UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

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

For the quarterly period ended September 30, 2012

OR

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

For the Transition Period from              to             

Commission File Number 033-44202

Prudential Annuities Life Assurance Corporation

(Exact Name of Registrant as Specified in its Charter)

Connecticut	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  x    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  x    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	x	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  x

As of November 13, 2012, 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. formerly known as American Skandia, Inc., an indirect wholly owned subsidiary of Prudential Financial, Inc., a New Jersey corporation, owned all of the registrant’s Common Stock.

Prudential Annuities Life Assurance Corporation meets the conditions set

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

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

TABLE OF CONTENTS

			Page
PART I	FINANCIAL INFORMATION
	Item 1.	Financial Statements:
		Unaudited Interim Statements of Financial Position As of September 30, 2012 and December 31, 2011		4
		Unaudited Interim Statements of Operations and Comprehensive Income Three and Nine Months Ended September 30, 2012 and 2011		5
		Unaudited Interim Statements of Equity Nine Months Ended September 30, 2012 and 2011		6
		Unaudited Interim Statements of Cash Flows Nine Months Ended September 30, 2012 and 2011		7
		Notes to Unaudited Interim Financial Statements		8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		43
	Item 4.	Controls and Procedures		52
PART II	OTHER INFORMATION
	Item 1.	Legal Proceedings		53
	Item 1A.	Risk Factors		53
	Item 6.	Exhibits		54
SIGNATURES				55

2

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, with regard to variable annuity or other product guarantees; (5) any inability to access our credit facilities; (6) reestimates of our reserves for future policy benefits and claims; (7) differences between actual experience regarding mortality, morbidity, persistency, surrender experience, interest rates, or market returns and the assumptions we use in pricing our products, establishing liabilities and reserves or for other purposes; (8) changes in our assumptions related to deferred policy acquisition costs or value of business acquired; (9) changes in our financial strength or credit ratings; (10) investment losses, defaults and counterparty non-performance; (11) competition in our product lines and for personnel; (12) changes in tax law; (13) regulatory or legislative changes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act; (14) inability to protect our intellectual property rights or claims of infringement of the intellectual property rights of others; (15) adverse determinations in litigation or regulatory matters and our exposure to contingent liabilities; (16) 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; (17) ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks; (18) interruption in telecommunication, information technology or other operational systems or failure to maintain the security, confidentiality or privacy of sensitive data on such systems; and (19) changes in statutory or U.S. GAAP accounting principles, practices or policies. 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, 2011 for discussion of certain risks relating to our businesses and investment in our securities.

3

PART I-FINANCIAL INFORMATION

ITEM 1. Financial Statements

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Financial Position

As of September 30, 2012 and December 31, 2011 (in thousands, except share amounts)

	September 30, 2012		December 31, 2011
ASSETS
Fixed maturities, available-for-sale, at fair value (amortized cost, 2012: $4,110,133; 2011: $4,838,695)	$	4,527,910	$	5,273,767
Trading account assets, at fair value		7,926		38,578
Equity securities, available-for-sale, at fair value (cost, 2012: $18; 2011: $2,510)		22		3,071
Commercial mortgage and other loans, net of valuation allowance		461,186		449,359
Policy loans		12,065		14,316
Short-term investments		175,729		237,601
Other long-term investments		207,277		191,545
Total investments		5,392,115		6,208,237
Cash and cash equivalents		477		8,861
Deferred policy acquisition costs		829,214		666,764
Accrued investment income		52,574		59,033
Reinsurance recoverables		1,822,848		1,748,177
Income taxes		—		102,678
Valuation of business acquired		42,053		29,010
Deferred sales inducements		513,366		445,841
Receivables from parent and affiliates		27,453		24,968
Other assets		16,829		18,531
Separate account assets		45,134,054		42,942,758
TOTAL ASSETS	$	53,830,983	$	52,254,858
LIABILITIES AND EQUITY
Policyholders’ account balances	$	4,269,906	$	5,189,269
Future policy benefits and other policyholder liabilities		2,258,594		2,092,694
Payables to parent and affiliates		73,066		73,587
Cash collateral for loaned securities		48,371		125,884
Income taxes		30,081		—
Short-term debt		83,502		27,803
Long-term debt		600,000		600,000
Other liabilities		99,671		182,286
Separate account liabilities		45,134,054		42,942,758
TOTAL LIABILITIES		52,597,245		51,234,281
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		893,336		882,670
Retained earnings (accumulated deficit)		171,642		(25,305	)
Accumulated other comprehensive income (loss)		166,260		160,712
Total Equity		1,233,738		1,020,577
TOTAL LIABILITIES AND EQUITY	$	53,830,983	$	52,254,858

See Notes to Unaudited Interim Financial Statements

4

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Operations and Comprehensive Income

Three and Nine Months Ended September 30, 2012 and 2011 (in thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
REVENUES
Premiums	$	5,502		$	6,325		$	16,569		$	21,771
Policy charges and fee income		197,284			209,247			598,714			624,820
Net investment income		71,371			72,987			214,441			230,705
Asset administration fees and other income		66,618			69,329			200,593			226,358
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities		(2,377	)		(4,295	)		(5,508	)		(19,623	)
Other-than-temporary impairments on fixed maturity securities transferred to other comprehensive income		2,306			3,736			5,285			18,765
Other realized investment gains (losses), net		(60,569	)		56,620			(61,340	)		84,934
Total realized investment gains (losses), net		(60,640	)		56,061			(61,563	)		84,076
Total revenues		280,135			413,949			968,754			1,187,730
BENEFITS AND EXPENSES
Policyholders’ benefits		78,152			93,346			110,354			134,815
Interest credited to policyholders’ account balances		(73,384	)		345,624			66,411			516,235
Amortization of deferred policy acquisition costs		(229,687	)		578,312			(119,840	)		717,785
General, administrative and other expenses		93,052			116,514			309,829			333,602
Total benefits and expenses		(131,867	)		1,133,796			366,754			1,702,437
Income (loss) from operations before income taxes		412,002			(719,847	)		602,000			(514,707	)
Income tax expense (benefit)		102,255			(280,116	)		157,053			(231,149	)
NET INCOME (LOSS)	$	309,747		$	(439,731	)	$	444,947		$	(283,558	)
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments	$	20		$	—		$	—		$	—
Net unrealized investment gains (losses):
Unrealized investment gains (losses) for the period		30,002			(9,683	)		25,159			(620	)
Reclassification adjustment for (gains) losses included in net income		(2,756	)		(8,899	)		(16,613	)		(54,521	)
Total		27,246			(18,582	)		8,546			(55,141	)
Other comprehensive income (loss), before tax		27,266			(18,582	)		8,546			(55,141	)
Less: Income tax expense (benefit) related to
Foreign currency translation adjustments		7			—			—			—
Net unrealized gains (losses)		9,536			(6,503	)		2,998			(19,299	)
Total		9,543			(6,503	)		2,998			(19,299	)
Other comprehensive income (loss), net of taxes		17,723			(12,079	)		5,548			(35,842	)
Comprehensive Income (Loss)	$	327,470		$	(451,810	)	$	450,495		$	(319,400	)

See Notes to Unaudited Interim Financial Statements

5

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Equity

Nine Months Ended September 30, 2012 and 2011 (in thousands)

