of $46 million and $39 million as of June 30, 2021 and December 31, 2020, respectively. As of June 30, 2021 the notional amount of these credit derivatives had the following NAIC rating: $1,488 million in NAIC 3 and $75 million in NAIC 6.

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 $0 million and $6 million reported as of June 30, 2021 and December 31, 2020, respectively, with a fair value of $0 million for both periods.

Counterparty Credit Risk

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

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

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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, 2020.

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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.
 June 30, 2021
 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$$1,015,764 $15,000 $$1,030,764 
Obligations of U.S. states and their political subdivisions317,034 317,034 
Foreign government bonds195,741 195,741 
U.S. corporate public securities4,278,802 4,278,802 
U.S. corporate private securities2,091,855 97,071 2,188,926 
Foreign corporate public securities994,187 201 994,388 
Foreign corporate private securities1,833,988 134,928 1,968,916 
Asset-backed securities(2)1,106,707 206,345 1,313,052 
Commercial mortgage-backed securities861,117 861,117 
Residential mortgage-backed securities64,051 10,018 74,069 
Subtotal12,759,246 463,563 13,222,809 
Fixed maturities, trading3,868,245 5,350 3,873,595 
Equity securities227,779 4,684 232,464 
Short-term investments49,994 3,844 22,921 76,759 
Cash equivalents249,996 1,248,853 25 1,498,874 
Other invested assets(3)132,041 7,843,276 (7,669,767)305,550 
Other assets68,305 68,305 
Reinsurance recoverables63,974 302,009 365,983 
Receivables from parent and affiliates54,566 54,566 
Subtotal excluding separate account assets659,810 25,842,005 866,857 (7,669,767)19,698,905 
Separate account assets(4)32,934,232 32,934,232 
Total assets$659,810 $58,776,237 $866,857 $(7,669,767)$52,633,137 
Future policy benefits(5)$$$12,530,109 $$12,530,109 
Policyholders' account balances1,361,320 1,361,320 
Payables to parent and affiliates13,140,626 (13,140,626)
Other liabilities8,570 31,459 (7,049)32,980 
Total liabilities$8,570 $13,172,085 $13,891,429 $(13,147,675)$13,924,409 
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Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
 December 31, 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$$8,887,432 $15,000 $$8,902,432 
Obligations of U.S. states and their political subdivisions277,491 277,491 
Foreign government bonds177,383 177,383 
U.S. corporate public securities3,450,407 3,450,407 
U.S. corporate private securities1,804,855 82,208 1,887,063 
Foreign corporate public securities541,644 181 541,825 
Foreign corporate private securities1,427,537 66,298 1,493,835 
Asset-backed securities(2)974,041 18,542 992,583 
Commercial mortgage-backed securities785,942 785,942 
Residential mortgage-backed securities75,724 75,724 
Subtotal18,402,456 182,229 18,584,685 
Fixed maturities, trading1,109,097 5,045 1,114,142 
Equity securities234,452 39,477 4,153 278,082 
Short-term investments143,161 10,000 153,161 
Cash equivalents533,133 533,133 
Other invested assets(3)39,906 14,779,330 (14,624,985)194,251 
Other assets53,980 53,980 
Reinsurance recoverables62,232 409,013 471,245 
Receivables from parent and affiliates56,026 56,026 
Subtotal excluding separate account assets274,358 35,124,912 664,420 (14,624,985)21,438,705 
Separate account assets(4)32,205,296 32,205,296 
Total assets$274,358 $67,330,208 $664,420 $(14,624,985)$53,644,001 
Future policy benefits(5)$$$17,314,004 $$17,314,004 
Policyholders' account balances580,184 580,184 
Payables to parent and affiliates11,926,536 (11,926,536)
Other liabilities26,309 33,416 (9,523)50,202 
Total liabilities$26,309 $11,959,952 $17,894,188 $(11,936,059)$17,944,390 

(1)“Netting” amounts represent cash collateral of $(5,478) million and $2,689 million as of June 30, 2021 and December 31, 2020, respectively.
(2)Includes credit-tranched securities collateralized by syndicated bank loans, sub-prime mortgages, auto loans, credit cards, education loans and other asset types.
(3)Other invested assets excluded from the fair value hierarchy include certain hedge funds, private equity funds and other funds for which fair value is measured at net asset value ("NAV") per share (or its equivalent) as a practical expedient. At June 30, 2021 and December 31, 2020, the fair values of such investments were $10.4 million and $10.6 million, respectively.
(4)Separate account assets represent segregated funds that are invested for certain customers. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. Separate account liabilities are not included in the above table as they are reported at contract value and not fair value in the Company’s Unaudited Interim Statements of Financial Position.
(5)As of June 30, 2021, the net embedded derivative liability position of $12,530 million includes $612 million of embedded derivatives in an asset position and $13,142 million of embedded derivatives in a liability position. As of December 31, 2020, the net embedded derivative liability position of $17,314 million includes $455 million of embedded derivatives in an asset position and $17,769 million of embedded derivatives in a liability position.

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Notes to Unaudited Interim Financial Statements—(Continued)
Quantitative Information Regarding Internally Priced Level 3 Assets and Liabilities – The tables below present quantitative information on significant internally-priced Level 3 assets and liabilities.
 June 30, 2021
 Fair ValueValuation TechniquesUnobservable    
Inputs
Minimum    Maximum    Weighted AverageImpact of
Increase in
Input on Fair 
Value(1)
 (in thousands)
Assets:
Corporate securities(2)$144,592 Discounted cash flowDiscount rate1.24 %20 %4.26 %Decrease
Market ComparablesEBITDA multiples(3)5.2X14.6X8.5XIncrease
Reinsurance recoverables$302,009 Fair values are determined using the same unobservable inputs as future policy benefits. 
Liabilities:
Future policy benefits(4)$12,530,109 Discounted cash flowLapse rate(6)%20 %Decrease
Spread over LIBOR(7)0.05 %1.12 %Decrease
Utilization rate(8)39 %96 %Increase
Withdrawal rateSee table footnote (9) below.
Mortality rate(10)%15 %Decrease
   Equity volatility curve16 %25 % Increase
Policyholders' account balances(5)$1,361,320 Discounted cash flowLapse rate(6)%42 %Decrease
Spread over LIBOR(7)0.05 %1.12 %Decrease
Equity volatility curve%30 %Increase
 
 December 31, 2020
 Fair ValueValuation TechniquesUnobservable    
Inputs
MinimumMaximumWeighted AverageImpact of
Increase in
Input on Fair 
Value(1)
 (in thousands)
Assets:
Corporate securities(2)$59,960 Discounted cash flowDiscount rate0.99 %20 %6.53 %Decrease
Reinsurance recoverables$409,013 Fair values are determined using the same unobservable inputs as future policy benefits. 
Liabilities:
Future policy benefits(4)$17,314,004 Discounted cash flowLapse rate(6)%20 %Decrease
Spread over LIBOR(7)0.06 %1.17 %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)$580,184 Discounted cash flowLapse rate(6)%40 %Decrease
Spread over LIBOR(7)0.06 %1.17 %Decrease
Equity volatility curve(11)%42 %Increase

(1)Conversely, the impact of a decrease in input would have the opposite impact on fair value as that presented in the table.
(2)Includes assets classified as fixed maturities, available-for-sale and fixed maturities trading.
(3)Represents multiples of earnings before interest, taxes, depreciation and amortization ("EBITDA"), and are amounts used when the Company has determined that market participants would use such multiples when valuing the investments.
(4)Future policy benefits primarily represent general account liabilities for the living benefit features of the Company’s variable annuity contracts which are accounted for as embedded derivatives. Since the valuation methodology for these liabilities uses a range of inputs that vary at the contract level over the cash flow projection period, presenting a range, rather than weighted average, is a more meaningful representation of the unobservable inputs used in the valuation.
(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 weighted average, is a more meaningful representation of the unobservable inputs used in the valuation.
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Notes to Unaudited Interim Financial Statements—(Continued)
(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 June 30, 2021 and December 31, 2020, the minimum withdrawal rate assumption is 76% and the maximum withdrawal rate assumption may be greater than 100%. The fair value of the liability will generally increase the closer the withdrawal rate is to 100% and decrease as the withdrawal rate moves further away from 100%.
(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.
(11)Prior period amount has been updated.

