PRUDENTIAL ANNUITIES LIFE ASSURANCE CORP/CT - FORM 10-Q

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EX-32.1 - EXHIBIT 32.1 - PRUDENTIAL ANNUITIES LIFE ASSURANCE CORP/CT	palac-2016331xex321.htm
EX-31.1 - EXHIBIT 31.1 - PRUDENTIAL ANNUITIES LIFE ASSURANCE CORP/CT	palac-2016331xex311.htm
EX-31.2 - EXHIBIT 31.2 - PRUDENTIAL ANNUITIES LIFE ASSURANCE CORP/CT	palac-2016331xex312.htm
EX-32.2 - EXHIBIT 32.2 - PRUDENTIAL ANNUITIES LIFE ASSURANCE CORP/CT	palac-2016331xex322.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________

FORM 10-Q

_____________________________________

(MARK ONE)



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

For the quarterly period ended March 31, 2016



¨	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, Connecticut 06484

(203) 926-1888

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

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 ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ý No ¨

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



Large accelerated filer	¨	Accelerated filer	¨

Non-accelerated filer	ý	Smaller reporting company	¨

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

As of May 12, 2016, 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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TABLE OF CONTENTS



			Page
PART I FINANCIAL INFORMATION
	Item 1.	Financial Statements:
		Unaudited Interim Statements of Financial Position as of March 31, 2016 and December 31, 2015	4
		Unaudited Interim Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2016 and 2015	5
		Unaudited Interim Statements of Equity for the Three Months Ended March 31, 2016 and 2015	6
		Unaudited Interim Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015	7
		Notes to Unaudited Interim Financial Statements	9
		1. Business and Basis of Presentation	9
		2. Significant Accounting Policies and Pronouncements	10
		3. Investments	12
		4. Fair Value of Assets and Liabilities	23
		5. Derivative Instruments	39
		6. Commitments, Contingent Liabilities and Litigation and Regulatory Matters	44
		7. Related Party Transactions	46
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	48
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56
	Item 4.	Controls and Procedures	56
PART II OTHER INFORMATION			57
	Item 1.	Legal Proceedings	57
	Item 1A.	Risk Factors	57
	Item 6.	Exhibits	58
SIGNATURES			59

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FORWARD LOOKING STATEMENTS

Certain of the statements included in this Quarterly Report on Form 10-Q, including but not limited to those in Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Prudential Annuities Life Assurance Corporation. There can be no assurance that future developments affecting Prudential Annuities Life Assurance Corporation will be those anticipated by management. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (1) general economic, market and political conditions, including the performance and fluctuations of fixed income, equity, real estate and other financial markets; (2) the availability and cost of additional debt or equity capital or external financing for our operations; (3) interest rate fluctuations or prolonged periods of low interest rates; (4) the degree to which we choose not to hedge risks, or the potential ineffectiveness or insufficiency of hedging or risk management strategies we do implement; (5) reestimates of our reserves for future policy benefits and claims; (6) differences between actual experience regarding mortality, morbidity, persistency, utilization, interest rates, or market returns and the assumptions we use in pricing our products, establishing liabilities and reserves or for other purposes; (7) changes in our assumptions related to deferred policy acquisition costs or value of business acquired; (8) changes in our financial strength or credit ratings; (9) investment losses, defaults and counterparty non-performance; (10) competition in our product lines and for personnel; (11) changes in tax law; (12) regulatory or legislative changes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the U.S. Department of Labor's fiduciary rules; (13) inability to protect our intellectual property rights or claims of infringement of the intellectual property rights of others; (14) adverse determinations in litigation or regulatory matters, and our exposure to contingent liabilities, including related to the remediation of certain securities lending activities administered by Prudential Financial, Inc.; (15) domestic or international military actions, natural or man-made disasters including terrorist activities or pandemic disease, or other events resulting in catastrophic loss of life; (16) ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks; (17) interruption in telecommunication, information technology or other operational systems or failure to maintain the security, confidentiality or privacy of sensitive data on such systems; (18) changes in statutory or U.S. GAAP accounting principles, practices or policies; and (19) possible difficulties in executing, integrating and realizing projected results of acquisitions, divestitures and restructurings. 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, 2015 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

March 31, 2016 and December 31, 2015 (in thousands, except share amounts)



	March 31, 2016		December 31, 2015
ASSETS
Fixed maturities, available-for-sale, at fair value (amortized cost, 2016: $2,521,513; 2015: $2,433,626)	$	2,653,708	$	2,524,272
Trading account assets, at fair value	7,331		5,653
Equity securities, available-for-sale, at fair value (cost, 2016: $14; 2015: $14)	18		17
Commercial mortgage and other loans	446,620		438,172
Policy loans	13,094		13,054
Short-term investments	764		158,227
Other long-term investments	221,301		182,157
Total investments	3,342,836		3,321,552
Cash and cash equivalents	106,478		536
Deferred policy acquisition costs	536,943		749,302
Accrued investment income	27,028		22,615
Reinsurance recoverables	3,776,339		3,088,328
Value of business acquired	30,184		33,640
Deferred sales inducements	327,494		452,752
Receivables from parent and affiliates	49,087		212,696
Other assets	104,486		123,158
Separate account assets	38,392,917		39,250,159
TOTAL ASSETS	$	46,693,792	$	47,254,738
LIABILITIES AND EQUITY
LIABILITIES
Policyholders’ account balances	$	2,422,041	$	2,416,125
Future policy benefits	4,294,804		3,578,662
Payables to parent and affiliates	47,589		275,737
Cash collateral for loaned securities	3,683		10,568
Income taxes	196,710		274,951
Short-term debt	0		1,000
Other liabilities	113,806		100,618
Separate account liabilities	38,392,917		39,250,159
Total Liabilities	45,471,550		45,907,820
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 6)
EQUITY
Common stock, ($100 par value; 25,000 shares authorized, issued and outstanding)	2,500		2,500
Additional paid-in capital	901,422		901,422
Retained earnings	254,165		396,830
Accumulated other comprehensive income	64,155		46,166
Total Equity	1,222,242		1,346,918
TOTAL LIABILITIES AND EQUITY	$	46,693,792	$	47,254,738

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 Months Ended March 31, 2016 and 2015 (in thousands)



	Three Months Ended March 31,
	2016			2015
REVENUES
Premiums	$	5,490		$	9,192
Policy charges and fee income	149,506			191,383
Net investment income	33,010			37,589
Asset administration fees and other income	27,331			54,043
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities	(3,755		)	(25		)
Other-than-temporary impairments on fixed maturity securities transferred to other comprehensive income (loss)	1,818			16
Other realized investment gains (losses), net	(12,305		)	13,484
Total realized investment gains (losses), net	(14,242		)	13,475
Total revenues	201,095			305,682
BENEFITS AND EXPENSES
Policyholders’ benefits	23,676			11,989
Interest credited to policyholders’ account balances	131,659			91,630
Amortization of deferred policy acquisition costs	207,476			141,060
General, administrative and other expenses	66,779			87,072
Total benefits and expenses	429,590			331,751
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES	(228,495		)	(26,069		)
Income tax expense (benefit)	(85,830		)	(4,767		)
NET INCOME (LOSS)	(142,665		)	(21,302		)
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments	28			(59		)
Net unrealized investment gains (losses):
Unrealized investment gains (losses) for the period	25,501			14,793
Reclassification adjustment for (gains) losses included in net income	2,146			(1,862		)
Net unrealized investment gains (losses)	27,647			12,931
Other comprehensive income (loss), before tax:	27,675			12,872
Less: Income tax expense (benefit) related to other comprehensive income (loss)
Foreign currency translation adjustments	10			(21		)
Net unrealized investment gains (losses)	9,676			4,526
Total	9,686			4,505
Other comprehensive income (loss), net of tax	17,989			8,367
COMPREHENSIVE INCOME (LOSS)	$	(124,676	)	$	(12,935	)

See Notes to Unaudited Interim Financial Statements

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Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Equity

Three Months Ended March 31, 2016 and 2015 (in thousands)



	Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)		Total Equity
Balance, December 31, 2015	$	2,500	$	901,422	$	396,830		$	46,166	$	1,346,918
Comprehensive income:
Net income (loss)	0		0		(142,665		)	0		(142,665		)
Other comprehensive income (loss), net of tax	0		0		0			17,989		17,989
Total comprehensive income (loss)										(124,676		)
Balance, March 31, 2016	$	2,500	$	901,422	$	254,165		$	64,155	$	1,222,242

	Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)		Total Equity
Balance, December 31, 2014	$	2,500	$	901,422	$	673,613		$	84,622	$	1,662,157
Comprehensive income:
Net income (loss)	0		0		(21,302		)	0		(21,302		)
Other comprehensive income (loss), net of tax	0		0		0			8,367		8,367
Total comprehensive income (loss)										(12,935		)
Balance, March 31, 2015	$	2,500	$	901,422	$	652,311		$	92,989	$	1,649,222

See Notes to Unaudited Interim Financial Statements

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Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Cash Flows

Three Months Ended March 31, 2016 and 2015 (in thousands)



	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(142,665	)	$	(21,302	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Policy charges and fee income	102			539
Realized investment (gains) losses, net	14,242			(13,475		)
Depreciation and amortization	1,819			32,888
Interest credited to policyholders’ account balances	131,659			91,630
Change in:
Future policy benefits	64,852			57,356
Accrued investment income	(4,413		)	(2,783		)
Net receivable from/payable to parent and affiliates	(64,504		)	(2,451		)
Deferred sales inducements	(8		)	(724		)
Deferred policy acquisition costs	207,158			140,554
Income taxes	(87,927		)	4,495
Reinsurance recoverables	(69,025		)	(67,013		)
Bonus reserve	0			(30,029		)
Derivatives, net	(6,366		)	(4,092		)
Deferred loss on reinsurance	4,445			0
Other, net	(13,642		)	(3,914		)
Cash flows from operating activities	$	35,727		$	181,679
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale	$	74,705		$	155,652
Commercial mortgage and other loans	5,582			5,890
Trading account assets	540			1,799
Policy loans	227			179
Other long-term investments	415			883
Short-term investments	702,478			478,691
Payments for the purchase/origination of:
Fixed maturities, available-for-sale	(148,237		)	(78,468		)
Commercial mortgage and other loans	(14,184		)	(1,492		)
Trading account assets	(300		)	(1,577		)
Policy loans	(109		)	(38		)
Other long-term investments	(2,156		)	274
Short-term investments	(545,014		)	(523,304		)
Notes receivable from parent and affiliates, net	1,941			274
Derivatives, net	1			30
Other, net	149			158
Cash flows from investing activities	$	76,038		$	38,951
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash collateral for loaned securities	(6,885		)	3,847
Net decrease in short-term borrowing	(1,000		)	(30,347		)
Drafts outstanding	2,584			10,021

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Policyholders’ account balances
Deposits	412,276			250,594
Withdrawals	(412,798		)	(439,124		)
Cash flows used in financing activities	$	(5,823	)	$	(205,009	)
NET INCREASE IN CASH AND CASH EQUIVALENTS	105,942			15,621
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	536			594
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	106,478		$	16,215

See Notes to Unaudited Interim Financial Statements

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

1. BUSINESS AND BASIS OF PRESENTATION

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

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

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

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

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

As disclosed in Note 1 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015, the Company surrendered its New York license effective as of December 31, 2015, and reinsured the majority of its New York business to an affiliate, The Prudential lnsurance Company of America (“Prudential Insurance”). The license surrender relieves the Company of the requirement to hold New York statutory reserves on its business in excess of the statutory reserves required by its domiciliary regulator, the Arizona Department of Insurance. For the small portion of New York business retained by the Company, a custodial account has been established to hold collateral assets in an amount equal to a percentage of the reserves associated with such business, as calculated in accordance with PALAC's New York Regulation 109 Plan approved by the New York Department of Financial Services.

Effective April 1, 2016, the Company recaptured the risks related to its variable annuity living benefit riders that were previously reinsured to Pruco Re. In addition, the Company reinsured variable annuity base contracts, along with the living benefit riders, from Pruco Life Insurance Company, excluding the Pruco Life Insurance Company of New Jersey business which was reinsured to Prudential Insurance. This reinsurance agreement covers new and in force business and excludes business reinsured externally. The product risks related to the reinsured business are being managed in the Company. In addition, the living benefit hedging program related to the reinsured living benefit riders will be managed within the Company.

Basis of Presentation

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

In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations have been made. All such adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Company’s Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

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Use of Estimates

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

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

Reclassifications

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

2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS

This section supplements, and should be read in conjunction with, Note 2 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Adoption of New Accounting Pronouncements

In May 2015, the Financial Accounting Standards Board (“FASB”) issued guidance (Accounting Standards Update (“ASU”) 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)) to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The new guidance became effective for annual periods and interim periods within those annual periods that began after December 15, 2015, and was applied retrospectively. Adoption of the guidance did not have a significant effect on the Company’s financial statement disclosures. See Note 4.

In August 2014, the FASB issued updated guidance (ASU 2014-14, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure) requiring that mortgage loans be derecognized and that a separate other receivable be recognized upon foreclosure if certain conditions are met. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The new guidance became effective for annual periods and interim periods within those annual periods that began after December 15, 2014 and was applied prospectively. Adoption of the guidance did not have a significant effect on the Company’s financial position, results of operations or financial statement disclosures.

In August 2014, the FASB issued updated guidance (ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity) for measuring the financial assets and the financial liabilities of a consolidated collateralized financing entity. Under the guidance, an entity within scope is permitted to measure both the financial assets and financial liabilities of a consolidated collateralized financing entity based on either the fair value of the financial assets or the financial liabilities, whichever is more observable. If adopted, the guidance eliminates the measurement difference that exists when both are measured at fair value. The Company adopted the updated guidance effective January 1, 2016, and applied the modified retrospective method of adoption. Adoption of the updated guidance did not have a significant effect on the Company’s financial position, results of operations or financial statement disclosures.

In June 2014, the FASB issued updated guidance (ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures) that requires repurchase-to-maturity transactions to be accounted for as secured borrowings and eliminates existing guidance for repurchase financings. The guidance also requires new disclosures for certain transactions accounted for as secured borrowings and for transfers accounted for as sales when the transferor also retains substantially all of the exposure to the economic return on the transferred financial assets. Accounting changes and new disclosures for transfers accounted for as sales under the new guidance were effective for the first interim or annual period beginning after December 15, 2014 and did not have a significant effect on the Company's financial position, results of operations or financial statement disclosures. Disclosures for certain transactions accounted for as secured borrowings were effective for interim periods beginning after March 15, 2015 and are included in Note 3.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

In April 2014, the FASB issued updated guidance (ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity) that changes the criteria for reporting discontinued operations and introduces new disclosures. The new guidance became effective for new disposals and new classifications of disposal groups as held for sale that occur within annual periods that began on or after December 15, 2014, and interim periods within those annual periods. Adoption of the guidance did not have a significant effect on the Company’s financial position, results of operations or financial statement disclosures.