	Common stock		Additional paid-in capital		Retained earnings (accumulated deficit)			Accumulated other comprehensive income (loss)		Total equity
Balance, December 31, 2011	$	2,500	$	882,670	$	(25,305	)	$	160,712	$	1,020,577
Net income		—		—		444,947			—		444,947
Affiliated asset transfers		—		10,666		—			—		10,666
Distribution to parent		—		—		(248,000	)		—		(248,000	)
Other comprehensive loss, net of taxes		—		—		—			5,548		5,548
Balance, September 30, 2012	$	2,500	$	893,336	$	171,642		$	166,260	$	1,233,738

	Common stock		Additional paid-in capital		Retained earnings (accumulated deficit)			Accumulated other comprehensive income (loss)			Total equity
Balance, December 31, 2010	$	2,500	$	974,921	$	749,751		$	181,212		$	1,908,384
Cumulative effect of adoption of accounting principle		—		—		(127,920	)		9,659			(118,261	)
Net income		—		—		(283,558	)		—			(283,558	)
Distribution to parent		—		—		(270,000	)		—			(270,000	)
Other comprehensive loss, net of taxes		—		—		—			(35,842	)		(35,842	)
Balance, September 30, 2011	$	2,500	$	974,921	$	68,273		$	155,029		$	1,200,723

See Notes to Unaudited Interim Financial Statements

6

Prudential Annuities Life Assurance Corporation

Unaudited Interim Statements of Cash Flows

Nine Months Ended September 30, 2012 and 2011 (in thousands)

	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	444,947		$	(283,558	)
Adjustments to reconcile net income to net cash provided by operating activities:
Policy charges and fee income		10,323			39,709
Realized investment (gains) losses, net		61,563			(84,076	)
Amortization and depreciation		(7,993	)		(263	)
Interest credited to policyholders’ account balances		66,411			88,246
Change in:
Future policy benefit reserves		237,050			250,459
Accrued investment income		6,459			782
Net receivable (payable) to affiliates		(3,045	)		(32,379	)
Deferred sales inducements		(58,393	)		375,322
Deferred policy acquisition costs		(143,124	)		683,353
Income taxes		129,760			(230,921	)
Reinsurance recoverables		(200,316	)		(190,487	)
Other, net		(34,598	)		(22,010	)
Cash Flows From Operating Activities	$	509,044		$	594,177
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale	$	1,035,956		$	940,218
Equity securities, available-for-sale		3,201			10,054
Commercial mortgage and other loans		16,360			89,303
Trading account assets		35,023			44,504
Policy loans		2,965			873
Other long-term investments		3,617			1,589
Short-term investments		2,604,348			3,974,912
Payments for the purchase/origination of:
Fixed maturities, available-for-sale		(323,283	)		(797,405	)
Equity securities, available-for-sale		(8	)		(2,643	)
Commercial mortgage and other loans		(28,775	)		(56,646	)
Trading account assets		(3,894	)		(2,491	)
Policy loans		(243	)		(649	)
Other long-term investments		(25,022	)		(20,017	)
Short-term investments		(2,542,476	)		(4,160,525	)
Notes receivable from parent and affiliates, net		5,993			6,727
Other, net		(564	)		(911	)
Cash Flows From Investing Activities	$	783,198		$	26,893
CASH FLOWS USED IN FINANCING ACTIVITIES:
Cash collateral for loaned securities		(77,513	)		72,315
Net increase (decrease) in short-term borrowing		55,699			23,867
Drafts outstanding		5,803			(29,468	)
Distribution to parent		(248,000	)		(270,000	)
Contributed capital (including parent/child asset transfer)		10,666			—
Policyholders’ account balances
Deposits		755,346			1,981,861
Withdrawals		(1,802,627	)		(2,167,558	)
Cash Flows Used in Financing Activities	$	(1,300,626	)	$	(388,983	)
Net (decrease) increase in cash and cash equivalents		(8,384	)		232,087
Cash and cash equivalents, beginning of period		8,861			487
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	477		$	232,574

See Notes to Unaudited Interim Financial Statements

7

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 “our”), formerly known as American Skandia Life Assurance Corporation, 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”), formerly known as American Skandia, Inc., 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, Incorporated (“PAD”), formerly known as American Skandia Marketing, Incorporated. The Company issued variable deferred and immediate annuities for individuals and groups in the United States of America and its territories.

Beginning in March 2010, the Company ceased offering its then existing variable annuity products (and where offered, the companion market value adjustment option) to new investors upon the launch of a new product line in each of Pruco Life Insurance Company and Pruco Life Insurance Company of New Jersey (which are affiliates of the Company within the Prudential Annuities business unit of Prudential Financial). In general, the new product line offers the same optional living benefits and optional death benefits as offered by the Company’s existing variable annuities. However, subject to applicable contractual provisions and administrative rules, the Company continues to accept certain subsequent purchase payments on inforce contracts under existing annuity products. Effective in September of 2012, the Company announced the suspension of additional customer deposits for variable annuities with certain older optional living benefit riders.

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

Basis of Presentation

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

These interim financial statements are unaudited but reflect all adjustments that, in the opinion of management, are necessary to provide a fair presentation of the results of operations and financial condition of the Company for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for any interim period are not necessarily indicative of results that may be expected for the full year.

The Company has extensive transactions and relationships with The Prudential Insurance Company of America (“Prudential Insurance”) and other affiliates, (as more fully described in Note 7). Due to these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among unrelated parties.

These unaudited interim financial statements should be read in conjunction with the Audited Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

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 and related amortization; value of business acquired and its amortization; amortization of sales inducements; valuation of investments including derivatives and the recognition of other-than-temporary impairments (“OTTI”); future policy benefits including guarantees; provision for income taxes and valuation of deferred tax assets; and reserves for contingent liabilities, including reserves for losses in connection with unresolved legal matters.

Reclassifications

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

8

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS

Investments and Investment Related Liabilities

The Company’s investments in debt and equity securities include fixed maturities; equity securities; and short-term investments. The accounting policies related to these, as well as commercial mortgage and other loans, are as follows:

Fixed maturities are comprised of bonds, notes and redeemable preferred stock. Fixed maturities classified as “available-for-sale” are carried at fair value. See Note 4 for additional information regarding the determination of fair value. The amortized cost of fixed maturities is adjusted for amortization of premiums and accretion of discounts to maturity. Interest income, as well as the related amortization of premium and accretion of discount is included in “Net investment income” under the effective yield method. For mortgage-backed and asset-backed securities, the effective yield is based on estimated cash flows, including interest rate and prepayment assumptions based on data from widely accepted third-party data sources or internal estimates. In addition to interest rate and prepayment assumptions, cash flow estimates also vary based on other assumptions regarding the underlying collateral including default rates and changes in value. These assumptions can significantly impact income recognition and the amount of other-than-temporary impairments recognized in earnings and other comprehensive income. For high credit quality mortgage-backed and asset-backed securities (those rated AA or above), cash flows are provided quarterly, and the amortized cost and effective yield of the security are adjusted as necessary to reflect historical prepayment experience and changes in estimated future prepayments. The adjustments to amortized cost are recorded as a charge or credit to net investment income in accordance with the retrospective method. For asset-backed and mortgage-backed securities rated below AA, or those for which an other than temporary impairment has been recorded, the effective yield is adjusted prospectively for any changes in estimated cash flows. See the discussion below on realized investment gains and losses for a description of the accounting for impairments. Unrealized gains and losses on fixed maturities classified as “available-for-sale,” net of tax, and the effect on deferred policy acquisition costs, value of business acquired, deferred sales inducements and future policy benefits that would result from the realization of unrealized gains and losses, are included in “Accumulated other comprehensive income (loss)” or (“AOCI”).