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

Corporate Securities – The rate used to discount future cash flows reflects current risk-free rates plus credit and liquidity spread requirements that market participants would use to value an asset. The discount rate may be influenced by many factors, including market cycles, expectations of default, collateral, term and asset complexity. Each of these factors can influence discount rates, either in isolation, or in response to other factors. During weaker economic cycles, as the expectations of default increases, credit spreads widen, which results in a decrease in fair value.

Future Policy Benefits – The Company expects efficient benefit utilization and withdrawal rates to generally be correlated with lapse rates. However, behavior is 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 that 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.

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Table of Contents                                         
Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
Three Months Ended June 30, 2021
Fair Value, beginning of periodTotal realized and unrealized gains (losses)(1)PurchasesSalesIssuancesSettlementsOtherTransfers into Level 3Transfers out of Level 3Fair Value, end of periodUnrealized gains (losses) for assets still held(2)
(in thousands)
Fixed maturities, available-for-sale:
U.S. government$15,000 $$$$$$$$$15,000 $
Corporate securities(3)165,910 2,345 95,875 (23,695)(8,235)232,200 508 
Structured securities(4)16,956 (733)202,798 (2,658)216,363 (735)
Other assets:
Fixed maturities, trading5,127 223 5,350 224 
Equity securities4,166 518 4,684 518 
Short term investments12,349 (38)21,693 (11,723)100 540 22,921 (34)
Cash equivalents100 (13)38 (100)25 (13)
Other assets63,072 4,707 3,813 (3,287)68,305 1,420 
Reinsurance recoverables271,390 26,337 4,282 302,009 28,643 
Liabilities:
Future policy benefits(10,511,815)(1,727,558)(290,736)(12,530,109)(1,837,883)
Policyholders' account balances(5)(986,479)(240,208)(134,633)(1,361,320)(211,238)

Three Months Ended June 30, 2021
Total realized and unrealized gains (losses)Unrealized gains (losses) for assets still held(2)
Realized investment gains (losses), net(1)Other income (loss)Included in other comprehensive income (loss)Net investment incomeRealized investment gains (losses), netOther income (loss)Included in other comprehensive income (loss)
(in thousands)
Fixed maturities, available-for-sale$(2,971)$$4,556 $27 $(3,001)$$2,774 
Other assets:
Fixed maturities, trading223 224 
Equity securities518 518 
Short term investments(34)(4)(34)
Cash equivalents(13)(13)
Other assets4,707 1,420 
Reinsurance recoverables26,337 28,643 
Liabilities:
Future policy benefits(1,727,558)(1,837,883)
Policyholders' account balances(240,208)(211,238)
34

Table of Contents                                         
Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
Six Months Ended June 30, 2021
Fair Value, beginning of periodTotal realized and unrealized gains (losses)(1)PurchasesSalesIssuancesSettlementsOtherTransfers into Level 3Transfers out of Level 3Fair Value, end of periodUnrealized gains (losses) for assets still held(2)
(in thousands)
Fixed maturities, available-for-sale:
U.S. government$15,000 $$$$$$$$$15,000 $
Corporate securities(3)148,687 1,414 106,509 (31,322)15,147 (8,235)232,200 (523)
Structured securities(4)18,542 (840)202,798 (4,137)216,363 (841)
Other assets:
Fixed maturities, trading5,045 305 5,350 311 
Equity securities4,153 531 4,684 531 
Short term investments10,000 (38)24,042 (11,723)100 540 22,921 (34)
Cash equivalents(13)138 (100)25 (13)
Other assets53,980 13,279 6,466 (5,420)68,305 7,859 
Reinsurance recoverables409,013 (115,548)8,544 302,009 (105,520)
Liabilities:
Future policy benefits(17,314,004)5,365,780 (581,885)(12,530,109)4,982,288 
Policyholders' account balances(5)(580,184)(507,978)(273,158)(1,361,320)(463,941)

Six Months Ended June 30, 2021
Total realized and unrealized gains (losses)Unrealized gains (losses) for assets still held(2)
Realized investment gains (losses), net(1)Other income (loss)Included in other comprehensive income (loss)Net investment incomeRealized investment gains (losses), netOther income (loss)Included in other comprehensive income (loss)
(in thousands)
Fixed maturities, available-for-sale$(3,015)$$3,569 $20 $(3,038)$$1,674 
Other assets:
Fixed maturities, trading311 (6)311 
Equity securities531 531 
Short term investments(34)(4)(34)
Cash equivalents(13)(13)
Other assets13,279 7,859 
Reinsurance recoverables(115,548)(105,520)
Liabilities:
Future policy benefits5,365,780 4,982,288 
Policyholders' account balances(507,978)(463,941)

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Table of Contents                                         
Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
Three Months Ended June 30, 2020
Fair Value, beginning of periodTotal realized and unrealized gains (losses)(1)PurchasesSalesIssuancesSettlementsOtherTransfers into Level 3Transfers out of Level 3Fair Value, end of periodUnrealized gains (losses) for assets still held(2)
(in thousands)
Fixed maturities, available-for-sale:
U.S. government$11,458 $$758 $$$$$$$12,216 $
Corporate securities(3)111,606 8,603 3,896 (7,810)(3,445)10,783 (244)123,389 7,738 
Structured securities(4)24,227 157 (620)(5,636)18,128 155 
Other assets:
Fixed maturities, trading3,593 708 4,301 713 
Equity securities4,986 256 5,242 256 
Short term investments
Cash equivalents
Other assets12,242 4,558 10,338 (2)27,136 4,556 
Reinsurance recoverables565,090 (30,207)4,240 539,123 (26,137)
Liabilities:
Future policy benefits(25,302,654)1,588,409 (284,426)(23,998,671)1,421,382 
Policyholders' account balances(5)(158,920)(39,095)(28,057)(226,072)(34,321)

Three Months Ended June 30, 2020
Total realized and unrealized gains (losses)Unrealized gains (losses) for assets still held(2)
Realized investment gains (losses), net(1)Other income (loss)(6)Included in other comprehensive income (loss)Net investment incomeRealized investment gains (losses), netOther income (loss)(6)Included in other comprehensive income (loss)
(in thousands)
Fixed maturities, available-for-sale$(57)$$8,799 $18 $(982)$$8,875 
Other assets:
Fixed maturities, trading713 (5)713 
Equity securities256 256 
Short term investments
Cash equivalents
Other assets4,558 4,556 
Reinsurance recoverables(30,207)(26,137)
Liabilities:
Future policy benefits1,588,409 1,421,382 
Policyholders' account balances(39,095)(34,321)
36

Table of Contents                                         
Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
Six Months Ended June 30, 2020
Fair Value, beginning of periodTotal realized and unrealized gains (losses)(1)PurchasesSalesIssuancesSettlementsOtherTransfers into Level 3Transfers out of Level 3Fair Value, end of periodUnrealized gains (losses) for assets still held(2)
(in thousands)
Fixed maturities, available-for-sale:
U.S. government$10,547 $$1,669 $$$$$$$12,216 $
Corporate securities(3)104,267 (6,164)15,173 (8,965)(5,810)25,132 (244)123,389 (8,042)
Structured securities(4)18,825 (131)6,145 (1,075)(5,636)18,128 (131)
Other assets:
Fixed maturities, trading4,464 (163)4,301 (153)
Equity securities5,247 (5)5,242 (5)
Short term investments
Cash equivalents
Other assets8,059 945 18,134 (2)27,136 944 
Reinsurance recoverables302,814 227,746 8,563 539,123 232,325 
Liabilities:
Future policy benefits(11,822,998)(11,609,063)(566,610)(23,998,671)(11,807,482)
Policyholders' account balances(5)(196,892)21,334 (50,514)(226,072)10,084 