In January 2014, the FASB issued updated guidance (ASU 2014-04, Receivables-Troubled Debt Restructuring by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure) for troubled debt restructurings clarifying when an in-substance repossession or foreclosure occurs, and when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The new guidance became effective for annual periods and interim periods within those annual periods that began after December 15, 2014, and was applied prospectively. Adoption of the guidance did not have a significant effect on the Company’s financial position, results of operations or financial statement disclosures.

Future Adoption of New Accounting Pronouncements

In May 2014, the FASB issued updated guidance (ASU 2014-09, Revenue from Contracts with Customers (Topic 606)) on accounting for revenue recognition. The guidance is based on the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from cost incurred to obtain or fulfill a contract. Revenue recognition for insurance contracts is explicitly scoped out of the guidance. In August 2015, the FASB issued an update to defer the original effective date of this guidance. As a result of the deferral, the new guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017, and must be applied using one of two retrospective application methods. Early adoption is permitted only for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently assessing the impact of the guidance on the Company’s financial position, results of operations and financial statement disclosures.

In January 2016, the FASB issued updated guidance (ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities) on the recognition and measurement of financial assets and financial liabilities. The guidance revises an entity’s accounting related to the classification and measurement of certain equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. The guidance also amends certain disclosure requirements associated with the fair value of financial instruments. The new guidance is effective for annual periods and interim reporting periods within those annual periods beginning after December 15, 2017. Early adoption is not permitted except for the provisions related to the presentation of certain fair value changes for financial liabilities measured at fair value. The Company is currently assessing the impact of the guidance on the Company’s financial position, results of operations and financial statement disclosures.

In February 2016, the FASB issued guidance (ASU 2016-02, Leases (Topic 842)) that ensures assets and liabilities from all outstanding lease contracts are recognized on balance sheet (with limited exception). The guidance substantially changes a Lessee’s accounting for leases and requires the recording on balance sheet of a “right-of-use” asset and liability to make lease payments for most leases. A Lessee will continue to recognize expense in its income statement in a manner similar to the requirements under the current lease accounting guidance. For Lessors, the guidance modifies classification criteria and accounting for sales-type and direct financing leases and requires a Lessor to derecognize the carrying value of the leased asset that is considered to have been transferred to a Lessee and record a lease receivable and residual asset (“receivable and residual” approach). The guidance also eliminates the real estate specific provisions of the current guidance (i.e., sale-leaseback). The amendments are effective for financial statements issued for annual reporting periods beginning after December 15, 2018, and for interim periods within those annual periods, with early adoption permitted. The Company is currently assessing the impact of the guidance on the Company’s financial position, results of operations and financial statement disclosures.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

In March 2016, the FASB issued guidance (ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting) to simplify the transition to equity method when an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The amendments are effective for financial statements issued for annual reporting periods beginning after December 15, 2016, and for interim periods within those annual periods. The Company is currently assessing the impact of the guidance on the Company’s financial position, results of operations and financial statement disclosures.

3. INVESTMENTS

Fixed Maturities and Equity Securities

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



	March 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI(3)
	(in thousands)
Fixed maturities, available-for-sale
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	18,175	$	231	$	0	$	18,406	$	0
Obligations of U.S. states and their political subdivisions	23,567		1,020		0		24,587		0
Foreign government bonds	42,886		6,771		10		49,647		0
Public utilities	202,972		21,631		2,092		222,511		0
Redeemable preferred stock	16,000		720		0		16,720		0
All other U.S. public corporate securities	797,603		65,416		5,010		858,009		31
All other U.S. private corporate securities	505,153		32,605		5,230		532,528		(660		)
All other foreign public corporate securities	125,408		4,323		34		129,697		0
All other foreign private corporate securities	232,411		3,515		12,377		223,549		0
Asset-backed securities(1)	162,166		2,000		1,638		162,528		(34		)
Commercial mortgage-backed securities	270,865		14,242		4		285,103		0
Residential mortgage-backed securities(2)	124,307		6,125		9		130,423		(6		)
Total fixed maturities, available-for-sale	$	2,521,513	$	158,599	$	26,404	$	2,653,708	$	(669	)
Equity securities, available-for-sale
Common Stocks:
Public utilities	$	0	$	0	$	0	$	0
Mutual funds	14		4		0		18
Total equity securities, available-for-sale	$	14	$	4	$	0	$	18


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


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


(3)	Represents the amount of OTTI losses in Accumulated Other Comprehensive Income ("AOCI"), which were not included in earnings. Amount excludes $(0.8) million of net unrealized losses on impaired available-for-sale securities relating to changes in the value of such securities subsequent to the impairment measurement date.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements



	December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI(3)
	(in thousands)
Fixed maturities, available-for-sale
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	12,233	$	28	$	107	$	12,154	$	0
Obligations of U.S. states and their political subdivisions	20,116		474		378		20,212		0
Foreign government bonds	43,188		6,123		28		49,283		0
Public utilities	203,803		15,969		4,263		215,509		0
All other U.S. public corporate securities	818,627		52,866		7,717		863,776		0
All other U.S. private corporate securities	494,640		30,996		4,407		521,229		0
All other foreign public corporate securities	132,414		3,781		608		135,587		0
All other foreign private corporate securities	219,009		2,487		15,842		205,654		0
Asset-backed securities(1)	149,196		2,786		692		151,290		(35		)
Commercial mortgage-backed securities	211,429		4,963		652		215,740		0
Residential mortgage-backed securities(2)	128,971		4,886		19		133,838		(7		)
Total fixed maturities, available-for-sale	$	2,433,626	$	125,359	$	34,713	$	2,524,272	$	(42	)
Equity securities, available-for-sale
Common Stocks:
Public utilities	$	0	$	0	$	0	$	0
Mutual funds	14		3		0		17
Total equity securities, available-for-sale	$	14	$	3	$	0	$	17


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


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


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

The amortized cost and fair value of fixed maturities by contractual maturities at March 31, 2016, are as follows:



	Available-for-Sale
	Amortized Cost		Fair Value
	(in thousands)
Due in one year or less	$	447,470	$	449,492
Due after one year through five years	637,263		662,980
Due after five years through ten years	491,903		530,852
Due after ten years	387,539		432,330
Asset-backed securities	162,166		162,528
Commercial mortgage-backed securities	270,865		285,103
Residential mortgage-backed securities	124,307		130,423
Total	$	2,521,513	$	2,653,708

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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

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



	Three Months Ended March 31,
	2016			2015
	(in thousands)
Fixed maturities, available-for-sale
Proceeds from sales	$	30,474		$	4,736
Proceeds from maturities/repayments	45,601			157,146
Gross investment gains from sales, prepayments and maturities	86			1,902
Gross investment losses from sales and maturities	(295		)	(31		)
Equity securities, available-for-sale
Proceeds from sales	$	0		$	0
Gross investment gains from sales	0			0
Gross investment losses from sales	0			0
Fixed maturity and equity security impairments
Net writedowns for OTTI losses on fixed maturities recognized in earnings(1)	$	(1,937	)	$	(9	)
Writedowns for impairments on equity securities	0			0


(1)	Excludes the portion of OTTI recorded in “Other comprehensive income (loss),” representing any difference between the fair value of the impaired debt security and the net present value of its projected future cash flows at the time of the impairment.

As discussed in Note 2 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015, a portion of certain OTTI losses on fixed maturity securities is recognized in “Other comprehensive income (loss)" (“OCI”). For these securities, the net amount recognized in earnings (“credit loss impairments”) represents the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. Any remaining difference between the fair value and amortized cost is recognized in OCI. The following table sets forth the amount of pre-tax credit loss impairments on fixed maturity securities held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized in OCI, and the corresponding changes in such amounts.



	Three Months Ended March 31,
	2016			2015
	(in thousands)
Balance, beginning of period	$	86		$	93
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period	(3		)	(5		)
Credit loss impairment recognized in the current period on securities not previously impaired	1,189			0
Additional credit loss impairments recognized in the current period on securities previously impaired	0			9
Increases due to the passage of time on previously recorded credit losses	0			0
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected	(1		)	(3		)
Balance, end of period	$	1,271		$	94

Trading Account Assets

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



	March 31, 2016				December 31, 2015
	Cost		Fair Value		Cost		Fair Value
	(in thousands)
Total trading account assets—Equity securities	$	5,470	$	7,331	$	5,618	$	5,653

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

The net change in unrealized gains (losses) from trading account assets still held at period end, recorded within “Asset administration fees and other income,” was $1.8 million and less than $(0.1) million for the three months ended March 31, 2016 and 2015, respectively.

Commercial Mortgage and Other Loans

The Company’s commercial mortgage and other loans are comprised as follows, as of the dates indicated:



	March 31, 2016					December 31, 2015
	Amount (in thousands)			% of Total		Amount (in thousands)			% of Total
Commercial mortgage and agricultural property loans by property type:
Apartments/Multi-Family	$	139,790		31.5	%	$	136,190		31.2	%
Industrial	63,037			14.2		58,621			13.5
Retail	66,848			15.0		67,358			15.5
Office	99,247			22.3		100,357			23.0
Other	21,947			4.9		18,660			4.3
Hospitality	4,933			1.1		4,963			1.1
Total commercial mortgage loans	395,802			89.0		386,149			88.6
Agricultural property loans	48,727			11.0		49,926			11.4
Total commercial mortgage and agricultural property loans by property type	444,529			100.0	%	436,075			100.0	%
Valuation allowance	(649		)			(643		)
Total net commercial mortgage and agricultural property loans by property type	443,880					435,432
Other Loans
Uncollateralized loans	2,740					2,740
Valuation allowance	0					0
Total net other loans	2,740					2,740
Total commercial mortgage and other loans	$	446,620				$	438,172

The commercial mortgage and agricultural property loans are geographically dispersed throughout the United States (with the largest concentrations in California (23%), New York (11%) and Texas (7%)) and include loans secured by properties in Europe and Australia at March 31, 2016.

Activity in the allowance for credit losses for all commercial mortgage and other loans, as of the dates indicated, is as follows:



	March 31, 2016
	Commercial Mortgage Loans		Agricultural Property Loans			Uncollateralized Loans		Total
	(in thousands)
Allowance for credit losses, beginning of year	$	622	$	21		$	0	$	643
Addition to (release of) allowance for losses	17		(11		)	0		6
Charge-offs, net of recoveries	0		0			0		0
Total ending balance	$	639	$	10		$	0	$	649

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements



	December 31, 2015
	Commercial Mortgage Loans		Agricultural Property Loans			Uncollateralized Loans		Total
	(in thousands)
Allowance for credit losses, beginning of year	$	455	$	27		$	0	$	482
Addition to (release of) allowance for losses	167		(6		)	0		161
Charge-offs, net of recoveries	0		0			0		0
Total ending balance	$	622	$	21		$	0	$	643

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



	March 31, 2016
	Commercial Mortgage Loans		Agricultural Property Loans		Uncollateralized Loans		Total
	(in thousands)
Allowance for Credit Losses:
Individually evaluated for impairment	$	0	$	0	$	0	$	0
Collectively evaluated for impairment	639		10		0		649
Loans acquired with deteriorated credit quality	0		0		0		0
Total ending balance	$	639	$	10	$	0	$	649



Recorded Investment(1):
Gross of reserves: individually evaluated for impairment	$	0	$	0	$	0	$	0
Gross of reserves: collectively evaluated for impairment	395,802		48,727		2,740		447,269
Gross of reserves: loans acquired with deteriorated credit quality	0		0		0		0
Total ending balance, gross of reserves	$	395,802	$	48,727	$	2,740	$	447,269


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



	December 31, 2015
	Commercial Mortgage Loans		Agricultural Property Loans		Uncollateralized Loans		Total
	(in thousands)
Allowance for Credit Losses:
Individually evaluated for impairment	$	0	$	0	$	0	$	0
Collectively evaluated for impairment	622		21		0		643
Loans acquired with deteriorated credit quality	0		0		0		0
Total ending balance	$	622	$	21	$	0	$	643



Recorded Investment(1):
Gross of reserves: individually evaluated for impairment	$	0	$	0	$	0	$	0
Gross of reserves: collectively evaluated for impairment	386,149		49,926		2,740		438,815
Gross of reserves: loans acquired with deteriorated credit quality	0		0		0		0
Total ending balance, gross of reserves	$	386,149	$	49,926	$	2,740	$	438,815


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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

Impaired loans include those loans for which it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. Impaired commercial mortgage and other loans identified in management's specific review of probable loan losses and the related allowance for losses, as of the dates indicated, are as follows:



	March 31, 2016
	Recorded Investment(1)		Unpaid Principal Balance		Related Allowance		Average Recorded Investment Before Allowance(2)		Interest Income Recognized(3)
	(in thousands)
With no related allowance recorded	$	0	$	0	$	0	$	0	$	0
With an allowance recorded	0		0		0		0		0
Total	$	0	$	0	$	0	$	0	$	0


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


(2)	Average recorded investment represents the average of the beginning-of-period and end-of-period balances.


(3)	The interest income recognized is for the year-to-date income regardless of when the impairments occurred.



	December 31, 2015
	Recorded Investment(1)		Unpaid Principal Balance		Related Allowance	Average Recorded Investment Before Allowance(2)		Interest Income Recognized(3)
	(in thousands)
With no related allowance recorded	$	0	$	0	0	$	0	$	0
With an allowance recorded	0		0		0	0		0
Total	$	0	$	0	0	$	0	$	0


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


(2)	Average recorded investment represents the average of the beginning-of-period and all subsequent quarterly end-of-period balances.


(3)	The interest income recognized is for the year-to-date income regardless of when the impairments occurred.