Trading account assets, at fair value, represents equity securities held in support of a deferred compensation plan and other fixed maturity securities carried at fair value. Realized and unrealized gains and losses for these assets are reported in “Asset administration fees and other income.” Interest and dividend income from these investments is reported in “Net investment income.”

Equity securities, available-for-sale are comprised of common stock, and non-redeemable preferred stock, and are carried at fair value. The associated unrealized gains and losses, net of tax, and the effect on deferred policy acquisition costs, value of business acquired, deferred sales inducements, and future policy benefits that would result from the realization of unrealized gains and losses, are included in “Accumulated other comprehensive income (loss)”. The cost of equity securities is written down to fair value when a decline in value is considered to be other-than-temporary. See the discussion below on realized investment gains and losses for a description of the accounting for impairments. Dividends from these investments are recognized in “Net investment income” when earned.

Commercial mortgage and other loans consist of commercial mortgage loans and agricultural loans. Commercial mortgage loans are broken down by class which is based on property type (industrial properties, retail, office, multi-family/apartment, hospitality, and other).

Commercial mortgage and other loans originated and held for investment are generally carried at unpaid principal balance, net of unamortized deferred loan origination fees and expenses, and net of an allowance for losses. Commercial mortgage and other loans acquired, including those related to the acquisition of a business, are recorded at fair value when purchased, reflecting any premiums or discounts to unpaid principal balances.

Interest income, as well as prepayment fees and the amortization of the related premiums or discounts, related to commercial mortgage and other loans, are included in “Net investment income.”

Impaired loans include those loans for which it is probable that amounts due will not be collected according to the contractual terms of the loan agreement. The Company defines “past due” as principal or interest not collected at least 30 days past the scheduled contractual due date. Interest received on loans that are past due, including impaired and non-impaired loans, as well as, loans that were previously modified in a troubled debt restructuring, is either applied against the principal or reported as net investment income based on the Company’s assessment as to the collectability of the principal. See Note 3 for additional information about the Company’s past due loans.

The Company discontinues accruing interest on loans after the loans become 90 days delinquent as to principal or interest payments, or earlier when the Company has doubts about collectability. When the Company discontinues accruing interest on a loan, any accrued but uncollectible interest on the loan and other loans backed by the same collateral, if any, is charged to interest income in the same period. Generally, a loan is restored to accrual status only after all delinquent interest and principal are brought current and, in the case of loans where the payment of interest has been interrupted for a substantial period, or the loan has been modified, a regular payment performance has been established.

The Company reviews the performance and credit quality of the commercial mortgage and other loan portfolio on an on-going basis. Loans are placed on watch list status based on a predefined set of criteria and are assigned one of three categories. Loans are placed on “early warning” status in cases where, based on the Company’s analysis of the loan’s collateral, the financial situation of the borrower or tenants or other market factors, it is believed a loss of principal or interest could occur. Loans are classified as “closely monitored” when it is determined that there is a collateral deficiency or other credit events that may lead to a potential loss of principal or interest. Loans “not in good standing” are those loans where the Company has concluded that there is a high probability of loss of principal, such as when the loan is delinquent or in the process of foreclosure. As described below, in determining the allowance for losses, the Company evaluates each loan on the watch list to determine if it is probable that amounts due will not be collected according to the contractual terms of the loan agreement.

9

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

Loan-to-value and debt service coverage ratios are measures commonly used to assess the quality of commercial mortgage loans. The loan-to-value ratio compares the amount of the loan to the fair value of the underlying property collateralizing the loan, and is commonly expressed as a percentage. Loan-to-value ratios greater than 100% indicate that the loan amount exceeds the collateral value. A smaller loan-to-value ratio indicates a greater excess of collateral value over the loan amount. The debt service coverage ratio compares a property’s net operating income to its debt service payments. Debt service coverage ratios less than 1.0 times indicate that property operations do not generate enough income to cover the loan’s current debt payments. A larger debt service coverage ratio indicates a greater excess of net operating income over the debt service payments. The values utilized in calculating these ratios are developed as part of the Company’s periodic review of the commercial mortgage loan and agricultural loan portfolio, which includes an internal appraisal of the underlying collateral value. The Company’s periodic review also includes a quality re-rating process, whereby the internal quality rating originally assigned at underwriting is updated based on current loan, property and market information using a proprietary quality rating system. The loan-to-value ratio is the most significant of several inputs used to establish the internal credit rating of a loan which in turn drives the allowance for losses. Other key factors considered in determining the internal credit rating include debt service coverage ratios, amortization, loan term, estimated market value growth rate and volatility for the property type and region. See Note 3 for additional information related to the loan-to-value ratios and debt service coverage ratios related to the Company’s commercial mortgage and agricultural loan portfolios.

The allowance for loan losses includes a loan specific reserve for each impaired loan that has a specifically identified loss and a portfolio reserve for probable incurred but not specifically identified losses. For impaired commercial mortgage and other loans the allowances for losses are determined based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or based upon the fair value of the collateral if the loan is collateral dependent. The portfolio reserves for probable incurred but not specifically identified losses in the commercial mortgage and agricultural loan portfolio segments considers the current credit composition of the portfolio based on an internal quality rating, (as described above). The portfolio reserves are determined using past loan experience, including historical credit migration, loss probability and loss severity factors by property type. These factors are reviewed each quarter and updated as appropriate.

The allowance for losses on commercial mortgage and other loans can increase or decrease from period to period based on the factors noted above. “Realized investment gains (losses), net” includes changes in the allowance for losses. “Realized investment gains (losses), net” also includes gains and losses on sales, certain restructurings, and foreclosures.

When a commercial mortgage or other loan is deemed to be uncollectible, any specific valuation allowance associated with the loan is reversed and a direct write down to the carrying amount of the loan is made. The carrying amount of the loan is not adjusted for subsequent recoveries in value.

Policy loans are carried at unpaid principal balances. Interest income on policy loans is recognized in “Net investment income” at the contract interest rate when earned. Policy loans are fully collateralized by the cash surrender value of the associated insurance policies.

Short-term investments primarily consist of investments in certain money market funds as well as highly liquid debt instruments with a maturity of greater than three months and less than twelve months when purchased. These investments are generally carried at fair value.

Other long-term investments consist of the Company’s investments in joint ventures and limited partnerships. Joint venture and partnership interests are generally accounted for using the equity method of accounting. In certain instances in which the Company’s partnership interest is so minor that it exercises virtually no influence over operating and financial policies, the Company applies the cost method of accounting. The Company’s income from investments in joint ventures and partnerships accounted for using the equity method or cost method is included in “Net investment income.” The carrying value of these investments is written down, or impaired, to fair value when a decline in value is considered to be other-than-temporary. In applying the equity method or the cost method (including assessment for other-than-temporary impairment), the Company uses financial information provided by the investee, generally on a one to three month lag.