Six Months Ended June 30, 2020
Total realized and unrealized gains (losses)Unrealized gains (losses) for assets still held(2)
Realized investment gains (losses), net(1)Other income (loss)(6)Included in other comprehensive income (loss)Net investment incomeRealized investment gains (losses), netOther income (loss)(6)Included in other comprehensive income (loss)
(in thousands)
Fixed maturities, available-for-sale$(167)$$(6,125)$(3)$(982)$$(7,191)
Other assets:
Fixed maturities, trading(153)(10)(153)
Equity securities(5)(5)
Short term investments
Cash equivalents
Other assets945 944 
Reinsurance recoverables227,746 232,325 
Liabilities:
Future policy benefits(11,609,063)(11,807,482)
Policyholders' account balances21,334 10,084 

(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)Unrealized gains or losses related to assets still held at the end of the period do not include amortization or accretion of premiums and discounts.
(3)Includes U.S. corporate public, U.S. corporate private, foreign corporate public and foreign corporate private securities.
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Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
(4)Includes asset-backed and residential mortgage-backed securities.
(5)Issuances and settlements for Policyholders' account balances are presented net in the rollforward.
(6)Retitled to "Other income (loss)" to conform to current period presentation.

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.
 June 30, 2021
Fair ValueCarrying
Amount(1)
Level 1Level 2Level 3TotalTotal
 (in thousands)
Assets:
Commercial mortgage and other loans$$$2,257,172 $2,257,172 $2,153,735 
Policy loans11,679 11,679 11,679 
Short-term investments
Cash and cash equivalents591,640 591,640 591,640 
Accrued investment income110,380 110,380 110,380 
Reinsurance recoverables50,683 50,683 49,793 
Receivables from parent and affiliates59,664 59,664 59,664 
Other assets20,698 417,970 438,668 438,668 
Total assets$591,640 $190,742 $2,737,504 $3,519,886 $3,415,559 
Liabilities:
Policyholders’ account balances - investment contracts$$$2,574,837 $2,574,837 $2,557,538 
Short-term debt
Long-term debt326,620 326,620 299,747 
Reinsurance payables42,146 42,146 42,146 
Payables to parent and affiliates34,272 34,272 34,272 
Other liabilities616,971 616,971 616,971 
Separate account liabilities - investment contracts17 17 17 
Total liabilities$$977,880 $2,616,983 $3,594,863 $3,550,691 
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Table of Contents                                         
Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
 December 31, 2020
Fair ValueCarrying
Amount(1)
Level 1Level 2Level 3TotalTotal
 (in thousands)
Assets:
Commercial mortgage and other loans$$$1,836,633 $1,836,633 $1,765,770 
Policy loans11,806 11,806 11,806 
Short-term investments165,000 165,000 165,000 
Cash and cash equivalents386,078 150,000 536,078 536,078 
Accrued investment income121,604 121,604 121,604 
Reinsurance recoverables51,225 51,225 50,484 
Receivables from parent and affiliates31,594 31,594 31,594 
Other assets278,355 394,069 672,424 672,424 
Total assets$551,078 $581,553 $2,293,733 $3,426,364 $3,354,760 
Liabilities:
Policyholders’ account balances - investment contracts$$$2,426,471 $2,426,471 $2,406,100 
Short-term debt121,205 121,205 119,671 
Long-term debt332,451 332,451 299,747 
Reinsurance payables44,446 44,446 44,446 
Payables to parent and affiliates47,345 47,345 47,345 
Other liabilities757,968 757,968 757,968 
Separate account liabilities - investment contracts30 30 30 
Total liabilities$$1,258,999 $2,470,917 $3,729,916 $3,675,307 

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

6.    REINSURANCE

The Company uses reinsurance as part of its risk management and capital management strategies for certain of its living benefit guarantees and variable annuity base contracts. Effective April 1, 2016, the Company recaptured the risks related to its variable annuity living benefit guarantees that were previously reinsured to affiliates. In addition, the Company reinsured variable annuity base contracts, along with the living benefit guarantees, from Pruco Life, excluding the PLNJ business which was reinsured to Prudential Insurance. This reinsurance covers new and in force business and excludes business reinsured externally. As of December 31, 2020, Pruco Life discontinued the sales of traditional variable annuities with guaranteed living benefit riders. This discontinuation has no impact on the reinsurance agreement between Pruco Life and the Company.

Effective July 1, 2021, Pruco Life recaptured the risks related to its business, as discussed above, that had previously been reinsured to the Company from April 1, 2016 through June 30, 2021. The recapture does not impact PLNJ, which will continue to reinsure its new and in force business to Prudential Insurance. The product risks related to the previously reinsured business that were being managed in the Company, were transferred to Pruco Life. In addition, the living benefit hedging program related to the previously reinsured living benefit riders will be managed within Pruco Life.

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.
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Table of Contents                                         
Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
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 June 30, 2021 and December 31, 2020 were as follows:
June 30, 2021December 31, 2020
 (in thousands)
Reinsurance recoverables$567,185 $694,040 
Deferred policy acquisition costs3,231,384 3,414,620 
Deferred sales inducements361,178 374,631 
Value of business acquired(2,170)(2,124)
Other assets57,701 61,471 
Policyholders’ account balances3,199,407 3,273,863 
Future policy benefits9,047,794 12,610,942 
Reinsurance payables(1)147,807 178,860 
Other liabilities244,944 262,462 

(1)Includes $1.3 million and $2.3 million of unaffiliated activity as of June 30, 2021 and December 31, 2020, respectively.


The reinsurance recoverables by counterparty are broken out below:
June 30, 2021December 31, 2020
 (in thousands)
Prudential Insurance$385,194 $494,611 
Pruco Life180,793 198,547 
Unaffiliated1,198 882 
Total reinsurance recoverables$567,185 $694,040 
40

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 six months ended June 30, were as follows:
 Three Months Ended June 30,Six Months Ended June 30,
 2021202020212020
 (in thousands)
Premiums:
Direct$6,581 $7,717 $12,718 $14,215 
Assumed6,017 8,003 16,093 18,430 
Ceded(1,321)(707)(1,772)(1,053)
Net premiums11,277 15,013 27,039 31,592 
Policy charges and fee income:
Direct108,788 95,670 216,120 201,924 
Assumed412,053 367,194 819,191 765,855 
Ceded(1)(6,693)(7,182)(13,580)(15,228)
Net policy charges and fee income514,148 455,682 1,021,731 952,551 
Asset management and service fees(2):
Direct24,568 21,195 48,484 44,242 
Assumed83,554 72,285 165,176 149,065 
Ceded(2,072)(1,840)(4,089)(3,818)
Net asset management and service fees106,050 91,640 209,571 189,489 
Realized investment gains (losses), net:
Direct493,028 (4,643,352)(1,613,057)4,399,638 
Assumed(1,355,940)1,305,763 4,021,957 (8,754,691)
Ceded25,948 (38,175)(116,728)221,598 
Realized investment gains (losses), net(836,964)(3,375,764)2,292,172 (4,133,455)
Policyholders' benefits (including change in reserves):
Direct7,216 467 24,505 59,633 
Assumed(9,606)(38,289)2,784 150,235 
Ceded(3)(1,221)54 (1,272)(5,107)
Net policyholders' benefits (including change in reserves)(3,611)(37,768)26,017 204,761 
Interest credited to policyholders’ account balances:
Direct14,546 (12,284)96,167 33,555 
Assumed6,363 (22,561)77,309 45,854 
Ceded350 1,591 (4,307)307 
Net interest credited to policyholders’ account balances21,259 (33,254)169,169 79,716 
Reinsurance expense allowances and general and administrative expenses, net of capitalization and amortization174,726 38,342 514,437 583,806 

(1)Includes $(0.1) million and $(0.4) million of unaffiliated activity for the three months ended June 30, 2021 and 2020, respectively, and $(0.4) million and $(0.7) million for the six months ended June 30, 2021 and 2020, respectively.
(2)Prior period amounts updated to conform to current period presentation.
(3)Includes $(0.3) million and $(0.5) million of unaffiliated activity for the three months ended June 30, 2021 and 2020, respectively, and $(0.4) million and $(0.4) million for the six months ended June 30, 2021 and 2020, respectively.