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



	Debt Service Coverage Ratio - March 31, 2016
	Greater than 1.2X		1.0X to <1.2X		Less than 1.0X		Total
	(in thousands)
Loan-to-Value Ratio
0%-59.99%	$	304,569	$	4,628	$	907	$	310,104
60%-69.99%	98,855		0		0		98,855
70%-79.99%	34,164		1,406		0		35,570
Greater than 80%	0		0		0		0
Total commercial mortgage and agricultural property loans	$	437,588	$	6,034	$	907	$	444,529

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements



	Debt Service Coverage Ratio - December 31, 2015
	Greater than 1.2X		1.0X to <1.2X		Less than 1.0X		Total
	(in thousands)
Loan-to-Value Ratio
0%-59.99%	$	303,215	$	9,073	$	992	$	313,280
60%-69.99%	95,977		0		0		95,977
70%-79.99%	25,401		1,417		0		26,818
Greater than 80%	0		0		0		0
Total commercial mortgage and agricultural property loans	$	424,593	$	10,490	$	992	$	436,075

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



	March 31, 2016
	Current		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Commercial Mortgage and Other Loans		Non-Accrual Status
	(in thousands)
Commercial mortgage loans	$	395,802	$	0	$	0	$	0	$	395,802	$	0
Agricultural property loans	48,727		0		0		0		48,727		0
Uncollateralized loans	2,740		0		0		0		2,740		0
Total	$	447,269	$	0	$	0	$	0	$	447,269	$	0



	December 31, 2015
	Current		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Commercial Mortgage and Other Loans		Non-Accrual Status
	(in thousands)
Commercial mortgage loans	$	386,149	$	0	$	0	$	0	$	386,149	$	0
Agricultural property loans	49,926		0		0		0		49,926		0
Uncollateralized loans	2,740		0		0		0		2,740		0
Total	$	438,815	$	0	$	0	$	0	$	438,815	$	0

See Note 2 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015 for further discussion regarding non-accrual status loans.

For the three months ended March 31, 2016 and 2015, there were no commercial mortgage and other loans acquired, other than those through direct origination, nor were there any commercial mortgage and other loans sold.

The Company’s commercial mortgage and other loans may occasionally be involved in a troubled debt restructuring. As of both March 31, 2016 and December 31, 2015, the Company had no significant commitments to borrowers that have been involved in a troubled debt restructuring. For the three months ended March 31, 2016 and 2015, there were no new troubled debt restructurings related to commercial mortgage and other loans and no payment defaults on commercial mortgage and other loans that were modified as a troubled debt restructuring within the twelve months preceding. For additional information relating to the accounting 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, 2015.

As of both March 31, 2016 and December 31, 2015, the Company did not have any foreclosed residential real estate property.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

Net Investment Income

Net investment income for the three months ended March 31, 2016 and 2015, was from the following sources:



	Three Months Ended March 31,
	2016			2015
	(in thousands)
Fixed maturities, available-for-sale	$	29,070		$	30,782
Trading account assets	2			2
Commercial mortgage and other loans	4,896			5,236
Policy loans	110			130
Short-term investments	204			44
Other long-term investments	114			2,795
Gross investment income	34,396			38,989
Less: investment expenses	(1,386		)	(1,400		)
Net investment income	$	33,010		$	37,589

Realized Investment Gains (Losses), Net

Realized investment gains (losses), net, for the three months ended March 31, 2016 and 2015, were from the following sources:



	Three Months Ended March 31,
	2016			2015
	(in thousands)
Fixed maturities	$	(2,146	)	$	1,862
Equity securities	0			0
Commercial mortgage and other loans	(6		)	75
Derivatives	(11,610		)	11,538
Other long-term investments	(480		)	0
Realized investment gains (losses), net	$	(14,242	)	$	13,475

Accumulated Other Comprehensive Income (Loss)

The balance of and changes in each component of “Accumulated other comprehensive income (loss)” for the three months ended March 31, 2016 and 2015 are as follows:



	Accumulated Other Comprehensive Income (Loss)
	Foreign Currency Translation Adjustment			Net Unrealized Investment Gains (Losses)(1)			Total Accumulated Other Comprehensive Income (Loss)
	(in thousands)
Balance, December 31, 2015	$	(65	)	$	46,231		$	46,166
Change in OCI before reclassifications	28			25,501			25,529
Amounts reclassified from AOCI	0			2,146			2,146
Income tax benefit (expense)	(10		)	(9,676		)	(9,686		)
Balance, March 31, 2016	$	(47	)	$	64,202		$	64,155

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements



	Accumulated Other Comprehensive Income (Loss)
	Foreign Currency Translation Adjustment			Net Unrealized Investment Gains (Losses)(1)			Total Accumulated Other Comprehensive Income (Loss)
	(in thousands)
Balance, December 31, 2014	$	(30	)	$	84,652		$	84,622
Change in OCI before reclassifications	(59		)	14,793			14,734
Amounts reclassified from AOCI	0			(1,862		)	(1,862		)
Income tax benefit (expense)	21			(4,526		)	(4,505		)
Balance, March 31, 2015	$	(68	)	$	93,057		$	92,989


(1)	Includes cash flow hedges of $10.7 million and $14.8 million as of March 31, 2016 and December 31, 2015, respectively, and $13.0 million and $5.0 million as of March 31, 2015 and December 31, 2014, respectively.

Reclassifications out of Accumulated Other Comprehensive Income (Loss)



	Three Months Ended March 31, 2016			Three Months Ended March 31, 2015
	(in thousands)
Amounts reclassified from AOCI(1)(2):
Net unrealized investment gains (losses):
Cash flow hedges—Currency/ Interest rate(3)	$	391		$	232
Net unrealized investment gains (losses) on available-for-sale securities	(2,537		)	1,630
Total net unrealized investment gains (losses)(4)	(2,146		)	1,862
Total reclassifications for the period	$	(2,146	)	$	1,862


(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 5 for additional information on cash flow hedges.


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

Net Unrealized Investment Gains (Losses)

Net unrealized investment gains and losses on securities classified as available-for-sale and certain other long-term investments and other assets are included in the Company’s 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 fixed maturity securities on which an OTTI loss has been recognized, and all other net unrealized investment gains and losses, are as follows:

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

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



	Net Unrealized Gains (Losses) on Investments			DAC and Other Costs			Future Policy Benefits		Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related to Net Unrealized Investment Gains (Losses)
	(in thousands)
Balance, December 31, 2015	$	9		$	(3	)	$	0	$	14		$	20
Net investment gains (losses) on investments arising during the period	(3		)	0			0		1			(2		)
Reclassification adjustment for (gains) losses included in net income	(1		)	0			0		0			(1		)
Reclassification adjustment for (gains) losses excluded from net income(1)	(1,497		)	0			0		524			(973		)
Impact of net unrealized investment (gains) losses on DAC and other costs	0			441			0		(154		)	287
Impact of net unrealized investment (gains) losses on future policy benefits	0			0			66		(23		)	43
Balance, March 31, 2016	$	(1,492	)	$	438		$	66	$	362		$	(626	)


(1)	Represents "transfers in" related to the portion of OTTI losses recognized during the period that were not recognized in earnings for securities with no prior OTTI loss.

All Other Net Unrealized Investment Gains and Losses in AOCI



	Net Unrealized Gains (Losses) on Investments(2)		DAC and Other Costs			Future Policy Benefits			Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related to Net Unrealized Investment Gains (Losses)
	(in thousands)
Balance, December 31, 2015	$	107,451	$	(30,465	)	$	(4,596	)	$	(26,179	)	$	46,211
Net investment gains (losses) on investments arising during the period	35,245		0			0			(12,335		)	22,910
Reclassification adjustment for (gains) losses included in net income	2,147		0			0			(751		)	1,396
Reclassification adjustment for (gains) losses excluded from net income(1)	1,497		0			0			(524		)	973
Impact of net unrealized investment (gains) losses on DAC and other costs	0		(8,921		)	0			3,122			(5,799		)
Impact of net unrealized investment (gains) losses on future policy benefits	0		0			(1,327		)	464			(863		)
Balance, March 31, 2016	$	146,340	$	(39,386	)	$	(5,923	)	$	(36,203	)	$	64,828


(1)	Represents "transfers out" related to the portion of OTTI losses recognized during the period that were not recognized in earnings for securities with no prior OTTI loss.


(2)	Includes cash flow hedges. See Note 5 for information on cash flow hedges.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

Net Unrealized Gains (Losses) on Investments by Asset Class

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



	March 31, 2016			December 31, 2015
	(in thousands)
Fixed maturity securities on which an OTTI loss has been recognized	$	(1,492	)	$	9
Fixed maturity securities, available-for-sale—all other	133,687			90,637
Equity securities, available-for-sale	4			3
Affiliated notes	1,630			1,660
Derivatives designated as cash flow hedges (1)	10,664			14,847
Other investments	355			304
Net unrealized gains (losses) on investments	$	144,848		$	107,460


(1)	See Note 5 for more information on cash flow hedges.

Duration of Gross Unrealized Loss Positions for Fixed Maturities and Equity Securities

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



	March 31, 2016
	Less than twelve months				Twelve months or more				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(in thousands)
Fixed maturities, available-for-sale
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	0	$	0	$	0	$	0	$	0	$	0
Obligations of U.S. states and their political subdivisions	0		0		0		0		0		0
Foreign government bonds	6,072		10		0		0		6,072		10
Public utilities	8,393		442		15,296		1,650		23,689		2,092
All other U.S. public corporate securities	52,075		4,182		37,953		828		90,028		5,010
All other U.S. private corporate securities	65,504		4,935		1,772		295		67,276		5,230
All other foreign public corporate securities	13,602		34		0		0		13,602		34
All other foreign private corporate securities	33,779		3,137		88,232		9,240		122,011		12,377
Asset-backed securities	66,304		1,336		26,332		302		92,636		1,638
Commercial mortgage-backed securities	197		1		661		3		858		4
Residential mortgage-backed securities	256		9		0		0		256		9
Total	$	246,182	$	14,086	$	170,246	$	12,318	$	416,428	$	26,404
Equity securities, available-for-sale	$	0	$	0	$	0	$	0	$	0	$	0

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements



	December 31, 2015
	Less than twelve months				Twelve months or more				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(in thousands)
Fixed maturities, available-for-sale
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	8,480	$	107	$	0	$	0	$	8,480	$	107
Obligations of U.S. states and their political subdivisions	6,887		378		0		0		6,887		378
Foreign government bonds	13,616		28		0		0		13,616		28
Public utilities	49,104		1,421		14,217		2,842		63,321		4,263
All other U.S. public corporate securities	207,578		6,297		29,828		1,420		237,406		7,717
All other U.S. private corporate securities	84,318		4,020		3,550		387		87,868		4,407
All other foreign public corporate securities	76,573		608		0		0		76,573		608
All other foreign private corporate securities	38,047		1,972		85,341		13,870		123,388		15,842
Asset-backed securities	50,195		430		26,359		262		76,554		692
Commercial mortgage-backed securities	55,065		642		833		10		55,898		652
Residential mortgage-backed securities	2,141		19		0		0		2,141		19
Total	$	592,004	$	15,922	$	160,128	$	18,791	$	752,132	$	34,713
Equity securities, available-for-sale	$	0	$	0	$	0	$	0	$	0	$	0

The gross unrealized losses on fixed maturity securities as of March 31, 2016 and December 31, 2015, are composed of $12.6 million and $22.6 million, respectively, related to high or highest quality securities based on the National Association of Insurance Commissioners (“NAIC”) or equivalent rating and $13.8 million and $12.1 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. As of March 31, 2016, the $12.3 million of gross unrealized losses of twelve months or more were concentrated in the consumer non-cyclical, capital goods, finance and utility sectors of the Company’s corporate securities. As of December 31, 2015, the $18.8 million of gross unrealized losses of twelve months or more were concentrated in consumer non-cyclical, capital goods, utility and finance sectors of the Company’s corporate 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, 2015, the Company concluded that an adjustment to earnings for OTTI for these securities was not warranted at March 31, 2016 or December 31, 2015. These conclusions are based on a detailed analysis of the underlying credit and cash flows on each security. The gross unrealized losses are primarily attributable to a decrease in interest rates, general credit spread tightening and foreign currency exchange rate movements. As of March 31, 2016, the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before the anticipated recovery of the remaining amortized cost basis.

Securities Lending and Repurchase Agreements

In the normal course of business, the Company sells securities under agreements to repurchase and enters into securities lending transactions. As of March 31, 2016 and December 31, 2015, the Company had $3.7 million and $10.6 million, respectively, of securities lending transactions recorded as "Cash collateral for loaned securities," all of which were corporate securities. The remaining contractual maturity of all securities lending transactions is overnight and continuous. As of both March 31, 2016 and December 31, 2015, the Company had no repurchase transactions.

4. 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:

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

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

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

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. The Company’s Level 3 assets and liabilities primarily include: certain private fixed maturities and equity securities, certain manually priced public equity securities and fixed maturities, short-term investments, certain highly structured OTC derivative contracts and embedded derivatives resulting from certain products with guaranteed benefits.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

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



	As of March 31, 2016
	Level 1		Level 2		Level 3		Netting(1)			Total
	(in thousands)
Fixed maturities, available-for-sale:
U.S Treasury securities and obligations of U.S. government authorities and agencies	$	0	$	18,406	$	0	$	0		$	18,406
Obligations of U.S. states and their political subdivisions	0		24,587		0		0			24,587
Foreign government bonds	0		49,647		0		0			49,647
U.S. corporate public securities	0		931,933		15,000		0			946,933
U.S. corporate private securities	0		527,850		116,844		0			644,694
Foreign corporate public securities	0		147,034		0		0			147,034
Foreign corporate private securities	0		235,364		8,989		0			244,353
Asset-backed securities	0		99,809		62,719		0			162,528
Commercial mortgage-backed securities	0		285,103		0		0			285,103
Residential mortgage-backed securities	0		130,423		0		0			130,423
Sub total	0		2,450,156		203,552		0			2,653,708
Trading account assets:
Equity securities	5,295		0		2,036		0			7,331
Sub total	5,295		0		2,036		0			7,331
Equity securities, available-for-sale			18		0		0			18
Short-term investments	0		314		450		0			764
Cash equivalents	12,604		73,896		375		0			86,875
Other long-term investments	0		191,853		0		(38,525		)	153,328
Reinsurance recoverables	0		0		3,693,262		0			3,693,262
Receivables from parent and affiliates	0		32,522		2,847		0			35,369
Sub total excluding separate account assets	17,899		2,748,759		3,902,522		(38,525		)	6,630,655
Separate account assets(2)	0		38,392,917		0		0			38,392,917
Total assets	$	17,899	$	41,141,676	$	3,902,522	$	(38,525	)	$	45,023,572
Future policy benefits(3)	$	0	$	0	$	3,842,607	$	0		$	3,842,607
Payables to parent and affiliates	0		52,818		0		(52,818		)	0
Total liabilities	$	0	$	52,818	$	3,842,607	$	(52,818	)	$	3,842,607

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements



	As of December 31, 2015
	Level 1		Level 2		Level 3		Netting(1)			Total
	(in thousands)
Fixed maturities, available-for-sale:
U.S Treasury securities and obligations of U.S. government authorities and agencies	$	0	$	12,154	$	0	$	0		$	12,154
Obligations of U.S. states and their political subdivisions	0		20,212		0		0			20,212
Foreign government securities	0		49,283		0		0			49,283
U.S. corporate public securities	0		934,109		15,000		0			949,109
U.S. corporate private securities	0		523,298		107,777		0			631,075
Foreign corporate public securities	0		136,222		0		0			136,222
Foreign corporate private securities	0		220,818		4,531		0			225,349
Asset-backed securities	0		104,797		46,493		0			151,290
Commercial mortgage-backed securities	0		215,740		0		0			215,740
Residential mortgage-backed securities	0		133,838		0		0			133,838
Sub total	0		2,350,471		173,801		0			2,524,272
Trading account assets:
Equity securities	5,653		0		0		0			5,653
Sub total	5,653		0		0		0			5,653
Equity securities, available-for-sale	0		17		0		0			17
Short-term investments	157,257		520		450		0			158,227
Cash equivalents	0		0		225		0			225
Other long-term investments(4)	0		135,209		1,565		(21,508		)	115,266
Reinsurance recoverables	0		0		3,012,653		0			3,012,653
Receivables from parent and affiliates	0		29,676		7,664		0			37,340
Sub total excluding separate account assets	162,910		2,515,893		3,196,358		(21,508		)	5,853,653
Separate account assets(2)	0		39,250,159		0		0			39,250,159
Total assets	$	162,910	$	41,766,052	$	3,196,358	$	(21,508	)	$	45,103,812
Future policy benefits(3)	$	0	$	0	$	3,134,077	$	0		$	3,134,077
Payables to parent and affiliates	0		25,277		0		(25,277		)	0
Total liabilities	$	0	$	25,277	$	3,134,077	$	(25,277	)	$	3,134,077


(1)	“Netting” amounts represent cash collateral of $(14.3) million and $(3.8) million as of March 31, 2016 and December 31, 2015, respectively, and the impact of offsetting asset and liability positions held with the same counterparty, subject to master netting arrangements.