Realized investment gains (losses) are computed using the specific identification method. Realized investment gains and losses are generated from numerous sources, including the sale of fixed maturity securities, equity securities, investments in joint ventures and limited partnerships and other types of investments, as well as adjustments to the cost basis of investments for net other-than-temporary impairments recognized in earnings. Realized investment gains and losses are also generated from prepayment premiums received on private fixed maturity securities, allowance for losses on commercial mortgage and other loans, and fair value changes on embedded derivatives and free-standing derivatives that do not qualify for hedge accounting treatment.

The Company’s available-for-sale securities with unrealized losses are reviewed quarterly to identify other-than-temporary impairments in value. In evaluating whether a decline in value is other-than-temporary, the Company considers several factors including, but not limited to the following: (1) the extent and the duration of the decline; (2) the reasons for the decline in value (credit event, currency or interest-rate related, including general credit spread widening); and (3) the financial condition of and near-term prospects of the issuer. With regard to available-for-sale equity securities, the Company also considers the ability and intent to hold the investment for a period of time to allow for a recovery of value. When it is determined that a decline in value of an equity security is other-than-temporary, the carrying value of the equity security is reduced to its fair value, with a corresponding charge to earnings.

Under the authoritative guidance for the recognition and presentation of other-than-temporary impairments for debt securities an other-than-temporary impairment must be recognized in earnings for a debt security in an unrealized loss position when an entity either (a) has the intent to sell the debt security or (b) more likely than not will be required to sell the debt security before its anticipated recovery. For all debt securities in

10

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

unrealized loss positions that do not meet either of these two criteria, the guidance requires that the Company analyze its ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security prior to impairment. The Company may use the estimated fair value of collateral as a proxy for the net present value if it believes that the security is dependent on the liquidation of collateral for recovery of its investment. If the net present value is less than the amortized cost of the investment an other-than-temporary impairment is recognized.

Under the authoritative guidance for the recognition and presentation of other-than-temporary impairments, when an other-than-temporary impairment of a debt security has occurred, the amount of the other-than-temporary impairment recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the debt security meets either of these two criteria, the other-than-temporary impairment recognized in earnings is equal to the entire difference between the security’s amortized cost basis and its fair value at the impairment measurement date. For other-than-temporary impairments of debt securities that do not meet these criteria, the net amount recognized in earnings is equal to the difference between the amortized cost of the debt security and its net present value calculated as described above. Any difference between the fair value and the net present value of the debt security at the impairment measurement date is recorded in “Other comprehensive income (loss)” (“OCI”). Unrealized gains or losses on securities for which an other-than-temporary impairment has been recognized in earnings is tracked as a separate component of “Accumulated other comprehensive income (loss).”

For debt securities, the split between the amount of an other-than-temporary impairment recognized in other comprehensive income and the net amount recognized in earnings is driven principally by assumptions regarding the amount and timing of projected cash flows. For mortgage-backed and asset-backed securities, cash flow estimates consider the payment terms of the underlying assets backing a particular security, including interest rate and prepayment assumptions, based on data from widely accepted third-party data sources or internal estimates. In addition to interest rate and prepayment assumptions, cash flow estimates also include other assumptions regarding the underlying collateral including default rates and recoveries which vary based on the asset type and geographic location, as well as the vintage year of the security. For structured securities, the payment priority within the tranche structure is also considered. For all other debt securities, cash flow estimates are driven by assumptions regarding probability of default and estimates regarding timing and amount of recoveries associated with a default. The Company has developed these estimates using information based on its historical experience as well as using market observable data, such as industry analyst reports and forecasts, sector credit ratings and other data relevant to the collectability of a security, such as the general payment terms of the security and the security’s position within the capital structure of the issuer.

The new cost basis of an impaired security is not adjusted for subsequent increases in estimated fair value. In periods subsequent to the recognition of an other-than-temporary impairment, the impaired security is accounted for as if it had been purchased on the measurement date of the impairment. For debt securities, the discount (or reduced premium) based on the new cost basis may be accreted into net investment income in future periods, including increases in cash flow on a prospective basis. In certain cases where there are decreased cash flow expectations, the security is reviewed for further cash flow impairments.

Asset Administration Fees

The Company receives asset administration fee income from policyholders’ account balances invested in the Advanced Series Trust Funds or “AST” (see Note 7), which are a portfolio of mutual fund investments related to the Company’s separate account products. In addition, the Company receives fees from policyholders’ account balances invested in funds managed by companies other than affiliates of Prudential Insurance. Asset administration fees are recognized as income when earned.

Derivative Financial Instruments

Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices or the values of securities, credit spreads, market volatility, expected returns, and liquidity. Values can also be affected by changes in estimates and assumptions, including those related to counterparty behavior and non performance risk used in valuation models. Derivative financial instruments generally used by the Company include swaps and options. Derivative positions are carried at fair value, generally by obtaining quoted market prices or through the use of valuation models.

Derivatives are used to manage the characteristics of the Company’s asset/liability mix, and to manage the interest rate and currency characteristics of assets or liabilities. Additionally, derivatives may be used to seek to reduce exposure to interest rate, credit, foreign currency, and equity risks associated with assets held or expected to be purchased or sold, and liabilities incurred or expected to be incurred. As discussed below and in Note 5, all realized and unrealized changes in fair value of derivatives, with the exception of the effective portion of cash flow hedges, are recorded in current earnings. Cash flows from derivatives are reported in the operating and investing activities sections in the Unaudited Interim Statements of Cash Flows based on the nature and purpose of the derivative.

Derivatives are recorded either as assets, within “Other long-term investments” or as liabilities, within “Other liabilities,” except for embedded derivatives, which are recorded with the associated host contract. The Company nets the fair value of all derivative financial instruments with its affiliated counterparty Prudential Global Funding, LLC (“PGF”), with which a master netting arrangement has been executed.

The Company designates derivatives as either (1) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge), or (2) a derivative that does not qualify for hedge accounting.

11

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated risk of the hedged item. Effectiveness of the hedge is formally assessed at inception and throughout the life of the hedging relationship. Even if a derivative qualifies for hedge accounting treatment, there may be an element of ineffectiveness of the hedge. Under such circumstances, the ineffective portion is recorded in “Realized investment gains (losses), net.”

The Company formally documents at inception all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives designated as cash flow hedges to specific assets and liabilities on the balance sheet or to forecasted transactions.

When a derivative is designated as a cash flow hedge and is determined to be highly effective, changes in its fair value are recorded in “Accumulated other comprehensive income (loss)” to the extent they are effective, until earnings are affected by the variability of cash flows being hedged (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings). At that time, the related portion of deferred gains or losses on the derivative instrument is reclassified and reported in the income statement line item associated with the hedged item.

If it is determined that a derivative no longer qualifies as an effective cash flow hedge or management removes the hedge designation, the derivative will continue to be carried on the balance sheet at its fair value, with changes in fair value recognized currently in “Realized investment gains (losses), net.” In this scenario, the hedged asset or liability under a fair value hedge will no longer be adjusted for changes in fair value and the existing basis adjustment is amortized to the income statement line associated with the asset or liability. The component of “Accumulated other comprehensive income (loss)” related to discontinued cash flow hedges is reclassified to the income statement line associated with the hedged cash flows consistent with the earnings impact of the original hedged cash flows.