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

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

The Company's income tax provision amounted to an income tax expense of $469 million, or 20.54% of income (loss) from operations before income taxes in the first six months of 2021, compared to an income tax benefit of $(1,100) million, or 29.91%, in the first six months of 2020. The Company’s current and prior effective tax rates differed from the U.S. statutory tax rate of 21% primarily due to non-taxable investment income and tax credits.

On March 27, 2020, the CARES Act was enacted into law. One provision of the CARES Act amended the Tax Cuts and Jobs Act (“TCJA”) and allowed 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 2020 projected effective tax rate an income tax benefit of $305 million that would result from carrying the estimated 2020 NOL back to tax years that have a 35% tax rate.

8.    EQUITY

Accumulated Other Comprehensive Income (Loss)

AOCI represents the cumulative OCI items that are reported separate from net income and detailed on the Unaudited Interim Statements of Operations and Comprehensive Income (Loss). The balance of and changes in each component of AOCI as of and for the six months ended June 30, 2021 and 2020 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, 2020$(708)$1,533,767 $1,533,059 
Change in OCI before reclassifications66 (418,162)(418,096)
Amounts reclassified from AOCI(1,074,047)(1,074,047)
Income tax benefit (expense)(14)313,364 313,350 
Balance, June 30, 2021$(656)$354,922 $354,266 
 
 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 $428,612 
Change in OCI before reclassifications(481)1,563,347 1,562,866 
Amounts reclassified from AOCI(35,880)(35,880)
Income tax benefit (expense)101 (320,767)(320,666)
Balance, June 30, 2020$(1,314)$1,636,246 $1,634,932 

(1)Includes cash flow hedges of $(18) million and $(43) million as of June 30, 2021 and December 31, 2020, respectively, and $68 million and $0 million as of June 30, 2020 and December 31, 2019, respectively.

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Table of Contents                                         
Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
Reclassifications out of Accumulated Other Comprehensive Income (Loss)
Three Months Ended
June 30,
Six Months Ended
June 30,
2021202020212020
 (in thousands)
Amounts reclassified from AOCI(1)(2):
Net unrealized investment gains (losses):
Cash flow hedges—Currency/ Interest rate(3)$5,986 $(2,267)$18,302 $20,790 
Net unrealized investment gains (losses) on available-for-sale securities(25,759)8,668 1,055,745 15,090 
Total net unrealized investment gains (losses)(4)(19,773)6,401 1,074,047 35,880 
Total reclassifications for the period$(19,773)$6,401 $1,074,047 $35,880 

(1)All amounts are shown before tax.
(2)Positive amounts indicate gains/benefits reclassified out of AOCI. Negative amounts indicate losses/costs reclassified out of AOCI.
(3)See Note 4 for additional information on cash flow hedges.
(4)See table below for additional information on unrealized investment gains (losses), including the impact on DAC and other costs and future policy benefits and other liabilities.

Net Unrealized Investment Gains (Losses)

Net unrealized investment gains (losses) on available-for-sale fixed maturity securities and certain other invested assets and other assets are included in the Company’s Unaudited Interim Statements of Financial Position as a component of AOCI. Changes in these amounts include reclassification adjustments to exclude from OCI those items that are included as part of “Net income” for a period that had been part of OCI in earlier periods. The amounts for the periods indicated below, split between amounts related to net unrealized investment gains (losses) on available-for-sale fixed maturity securities on which an allowance for credit losses has been recognized, and all other net unrealized investment gains (losses), are as follows:
Net Unrealized Gains (Losses) on Investments on Available-for-Sale Fixed Maturity Securities on which an allowance for credit losses has been recognizedNet Unrealized
Gains (Losses)
on All Other  Investments(1)
DAC and Other Costs(2)Future Policy Benefits and Other Liabilities(3)
Income Tax
Benefit (Expense)
Accumulated Other Comprehensive
Income (Loss) Related To Net Unrealized Investment Gains (Losses)
 (in thousands)
Balance, December 31, 2020$$2,369,107 $(363,429)$(63,159)$(408,754)$1,533,767 
Net investment gains (losses) on investments arising during the period1,867 (676,063)141,580 (532,616)
Reclassification adjustment for (gains) losses included in net income(1,074,047)225,551 (848,496)
Reclassification due to allowance for credit losses recorded during the period121 (121)
Impact of net unrealized investment (gains) losses227,549 28,485 (53,767)202,267 
Balance, June 30, 2021$1,990 $618,876 $(135,880)$(34,674)$(95,390)$354,922 

(1)Includes cash flow hedges. See Note 4 for information on cash flow hedges.
(2)"Other costs" primarily includes reinsurance recoverables, DSI and VOBA.
(3)"Other liabilities" primarily includes reinsurance payables and deferred reinsurance gains.

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Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
9.    RELATED PARTY TRANSACTIONS

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

Expense Charges and Allocations

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 $0.3 million and $0.0 million for the three months ended June 30, 2021 and 2020, respectively, and $0.3 million and $0.1 million for the six months ended June 30, 2021 and 2020, respectively. The expense charged to the Company for the deferred compensation program was $0.5 million and $0.0 million for the three months ended June 30, 2021 and 2020, respectively, and $1.2 million and $0.3 million for the six months ended June 30, 2021 and 2020, respectively.

The Company is charged for its share of employee benefit expenses. These expenses include costs for funded and non-funded, non-contributory defined benefit pension plans. Some of these benefits are based on final earnings and length of service while others are based on an account balance, which takes into consideration age, service and earnings during a career. The Company’s share of net expense for the pension plans was $2.4 million and $0.5 million for the three months ended June 30, 2021 and 2020, respectively, and $4.7 million and $1.1 million for the six months ended June 30, 2021 and 2020, respectively.

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 $0.9 million and $0.4 million for the three months ended June 30, 2021 and 2020, respectively, and $2.0 million and $1.0 million for the six months ended June 30, 2021 and 2020, 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 $0.9 million and $0.2 million for the three months ended June 30, 2021 and 2020, respectively, and $1.8 million and $0.5 million for the six months ended June 30, 2021 and 2020, 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 $117 million and $29 million for the three months ended June 30, 2021 and 2020, respectively, and $236 million and $52 million for the six months ended June 30, 2021 and 2020, 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 $6 million and $2 million for the three months ended June 30, 2021 and 2020, respectively, and $13 million and $6 million for the six months ended June 30, 2021 and 2020, respectively.

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Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
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 $5 million for the three months ended June 30, 2021 and 2020, respectively, and $12 million and $10 million for the six months ended June 30, 2021 and 2020, 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 $521 million and $534 million as of June 30, 2021 and December 31, 2020, respectively. "Net investment income" related to these ventures includes gains of $14 million and $15 million for the three months ended June 30, 2021 and 2020, respectively, and a gain of $18 million and a loss of $3 million for the six months ended June 30, 2021 and 2020, respectively.

Affiliated Asset Management and Service Fees

The Company has a revenue sharing agreement with AST Investment Services, Inc. (“ASTISI”) and PGIM Investments LLC (“PGIM Investments”) whereby the Company receives fee income based on policyholders' separate account balances invested in the Advanced Series Trust and The Prudential Series Fund. Income received from ASTISI and PGIM Investments related to this agreement was $24 million and $21 million for the three months ended June 30, 2021 and 2020, respectively, and $47 million and $43 million for the six months ended June 30, 2021 and 2020, respectively. These revenues are recorded as “Asset management and service fees” in the Company's Unaudited Interim Statements of Operations and Comprehensive Income (Loss).