(2)

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

(3)

As of March 31, 2016, the net embedded derivative liability position of $3,843 million includes $19 million of embedded derivatives in an asset position and $3,862 million of embedded derivatives in a liability position. As of December 31, 2015, the net embedded derivative liability position of $3,134 million includes $34 million of embedded derivatives in an asset position and $3,168 million of embedded derivatives in a liability position.


(4)	Prior period amounts are presented on a basis consistent with the current period presentation, reflecting the adoption of ASU 2015-07.

The methods and assumptions the Company uses to estimate the fair value of assets and liabilities measured at fair value on a recurring basis are summarized below.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

Fixed Maturity Securities – The fair values of the Company’s public fixed maturity securities are generally based on prices obtained from independent pricing services. Prices for each security are generally sourced from multiple pricing vendors, and a vendor hierarchy is maintained by asset type based on historical pricing experience and vendor expertise. The Company ultimately uses the price from the pricing service highest in the vendor hierarchy based on the respective asset type. The pricing hierarchy is updated for new financial products and recent pricing experience with various vendors. Consistent with the fair value hierarchy described above, securities with validated quotes from pricing services are generally reflected within Level 2, as they are primarily based on observable pricing for similar assets and/or other market observable inputs. Typical inputs used by these pricing services include but are not limited to reported trades, benchmark yields, issuer spreads, bids, offers, and/or estimated cash flow, prepayment speeds and default rates. If the pricing information received from third party pricing services is deemed not reflective of market activity or other inputs observable in the market, the Company may challenge the price through a formal process with the pricing service or classify the securities as Level 3. If the pricing service updates the price to be more consistent with the presented market observations, the security remains within Level 2.

Internally-developed valuations or indicative broker quotes are also used to determine fair value in circumstances where vendor pricing is not available, or where the Company ultimately concludes that pricing information received from the independent pricing services is not reflective of market activity. If the Company concludes the values from both pricing services and brokers are not reflective of market activity, it may override the information with an internally developed valuation. As of March 31, 2016 and December 31, 2015 overrides on a net basis were not material. Pricing service overrides, internally-developed valuations and indicative broker quotes are generally included in Level 3 in the fair value hierarchy.

The Company conducts several specific price monitoring activities. Daily analyses identify price changes over predetermined thresholds defined at the financial instrument level. Various pricing integrity reports are reviewed on a daily and monthly basis to determine if pricing is reflective of market activity or if it would warrant any adjustments. Other procedures performed include, but are not limited to, reviews of third-party pricing services methodologies, reviews of pricing trends, and back-testing.

The fair value of private fixed maturities, which are comprised of investments in private placement securities, originated by internal private asset managers, are primarily determined using discounted cash flow models. These models primarily use observable inputs that include Treasury or similar base rates plus estimated credit spreads to value each security. The credit spreads are obtained through a survey of private market intermediaries who are active in both primary and secondary transactions, and consider, among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements. Since most private placements are valued using standard market observable inputs and inputs derived from, or corroborated by, market observable data including observed prices and spreads for similar publicly traded or privately traded issues, they have been reflected within Level 2. For certain private fixed maturities, the discounted cash flow model may incorporate significant unobservable inputs, which reflect the Company’s own assumptions about the inputs that market participants would use in pricing the asset. To the extent management determines that such unobservable inputs are significant to the price of a security, a Level 3 classification is made.

Trading Account Assets – Trading account assets consist primarily of equity securities whose fair values are determined consistent with similar instruments described below under “Equity Securities”.

Equity Securities – Equity securities consist principally of investments in common and preferred stock of publicly-traded companies, privately-traded securities, as well as mutual fund shares. The fair values of most publicly traded equity securities are based on quoted market prices in active markets for identical assets and are classified within Level 1 in the fair value hierarchy. Estimated fair values for most privately traded equity securities are determined using discounted cash flow, earnings multiple and other valuation models that require a substantial level of judgment around inputs and therefore are classified within Level 3. The fair values of mutual fund shares that transact regularly (but do not trade in active markets because they are not publicly available) are based on transaction prices of identical fund shares and are classified within Level 2 in the fair value hierarchy.

Derivative Instruments – Derivatives are recorded at fair value either as assets, within “Other long-term investments” or as liabilities, within “Payables to parent and affiliates” except for embedded derivatives which are recorded with the associated host contract. The fair values of derivative contracts can be affected by changes in interest rates, foreign exchange rates, credit spreads, market volatility, expected returns, non-performance risk (“NPR”), liquidity and other factors. For derivative positions included within Level 3 of the fair value hierarchy, liquidity valuation adjustments are made to reflect the cost of exiting significant risk positions, and consider the bid-ask spread, maturity, complexity and other specific attributes of the underlying derivative position.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

The majority of the Company’s derivative positions are traded in the OTC derivative market and are classified within Level 2 in the fair value hierarchy. OTC derivatives classified within Level 2 are valued using models that utilize actively quoted or observable market input values from external market data providers, third-party pricing vendors and/or recent trading activity. The Company’s policy is to use mid-market pricing in determining its best estimate of fair value. The fair values of most OTC derivatives, including interest rate and cross currency swaps and single name credit default swaps are determined using discounted cash flow models. The fair values of European style option contracts are determined using Black-Scholes option pricing models. These models’ key inputs include the contractual terms of the respective contract, along with significant observable inputs, including interest rates, currency rates, credit spreads, equity prices, index dividend yields, NPR, volatility and other factors.

The Company’s cleared interest rate swaps and credit derivatives linked to an index are valued using models that utilize actively quoted or observable market inputs, including Overnight Indexed Swap discount rates, obtained from external market data providers, third-party pricing vendors, and/or recent trading activity. These derivatives are classified as Level 2 in the fair value hierarchy.

The vast majority of the Company’s derivative agreements are with highly rated major international financial institutions. To reflect the market’s perception of its own and the counterparty’s NPR, the Company incorporates additional spreads over London Inter-Bank Offered Rate (“LIBOR”) into the discount rate used in determining the fair value of OTC derivative assets and liabilities that are not otherwise collateralized.

Derivatives classified as Level 3 include structured products. These derivatives are valued based upon models, such as Monte Carlo simulation models and other techniques that utilize significant unobservable inputs. Level 3 methodologies are validated through periodic comparison of the Company’s fair values to external broker-dealer values. As of March 31, 2016, there were no internally valued derivatives with the fair value classified within Level 3, and all derivatives were classified within Level 2. As of December 31, 2015, there was $1.6 million of internally valued derivatives with the fair value classified within Level 3. See Note 5 for more details on the fair value of derivative instruments by primary underlying.

As discussed in Note 2, the Company adopted ASU 2015-07, effective January 1, 2016, which resulted in the exclusion of certain "Other long-term investments" from the fair value hierarchy. The guidance was required to be applied retrospectively, and therefore, prior period amounts have been revised to conform to the current period presentation. At March 31, 2016 and December 31, 2015, the fair value of these investments were $0.5 million and $0.6 million, respectively, which had been previously classified in Level 3 at December 31, 2015.

Cash Equivalents and Short-Term Investments – Cash equivalents and short-term investments include money market instruments and other highly liquid debt instruments. Certain money market instruments are valued using unadjusted quoted prices in active markets that are accessible for identical assets and are primarily classified as Level 1. The remaining instruments in this category are classified within Level 2 and Level 3. Level 2 instruments are generally fair valued based on market observable inputs. Level 3 instruments are internally valued based on internal asset manager valuations.

Separate Account Assets – Separate account assets include fixed maturity securities, treasuries, equity securities, and mutual funds for which values are determined consistent with similar instruments described above under “Fixed Maturity Securities” and “Equity Securities”.

Receivables from Parent and Affiliates – Receivables from parent and affiliates carried at fair value include affiliated bonds within the Company’s legal entity whose fair values are determined consistent with similar securities described above under “Fixed Maturity Securities” managed by affiliated asset managers.

Reinsurance Recoverables – Reinsurance recoverables carried at fair value include the reinsurance of the Company’s living benefit guarantees on certain of its variable annuity contracts. These guarantees are accounted for as embedded derivatives and are described below in “Future Policy Benefits”. The reinsurance agreements covering these guarantees are derivatives with fair value determined in the same manner as the living benefit guarantees.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

Future Policy Benefits – The liability for future policy benefits is related to guarantees primarily associated with the living benefit features of certain variable-annuity contracts offered by the Company, including guaranteed minimum accumulation benefits (“GMAB”), guaranteed minimum withdrawal benefits (“GMWB”), and guaranteed minimum income and withdrawal benefits (“GMIWB”), accounted for as embedded derivatives. The fair values of these liabilities are calculated as the present value of future expected benefit payments to contractholders less the present value of future rider fees attributable to the optional living benefit feature. This methodology could result in either a liability or contra-liability balance, given changing capital market conditions and various actuarial assumptions. Since there is no observable active market for the transfer of these obligations, the valuations are calculated using internally developed models with option pricing techniques. The models are based on a risk neutral valuation framework and incorporate premiums for risks inherent in valuation techniques, inputs, and the general uncertainty around the timing and amount of future cash flows. The determination of these risk premiums requires the use of management's judgment. The significant inputs to the valuation models for these embedded derivatives include capital market assumptions, such as interest rate levels and volatility assumptions, the Company’s market-perceived NPR, as well as actuarially determined assumptions, including contractholder behavior, such as lapse rates, benefit utilization rates, withdrawal rates and mortality rates. Since many of these assumptions are unobservable and are considered to be significant inputs to the liability valuation, the liability included in future policy benefits has been reflected within Level 3 in the fair value hierarchy.

Capital market inputs and actual policyholders’ account values are updated each quarter based on capital market conditions as of the end of the quarter, including interest rates, equity markets and volatility. In the risk neutral valuation, the initial swap curve drives the total return used to grow the policyholders’ account values. The Company’s discount rate assumption is based on the LIBOR swap curve, adjusted for an additional spread relative to LIBOR to reflect NPR.

Actuarial assumptions, including contractholder behavior and mortality, are reviewed at least annually, and updated based upon emerging experience, future expectations, and other data, including any observable market data. These assumptions are generally updated annually unless a material change that the Company feels is indicative of a long-term trend is observed in an interim period.

Transfers between Levels 1 and 2 – Transfers between levels are made to reflect changes in observability of inputs and market activity. Transfers into or out of any level are generally reported as the value as of the beginning of the quarter in which the transfers occur for any such assets still held at the end of the quarter. Periodically there are transfers between Level 1 and Level 2 for assets held in the Company’s Separate Account. During the three months ended March 31, 2016 and 2015, there were no transfers between Level 1 and Level 2.

Level 3 Assets and Liabilities by Price Source – The tables below present the balances of Level 3 assets and liabilities measured at fair value with their corresponding pricing sources.



	As of March 31, 2016
	Internal (1)		External (2)		Total
	(in thousands)
Corporate securities(3)	$	124,818	$	16,015	$	140,833
Asset-backed securities(4)	0		62,719		62,719
Trading account assets:
Equity securities	2,036		0		2,036
Short-term investments	450		0		450
Cash equivalents	375		0		375
Reinsurance recoverables	3,693,262		0		3,693,262
Receivables from parent and affiliates	0		2,847		2,847
Total assets	$	3,820,941	$	81,581	$	3,902,522
Future policy benefits	$	3,842,607	$	0	$	3,842,607
Total liabilities	$	3,842,607	$	0	$	3,842,607

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements



	As of December 31, 2015
	Internal (1)		External (2)		Total
	(in thousands)
Corporate securities(3)	$	111,295	$	16,013	$	127,308
Asset-backed securities(4)	0		46,493		46,493
Short-term investments	450		0		450
Cash equivalents	225		0		225
Other long-term investments(5)	1,565		0		1,565
Reinsurance recoverables	3,012,653		0		3,012,653
Receivables from parent and affiliates	0		7,664		7,664
Total assets	$	3,126,188	$	70,170	$	3,196,358
Future policy benefits	$	3,134,077	$	0	$	3,134,077
Total liabilities	$	3,134,077	$	0	$	3,134,077


(1)	Represents valuations reflecting both internally-derived and market inputs as well as third-party pricing information or quotes. See below for additional information related to internally-developed valuation for significant items in the above table.


(2)	Represents unadjusted prices from independent pricing services and independent indicative broker quotes where pricing inputs are not readily available.


(3)	Includes assets classified as fixed maturities available-for-sale.


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


(5)	Prior period amounts are presented on a basis consistent with the current period presentation, reflecting the adoption of ASU 2015-07.