When hedge accounting is discontinued because it is probable that the forecasted transaction will not occur by the end of the specified time period, the derivative will continue to be carried on the balance sheet at its fair value, with changes in fair value recognized currently in “Realized investment gains (losses), net.” Gains and losses that were in “Accumulated other comprehensive income (loss)” pursuant to the hedge of a forecasted transaction are recognized immediately in “Realized investment gains (losses), net.”

If a derivative does not qualify for hedge accounting, all changes in its fair value, including net receipts and payments, are included in “Realized investment gains (losses), net” without considering changes in the fair value of the economically associated assets or liabilities.

The Company is a party to financial instruments that contain derivative instruments that are “embedded” in the financial instruments. At inception, the Company assesses whether the economic characteristics of the embedded instrument are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the host contract) and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that (1) the embedded instrument possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and (2) a separate instrument with the same terms would qualify as a derivative instrument, the embedded instrument qualifies as an embedded derivative that is separated from the host contract, carried at fair value, and changes in its fair value are included in “Realized investment gains (losses), net.” For certain financial instruments that contain an embedded derivative that otherwise would need to be bifurcated and reported at fair value, the Company may elect to classify the entire instrument as a trading account asset and report it within “Other trading account assets, at fair value.” The Company has sold variable annuity products, which may include guaranteed benefit features that are accounted for as embedded derivatives. The Company has entered into reinsurance agreements to transfer the risk related to the embedded derivatives contained in certain insurance product to affiliates. These reinsurance agreements are derivatives and have been accounted in the same manner as the guaranteed benefit feature.

Income Taxes

The Company determines its interim tax provision using the annual effective tax rate methodology in accordance with the authoritative guidance. The increase in the income tax expense for the three months and nine months ended September 30, 2012 and change in effective tax rate was primarily driven by an increase in pre-tax income for the three months and nine months ended September 30, 2012 compared to the three months and nine months ended September 30, 2011.

Adoption of New accounting pronouncements

Effective January 1, 2012, the Company adopted, retrospectively, updated guidance regarding the presentation of comprehensive income. The updated guidance eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. Under the updated guidance, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The updated guidance does not change the items that are reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The Company opted to present the total of comprehensive income, the components of net income, and the components of other comprehensive income in a single continuous statement of comprehensive income. The Unaudited Interim Financial Statements included herein reflect the adoption of this updated guidance.

Effective January 1, 2012, the Company adopted, prospectively, updated guidance regarding the fair value measurements and disclosure requirements. The updated guidance clarifies existing guidance related to the application of fair value measurement methods and requires expanded disclosures. The expanded disclosures required by this guidance are included in Note 4. Adoption of this guidance did not have a material effect on the Company’s financial position or results of operations.

12

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

Effective January 1, 2012, the Company adopted, prospectively, updated guidance regarding the assessment of effective control for repurchase agreements. The Company’s adoption of this guidance did not have a material effect on the Company’s financial position, results of operations, and financial statement disclosures.

Effective January 1, 2012, the Company adopted retrospectively new authoritative guidance to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. Under the amended guidance, acquisition costs are to include only those costs that are directly related to the acquisition or renewal of insurance contracts by applying a model similar to the accounting for loan origination costs. An entity may defer incremental direct costs of contract acquisition with independent third parties or employees that are essential to the contract transaction, as well as the portion of employee compensation, including payroll fringe benefits, and other costs directly related to underwriting, policy issuance and processing, medical inspection, and contract selling for successfully negotiated contracts. Prior period financial information presented in these financial statements has been adjusted to reflect the retrospective adoption of the amended guidance. The impact mainly reflects the initial “Deferred policy acquisition cost” write-off which resulted in a lower level of amortization. Since the Company ceased offering its existing variable annuity products in March 2010, the lower level of cost qualifying for deferral under this guidance will have a minimal impact on earnings. While the adoption of this amended guidance changes the timing of when certain costs are reflected in the Company’s results of operations, it has no effect on the total acquisition costs to be recognized over time and has no impact on the Company’s cash flows.

The following tables present amounts as previously reported in 2011, the effect of the change due to the retrospective adoption of the amended guidance related to the deferral of acquisition costs as described above, and the adjusted amounts that are reflected in the Unaudited Interim Financial Statements included herein.

Unaudited Interim Statements of Financial Position:
	December 31, 2011
	As  Previously Reported			Effect of Change			As  Currently Reported
	(in thousands)
Deferred policy acquisition costs	$	757,183		$	(90,419	)	$	666,764
Income taxes		70,425			32,253			102,678
TOTAL ASSETS		52,313,024			(58,166	)		52,254,858
Total liabilities		51,234,281			—			51,234,281
Accumulated other comprehensive income (loss)		151,692			9,020			160,712
Retained earnings (accumulated deficit)		41,881			(67,186	)		(25,305	)
Total equity		1,078,743			(58,166	)		1,020,577
TOTAL LIABILITIES AND EQUITY	$	52,313,024		$	(58,166	)	$	52,254,858
Unaudited Interim Statements of Operations and Comprehensive Income:
	Three Months Ended September 30, 2011
	As  Previously Reported			Effect of Change			As  Currently Reported
	(in thousands)
REVENUES
Total revenues	$	413,949		$	—		$	413,949
BENEFITS AND EXPENSES
Amortization of deferred policy acquisition costs		653,448			(75,136	)		578,312
General, administrative and other expenses		115,374			1,140			116,514
Total benefits and expenses		1,207,792			(73,996	)		1,133,796
INCOME FROM OPERATIONS BEFORE INCOME TAXES		(793,843	)		73,996			(719,847	)
Income tax expense		(304,640	)		24,524			(280,116	)
NET INCOME	$	(489,203	)	$	49,472		$	(439,731	)

13

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

	Nine Months Ended September 30, 2011
	As  Previously Reported			Effect of Change			As  Currently Reported
	(in thousands)
REVENUES
Total revenues	$	1,187,730		$	—		$	1,187,730
BENEFITS AND EXPENSES
Amortization of deferred policy acquisition costs		815,706			(97,921	)		717,785
General, administrative and other expenses		330,166			3,436			333,602
Total benefits and expenses		1,796,922			(94,485	)		1,702,437
INCOME FROM OPERATIONS BEFORE INCOME TAXES		(609,192	)		94,485			(514,707	)
Income tax expense		(264,219	)		33,070			(231,149	)
NET INCOME	$	(344,973	)	$	61,415		$	(283,558	)

Unaudited Interim Statement of Cash Flows:
	Nine Months Ended September 30, 2011
	As  Previously Reported			Effect of Change			As  Currently Reported
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	(344,973	)	$	61,415		$	(283,558	)
Change in:
Deferred policy acquisition costs		777,838			(94,485	)		683,353
Income taxes		(263,991	)		33,070			(230,921	)
Cash flows from operating activities	$	594,177		$	—		$	594,177

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:

	September 30, 2012
									Other-than-
			Gross		Gross				temporary
	Amortized		Unrealized		Unrealized		Fair		impairments
	Cost		Gains		Losses		Value		in AOCI (3)
	(in thousands)
Fixed maturities, available-for-sale
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	35,363	$	401	$	—	$	35,764	$	—
Obligations of U.S. states and their political subdivisions		94,734		8,452		271		102,915		—
Foreign government bonds		45,855		10,470		—		56,325		—
Corporate securities		3,034,106		344,149		1,020		3,377,235		—
Asset-backed securities (1)		177,191		9,054		1,260		184,985		(3,704	)
Commercial mortgage-backed securities		399,534		30,038		43		429,529		—
Residential mortgage-backed securities (2)		323,350		17,807		—		341,157		(50	)
Total fixed maturities, available-for-sale	$	4,110,133	$	420,371	$	2,594	$	4,527,910	$	(3,754	)
Equity securities, available-for-sale
Common Stocks
Industrial, miscellaneous & other	$	18	$	4	$	—	$	22

14

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

(1) Includes credit tranched securities collateralized by sub-prime mortgages, 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 other-than-temporary impairment losses in “AOCI,” which were not included in earnings. Amount excludes $4.4 million of net unrealized gains on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.