Affiliated Notes Receivable

Affiliated notes receivable included in "Receivables from parent and affiliates" at June 30, 2021 and December 31, 2020 were as follows:
Maturity DatesInterest RatesJune 30, 2021December 31, 2020
(in thousands)
U.S. dollar fixed rate notes2026 - 20272.62%-14.85 %$54,566 $56,025 
Total long-term notes receivable - affiliated(1)$54,566 $56,025 

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

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

Accrued interest receivable related to these loans was $0.1 million and $0.0 million at June 30, 2021 and December 31, 2020, respectively, and is included in “Other assets”. Revenues related to these loans were $0.4 million for both the three months ended June 30, 2021 and 2020, and $0.7 million and $0.8 million for the six months ended June 30, 2021 and 2020, respectively, and are included in “Asset management and service fees”.

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Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
Affiliated Commercial Mortgage Loan

The affiliated commercial mortgage loan included in "Commercial mortgage and other loans" at June 30, 2021 and December 31, 2020 was as follows:
Maturity DateInterest RateJune 30, 2021December 31, 2020
(in thousands)
Affiliated Commercial Mortgage Loan20254.58%$74,005 $74,005 

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

Accrued interest receivable related to the loan was $0.2 million and $0.3 million at June 30, 2021 and December 31, 2020, respectively, and is included in "Accrued investment income". Revenues were $0.9 million and $0.3 million for the three months ended June 30, 2021 and 2020, respectively, and $1.7 million and $0.3 million for the six months ended June 30, 2021 and 2020, respectively, and are included in "Net investment income".

Affiliated Asset Transfers

The Company participates in affiliated asset trades with parent and sister companies. Book and market value differences for trades with a parent and sister are recognized within "Additional paid in capital" ("APIC") and "Realized investment gains (losses), net", respectively. The table below shows affiliated asset trades for the six months ended June 30, 2021 and for the year ended December 31, 2020.
AffiliateDateTransaction Security Type  Fair Value  Book Value  APIC, Net of Tax Increase/(Decrease)Realized
Investment
Gain (Loss)
(in thousands)
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 $$
Prudential InsuranceApril 2021PurchaseFixed Maturities$200,873 $200,873 $$
Prudential InsuranceApril 2021PurchaseCommercial Mortgage Loan$176,904 $176,904 $$
Vantage Casualty Insurance Co.June 2021PurchaseFixed Maturities$14,662 $14,662 $$
Prudential InsuranceJune 2021SaleEquities$3,050 $3,013 $$37 
Pruco LifeJune 2021SaleEquities$40,284 $38,026 $$2,258 
Passaic Fund LLCJune 2021Transfer OutOther Invested Assets$12,350 $12,350 $$



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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 June 30, 2021 and December 31, 2020:
AffiliateDate
Issued
Amount of Notes - June 30, 2021Amount of Notes - December 31, 2020Interest Rate  Date of Maturity  
  (in thousands)  
Prudential Insurance4/20/2016$$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 2.59 %6/28/2021
Total Loans Payable to Affiliates$299,747 $419,418 

The total interest expense to the Company related to affiliated loans and cash collateral with PGF was $4 million and $8 million for the three months ended June 30, 2021 and 2020, respectively, and $8 million and $36 million for the six months ended June 30, 2021 and 2020, respectively.

Contributed Capital and Dividends

Through June 2021 and December 2020, the Company did 0t receive any capital contributions.

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

In March and June 2021, the Company paid a dividend of $192 million and $188 million, respectively, to PAI. In 2020, the Company did 0t pay any dividends to PAI.

Reinsurance with Affiliates

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

10.    COMMITMENTS AND CONTINGENT LIABILITIES

Commitments

The Company has made commitments to fund commercial mortgage loans. As of June 30, 2021 and December 31, 2020, the outstanding balances on these commitments were $206 million and $48 million, respectively. These amounts include unfunded commitments that are not unconditionally cancellable. For related credit exposure, there was an allowance for credit losses of $0.0 million as of both June 30, 2021 and December 31, 2020. There was a change in allowance of $0.0 million for both the three and six months ended June 30, 2021 and 2020. The Company also made commitments to purchase or fund investments, mostly private fixed maturities. As of June 30, 2021 and December 31, 2020, $717 million and $305 million, respectively, of these commitments were outstanding. These amounts include unfunded commitments that are not unconditionally cancellable. There were 0 related charges for credit losses for either the three or six months ended June 30, 2021 or 2020.

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Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
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 June 30, 2021, the aggregate range of reasonably possible losses in excess of accruals established for those litigation and regulatory matters for which such an estimate currently can be made is less than $150 million. This estimate is not an indication of expected loss, if any, or the Company’s maximum possible loss exposure on such matters. The Company reviews relevant information with respect to its litigation and regulatory matters on a quarterly and annual basis and updates its accruals, disclosures and estimates of reasonably possible loss based on such reviews.

The following discussion of litigation and regulatory matters provides an update of those matters discussed in Note 15 to the Company's Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020, and should be read in conjunction with the complete descriptions provided in the Form 10-K.

Regulatory

Variable Products

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

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Prudential Annuities Life Assurance Corporation
Notes to Unaudited Interim Financial Statements—(Continued)
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 statements. Management believes, however, that, based on information currently known to it, the ultimate outcome of all pending litigation and regulatory matters, after consideration of applicable reserves and rights to indemnification, is not likely to have a material adverse effect on the Company’s financial statements.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) addresses the financial condition of Prudential Annuities Life Assurance Corporation (“PALAC” or the “Company”) as of June 30, 2021, compared with December 31, 2020, and its results of operations for the three and six months ended June 30, 2021 and 2020. You should read the following analysis of our financial condition and results of operations in conjunction with the MD&A, the “Risk Factors” section, and the audited Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, as well as the statements under “Forward-Looking Statements”, and the Unaudited Interim Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Overview

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

The Company has sold a wide array of annuities, including deferred and immediate variable annuities with (1) fixed interest rate allocation options, subject to a market value adjustment, that are registered with the United States Securities and Exchange Commission (the “SEC”), and (2) fixed-rate allocation options subject to a limited market value adjustment or no market value adjustment and not registered with the SEC. The Company ceased offering these products in March 2010. In 2018, the Company resumed offering annuity products to new investors (except in New York).

Effective April 1, 2016, the Company recaptured the risks related to its variable annuity living benefit guarantees that were previously reinsured to affiliates and reinsured the variable annuity base contracts, along with the living benefit guarantees, from Pruco Life Insurance Company ("Pruco Life"), excluding the Pruco Life Insurance Company of New Jersey ("PLNJ") business which was reinsured to the The Prudential Insurance Company of America (“Prudential Insurance”), in each case under a coinsurance and modified coinsurance agreement. This reinsurance agreement covers new and in force business and excludes business reinsured externally. As of December 31, 2020, Pruco Life discontinued the sales of traditional variable annuities with guaranteed living benefit riders. The discontinuation has no impact on the reinsurance agreement between Pruco Life and the Company. Additionally, the living benefit hedging program related to the living benefit guarantees as well as the product risks for retained and reinsured businesses are being managed within the Company and Prudential Insurance, as applicable.

Effective July 1, 2021, Pruco Life recaptured the risks related to its business, as discussed above, that had previously been reinsured to the Company from April 1, 2016 through June 30, 2021. The recapture does not impact PLNJ, which will continue to reinsure its new and in force business to Prudential Insurance. The product risks related to the previously reinsured business that were being managed in the Company, were transferred to Pruco Life. In addition, the living benefit hedging program related to the previously reinsured living benefit riders will be managed within Pruco Life.