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



	As of March 31, 2016
	Fair Value		Primary Valuation Techniques	Unobservable Inputs	Minimum		Maximum		Weighted Average		Impact of Increase in Input on Fair Value (1)
	(in thousands)
Assets:
Corporate securities	$	124,818	Discounted cash flow	Discount rate	3.38	%	20.38	%	4.97	%	Decrease
Reinsurance recoverables	$	3,693,262	Fair values are determined in the same manner as future policy benefits
Liabilities:
Future policy benefits (2)	$	3,842,607	Discounted cash flow	Lapse rate (3)	0	%	14	%			Decrease
				NPR spread (4)	0.44	%	2.07	%			Decrease
				Utilization rate (5)	63	%	95	%			Increase
				Withdrawal rate (6)	74	%	100	%			Increase
				Mortality rate (7)	0	%	14	%			Decrease
				Equity volatility curve	16	%	28	%			Increase

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements



	As of December 31, 2015
	Fair Value		Primary Valuation Techniques	Unobservable Inputs	Minimum		Maximum		Weighted Average		Impact of Increase in Input on Fair Value (1)
	(in thousands)
Assets:
Corporate securities	$	111,295	Discounted cash flow	Discount rate	3.71	%	17.95	%	4.43	%	Decrease
Reinsurance recoverables	$	3,012,653	Fair values are determined in the same manner as future policy benefits
Liabilities:
Future policy benefits (2)	$	3,134,077	Discounted cash flow	Lapse rate (3)	0	%	14	%			Decrease
				NPR spread (4)	0.06	%	1.76	%			Decrease
				Utilization rate (5)	63	%	95	%			Increase
				Withdrawal rate (6)	74	%	100	%			Increase
				Mortality rate (7)	0	%	14	%			Decrease
				Equity volatility curve	17	%	28	%			Increase


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

(2)

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.


(3)	Lapse rates are adjusted at the contract level based on the in-the-moneyness of the living benefit and reflect other factors, such as the applicability of any surrender charges. Lapse rates are reduced when contracts are more in-the-money. Lapse rates are also generally assumed to be lower for the period where surrender charges apply.

(4)

To reflect NPR, the Company incorporates an additional spread over LIBOR into the discount rate used in the valuation of individual living benefit contracts in a liability position and generally not to those in a contra-liability position. The NPR spread reflects the financial strength ratings of the Company and its affiliates, as these are insurance liabilities and senior to debt. The additional spread over LIBOR is determined by utilizing the credit spreads associated with issuing funding agreements, adjusted for any illiquidity risk premium.

(5)

The utilization rate assumption estimates the percentage of contracts that will utilize the benefit during the contract duration, and begin lifetime withdrawals at various time intervals from contract inception. The remaining contractholders are assumed to either begin lifetime withdrawals immediately or never utilize the benefit. Utilization assumptions may vary by product type, tax status and age. The impact of changes in these assumptions is highly dependent on the product type, the age of the contractholder at the time of the sale, and the timing of the first lifetime income withdrawal. Range reflects the utilization rate for the vast majority of business with living benefits.


(6)	The withdrawal rate assumption estimates the magnitude of annual contractholder withdrawals relative to the maximum allowable amount under the contract. These assumptions may vary based on the product type, contractholder age, tax status and withdrawal timing. The fair value of the liability will generally increase the closer the withdrawal rate is to 100%.

(7)

Range reflects the mortality rate for the vast majority of business with living benefits, with policyholders ranging from 35 to 90 years old. While the majority of living benefits have a minimum age requirement, certain benefits do not have an age restriction. This results in contractholders for certain benefits with mortality rates approaching 0%. Based on historical experience, the Company applies a set of age and duration specific mortality rate adjustments compared to standard industry tables. A mortality improvement assumption is also incorporated into the overall mortality table.

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

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

Future Policy Benefits – The Company expects efficient benefit utilization and withdrawal rates to generally be correlated with lapse rates. However, behavior is generally highly dependent on the facts and circumstances surrounding the individual contractholder, such as their liquidity needs or tax situation, which could drive lapse behavior independent of other contractholder behavior assumptions. To the extent more efficient contractholder behavior results in greater in-the-moneyness at the contract level, lapse rates may decline for those contracts. Similarly, to the extent that increases in equity volatility are correlated with overall declines in the capital markets, lapse rates may decline as contracts become more in-the-money.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

Valuation Process for Fair Value Measurements Categorized within Level 3 – The Company has established an internal control infrastructure over the valuation of financial instruments that requires ongoing oversight by its various business groups. These management control functions are segregated from the trading and investing functions. For invested assets, the Company has established oversight teams, often in the form of pricing committees within each asset management group. The teams, which typically include representation from investment, accounting, operations, legal and other disciplines are responsible for overseeing and monitoring the pricing of the Company’s investments and performing periodic due diligence reviews of independent pricing services. An actuarial valuation team oversees the valuation of living benefit features of the Company’s variable annuity contracts.

The Company has also established policies and guidelines that require the establishment of valuation methodologies and consistent application of such methodologies. These policies and guidelines govern the use of inputs and price source hierarchies and provide controls around the valuation processes. These controls include appropriate review and analysis of investment prices against market activity or indicators of reasonableness, analysis of portfolio returns to corresponding benchmark returns, back-testing, review of bid/ask spreads to assess activity, approval of price source changes, price overrides, methodology changes and classification of fair value hierarchy levels. For living benefit features of the Company’s variable annuity products, the actuarial valuation unit periodically tests contract input data and actuarial assumptions are reviewed at least annually, and updated based upon emerging experience, future expectations and other data, including any observable market data. The valuation policies and guidelines are reviewed and updated as appropriate.

Within the trading and investing functions, the Company has established policies and procedures that relate to the approval of all new transaction types, transaction pricing sources and fair value hierarchy coding within the financial reporting system. For variable annuity product changes or new launches of living benefit features, the actuarial valuation unit validates input logic and new product features and agrees new input data directly to source documents.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

Changes in Level 3 assets and liabilities – The following tables provide summaries of the 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.



	Three Months Ended March 31, 2016
	Fixed Maturities Available-For-Sale
	U.S. Corporate Public Securities		U.S. Corporate Private Securities			Foreign Corporate Private Securities			Asset-Backed Securities			Trading Account Assets -Equity Securities		Short-Term Investments
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	15,000	$	107,777		$	4,531		$	46,493		$	0	$	450
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0		(962		)	0			0			0		0
Asset management fees and other income	0		0			0			0			471		0
Included in other comprehensive income (loss)	0		(1,437		)	(2,538		)	(225		)	0		0
Net investment income	0		1,381			50			54			0		0
Purchases	0		119			0			0			0		0
Sales	0		0			0			0			0		0
Issuances	0		0			0			0			0		0
Settlements	0		(210		)	(1,740		)	(440		)	0		0
Transfers into Level 3(1)	0		10,176			8,686			17,824			0		0
Transfers out of Level 3(1)	0		0			0			(987		)	0		0
Other(3)	0		0			0			0			1,565		0
Fair Value, end of period assets/(liabilities)	$	15,000	$	116,844		$	8,989		$	62,719		$	2,036	$	450
Unrealized gains (losses) for assets/(liabilities) still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0	$	(962	)	$	0		$	0		$	0	$	0
Asset management fees and other income	$	0	$	0		$	0		$	0		$	470	$	0

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements



	Three Months Ended March 31, 2016
	Cash Equivalents		Other Long-term Investments			Reinsurance Recoverables		Receivables from Parent and Affiliates			Future Policy Benefits
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	225	$	1,565		$	3,012,653	$	7,664		$	(3,134,077	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0		0			624,974		(13		)	(650,030		)
Asset management fees and other income	0		0			0		0			0
Included in other comprehensive income (loss)	0		0			0		141			0
Net investment income	0		0			0		0			0
Purchases	150		0			55,635		0			0
Sales	0		0			0		(1,988		)	0
Issuances	0		0			0		0			(58,500		)
Settlements	0		0			0		0			0
Transfers into Level 3(1)	0		0			0		0			0
Transfers out of Level 3(1)	0		0			0		(2,957		)	0
Other(3)	0		(1,565		)	0		0			0
Fair Value, end of period assets/(liabilities)	$	375	$	0		$	3,693,262	$	2,847		$	(3,842,607	)
Unrealized gains (losses) for assets/(liabilities) still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0		$	643,330	$	0		$	(669,159	)
Asset management fees and other income	$	0	$	0		$	0	$	0		$	0

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements



	Three Months Ended March 31, 2015
	Fixed Maturities Available-For-Sale(4)
	U.S. Corporate Public Securities			U.S. Corporate Private Securities			Foreign Corporate Private Securities			Asset-Backed Securities(5)
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	16,860		$	98,544		$	666		$	40,524
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			0			62			0
Asset management fees and other income	0			0			0			0
Included in other comprehensive income (loss)	(23		)	(145		)	(51		)	81
Net investment income	9			1,267			1			12
Purchases	15,000			2,270			0			0
Sales	(15,000		)	(212		)	0			0
Issuances	0			0			0			0
Settlements	(119		)	(129		)	(678		)	(579		)
Transfers into Level 3(1)	0			0			0			9,783
Transfers out of Level 3(1)	0			0			0			(983		)
Fair Value, end of period assets/(liabilities)	$	16,727		$	101,595		$	0		$	48,838
Unrealized gains (losses) for assets still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0		$	0		$	0		$	0
Asset management fees and other income	$	0		$	0		$	0		$	0

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements



	Three Months Ended March 31, 2015
	Cash Equivalents		Other Long- Term Investments (4)		Reinsurance Recoverables		Receivables from Parent and Affiliates			Future Policy Benefits
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	225	$	0	$	2,996,154	$	22,320		$	(3,112,411	)
Total gains or (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0		0		246,814		1			(257,315		)
Asset management fees and other income	0		0		0		0			0
Included in other comprehensive income (loss)	0		0		0		(292		)	0
Net investment income	0		0		0		0			0
Purchases	0		0		57,644		0			0
Sales	0		0		0		0			0
Issuances	0		0		0		0			(60,523		)
Settlements	0		0		0		0			0
Transfers into Level 3(1)	0		0		0		1,986			0
Transfers out of Level 3(1)	0		0		0		0			0
Other(3)	0		0		0		0			0
Fair Value, end of period assets/(liabilities)	$	225	$	0	$	3,300,612	$	24,015		$	(3,430,249	)
Unrealized gains (losses) for assets/(liabilities) still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0	$	272,379	$	0		$	(283,739	)
Asset management fees and other income	$	0	$	0	$	0	$	0		$	0


(1)	Transfers into or out of any level are generally reported as the value as of the beginning of the quarter in which the transfer occurs for any such assets still held at the end of the quarter.


(2)	Unrealized gains or losses related to assets still held at the end of the period do not include amortization or accretion of premiums and discounts.


(3)	Primarily related to private warrants reclassified from derivatives to trading securities.


(4)	Prior period amounts have been reclassified to conform to current period presentation, including the adoption of ASU 2015-07.


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

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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

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; however, in some cases, as described below, the carrying amount equals or approximates fair value.



	March 31, 2016
	Fair Value								Carrying Amount (1)
	Level 1		Level 2		Level 3		Total		Total
	(in thousands)
Assets:
Commercial mortgage and other loans	$	0	$	2,746	$	466,942	$	469,688	$	446,620
Policy loans	0		0		13,094		13,094		13,094
Cash and cash equivalents	19,603		0		0		19,603		19,603
Accrued investment income	0		27,028		0		27,028		27,028
Receivables from parent and affiliates	0		13,718		0		13,718		13,718
Other assets	0		1,477		0		1,477		1,477
Total assets	$	19,603	$	44,969	$	480,036	$	544,608	$	521,540
Liabilities:
Policyholders’ account balances - investment contracts	$	0	$	0	$	100,507	$	100,507	$	100,368
Cash collateral for loaned securities	0		3,683		0		3,683		3,683
Payables to parent and affiliates	0		25,868		0		25,868		25,868
Other liabilities	0		98,097		0		98,097		98,097
Separate account liabilities - investment contracts	0		263		0		263		263
Total liabilities	$	0	$	127,911	$	100,507	$	228,418	$	228,279

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements



	December 31, 2015(2)
	Fair Value								Carrying Amount(1)
	Level 1		Level 2		Level 3		Total		Total
	(in thousands)
Assets:
Commercial mortgage and other loans	$	0	$	2,793	$	448,349	$	451,142	$	438,172
Policy loans	0		0		13,054		13,054		13,054
Cash and cash equivalents	311		0		0		311		311
Accrued investment income	0		22,615		0		22,615		22,615
Receivables from parent and affiliates	0		14,868		0		14,868		14,868
Other assets	0		1,085		0		1,085		1,085
Total assets	$	311	$	41,361	$	461,403	$	503,075	$	490,105
Liabilities:
Policyholders’ account balances - investment contracts	$	0	$	0	$	102,438	$	102,438	$	103,003
Cash collateral for loaned securities	0		10,568		0		10,568		10,568
Short-term debt	0		1,000		0		1,000		1,000
Payables to parent and affiliates	0		25,678		0		25,678		25,678
Other liabilities	0		83,464		0		83,464		83,464
Separate account liabilities - investment contracts	0		293		0		293		293
Total liabilities	$	0	$	121,003	$	102,438	$	223,441	$	224,006

(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. Financial statement captions excluded from the above table are not considered financial instruments.

(2)

As discussed in Note 2, the Company adopted ASU 2015-07, effective January 1, 2016, which resulted in the exclusion of certain other long-term investments from the fair value hierarchy. The guidance was required to be applied retrospectively, and therefore, prior period amounts have been revised to conform to the current period presentation. At March 31, 2016 and December 31, 2015, the fair values of these cost method investments were $3.2 million and $3.3 million, respectively, which had been previously classified in level 3 at December 31, 2015. The carrying values of these investments were $3.2 million and $3.1 million as of March 31, 2016 and December 31, 2015, respectively.

The fair values presented above have been determined by using available market information and by applying market valuation methodologies, as described in more detail below.

Commercial Mortgage and Other Loans

The fair value of most commercial mortgage loans is based upon the present value of the expected future cash flows discounted at the appropriate U.S. Treasury rate plus an appropriate credit spread for similar quality loans. The quality ratings for these loans, a primary determinant of the credit spreads and a significant component of the pricing process, are based on an internally-developed methodology.

Policy Loans

Policy loans carrying value approximates fair value.

Other Long-Term Investments

Other long-term investments include investments in joint ventures and limited partnerships. The estimated fair values of these cost method investments are generally based on the Company’s share of the NAV as provided in the financial statements of the investees. In certain circumstances, management may adjust the NAV by a premium or discount when it has sufficient evidence to support applying such adjustments. No such adjustments were made as of March 31, 2016 and December 31, 2015.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

Cash and Cash Equivalents, Accrued Investment Income, Receivables from Parent and Affiliates, and Other Assets

The Company believes that due to the short-term nature of certain assets, the carrying value approximates fair value. These assets include: cash and cash equivalents, accrued investment income, and other assets that meet the definition of financial instruments, including receivables such as unsettled trades and accounts receivable.