	December 31, 2011 (4)
									Other-than-
			Gross		Gross				temporary
	Amortized		Unrealized		Unrealized		Fair		impairments
	Cost		Gains		Losses		Value		in AOCI (3)
	(in thousands)
Fixed maturities, available-for-sale
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	85,196	$	839	$	—	$	86,035	$	—
Obligations of U.S. states and their political subdivisions		85,822		8,336		—		94,158		—
Foreign government bonds		66,449		10,782		—		77,231		—
Corporate securities		3,585,776		369,769		4,336		3,951,209		(236	)
Asset-backed securities (1)		172,390		9,798		4,804		177,384		(3,906	)
Commercial mortgage-backed securities		463,576		28,189		8		491,757		—
Residential mortgage-backed securities (2)		379,486		16,562		55		395,993		(55	)
Total fixed maturities, available-for-sale	$	4,838,695	$	444,275	$	9,203	$	5,273,767	$	(4,197	)
Equity securities, available-for-sale
Common Stocks
Industrial, miscellaneous & other	$	2,510	$	561	$	—	$	3,071

(1) Includes credit tranched securities collateralized by sub-prime mortgages, 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 other-than-temporary impairment losses in AOCI, which were not included in earnings. Amount excludes $2.4 million of net unrealized gains on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.

(4) Prior period’s amounts are presented on a basis consistent with the current period presentation.

The amortized cost and fair value of fixed maturities by contractual maturities at September 30, 2012, are as follows:

	Available-for-Sale
	Amortized		Fair
	Cost		Value
	(in thousands)
Due in one year or less	$	833,834	$	868,462
Due after one year through five years		1,299,010		1,425,074
Due after five years through ten years		587,882		681,147
Due after ten years		489,332		597,556
Asset-backed securities		177,191		184,985
Commercial mortgage-backed securities		399,534		429,529
Residential mortgage-backed securities		323,350		341,157
Total	$	4,110,133	$	4,527,910

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.

15

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
	(in thousands)
Fixed maturities, available-for-sale
Proceeds from sales	$	186,603		$	10,700		$	380,099		$	562,602
Proceeds from maturities/repayments		282,052			146,615			655,857			376,721
Gross investment gains from sales, prepayments, and maturities		2,233			7,734			16,266			53,698
Gross investment losses from sales and maturities		(109	)		(216	)		(133	)		(216	)
Fixed maturity and equity security impairments
Net writedowns for other-than-temporary impairment losses on fixed maturities recognized in earnings (1)	$	(71	)	$	(559	)	$	(223	)	$	(858	)
Writedowns for impairments on equity securities		—			3,500			—			4,250

(1) Excludes the portion of other-than-temporary impairments 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 impairment.

As discussed in Note 2, a portion of certain OTTI losses on fixed maturity securities are recognized in 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 tables set 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			Nine Months Ended
	September 30,			September 30,
	2012			2012
	(in thousands)
Balance, beginning of period	$	3,387		$	3,542
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period		(59	)		(190	)
Additional credit loss impairments recognized in the current period on securities previously impaired		71			223
Increases due to the passage of time on previously recorded credit losses		28			79
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected		(114	)		(341	)
Balance, end of period	$	3,313		$	3,313
	Three Months Ended			Nine Months Ended
	September 30,			September 30,
	2011			2011
	(in thousands)
Balance, beginning of period	$	11,201		$	14,148
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period		(8,206	)		(11,420	)
Additional credit loss impairments recognized in the current period on securities previously impaired		558			857
Increases due to the passage of time on previously recorded credit losses		55			317
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected		(76	)		(370	)
Balance, end of period	$	3,532		$	3,532

16

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

Trading Account Assets

The following table sets forth the composition of the Company’s “trading account assets” as of the dates indicated:

	September 30, 2012				December 31, 2011
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in thousands)
Fixed maturities - Asset-backed securities	$	1,964	$	2,029	$	30,800	$	31,571
Equity securities		5,171		5,897		6,664		7,007
Total trading account assets	$	7,135	$	7,926	$	37,464	$	38,578

The net change in unrealized gains and losses from trading account assets still held at period end, recorded within “Asset administration fees and other income” included $0.2 million of gains and ($1.1) million of losses during the three months ended September 30, 2012 and 2011, respectively, and ($0.3) million and ($3.9) million of losses during the nine months ended September 30, 2012 and 2011, respectively.

Commercial Mortgage and Other Loans

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

	September 30, 2012						December 31, 2011
	Amount			% of Total			Amount			% of Total
Commercial mortgage and other loans by property type:	(in thousands)						(in thousands)
Office	$	59,684			12.9	%	$	60,220			13.3	%
Retail		80,490			17.4			68,369			15.1
Apartments/Multi-Family		111,297			24.0			114,900			25.5
Industrial		144,163			31.1			144,513			32.1
Hospitality		9,228			2.0			9,289			2.1
Total commercial mortgage loans		404,862			87.4			397,291			88.1
Agricultural property loans		53,815			11.6			48,964			10.9
Other		4,597			1.0			4,605			1.0
Total commercial mortgage and other loans		463,274			100.0	%		450,860			100.0	%
Valuation allowance		(2,088	)					(1,501	)
Total net commercial mortgage and other loans by property type	$	461,186					$	449,359

The commercial mortgage and agricultural property loans are geographically dispersed throughout the United States, Canada and Asia with the largest concentrations in California (23%), New York (16%), and Ohio (10%) at September 30, 2012.

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

	September 30, 2012		December 31, 2011
	(in thousands)
Allowance for losses, beginning of year	$	1,501	$	2,980
Addition to / (release of) allowance for losses		587		(1,479	)
Total ending balance (1)	$	2,088	$	1,501

(1) Agricultural loans represent $0.2 million of the ending allowance at both September 30, 2012 and December 31, 2011.

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

	September 30, 2012 Total Loans		December 31, 2011 Total Loans
	(in thousands)
Allowance for Credit Losses:
Ending balance: individually evaluated for impairment (1)	$	—	$	—
Ending balance: collectively evaluated for impairment (2)		2,088		1,501
Total ending balance	$	2,088	$	1,501
Recorded Investment (3):
Ending balance gross of reserves: individually evaluated for impairment (1)	$	—	$	—
Ending balance gross of reserves: collectively evaluated for impairment (2)		463,274		450,860
Total ending balance, gross of reserves	$	463,274	$	450,860

(1) There were no agricultural loans individually evaluated for impairments at September 30, 2012 and December 31, 2011.