COVID-19

Beginning in the first quarter of 2020, the outbreak of the 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. The pandemic continues to impact our results of operations in the current period and is expected to continue to be a driver of future impacts to our results of operations; however, the impacts to our businesses have moderated recently and are expected to continue to moderate. 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:

Results of Operations. For the three and six months ended June 30, 2021 we reported a net loss of $(75) million and net income of $1,815 million, respectively. See “Results of Operations” for a discussion of results for the second quarter and the first six months of 2021.

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” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
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Business Continuity. Throughout the COVID-19 pandemic, we have been executing Prudential Financial Inc.'s ("Prudential Financial") and our business continuity protocols to ensure our employees are safe and able to serve our customers. This included effectively transitioning the vast majority of our employees to remote work arrangements.

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

Impact of a Low Interest Rate Environment

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

investment-related activity, including: investment income returns, net interest margins, net investment spread results, new money rates, mortgage loan prepayments and bond redemptions;
hedging costs and other risk mitigation activities;
insurance reserve levels, amortization of deferred policy acquisition costs (“DAC”)/value of business acquired (“VOBA”)/deferred sales inducements ("DSI") and market experience true-ups;
customer account values, including their impact on fee income;
fair value of, and possible impairments, on intangible assets;
product offerings, design features, crediting rates and sales mix; and
policyholder behavior, including surrender or withdrawal activity.

For more information on interest rate risks, see “Risk Factors—Market Risk” included in our Annual Report on Form 10-K for the year ended December 31, 2020.

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.

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

DAC, DSI and VOBA;
Policyholder liabilities;
Valuation of investments, including derivatives, measurement of allowance for credit losses, and 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.

Market Performance - Equity and Interest Rate Assumptions

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

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

The weighted average rate of return assumptions used in developing estimated market returns consider many factors specific to each product type, including asset durations, asset allocations and other factors. With regard to equity market assumptions, the near-term future rate of return assumption used in evaluating DAC, DSI, and VOBA and liabilities for future policy benefits for certain of our products, primarily our domestic variable annuity products, is generally updated each quarter and is derived using a reversion to the mean approach, a common industry practice. Under this approach, we consider historical equity returns and adjust projected equity returns over an initial future period of five years (the “near-term”) so that equity returns converge to the long-term expected rate of return. If the near-term projected future rate of return is greater than our near-term maximum future rate of return of 15.0%, we use our maximum future rate of return. If the near-term projected future rate of return is lower than our near-term minimum future rate of return of 0%, we use our minimum future rate of return. As of June 30, 2021, we assume an 8.0% long-term equity expected rate of return and a 0% 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 2021 annual reviews and update of assumptions and other refinements, we kept our long-term expectation of the 10-year U.S. Treasury rate unchanged and continue to 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, 2020.
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Future Adoption of New Accounting Pronouncements
ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the Financial Accounting Standards Board ("FASB") on August 15, 2018 and is expected to have a significant impact on the Company's Financial Statements and Notes to the Financial Statements. In October 2019, the FASB issued ASU 2019-09, Financial Services - Insurance (Topic 944): Effective Date to affirm its decision to defer the effective date of ASU 2018-12 to January 1, 2022 (with early adoption permitted), representing a one year extension from the original effective date of January 1, 2021. As a result of the COVID-19 pandemic, in November 2020 the FASB issued ASU 2020-11, Financial Services—Insurance (Topic 944): Effective Date and Early Application to defer for an additional one year the effective date of ASU 2018-12 from January 1, 2022 to January 1, 2023, and to provide transition relief to facilitate the early adoption of the ASU. The transition relief would allow large calendar-year public companies that early adopt ASU 2018-12 to apply the guidance either as of January 1, 2020 or January 1, 2021 (and record transition adjustments as of January 1, 2020 or January 1, 2021, respectively) in the 2022 financial statements. Companies that do not early adopt ASU 2018-12 would apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2023 financial statements. The Company currently intends to adopt ASU 2018-12 effective January 1, 2023. ASU 2018-12 will impact, at least to some extent, the accounting and disclosure requirements for all long-duration insurance and investment contracts issued by the Company. In addition to the impacts to the balance sheet upon adoption, the Company also expects an impact to the pattern of earnings emergence following the transition date. See Note 2 to the Unaudited Interim Financial Statements for a more detailed discussion of ASU 2018-12, as well as other accounting pronouncements issued but not yet adopted and newly adopted accounting pronouncements.
Changes in Financial Position
Total assets decreased $0.8 billion from $64.3 billion at December 31, 2020 to $63.5 billion at June 30, 2021. Significant components were:
$1.4 billion decrease in Total investments and Cash and cash equivalents primarily driven by unrealized losses on investments due to rising interest rates, cash flows from insurance operations and dividend distributions;
Partially offset by:
$0.7 billion increase in Separate account assets, primarily driven by market appreciation driven by favorable equity market performance, largely offset by net outflows.
Total liabilities decreased $1.1 billion from $61.6 billion at December 31, 2020 to $60.5 billion at June 30, 2021. Significant components were:
$4.9 billion decrease in Future policy benefits primarily driven by a decrease in reserves related to our variable annuity living benefit guarantees due to rising interest rates and favorable equity market performance;
Partially offset by:
$3.4 billion increase in Policyholders' account balances primarily driven by incremental general account product sales; and
$0.7 billion increase in Separate account liabilities, corresponding to the increase in Separate account assets, as discussed above.
Total equity increased $0.3 billion from $2.7 billion at December 31, 2020 to $3.0 billion at June 30, 2021, primarily driven by an after-tax net income of $1.8 billion, partially offset by dividend distributions of $0.4 billion, and unrealized losses on investments of $1.8 billion driven by rising interest rates reflected in Accumulated other comprehensive income (loss).
Results of Operations
Income (loss) from Operations before Income Taxes
Three Months Comparison
Income (loss) from operations before income taxes increased $2,519 million from a loss of $2,618 million for the three months ended June 30, 2020 to a loss of $99 million for the three months ended June 30, 2021. Excluding the impact of our annual reviews and update of assumptions and other refinements, income (loss) from operations increased $2,437 million primarily driven by:

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Favorable impact related to the portions of our U.S. GAAP liability before non-performance risk ("NPR"), that are excluded from our hedge target, driven by favorable equity market performance, partially offset by declining interest rates. Also contributing is an unfavorable NPR adjustment. Prior year period reflected an increase in these reserves primarily driven by an unfavorable NPR adjustment and unfavorable hedge breakage driven by tightening of credit spreads, partially offset by the tightening of credit spreads used to measure our living benefit liability.
Six Months Comparison
Income (loss) from operations before income taxes increased $5,962 million from a loss of $3,677 million for the six months ended June 30, 2020 to income of $2,285 million for the six months ended June 30, 2021. Excluding the impact of our annual reviews and update of assumptions and other refinements, income (loss) from operations increased $5,879 million primarily driven by:
Favorable impact related to the portions of our U.S. GAAP liability before NPR, that are excluded from our hedge target driven by favorable equity market performance and rising interest rates. These increases were partially offset by an unfavorable NPR adjustment. Prior year period reflected an increase in these reserves primarily driven by declining interest rates, widening of credit spreads, and unfavorable hedge breakage, partially offset by a favorable NPR adjustment used to measure our living benefit liability.
The following table provides the net impact to the Unaudited Interim Statements of Operations, which is primarily driven by the changes in the U.S. GAAP embedded derivative liability and hedge positions under the Asset Liability Management ("ALM") strategy, and the related amortization of DAC and other costs.
Three Months EndedSix Months Ended
June 30, 2021June 30, 2020June 30, 2021June 30, 2020
(in millions)(1)(in millions)(1)
U.S. GAAP embedded derivative and hedging positions
Change in value of U.S.GAAP liability, pre-NPR(2)$(1,883)$4,516 $5,581 $(14,659)
Change in the NPR adjustment(104)(3,238)(903)2,720 
Change in fair value of hedge assets, excluding capital hedges(3)1,334 (3,047)(3,112)7,802 
Change in fair value of capital hedges(4)(503)(710)(803)237 
Other578 283 1,106 643 
Realized investment gains (losses), net, and related adjustments(578)(2,196)1,869 (3,257)
Market experience updates(5)92 23 161 (235)
Charges related to realized investments gains (losses), net74 455 (260)147 
Net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs(6)$(412)$(1,718)$1,770 $(3,345)
(1)Positive amount represents income; negative amount represents a loss.
(2)Represents the change in the liability (excluding NPR) for our variable annuities which is measured utilizing a valuation methodology that is required under U.S. GAAP. This liability includes such items as risk margins which are required by U.S. GAAP but not included in our best estimate of the liability.
(3)Represents the changes in fair value of the derivatives utilized to hedge potential claims associated with our variable annuity living benefit guarantees.
(4)Represents the changes in fair value of equity derivatives of the capital hedge program intended to protect a portion of the overall capital position of our business against exposure to the equity markets.
(5)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability.
(6)Excludes amounts from the changes in unrealized gains and losses from fixed income instruments recorded in OCI (versus net income) of $108 million and $(14) million for the three months ended June 30, 2021 and 2020, respectively, and $(1,627) million and $1,593 million for the six months ended June 30, 2021 and 2020, respectively.