Policyholders’ Account Balances - Investment Contracts

Only the portion of policyholders’ account balances related to products that are investment contracts (those without significant mortality or morbidity risk) are reflected in the table above. For payout annuities and other similar contracts without life contingencies, fair values are generally derived using discounted projected cash flows based on interest rates that are representative of the Company’s financial strength ratings, and hence reflect the Company’s own NPR. For those balances that can be withdrawn by the customer at any time without prior notice or penalty, the fair value is the amount estimated to be payable to the customer as of the reporting date, which is generally the carrying value.

Cash Collateral for Loaned Securities

Cash collateral for loaned securities represents the collateral received or paid in connection with loaning or borrowing securities. For these transactions, the carrying value of the related asset or liability approximates fair value as they equal the amount of cash collateral received or paid.

Debt

The fair value of short-term debt is generally determined by either prices obtained from independent pricing services, which are validated by the Company, or discounted cash flow models. These fair values consider the Company’s own NPR. Discounted cash flow models predominately use market observable inputs such as the borrowing rates currently available to the Company for debt and financial instruments with similar terms and remaining maturities. For debt with a maturity of less than 90 days, the carrying value approximates fair value.

Other Liabilities and Payables to Parent and Affiliates

Other liabilities and payables to parent and affiliates are primarily payables, such as unsettled trades, drafts, escrow deposits and accrued expense payables. Due to the short-term until settlement of most of these liabilities, the Company believes that carrying value approximates fair value.

Separate Account Liabilities - Investment Contracts

Only the portion of separate account liabilities related to products that are investment contracts are reflected in the table above. Separate account liabilities are recorded at the amount credited to the contractholder, which reflects the change in fair value of the corresponding separate account assets including contractholder deposits less withdrawals and fees; therefore, carrying value approximates fair value.

5. DERIVATIVE INSTRUMENTS

Types of Derivative Instruments and Derivative Strategies

Interest Rate Contracts

Interest rate swaps are used by the Company to reduce risks from changes in interest rates, manage interest rate exposures arising from mismatches between assets and liabilities (including duration mismatches) and to hedge against changes in the value of assets it owns or anticipates acquiring or selling. Swaps may be attributed to specific assets or liabilities or may be used on a portfolio basis. Under interest rate swaps, the Company agrees with counterparties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed upon notional principal amount.

Table of Contents

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

Equity Contracts

Equity index options are contracts which will settle in cash based on differentials in the underlying indices at the time of exercise and the strike price. The Company uses combinations of purchases and sales of equity index options to hedge the effects of adverse changes in equity indices within a predetermined range.

Total return swaps are contracts whereby the Company agrees with counterparties to exchange, at specified intervals, the difference between the return on an asset (or market index) and LIBOR plus an associated funding spread based on a notional amount. The Company generally uses total return swaps to hedge the effect of adverse changes in equity indices.

Foreign Exchange Contracts

Currency derivatives, including currency swaps and forwards, are used by the Company to reduce risks from changes in currency exchange rates with respect to investments denominated in foreign currencies that the Company either holds or intends to acquire or sell.

Under currency forwards, the Company agrees with counterparties to deliver a specified amount of an identified currency at a specified future date. Typically, the price is agreed upon at the time of the contract and payment for such a contract is made at the specified future date. The Company executes forward sales of the hedged currency in exchange for U.S. dollars at a specified exchange rate. The maturities of these forwards correspond with the future periods in which the non-U.S. dollar-denominated earnings are expected to be generated. These earnings hedges do not qualify for hedge accounting.

Under currency swaps, the Company agrees with counterparties to exchange, at specified intervals, the difference between one currency and another at an exchange rate and calculated by reference to an agreed principal amount. Generally, the principal amount of each currency is exchanged at the beginning and termination of the currency swap by each party. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty for payments made in the same currency at each due date.

Credit Contracts

Credit derivatives are used by the Company to enhance the return on the Company’s investment portfolio by creating credit exposure similar to an investment in public fixed maturity cash instruments. With credit derivatives the Company sells credit protection on a single name reference, or certain index reference, and in return receives a quarterly premium. With credit default derivatives, this premium or credit spread generally corresponds to the difference between the yield on the referenced name’s public fixed maturity cash instruments and swap rates, at the time the agreement is executed. If there is an event of default by the referenced name, as defined by the agreement, then the Company is obligated to pay the counterparty the referenced amount of the contract and receive in return the referenced defaulted security or similar security or pay the referenced amount less the auction recovery rate. See credit derivatives section for a discussion of guarantees related to credit derivatives written. In addition to selling credit protection, the Company has purchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio.

Embedded Derivatives

The Company sells variable annuity products, which may include guaranteed benefit features that are accounted for as embedded derivatives. The Company has reinsurance agreements to transfer the risk related to certain of these benefit features to affiliates, Pruco Re and Prudential Insurance. See Note 1 for the subsequent change effective April 1, 2016. The embedded derivatives related to the living benefit features and the related reinsurance agreements are carried at fair value. These embedded derivatives are marked to market through “Realized investment gains (losses), net” based on the change in value of the underlying contractual guarantees, which are determined using valuation models, as described in Note 4.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

The table below provides a summary of the gross notional amount and fair value of derivatives contracts by the primary underlying, excluding embedded derivatives which are recorded with the associated host. Many derivative instruments contain multiple underlyings. The fair value amounts below represent the gross fair value of derivative contracts prior to taking into account the netting effects of master netting agreements, cash collateral held with the same counterparty, and non-performance risk.



	March 31, 2016							December 31, 2015
			Gross Fair Value							Gross Fair Value
Primary Underlying	Notional		Assets		Liabilities			Notional		Assets		Liabilities
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Currency/Interest Rate
Foreign Currency Swaps	$	131,513	$	13,347	$	(1,686	)	$	115,358	$	15,910	$	(206	)
Total Qualifying Hedges	$	131,513	$	13,347	$	(1,686	)	$	115,358	$	15,910	$	(206	)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Swaps	$	1,706,750	$	134,729	$	(23,703	)	$	1,872,750	$	84,817	$	(13,452	)
Interest Rate Options	400,000		10,903		(636		)	100,000		9,431		0
Foreign Currency
Foreign Currency Forwards	2,752		0		(104		)	2,752		23		0
Currency/Interest Rate
Foreign Currency Swaps	72,334		8,215		(329		)	77,729		11,220		0
Credit
Credit Default Swaps	0		0		0			0		0		0
Equity
Total Return Swaps	676,451		0		(23,513		)	217,999		320		(3,626		)
Equity Options	18,886,800		24,659		(2,847		)	18,286,800		15,054		(7,993		)
Total Non-Qualifying Hedges	$	21,745,087	$	178,506	$	(51,132	)	$	20,558,030	$	120,865	$	(25,071	)
Total Derivatives (1)	$	21,876,600	$	191,853	$	(52,818	)	$	20,673,388	$	136,775	$	(25,277	)

(1)

Excludes embedded derivatives which contain multiple underlyings. The fair value of these embedded derivatives was a net liability of $3,843 million and $3,134 million as of March 31, 2016 and December 31, 2015, respectively, included in “Future policy benefits.” The fair value of the embedded derivatives related to the reinsurance of certain of these benefits to Pruco Re and Prudential Insurance included in “Reinsurance recoverables” was an asset of $3,693 million and $3,013 million as of March 31, 2016 and December 31, 2015, respectively.

Offsetting Assets and Liabilities

The following table presents recognized derivative instruments (excluding embedded derivatives and associated reinsurance recoverables) 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.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements



	March 31, 2016
	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	$	191,853	$	(38,525	)	$	153,328	$	(141,420	)	$	11,908
Offsetting of Financial Liabilities:
Derivatives	$	52,818	$	(52,818	)	$	0	$	0		$	0



	December 31, 2015
	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	$	135,210	$	(21,508	)	$	113,702	$	(101,288	)	$	12,414
Offsetting of Financial Liabilities:
Derivatives	$	25,277	$	(25,277	)	$	0	$	0		$	0


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

For information regarding the rights of offset associated with the derivative assets and liabilities in the table above see “Credit Risk” below and Note 7.

Cash Flow Hedges

The primary derivative instruments used by the Company in its cash flow hedge accounting relationships are currency swaps. These instruments are only designated for hedge accounting in instances where the appropriate criteria are met. The Company does not use futures, options, credit, equity or embedded derivatives in any of its cash flow hedge accounting relationships.

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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements



	Three Months Ended March 31, 2016
	Realized Investment Gains (Losses)			Net Investment Income		Other Income			AOCI(1)
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	0		$	251	$	169		$	(4,183	)
Total cash flow hedges	0			251		169			(4,183		)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	45,149			0		0			0
Currency	(127		)	0		0			0
Currency/Interest Rate	(3,058		)	0		(34		)	0
Credit	0			0		0			0
Equity	(19,413		)	0		0			0
Embedded Derivatives	(34,161		)	0		0			0
Total non-qualifying hedges	(11,610		)	0		(34		)	0
Total	$	(11,610	)	$	251	$	135		$	(4,183	)



	Three Months Ended March 31, 2015
	Realized Investment Gains (Losses)			Net Investment Income		Other Income		AOCI(1)
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	0		$	93	$	138	$	8,324
Total cash flow hedges	0			93		138		8,324
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	30,044			0		0		0
Currency	0			0		0		0
Currency/Interest Rate	6,006			0		99		0
Credit	(1		)	0		0		0
Equity	(3,883		)	0		0		0
Embedded Derivatives	(20,628		)	0		0		0
Total non-qualifying hedges	11,538			0		99		0
Total	$	11,538		$	93	$	237	$	8,324


(1)	Amounts deferred in AOCI.

For the three months ended March 31, 2016 and 2015, the ineffective portion of derivatives accounted for using hedge accounting was not material to the Company’s results of operations. Also, there were no material amounts reclassified into earnings relating to instances in which the Company discontinued cash flow hedge accounting because the forecasted transaction did not occur by the anticipated date or within the additional time period permitted by the authoritative guidance for the accounting for derivatives and hedging.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

Presented below is a rollforward of current period cash flow hedges in “Accumulated other comprehensive income (loss)” before taxes:



	(in thousands)
Balance, December 31, 2015	$	14,847
Net deferred gains (losses) on cash flow hedges from January 1 to March 31, 2016	(3,792		)
Amounts reclassified into current period earnings	(391		)
Balance, March 31, 2016	$	10,664

Using March 31, 2016 values, it is estimated that a pre-tax gain of approximately $1 million will be reclassified from AOCI to earnings during the subsequent twelve months ending March 31, 2017, offset by amounts pertaining to the hedged item. As of March 31, 2016, the Company did not have any qualifying cash flow hedges of forecasted transactions other than those related to the variability of the payment or receipt of interest or foreign currency amounts on existing financial instruments. The maximum length of time for which these variable cash flows are hedged is 17 years. Income amounts deferred in AOCI as a result of cash flow hedges are included in "Net unrealized investment gains (losses)" within OCI in the Unaudited Interim Statements of Operations and Comprehensive Income (Loss).

Credit Derivatives

The Company had no open credit derivative positions where it has written or purchased credit protection as of March 31, 2016 and December 31, 2015.

Credit Risk

The Company is exposed to credit-related losses in the event of non-performance by its counterparty to financial derivative transactions.

The Company has credit risk exposure to an affiliate, Prudential Global Funding, LLC (“PGF”), related to its OTC derivative transactions. PGF manages credit risk with external counterparties by entering into derivative transactions with highly rated major international financial institutions and other creditworthy counterparties, and by obtaining collateral, such as cash and securities, when appropriate. Additionally, limits are set on single party credit exposures which are subject to periodic management review.

Under fair value measurements, the Company incorporates the market’s perception of its own and the counterparty’s non-performance risk in determining the fair value of the portion of its OTC derivative assets and liabilities that are uncollateralized. Credit spreads are applied to the derivative fair values on a net basis by counterparty. To reflect the Company’s own credit spread, a proxy based on relevant debt spreads is applied to OTC derivative net liability positions. Similarly, the Company’s counterparty’s credit spread is applied to OTC derivative net asset positions.

6. COMMITMENTS, CONTINGENT LIABILITIES AND LITIGATION AND REGULATORY MATTERS

Commitments

The Company had made commitments to fund $28 million and $5 million of commercial loans as of March 31, 2016 and December 31, 2015, respectively. The Company also made commitments to purchase or fund investments, mostly private fixed maturities, of $31 million and $36 million as of March 31, 2016 and December 31, 2015, respectively.

Contingent Liabilities

On an ongoing basis, the Company’s internal supervisory and control functions review the quality of sales, marketing and other customer interface procedures and practices and may recommend modifications or enhancements. From time to time, this review process results in the discovery of product administration, servicing or other errors, including errors relating to the timing or amount of payments or contract values due to customers. In certain cases, if appropriate, the Company may offer customers remediation and may incur charges, including the cost of such remediation, administrative costs and regulatory fines.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

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 March 31, 2016, the aggregate range of reasonably possible losses in excess of accruals established for those litigation and regulatory matters for which such an estimate currently can be made is $0 to approximately $3 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.

For a discussion of the Company's litigations and regulatory matters, see Note 12 to the Company's Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.

Summary

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

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

7. RELATED PARTY TRANSACTIONS

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

Expense Charges and Allocations

Many of the Company’s expenses are allocations or charges from Prudential Insurance or other affiliates.

The Company’s general and administrative expenses are charged to the Company using allocation methodologies based on business production processes. Management believes that the methodology is reasonable and reflects costs incurred by Prudential Insurance to process transactions on behalf of the Company. The Company operates under service and lease agreements whereby services of officers and employees, supplies, use of equipment and office space are provided by Prudential Insurance. The Company reviews its allocation methodology periodically which it may adjust accordingly. General and administrative expenses also include allocations of stock compensation expenses related to a stock option program and a deferred compensation program issued by Prudential Financial. The expense charged to the Company for the stock option program and deferred compensation program was less than $1 million for both the three months ended March 31, 2016 and 2015.

The Company is charged for its share of employee benefits expenses. These expenses include costs for funded and non-funded contributory and non-contributory defined benefit pension plans. Some of these benefits are based on earnings and length of service. Other benefits are based on an account balance, which takes into consideration age, service and earnings during career. The Company’s share of net expense for the pension plans was less than $1 million for both the three months ended March 31, 2016 and 2015.

Prudential Insurance sponsors voluntary savings plans for its employees' 401(k) plans. The 401(k) plans provide for salary reduction contributions by employees and matching contributions by the Company of up to 4% of annual salary. The expense charged to the Company for the matching contribution to the 401(k) plans was less than $1 million for both the three months ended March 31, 2016 and 2015.