(2) Agricultural loans collectively evaluated for impairment had a recorded investment of $53.8 million and $48.9 million at September 30, 2012 and December 31, 2011, respectively, and both had a related allowance of $0.2 million.

(3) Recorded investment reflects the balance sheet carrying value gross of related allowance.

17

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. As shown in the table above, there were no impaired commercial mortgage and other loans identified in management’s specific review of probable loan losses and related allowance at September 30, 2012 and December 31, 2011. The average recorded investment in impaired loans with an allowance recorded, before the allowance for losses, was $0 million and $3 million at September 30, 2012 and December 31, 2011, respectively.

There was no net investment income recognized on these loans for the nine months ended September 30, 2012 and for the year ended December 31, 2011. See Note 2 for information regarding the Company’s accounting policies for non-performing loans.

Impaired commercial mortgage and other loans with no allowance for losses are loans in which the fair value of the collateral or the net present value of the loans’ expected future cash flows equals or exceeds the recorded investment. The Company had no such loans at September 30, 2012 or December 31, 2011. See Note 2 for information regarding the Company’s accounting policies for non-performing loans.

As described in Note 2, loan-to-value and debt service coverage ratios are measures commonly used to assess the quality of commercial mortgage and other loans. As of September 30, 2012 and December 31, 2011, 86% or $397 million of the recorded investment and 85% or $384 million of the recorded investment, respectively, had a loan-to-value ratio of less than 80%. As of September 30, 2012 and December 31, 2011, 92% and 96% of the recorded investment had a debt service coverage ratio of 1.0X or greater, respectively. As of September 30, 2012 and December 31, 2011, approximately 8% or $38 million and 4% or $19 million, respectively, of the recorded investment had a loan-to-value ratio greater than 100% or debt service coverage ratio less than 1.0X, reflecting loans where the mortgage amount exceeds the collateral value or where current debt payments are greater than income from property operations; none of which related to agricultural loans.

All commercial mortgage and other loans were in current status including $0 million and $3.1 million of hospitality loans in non-accrual status at September 30, 2012, and December 31, 2011, respectively. Nonaccrual loans are those on which the accrual of interest has been suspended after the loans become 90 days delinquent as to principal or interest payments, or earlier when the Company has doubts about collectability and loans for which a loan specific reserve has been established. See Note 2 for further discussion regarding non-accrual status loans.

During 2011, the Company sold commercial mortgage loans to an affiliated company. See Note 7 for further discussion regarding related party transactions.

Commercial mortgage and other loans are occasionally restructured in a troubled debt restructuring. These restructurings generally include one or more of the following: full or partial payoffs outside of the original contract terms: changes to interest rates; extensions of maturity; or additions or modifications to covenants. Additionally, the Company may accept assets in full or partial satisfaction of the debt as part of a troubled debt restructuring. When restructurings occur, they are evaluated individually to determine whether the restructuring or modification constitutes a “troubled debt restructuring” as defined by authoritative accounting guidance. The Company’s outstanding investment related to commercial mortgage and other loans that have been restructured in a troubled debt restructuring is not material.

As of September 30, 2012, the Company has not committed to provide additional funds to borrowers that have been involved in a troubled debt restructuring.

Net Investment Income

Net investment income for the three and nine months ended September 30, 2012 and 2011, was from the following sources:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(in thousands)
Fixed maturities, available-for-sale	$	59,419		$	68,351		$	190,400		$	211,147
Equity securities, available-for-sale		—			(10	)		7			333
Trading account assets		35			412			849			1,563
Commercial mortgage and other loans		6,871			6,300			20,584			21,444
Policy loans		273			158			625			564
Short-term investments and cash equivalents		140			186			503			499
Other long-term investments		6,614			(760	)		7,529			252
Gross investment income		73,352			74,637			220,497			235,802
Less investment expenses		(1,981	)		(1,650	)		(6,056	)		(5,097	)
Net investment income	$	71,371		$	72,987		$	214,441		$	230,705

18

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

Realized Investment Gains (Losses), Net

Realized investment gains (losses), net, for the three and nine months ended September 30, 2012 and 2011, were from the following sources:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(in thousands)
Fixed maturities	$	2,056		$	6,959		$	15,912		$	52,624
Equity securities		703			2,039			703			1,996
Commercial mortgage and other loans		(483	)		439			(588	)		5,114
Derivatives		(62,916	)		46,731			(77,590	)		24,451
Other		—			(107	)		—			(109	)
Realized investment gains (losses), net	$	(60,640	)	$	56,061		$	(61,563	)	$	84,076

19

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

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 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:

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

	Net Unrealized Gains (Losses) on Investments			Deferred Policy Acquisition Costs, Deferred Sales Inducements and Valuation of Business Acquired			Deferred Income  Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses)
	(in thousands)
Balance, December 31, 2011	$	(1,740	)	$	691		$	367		$	(682	)
Net investment (losses) gains on investments arising during the period		2,399			—			(840	)		1,559
Reclassification adjustment for gains (losses) included in net income		(1	)		—			—			(1	)
Impact of net unrealized investment (losses) gains on deferred policy acquisition costs, deferred sales inducements and valuation of business acquired		—			(949	)		332			(617	)
Balance, September 30, 2012	$	658		$	(258	)	$	(141	)	$	259

All Other Net Unrealized Investment Gains and Losses in AOCI

	Net Unrealized Gains/(Losses) on Investments (1)			Deferred Policy Acquisition Costs, Deferred Sales Inducements and Valuation of Business Acquired			Policy Holders’ Account Balances			Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related To Net  Unrealized Investment Gains (Losses)
	(in thousands)
Balance, December 31, 2011	$	441,680		$	(192,122	)	$	—		$	(88,164	)	$	161,394
Net investment gains (losses) on investments arising during the period		(4,629	)		—			—			1,620			(3,009	)
Reclassification adjustment for (losses) gains included in net income		(16,612	)		—			—			5,814			(10,798	)
Impact of net unrealized investment (losses) gains on deferred policy acquisition costs, deferred sales inducements and valuation of business acquired		—			30,618			—			(10,723	)		19,895
Impact of net unrealized investment (gains) losses on policyholders’ account balances		—			—			(2,279	)		798			(1,481	)
Balance, September 30, 2012	$	420,439		$	(161,504	)		(2,279	)	$	(90,655	)	$	166,001

(1) Includes cash flow hedges. See Note 5 for additional discussion of our cash flow hedges.