For the three months ended June 30, 2021, the loss of $412 million was driven by an unfavorable impact related to the U.S. GAAP liability before NPR, net of the change in fair value of hedge assets (excluding capital hedges) largely due to declining interest rates, partially offset by favorable equity market performance, as well as losses associated with our capital hedge program and an unfavorable NPR adjustment. This was partially offset by favorable market experience updates from higher equity markets.
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For the three months ended June 30, 2020, the loss of $1,718 million was driven by an unfavorable NPR adjustment driven by tightening credit spreads and losses associated with our capital hedge program driven by favorable equity markets. These losses were partially offset by the favorable impact related to the U.S. GAAP liability before NPR, net of the change in fair value of hedge assets (excluding capital hedges) largely due to tightening credit spreads and favorable equity markets, as well as benefits related to the amortization of DAC and other costs.
For the six months ended June 30, 2021, the gain of $1,770 million was driven by a favorable impact related to the U.S. GAAP liability before NPR, net of the change in fair value of hedge assets (excluding capital hedges) as well as favorable market experience updates largely due to favorable equity markets and rising interest rates. These impacts were partially offset by an unfavorable NPR adjustment, losses associated with our capital hedge program and charges related to the amortization of DAC and other costs.
For the six months ended June 30, 2020, the loss of $3,345 million was driven by an unfavorable impact related to the U.S. GAAP liability before NPR, net of the change in fair value of hedge assets (excluding capital hedges) driven by declining interest rates, widening of credit spreads and unfavorable equity market performance, as well as unfavorable market experience updates due to unfavorable equity markets and declining interest rates. These losses were partially offset by a favorable NPR adjustment, reflecting the impact of widening credit spreads.
Revenues, Benefits and Expenses
Three Months Comparison
Revenues increased $2,841 million from a loss of $2,641 million for the three months ended June 30, 2020 to a gain of $200 million for the three months ended June 30, 2021. Excluding the impact of our annual reviews and update of our assumptions and other refinements, revenues increased $2,955 million primarily driven by:
Higher Realized investment gains (losses), net reflecting favorable impact related to the portions of our U.S. GAAP liability before NPR, that are excluded from our hedge target driven by favorable equity market performance, partially offset by declining interest rates. Also contributing is an unfavorable NPR adjustment.
Benefits and expenses increased $321 million from income of $22 million for the three months ended June 30, 2020 to an expense of $299 million for the three months ended June 30, 2021. Excluding the impact of our annual reviews and update of our assumptions and refinements, benefits and expenses increased $518 million 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.
Six Months Comparison
Revenues increased $5,939 million from a loss of $2,617 million for the six months ended June 30, 2020 to a gain of $3,322 million for the six months ended June 30, 2021. Excluding the impact of our annual reviews and update to our assumptions and other refinements, revenues increased $6,053 million primarily driven by:
Higher Realized investment gains (losses), net reflecting favorable impact related to the portions of our U.S. GAAP liability before NPR, that are excluded from our hedge target driven by favorable equity market performance and rising interest rates. These increases were partially offset by an unfavorable NPR adjustment.
Benefits and expenses decreased $23 million from $1,060 million for the six months ended June 30, 2020 to $1,037 million for the six months ended June 30, 2021. Excluding the impact of our annual reviews and update to our assumptions and other refinements, benefits and expenses increased $174 million primarily driven by:
Higher Amortization of deferred policy acquisition costs driven by changes to expected gross profits reflecting change in market conditions.
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Risks and Risk Mitigants
Fixed Annuity Risks and Risk Mitigants. The primary risk exposure of our fixed annuity product relates to investment risks we bear for providing customers a minimum guaranteed interest rate or an index-linked interest rate required to be credited to the customer’s account value, which include interest rate fluctuations and/or sustained periods of low interest rates, and credit risk related to the underlying investments. We manage these risk exposures primarily through our investment strategies and product design features, which include credit rate resetting subject to the minimum guaranteed interest rate, as well as surrender charges applied during the early years of the contract that help to provide protection from premature withdrawals. In addition, a portion of our fixed annuity products has a market value adjustment provision that affords protection of lapse in the case of rising interest rates. We also manage these risk exposures through external reinsurance for certain of our fixed annuity products.
Indexed Variable Annuity Risks and Risk Mitigants. The primary risk exposure of our indexed variable annuity product relates to the investment risks we bear in order to credit to the customer’s account balance the required crediting rate based on the performance of the elected indices at the end of each term. We manage this risk primarily through our investment strategies including derivatives and product design features, which include credit rate resetting subject to contractual minimums as well as surrender charges applied during the early years of the contract that help to provide protection from premature withdrawals. In addition, our indexed variable annuity strategies have an interim value provision that provides protection from lapse in the case of rising interest rates.
Variable Annuity Risks and Risk Mitigants. The primary risk exposures of our variable annuity contracts relate to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including capital markets assumptions such as equity market returns, interest rates and market volatility, along with actuarial assumptions such as contractholder mortality, the timing and amount of annuitization and withdrawals, and contract lapses. For these risk exposures, achievement of our expected returns is subject to the risk that actual experience will differ from the assumptions used in the original pricing of these products. We manage our exposure to certain risks driven by fluctuations in capital markets primarily through a combination of i) Product Design Features, ii) our Asset Liability Management Strategy, and iii) our Capital Hedge Program as discussed below. We also manage these risk exposures through external reinsurance for certain of our variable annuity products. Sales of traditional variable annuities with guaranteed living benefit riders were discontinued as of December 31, 2020.
Effective July 1, 2021, Pruco Life recaptured the risks related to its business that had previously been reinsured to the Company from April 1, 2016 through June 30, 2021. The recapture does not impact PLNJ, which will continue to reinsure its new and in force business to Prudential Insurance. The product risks related to the previously reinsured business that were being managed in the Company, were transferred to Pruco Life. In addition, the living benefit hedging program related to the previously reinsured living benefit riders will be managed within Pruco Life.
i. Product Design Features:
A portion of the variable annuity contracts that we offered include an asset transfer feature. This feature is implemented at the contract level, and transfers assets between certain variable investment sub-accounts selected by the annuity contractholder and, depending on the benefit feature, a fixed-rate account in the general account or a bond fund sub-account within the separate account. The objective of the asset transfer feature is to reduce our exposure to equity market risk and market volatility. The transfers are based on a static mathematical formula used with the particular benefit which considers a number of factors, including, but not limited to, the impact of investment performance on the contractholder’s total account value. Other product design features we utilize include, among others, asset allocation restrictions, minimum issuance age requirements and certain limitations on the amount of contractholder purchase payments, as well as a required minimum allocation to our general account 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.
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 meet expected liabilities associated with our variable annuity living benefit guarantees. The economic liability we manage with this ALM strategy consists of expected living benefit claims under less severe market conditions, which are managed using fixed income instruments, derivatives, or a combination thereof, and potential living benefit claims resulting from more severe market conditions, which are hedged using derivative instruments. For the portion of our ALM strategy executed with derivatives, we enter into a range of exchange-traded and over-the-counter ("OTC") equity, interest rate and credit derivatives, including, but not limited to: equity and treasury futures; total return, credit default and interest rate swaps; and options, including equity options, swaptions, and floors and caps. The intent of this strategy is to more efficiently manage the capital and liquidity associated with these products while continuing to mitigate fluctuations in net income due to movements in capital markets.
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The valuation of the economic liability we seek to defray excludes certain items that are included within the U.S. GAAP liability, such as NPR in order to maximize protection irrespective of the possibility of our own default, as well as risk margins (required by U.S. GAAP but different from our best estimate) and valuation methodology differences. The following table provides a reconciliation between the liability reported under U.S. GAAP and the economic liability we manage through our ALM strategy, net of reinsurance recoverables, as of the periods indicated:
As of June 30, 2021As of December 31, 2020(1)
(in millions)
U.S. GAAP Liability, including NPR$12,228 $16,905 
NPR Adjustment2,802 3,705 
     Subtotal15,030 20,610 
Adjustments including risk margins and valuation methodology differences(3,176)(4,596)
     Economic liability managed by ALM strategy$11,854 $16,014 
(1)Prior period amounts have been updated to conform to current period presentation.
As of June 30, 2021, the fair value of our fixed income instruments and derivative assets exceed our economic liability.
Under our ALM strategy, we expect differences in the U.S. GAAP net income impact between the changes in value of the fixed income instruments (either designated as available-for-sale or designated as trading) and derivatives as compared to the changes in the embedded derivative liability these assets support. These differences can be primarily attributed to three distinct areas:
Different valuation methodologies in measuring the liability we intend to cover with fixed income instruments and derivatives versus the liability reported under U.S. GAAP. The valuation methodology utilized in estimating the economic liability we intend to defray with fixed income instruments (either designated as available-for-sale or designated as trading) and derivatives is different from that required to be utilized to measure the liability under U.S. GAAP. Additionally, the valuation of the economic liability excludes certain items that are included within the U.S. GAAP liability, such as NPR in order to maximize protection irrespective of the possibility of our own default and risk margins (required by U.S. GAAP but different from our best estimate).
Different accounting treatment between liabilities and assets supporting those liabilities. Under U.S. GAAP, changes in value of the embedded derivative liability, derivative instruments and fixed income instruments designated as trading immediately reflected in net income, while changes in the fair value of fixed income instruments that are designated as available-for-sale are recorded as unrealized gains (losses) in other comprehensive income.
General hedge results. For the derivative portion of the ALM strategy, the net hedging impact (the extent to which the changes in value of the hedging instruments offset the change in value of the portion of the economic liability we are hedging) may be impacted by a number of factors, including: cash flow timing differences between our hedging instruments and the corresponding portion of the economic liability we are hedging, basis differences attributable to actual underlying contractholder funds to be hedged versus hedgeable indices, rebalancing costs related to dynamic rebalancing of hedging instruments as markets move, certain elements of the economic liability that may not be hedged (including certain actuarial assumptions), and implied and realized market volatility on the hedge positions relative to the portion of the economic liability we seek to hedge.
For information regarding the Risk Appetite Framework ("RAF") we use to evaluate and support the risks of the ALM strategy, see “—Liquidity and Capital Resources—Capital”.
iii. Capital Hedge Program:
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.