Affiliated Asset Administration Fee Income

In accordance with a revenue sharing agreement with AST Investment Services, Inc. (“ASTISI”), and Prudential Investments LLC (“Prudential Investments”), the Company receives fee income calculated on contractholder separate account balances invested in the Advanced Series Trust and The Prudential Series Fund. Income received from ASTISI and Prudential Investments related to this agreement was $25 million and $53 million for the three months ended March 31, 2016 and 2015, respectively. These revenues are recorded as “Asset administration fees and other income” in the Unaudited Interim Statements of Operations and Comprehensive Income (Loss).

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 $1 million for both the three months ended March 31, 2016 and 2015. These expenses are recorded as “Net investment income” in the Unaudited Interim Statements of Operations and Comprehensive Income (Loss).

Cost Allocation Agreements with Affiliates

Certain operating costs (including rental of office space, furniture, and equipment) have been charged to the Company at cost by Prudential Annuities Information Services and Technology Corporation (“PAIST”), an affiliated company. PALAC signed a written service agreement with PAIST for these services executed and approved by the Connecticut Insurance Department in 1995. This agreement automatically continues in effect from year to year and may be terminated by either party upon 30 days written notice. Allocated lease expense was $0 and less than $1 million for the three months ended March 31, 2016 and 2015, respectively. Allocated sub-lease rental income, recorded as a reduction to lease expense was $0 for both the three months ended March 31, 2016 and 2015.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

The Company pays commissions and certain other fees to PAD in consideration for PAD’s marketing and underwriting of the Company’s products. Commissions and fees are paid by PAD to broker-dealers who sold and service the Company’s products. Commissions and fees paid by the Company to PAD were $27 million and $43 million for the three months ended March 31, 2016 and 2015, respectively.

Debt Agreements

Short-term and Long-term Debt

The Company is authorized to borrow funds up to $2 billion from Prudential Financial and its affiliates to meet its capital and other funding needs. The Company had debt of $0 and $1 million outstanding with Prudential Funding, LLC as of March 31, 2016 and December 31, 2015, respectively. Total interest expense on debt with Prudential Funding, LLC and Prudential Financial was less than $1 million for the three months ended March 31, 2016 and 2015, respectively.

Reinsurance Agreements

The Company uses reinsurance as part of its risk management and capital management strategies for certain of its optional living benefit features and certain base contracts. Through March 31, 2016, the Company reinsured its living benefit guarantees on certain variable annuity products to Pruco Re and Prudential Insurance, which are the legal entities in which we executed our living benefit hedging program. See Note 1 for the subsequent change effective April 1, 2016.

Fees ceded under these agreements are included in “Realized investment gains (losses), net” on the Unaudited Interim Statements of Operations and Comprehensive Income (Loss). The Company's ceded fees were $59 million and $68 million to Pruco Re for the three months ended March 31, 2016 and 2015, respectively. The Company's ceded fees were $6 million and less than $1 million to Prudential Insurance for the three months ended March 31, 2016 and 2015, respectively.

The Company ceded base contract fees of $11 million to Prudential Insurance as of March 31, 2016, which are included in "Policy Charges and Fee Income". See Note 1 for a discussion on the fourth quarter 2015 reinsurance treaty related to the Company's New York license surrender.

The Company’s reinsurance payables related to affiliated reinsurance were $22 million and $250 million as of March 31, 2016 and December 31, 2015, respectively. These payables are reflected in “Payable to parent and affiliates” in the Company’s Unaudited Interim Statements of Financial Position.

The Company’s reinsurance recoverables related to affiliated reinsurance were $3,776 million and $3,088 million as of March 31, 2016 and December 31, 2015, respectively. The assets are reflected in “Reinsurance recoverables” in the Company’s Unaudited Interim Statements of Financial Position. Realized gains (losses) were $616 million and $237 million for the three months ended March 31, 2016 and 2015, respectively. Changes in realized gains (losses) for the 2016 and 2015 periods were primarily due to changes in market conditions in each respective period.

See Note 6 to the Company’s Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2015, for information regarding the Company’s reinsurance agreements.

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.

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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 March 31, 2016, compared with December 31, 2015, and its results of operations for the three months ended March 31, 2016 and 2015. 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, 2015, 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 variable annuity contracts for the individual market in the United States. The Company’s products have been sold primarily to individuals to provide for long-term savings and retirement needs and to address the economic impact of premature death, estate planning concerns and supplemental retirement income.

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

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

As disclosed in Note 1 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015, the Company surrendered its New York license effective as of December 31, 2015, and reinsured the majority of its New York business to an affiliate, The Prudential lnsurance Company of America(“Prudential Insurance”). The license surrender relieves the Company of the requirement to hold New York statutory reserves on its business in excess of the statutory reserves required by its domiciliary regulator, the Arizona Department of Insurance. For the small portion of New York business retained by the Company, a custodial account has been established to hold collateral assets in an amount equal to a percentage of the reserves associated with such business, as calculated in accordance with PALAC's New York Regulation 109 Plan approved by the New York Department of Financial Services.

Effective April 1, 2016, the Company recaptured the risks related to its variable annuity living benefit riders that were previously reinsured to Pruco Reinsurance, Ltd. (“Pruco Re”). In addition, the Company reinsured variable annuity base contracts, along with the living benefit riders, from Pruco Life Insurance Company, excluding the Pruco Life Insurance Company of New Jersey business which was reinsured to Prudential Insurance. This reinsurance agreement covers new and in force business and excludes business reinsured externally. The product risks related to the reinsured business are being managed in the Company. In addition, the living benefit hedging program related to the reinsured living benefit riders will be managed within the Company.

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Regulatory Developments

In April 2016, the U.S. Department of Labor (“DOL”) issued a final regulation accompanied by new class exemptions and amendments to long-standing exemptions from the prohibited transaction provisions under the Employee Retirement Income Security Act (“ERISA”) (collectively, the “Rules”), with implementation beginning in April 2017, and compliance with certain additional provisions required by January 2018. The Rules redefine who will be considered a “fiduciary” for purposes of transactions with qualified plans, plan participants and Individual Retirement Accounts (“IRAs”), and generally provide that advice to a plan participant or IRA owner will be treated as a fiduciary activity. We are analyzing the Rules’ potential impact on our operations and preparing to implement the necessary adjustments to come into alignment with the Rules’ requirements. Overall, we believe the Rules will result in increased compliance costs and may create increased exposure to legal claims under certain circumstances, including class actions. Compliance with a new “best interest contract exemption” will be required for sales of variable annuities to IRAs, but certain fixed annuities will be subject to a separate exemption. As a result of the Rules, certain distributors may restrict the sale of annuities. In addition, we or our affiliates may need to alter our product design or offerings to meet the needs of distributors in complying with the Rules. We or our affiliates may also need to monitor or limit wholesaling and other sales support and customer service activities if we do not want to be considered a fiduciary.

For additional information on the potential impacts of regulation on the Company, including the topics described above, see “Business-Regulation” and “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015.

Revenues and Expenses

The Company earns revenues principally from policy charges, fee income, asset administration from insurance and investment products and from net investment income on the investment of general account and other funds. The Company’s operating expenses principally consist of insurance benefits provided and reserves established for anticipated future insurance benefits, interest credited to policyholders' account balances, general business expenses, commissions and other costs of selling and servicing the various products it sold.

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

Profitability

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

See “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for a discussion of risks that have materially affected and may affect in the future the Company’s business, results of operations or financial condition, or cause the Company’s actual results to differ materially from those expected or those expressed in any forward-looking statements made by or on behalf of the Company.

Products

The Company’s in force variable annuities provide its contractholders with tax-deferred asset accumulation together with a base death benefit and a suite of optional guaranteed death and living benefits and annuitization options. Certain optional living benefit guarantees include, among other features, the ability to make withdrawals based on the highest daily contract value plus a specified return, credited for a period of time. This guaranteed contract value is a notional amount that forms the basis for determining periodic withdrawals for the life of the contractholder, and cannot be accessed as a lump-sum surrender value. Most contracts also guarantee the contractholder’s beneficiary a return of the greater of account value or total premium payments made to the contract less any partial withdrawals upon death.

Our variable annuities generally provide our contractholders with the opportunity to allocate purchase payments to sub-accounts that invest in underlying mutual funds managed by our affiliates ("proprietary") and/or non-proprietary mutual funds, frequently under asset allocation programs. Certain products also allow fixed-rate accounts that are backed by investments in the general account and are credited with interest at rates we determine, subject to certain minimums. We also offered fixed annuities that

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provide a guarantee of principal and interest credited at rates we determine, subject to certain contractual minimums. Certain allocations made in the fixed-rate accounts of our variable annuities and certain fixed annuities impose a market value adjustment if the contract is not held to maturity.

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 equity market returns, interest rates, market volatility, contractholder longevity/mortality, timing and amount of annuitization and withdrawals, withdrawal efficiency and contract lapses. The return we realize from our variable annuity contracts will vary based on the extent of the differences between our actual experience and the assumptions used in the original pricing of these products. Our returns can also vary due to the impact and effectiveness of our hedging programs for any capital markets movements that we may hedge, the impact of affiliated reinsurance, the impact of that portion of our variable annuity contracts with an asset transfer feature, the impact of risks we have retained and the impact of risks that are not able to be hedged.

Our risk management strategy helps to limit our exposure to certain of these risks primarily through a combination of product design elements, our living benefits hedging program and affiliated reinsurance arrangements. The product design elements we utilize for certain products include, among others, asset allocation restrictions, minimum issuance age requirements, certain limitations on the amount of subsequent contractholder deposits and an asset transfer feature. The objective of the asset transfer feature is to help mitigate our exposure to equity market risk and market volatility by transferring assets between certain variable investment sub-accounts selected by the annuity contractholder, and investments that are expected to be more stable (e.g., a bond fund sub-account within the separate account or a fixed-rate account within the general account). The transfers are based on the static mathematical formula used with the particular optional benefit which considers a number of factors, including, but not limited to, the impact of investment performance on the contractholder’s total account value. This occurs at the contractholder level, rather than at the fund level, which we believe enhances our risk mitigation. As of March 31, 2016, approximately $33.9 billion or 84% of total variable annuity account values contain a living benefit feature, compared to approximately $34.6 billion or 84% as of December 31, 2015. As of March 31, 2016, approximately $27.0 billion or 80% of variable annuity account values with living benefit features included an asset transfer feature in the product design, compared to approximately $27.5 billion or 79% as of December 31, 2015.

As mentioned above, in addition to our asset transfer feature, we also manage certain risks associated with our variable annuity products through our living benefits hedging programs and affiliated reinsurance agreements. Through March 31, 2016, we reinsured the majority of our variable annuity living benefit guarantees to an affiliated reinsurance company, Pruco Re. The living benefits hedging program was primarily executed within Pruco Re to manage capital markets risk associated with the reinsured living benefit guarantees. Effective April 1, 2016, the Company recaptured the risks related to its variable annuity living benefit riders that were previously reinsured to Pruco Re. In addition, the Company reinsured variable annuity base contracts, along with the living benefit riders, from Pruco Life Insurance Company, excluding the Pruco Life Insurance Company of New Jersey business which was reinsured to Prudential Insurance. This reinsurance agreement covers new and in force business and excludes business reinsured externally. The product risks related to the reinsured business are being managed in the Company. In addition, the living benefit hedging program related to the reinsured living benefit riders will be managed within the Company.

Accounting Policies & Pronouncements

Application of Critical Accounting Estimates

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

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


•	Deferred policy acquisition costs ("DAC") and other costs, including deferred sales inducements ("DSI") and value of business acquired ("VOBA");


•	Valuation of investments, including derivatives, and the recognition of other-than-temporary impairments ("OTTI");


•	Policyholder liabilities;


•	Reinsurance recoverables;


•	Taxes on income; and


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

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DAC and Other Costs

We amortize DAC and other costs over the expected life of the contracts in proportion to total gross profits. Total gross profits include both actual gross profits and estimates of gross profits for future periods. In calculating gross profits, we consider mortality, persistency, and other elements as well as rates of return on investments associated with these contracts, and the cost related to our guaranteed minimum death benefits (“GMDB”) and guaranteed minimum income benefits (“GMIB”). Gross profits and amortization rates also include the impacts of the embedded derivatives associated with certain of the living benefit features of our variable annuity contracts and related hedging activities. In calculating amortization expense, we estimate the amounts of gross profits that will be included in our U.S. GAAP results, and utilize these estimates to calculate amortization rates and expense amounts. In addition, in calculating gross profits, we include the profits and losses related to contracts previously issued by the Company that are reported in affiliated legal entities other than the Company as a result of, for example, reinsurance agreements with those affiliated entities. The Company is an indirect subsidiary of Prudential Financial (an SEC registrant) and has extensive transactions and relationships with other subsidiaries of Prudential Financial, including reinsurance agreements, as discussed in Note 7 to the Unaudited Interim Financial Statements. Incorporating all product-related profits and losses in gross profits, including those that are reported in affiliated legal entities, produces a DAC amortization pattern representative of the total economics of the products. For a further discussion of the amortization of DAC and other costs, see “—Results of Operations”.

The near-term future equity rate of return assumptions used in evaluating DAC and DSI for our domestic variable annuity products are derived using a reversion to the mean approach, a common industry practice. Under this approach, we consider historical equity returns and adjust projected equity returns over an initial future period of five years (the “near-term”) so that equity returns converge to the long-term expected rate of return. If the near-term projected future rate of return is greater than our near-term maximum future rate of return of 15%, we use our maximum future rate of return. As of March 31, 2016, we assume an 8.0% long-term equity expected rate of return and a 6.3% near-term mean reversion equity rate of return.

The weighted average rate of return assumptions consider many factors, including asset durations, asset allocations and other factors. We generally update the near-term equity rate of return and our estimate of total gross profits each quarter to reflect the result of the reversion to the mean approach. We generally update the future interest rates used to project fixed income returns annually and in any quarter when interest rates vary significantly from these assumptions. These market performance related adjustments to our estimate of total gross profits result in cumulative adjustments to prior amortization, reflecting the application of the new required rate of amortization to all prior periods’ gross profits.

For additional information on our policies for DAC and other costs and for the remaining critical accounting estimates listed above, see our Annual Report on Form 10-K for the year ended December 31, 2015, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Accounting Policies & Pronouncements—Application of Critical Accounting Estimates”.

Adoption of New Accounting Pronouncements

See Note 2 to our Unaudited Interim Financial Statements for a discussion of newly adopted accounting pronouncements.

Changes in Financial Position

March 31, 2016 versus December 31, 2015

Total assets decreased by $0.6 billion from $47.3 billion at December 31, 2015 to $46.7 billion at March 31, 2016. Significant components were:


•	Separate account assets decreased $0.9 billion primarily driven by net outflows and continued surrenders due to runoff of the block, policy charges, and the impact of the asset transfer feature which moved contractholder account values from the separate account to the general account, partially offset by favorable fund performance.


•	DAC and DSI decreased $0.3 billion primarily resulting from the impact of the embedded derivatives and related hedge positions and base amortization.


•	Receivables from parent and affiliates decreased $0.2 billion related to cash consideration received from an affiliate related to the recapture of the New York contracts in the fourth quarter of 2015.

Partially offsetting these decreases in total assets were the following items:


•	Reinsurance recoverables increased $0.7 billion related to the reinsured liability for living benefit embedded derivatives primarily resulting from an increase in the present value of future expected benefit payments driven by declining interest rates.

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Total liabilities decreased by $0.4 billion, from $45.9 billion at December 31, 2015 to $45.5 billion at March 31, 2016. Significant components were:


•	Separate account liabilities decreased $0.9 billion offsetting the decrease in separate account assets above.


•	Payables to parent and affiliates decreased $0.2 billion related to the cash consideration paid relating to ceding the


•	New York contracts, as discussed above.

Partially offsetting these decreases in total liabilities were the following items:


•	Future policy benefits and other policyholder liabilities increased $0.7 billion primarily driven by the mark-to-market of the liability for living benefit embedded derivatives, as discussed above.

Total equity decreased by $0.1 billion from $1.3 billion at December 31, 2015 to $1.2 billion at March 31, 2016, reflecting changes in net income.

Results of Operations

Loss from Operations before Taxes

2016 to 2015 Three Months Comparison

Loss from operations before taxes increased $202 million from $26 million in the first quarter of 2015 to $228 million in the first quarter of 2016. Excluding the impacts of changes in the estimated profitability of the business, as discussed below, income from operations before taxes decreased $52 million. The decrease was primarily driven by lower net fees from lower average separate account assets due to runoff of the business and policy charges, the changes to the Rule 12b-1 Plan and the ceding of fees to an affiliate relating to the ceding of the New York contracts, as discussed above.

The impacts of changes in the estimated profitability of the business include adjustments to the amortization of DAC and other costs and to reserves, which resulted in a net charge of $291 million in the first quarter of 2016. The net charge primarily reflects the impact of NPR gains due to declining rates and widening spread, as well as unfavorable equity market performance. The net charge of $141 million in the first quarter of 2015 primarily reflects NPR gains due to spread widening and declining interest rates, partially offset by a net benefit reflecting favorable equity market performance which more than offset the impact of lower expected rates of return on fixed income investments within contractholder accounts and on future expected claims relative to our assumptions.

Revenues, Benefits and Expenses

2016 to 2015 Three Months Comparison

Revenues decreased $105 million, primarily driven by an unfavorable variance in policy charges and fee income and asset administration fees and other income of $69 million due to lower average separate account assets, the changes to the Rule 12b-1 Plan and the ceding of fees to an affiliate for the New York contracts, as discussed above. Realized gains and losses decreased $28 million primarily driven by general account losses in the first quarter of 2016 versus general account gains in the first quarter of 2015, as well as the mark-to-market of the non-reinsured portion of the living benefit embedded derivative liability and related hedge positions. Net investment income decreased $5 million primarily as a result of lower portfolio reinvestment yields.

Benefits and expenses increased $98 million. Excluding the $150 million impacts of the amortization of DAC and other costs and to the reserves for the GMDB and GMIB features, as discussed above, benefits and expenses decreased $52 million. The decrease was driven by a decline in DAC amortization and interest credited to policyholders’ account balances of $25 million primarily due to lower base DAC and DSI amortization driven by lower gross profits. General, administrative and other expenses decreased $24 million driven by lower distribution costs from lower average separate account values due to runoff of the business, and the changes to the Rule 12b-1 Plan, as discussed above.

Income Taxes

The income tax provision amounted to a benefit of $86 million in the first quarter of 2016, compared to $5 million in the first quarter of 2015. The increased benefit was primarily due to an increase in pre-tax losses.

The Company's liability for income taxes includes the liability for unrecognized tax benefits, interest and penalties which relate to tax years still subject to review by the Internal Revenue Service (“IRS”) or other taxing authorities. Audit periods remain open for review until the statute of limitations has passed. Generally, for tax years which produce net operating losses, capital losses or

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tax credit carryforwards (“tax attributes”), the statute of limitations does not close, to the extent of these tax attributes, until the expiration of the statute of limitations for the tax year in which they are fully utilized. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the liability for income taxes.

The Company does not anticipate any significant changes within the next 12 months to its total unrecognized tax benefits related to tax years for which the statute of limitations has not expired.

As of March 31, 2016, the Company remains subject to examination in the U.S. for tax years 2009 through 2015.

The dividends received deduction (“DRD”) reduces the amount of dividend income subject to U.S. tax and is a significant component of the difference between the Company’s effective tax rate and the federal statutory tax rate of 35%. The DRD for the current period was estimated using information from 2015 and current year results, and was adjusted to take into account the current year’s equity market performance and expected business results. The actual current year DRD can vary from the estimate based on factors such as, but not limited to, changes in the amount of dividends received that are eligible for the DRD, changes in the amount of distributions received from mutual fund investments, changes in the account balances of variable life and annuity contracts, and the Company’s taxable income before the DRD.

There is a possibility that the IRS and the U.S. Treasury will address, through guidance, their issues related to the calculation of the DRD. For the last several years, revenue proposals included in the Obama Administration's budgets have included proposed changes to the method used to determine the amount of the DRD. A change in the DRD, including the possible retroactive or prospective elimination of this deduction through guidance or legislation, could increase actual tax expense and reduce the Company’s net income.

In 2009, the Company joined in filing the consolidated federal tax return with Prudential Financial. For tax years 2009 through 2016, the Company is participating in the IRS’s Compliance Assurance Program (“CAP”). Under CAP, the IRS assigns an examination team to review completed transactions as they occur in order to reach agreement with the Company on how they should be reported in the relevant tax returns. If disagreements arise, accelerated resolution programs are available to resolve the disagreements in a timely manner before the tax returns are filed.

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, 2015.

Overview

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

Effective and prudent liquidity and capital management is a priority across the organization. Management monitors the liquidity of Prudential Financial, Prudential Insurance and the Company on a daily basis and projects borrowing and capital needs over a multi-year time horizon through our periodic planning process. We believe that cash flows from the sources of funds available to us are sufficient to satisfy the current liquidity requirements of Prudential Financial and the Company, including under reasonably foreseeable stress scenarios. Prudential Financial has a capital management framework in place that governs the allocation of capital and approval of capital uses. Prudential Financial and the Company also employ a “Capital Protection Framework” to ensure the availability of capital resources to maintain adequate capitalization and competitive risk-based capital ("RBC") ratios under various stress scenarios.

Prudential Financial is a non-bank financial company (a “Designated Financial Company”) under Dodd-Frank. As a Designated Financial Company, Prudential Financial is subject to supervision and examination by the Federal Reserve Bank of Boston and to stricter prudential regulatory standards, which include or will include requirements and limitations (many of which are the subject of ongoing rule-making) relating to capital, leverage, liquidity, stress-testing, overall risk management, resolution and recovery plans, credit exposure reporting, early remediation, management interlocks, and credit concentration. They may also include additional standards regarding enhanced public disclosure, short-term debt limits and other related subjects. In addition, the Financial Stability Board ("FSB") has identified Prudential Financial as a global systemically important insurer (“G-SII”). For

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information on these actions 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, 2015.

On December 22, 2015 and June 29, 2015, the Company paid dividends of $180 million and $270 million, respectively, to its parent, Prudential Annuities, Inc.

Capital

Our capital management framework is primarily based on statutory risk based capital measures. The RBC ratio is a primary measure of the capital adequacy of the Company. RBC is calculated based on statutory financial statements and risk formulas consistent with the practices of the National Association of Insurance Commissioners (“NAIC”). RBC considers, among other things, risks related to the type and quality of the invested assets, insurance-related risks associated with an insurer’s products and liabilities, interest rate risks and general business risks. RBC ratio calculations are intended to assist insurance regulators in measuring an insurer’s solvency and ability to pay future claims. The reporting of RBC measures is not intended for the purpose of ranking any insurance company or for use in connection with any marketing, advertising or promotional activities, but is available to the public. The RBC ratio is an annual calculation, however, as of March 31, 2016 we estimate that the Company’s RBC ratio exceeds the minimum level required by applicable insurance regulations.

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 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.

Capital Protection Framework

Prudential Financial employs a “Capital Protection Framework” (the “Framework”) to ensure that sufficient capital resources are available to maintain adequate capitalization and competitive RBC ratios and solvency margins under various stress scenarios. The Framework incorporates the potential impacts from market related stresses, including equity markets, real estate, interest rates, and credit losses. The Framework addresses the potential capital consequences, under stress scenarios, of certain of these net risks and the strategies we use to mitigate them, including the following:


•	Equity market exposure affecting the statutory capital of the Company and Prudential Financial as a whole, which is managed through Prudential Financial's equity hedge program and on-balance sheet and contingent sources of capital;

•

Prudential Financial's decision to manage a portion of its interest rate risk internally, on a net basis, at an enterprise level. In implementing this strategy, Prudential Financial executed intercompany derivative transactions between its Corporate and Other operations and certain business segments. Prudential Financial limits its exposure to the resulting net interest rate risk at the enterprise level through options embedded in our hedging strategy that may be exercised if interest rates decline below certain thresholds. During the first quarter of 2016, Prudential Financial replaced a portion of these intercompany derivatives with external derivatives and expects to manage this interest rate risk within the business segments of the Company and Prudential Insurance in the future; and


•	Activities of Prudential Financial's business segments, including those for which specific risk mitigation strategies have been implemented, such as the living benefits hedging program that covers certain risks associated with our variable annuity products. Effective April 1, 2016, the living benefits hedging program resides within the Company and Prudential Insurance.

The hedging strategy is periodically recalibrated in response to changing market conditions. The Framework accommodates periodic volatility within ranges that are deemed acceptable, while also providing for additional potential sources of capital, including on-balance sheet capital, derivatives, and contingent sources of capital. Although Prudential Financial continues to enhance its approach, we believe we currently have access to sufficient resources, either directly, or indirectly through Prudential Financial, to maintain adequate capitalization and a competitive RBC ratio under a range of potential stress scenarios.

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Affiliated Captive Reinsurance Companies

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital—Affiliated Captive Reinsurance Companies” included in our Annual Report on Form 10-K for the year ended December 31, 2015 for a discussion of our use of captive reinsurance companies.

Effective April 1, 2016, we recaptured the risks related to our variable annuity living benefit riders that were previously reinsured to Pruco Re.

Liquidity

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

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. 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 certain annuity considerations, investment and fee income, investment maturities, as well as 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 to the parent holding company, hedging activity and payments in connection with financing activities.

Liquid assets include cash and cash equivalents, short-term investments and fixed maturities that are not designated as held-to-maturity and public equity securities. As of March 31, 2016 and December 31, 2015, the Company had liquid assets of $2.8 billion and $2.7 billion, respectively. The portion of liquid assets comprised of cash and cash equivalents and short-term investments was $0.1 billion and $0.2 billion as of March 31, 2016 and December 31, 2015, respectively. As of March 31, 2016, $2.4 billion, or 92%, of the fixed maturity investments in Company general account portfolios were rated high or highest quality based on NAIC or equivalent rating. The remaining $0.2 billion, or 8%, of these fixed maturity investments were rated other than high or highest quality.

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

Hedging activities associated with living benefit guarantees

As noted above, effective April 1, 2016, the living benefit hedging program associated with the living benefit riders recaptured from Pruco Re as well as the living benefit riders reinsured from Pruco Life Insurance Company will be managed within the Company. As part of the living benefit hedging program, we enter into a range of exchange-traded, cleared and other OTC equity and interest rate derivatives to hedge certain living benefit features accounted for as embedded derivatives against changes in certain capital market conditions such as interest rates and equity index levels. The living benefit hedging program requires access to liquidity to meet its payment obligations, 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 living benefits hedging activity may also result in collateral postings on derivatives to or from counterparties. The net collateral position depends on changes in interest rates and equity markets related to the amount of the exposures hedged. Depending on market conditions, the collateral posting requirements can result in material liquidity needs.

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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 March 31, 2016 there have been no material changes in our economic exposure to market risk from December 31, 2015, a description of which may be found in our Annual Report on Form 10-K for the year ended December 31, 2015, 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, 2015, 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 April 1, 2016, the Company recaptured the risks related to its variable annuity living benefit riders that were previously reinsured to Pruco Re. In addition, the Company reinsured variable annuity base contracts, along with the living benefit riders, from Pruco Life Insurance Company, excluding the Pruco Life Insurance Company of New Jersey business which was reinsured to Prudential Insurance. This reinsurance agreement covers new and in force business and excludes business reinsured externally. The product risks related to the reinsured business are being managed in the Company. In addition, the living benefit hedging program related to the reinsured living benefit riders will be managed within the Company.

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 Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the “Exchange Act”, as amended, as of March 31, 2016. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2016, our disclosure controls and procedures were effective. No change in our internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), occurred during the quarter ended March 31, 2016 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 6 to the Unaudited Interim Financial Statements under “—Litigation and Regulatory Matters” for a description of material pending litigation and regulatory matters affecting us, and certain risks to our businesses 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, 2015. These risks could materially affect our business, results of operations or financial condition, or cause our actual results to differ materially from those expected or those expressed in any forward-looking statements made by or on behalf of the Company. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” above and the risks of our businesses described elsewhere in this Quarterly Report on Form 10-Q.

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Item 6. Exhibits

See accompanying Exhibit Index.

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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/ Yanela C. Frias
		Yanela C. Frias
		Executive Vice President and Chief Financial Officer
		(Authorized Signatory and Principal Financial Officer)

Date: May 12, 2016

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EXHIBIT INDEX

Exhibit Number and Description



31.1	Section 302 Certification of the Chief Executive Officer.

31.2	Section 302 Certification of the Chief Financial Officer.

32.1	Section 906 Certification of the Chief Executive Officer.

32.2	Section 906 Certification of the Chief Financial Officer.

101.INS-XBRL	Instance Document.

101.SCH-XBRL	Taxonomy Extension Schema Document.

101.CAL-XBRL	Taxonomy Extension Calculation Linkbase Document.

101.LAB-XBRL	Taxonomy Extension Label Linkbase Document.

101.PRE-XBRL	Taxonomy Extension Presentation Linkbase Document.

101.DEF-XBRL	Taxonomy Extension Definition Linkbase Document.

PRUDENTIAL ANNUITIES LIFE ASSURANCE CORP/CT - FORM 10-Q - May 12, 2016

Attached files

PRUDENTIAL ANNUITIES LIFE ASSURANCE CORP/CT Reports