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Liquidity and Capital Resources
This section supplements and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” included in our Annual Report on Form 10-K for the year ended December 31, 2020.
Overview
Liquidity refers to the ability to generate sufficient cash resources to meet the payment obligations of the Company. Capital refers to the long-term financial resources available to support the operations of our business, fund business growth, and provide a cushion to withstand adverse circumstances. Our ability to generate and maintain sufficient liquidity and capital depends on the profitability of our business, general economic conditions, our ability to borrow from affiliates and our access to the capital markets through affiliates as described herein.
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 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.
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, 2020.
Capital
We manage PALAC to regulatory capital levels consistent with our “AA” ratings targets. We utilize the risk-based capital (“RBC”) ratio as a primary measure of capital adequacy. RBC is calculated based on statutory financial statements and risk formulas consistent with the practices of the National Association of Insurance Commissioners ("NAIC"). RBC considers, among other things, risks related to the type and quality of the invested assets, insurance-related risks associated with an insurer’s products and liabilities, interest rate risks and general business risks. RBC ratio calculations are intended to assist insurance regulators in measuring an insurer’s solvency and ability to pay future claims. The reporting of RBC measures is not intended for the purpose of ranking any insurance company or for use in connection with any marketing, advertising or promotional activities, but is available to the public. The Company’s capital levels substantially exceed the minimum level required by applicable insurance regulations. Our regulatory capital levels may be affected in the future by changes to the applicable regulations, proposals for which are currently under consideration by both domestic and international insurance regulators.
The regulatory capital level of the Company can be materially impacted by interest rate and equity market fluctuations, changes in the values of derivatives, the level of impairments recorded, and credit quality migration of the investment portfolio, among other items. In addition, the reinsurance of business or the recapture of business subject to reinsurance arrangements due to defaults by, or credit quality migration affecting, the reinsurers or for other reasons could negatively impact regulatory capital levels. The Company’s regulatory capital level is also affected by statutory accounting rules, which are subject to change by each applicable insurance regulator.
The Company made distributions to its parent, Prudential Annuities, Inc., for the three month periods indicated below.
Return of CapitalDividends
(in millions)
June 30, 2021$$188 
March 31, 2021$$192 
December 31, 2020$188 $
September 30, 2020$192 $
June 30, 2020$173 $
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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 June 30, 2021 and December 31, 2020, the Company had liquid assets of $19.5 billion and $21.4 billion, respectively. The portion of liquid assets comprised cash and cash equivalents and short-term investments was $2.2 billion and $1.4 billion as of June 30, 2021 and December 31, 2020, respectively. As of June 30, 2021, $12 billion, or 91%, 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
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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of fluctuations in the value of financial instruments as a result of absolute or relative changes in interest rates, foreign currency exchange rates, equity prices or commodity prices. To varying degrees, our products and services, and the investment activities supporting them, generate exposure to market risk. The market risk incurred, and our strategies for managing this risk, vary by product. As of June 30, 2021, there have been no material changes in our economic exposure to market risk from December 31, 2020, a description of which may be found in our Annual Report on Form 10-K, for the year ended December 31, 2020, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” filed with the Securities and Exchange Commission. See Item 1A, “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2020, for a discussion of how difficult conditions in the financial markets and the economy generally may materially adversely affect our business and results of our operations.

Subsequent to the quarterly period covered by this Form 10-Q, effective July 1, 2021, Pruco Life Insurance Company (“Pruco Life”) recaptured the risks related to its variable annuity business, including base contracts, along with the living benefit guarantees that had previously been reinsured to the Company from April 1, 2016 through June 30, 2021. The product risks related to the previously reinsured business that were being managed in the Company, were transferred to Pruco Life. In addition, the living benefit hedging program related to the previously reinsured living benefit riders will be managed within Pruco Life.

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 June 30, 2021. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2021, our disclosure controls and procedures were effective. No change in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), occurred during the quarter ended June 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

You should carefully consider the risks described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020. These risks could materially affect our business, results of operations or financial condition, cause the trading price of our Common Stock to decline materially or cause our actual results to differ materially from those expected or those expressed in any forward-looking statements made by, or on behalf of, the Company. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” and the risks of our businesses described elsewhere in this Quarterly Report on Form 10-Q.
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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: August 12, 2021

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