20

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

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

	September 30, 2012			December 31, 2011
	(in thousands)
Fixed maturity securities on which an OTTI loss has been recognized	$	658		$	(1,740	)
Fixed maturity securities, available-for-sale - all other		417,119			436,812
Equity securities, available-for-sale		4			561
Affiliated notes		4,734			5,263
Derivatives designated as cash flow hedges (1)		(1,453	)		(962	)
Other investments		35			3
Unrealized gains (losses) on investments and derivatives	$	421,097		$	439,937

(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:

	September 30, 2012
	Less than twelve months				Twelve months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in thousands)
Fixed maturities, available-for-sale
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	7,183	$	271	$	—	$	—	$	7,183	$	271
Corporate securities		37,216	$	639		35,863		381		73,079		1,020
Commercial mortgage-backed securities		4,666		43		—		—		4,666		43
Asset-backed securities		15,455		38		31,925		1,222		47,380		1,260
Residential mortgage-backed securities		—		—		—		—		—		—
Total	$	64,520	$	991	$	67,788	$	1,603	$	132,308	$	2,594
Equity securities, available-for-sale	$	—	$	—	$	—	$	—	$	—	$	—
	December 31, 2011
	Less than twelve months				Twelve months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in thousands)
Fixed maturities, available-for-sale
Corporate securities	$	129,881	$	4,010	$	1,130	$	326	$	131,011	$	4,336
Commercial mortgage-backed securities		7,014		8		—		—		7,014		8
Asset-backed securities		48,831		782		28,430		4,022		77,261		4,804
Residential mortgage-backed securities		484		55		—		—		484		55
Total	$	186,210	$	4,855	$	29,560	$	4,348	$	215,770	$	9,203
Equity securities, available-for-sale	$	—	$	—	$	—	$	—	$	—	$	—

The gross unrealized losses, related to fixed maturities at September 30, 2012 and December 31, 2011 are composed of $1.5 million and $5.4 million, respectively, related to high or highest quality securities based on National Association of Insurance Commissioners (“NAIC”) or equivalent rating and $1.1 million and $3.8 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. At September 30, 2012, none of the gross unrealized losses represented declines in value of greater than 20%, as compared to $3.4 million at December 31, 2011 that represented declines in value of greater than 20%, $0.3 million of which had been in that position for less than six months. At September 30, 2012, the $1.6 million of gross unrealized losses of twelve months or more were concentrated in asset backed securities and the service and manufacturing sectors of the Company’s corporate securities. At December 31, 2011, $4.3 million of gross unrealized losses of twelve months or more were concentrated in asset backed securities, $1.7 million in services and $1.1 million in manufacturing sector of the Company’s corporate securities.

21

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

In accordance with its policy described in Note 2, the Company concluded that an adjustment to earnings for other-than-temporary impairments for these securities was not warranted at September 30, 2012 or December 31, 2011. 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 credit spread widening and increased liquidity discounts. At September 30, 2012, the Company does not intend to sell the securities and it is not more likely than not that the Company will be required to sell the securities before the anticipated recovery of its remaining amortized cost basis.

At September 30, 2012 and December 31, 2011, there were no gross unrealized losses, related to equity securities that represented declines of greater than 20%.

4. FAIR VALUE OF ASSETS AND LIABILITIES

Fair Value Measurement—Fair value is defined as 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 guidance around fair value establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs to valuation techniques into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level 1—Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities. These generally provide the most reliable evidence and are used to measure fair value whenever available. The Company’s Level 1 assets and liabilities primarily include certain cash equivalents and short term investments, and equity securities that trade on an active exchange market.

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 actively trade and are priced based on a net asset value, certain short term investments and certain cash equivalents (primarily commercial paper), and certain over-the-counter derivatives.

Level 3—Fair value is based on at least one or more significant unobservable inputs 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, certain highly structured over-the-counter derivative contracts, and embedded derivatives resulting from certain products with guaranteed benefits.

The Company has 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 prices against market activity or indicators of reasonableness, approval of price source changes, price overrides, methodology changes and classification of fair value hierarchy levels. The valuation policies and guidelines are reviewed and updated as appropriate.

22

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 measured at fair value on a recurring basis, as of the dates indicated.

	As of September 30, 2012
	Level 1		Level 2		Level 3		Netting (2)			Total
	(in thousands)
Fixed maturities, available-for-sale:
U.S Treasury securities and obligations of U.S. government authorities and agencies	$	—	$	35,764	$	—	$	—		$	35,764
Obligations of U.S. states and their political subdivisions		—		102,915		—		—			102,915
Foreign government bonds		—		56,325		—		—			56,325
Corporate securities		—		3,281,845		95,390		—			3,377,235
Asset-backed securities		—		127,282		57,703		—			184,985
Commercial mortgage-backed securities		—		429,529		—		—			429,529
Residential mortgage-backed securities		—		341,157		—		—			341,157
Sub-total		—		4,374,817		153,093		—			4,527,910
Trading account assets:
Asset-backed securities		—		2,029		—		—			2,029
Equity securities		5,702		—		195		—			5,897
Sub-total		5,702		2,029		195		—			7,926
Equity securities, available-for-sale		—		22		—		—			22
Short-term investments		175,729		—		—		—			175,729
Cash equivalents		39		—		—		—			39
Other long-term investments		—		195,750		1,757		(32,202	)		165,305
Reinsurance recoverables		—		—		1,822,323		—			1,822,323
Other assets		—		24,696		—		—			24,696
Sub-total excluding separate account assets		181,470		4,597,314		1,977,368		(32,202	)		6,723,950
Separate account assets (1)		171,842		44,962,212		—		—			45,134,054
Total assets	$	353,312	$	49,559,526	$	1,977,368	$	(32,202	)	$	51,858,004
Future policy benefits	$	—	$	—	$	1,886,648	$	—		$	1,886,648
Other liabilities		—		32,202		—		(32,202	)		—
Total liabilities	$	—	$	32,202	$	1,886,648	$	(32,202	)	$	1,886,648

23

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

	As of December 31, 2011 (3)
	Level 1		Level 2		Level 3		Netting (2)			Total
	(in thousands)
Fixed maturities, available-for-sale:
U.S Treasury securities and obligations of U.S. government authorities and agencies	$	—	$	86,036	$	—	$	—		$	86,036
Obligations of U.S. states and their political subdivisions		—		94,158		—		—			94,158
Foreign government securities		—		77,230		—		—			77,230
Corporate securities		6,705		3,854,846		89,658		—			3,951,209
Asset-backed securities		—		128,821		48,563		—			177,384
Commercial mortgage-backed securities		—		491,757		—		—			491,757
Residential mortgage-backed securities		—		395,993		—		—			395,993
Sub-total		6,705		5,128,841		138,221		—			5,273,767
Trading account assets:
Asset-backed securities		—		31,571		—		—			31,571
Equity securities		6,804		—		203		—			7,007
Sub-total		6,804		31,571		203		—			38,578
Equity securities, available-for-sale		3,071		—		—		—			3,071
Short-term investments		227,235		10,366		—		—			237,601
Cash equivalents		8,112		—		—		—			8,112
Other long-term investments		—		191,144		1,213		(40,012	)		152,345
Reinsurance recoverables		—		—		1,747,757		—			1,747,757
Other assets		—		25,225		—		—			25,225
Sub-total excluding separate account assets		251,927		5,387,147		1,887,394		(40,012	)		7,486,456
Separate account assets (1)		1,039,821		41,902,937		—		—			42,942,758
Total assets	$	1,291,748	$	47,290,084	$	1,887,394	$	(40,012	)	$	50,429,214
Future policy benefits	$	—	$	—	$	1,783,595	$	—		$	1,783,595
Other liabilities		—		40,012		—		(40,012	)		—
Total liabilities	$	—	$	40,012	$	1,783,595	$	(40,012	)	$	1,783,595

(1) 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.

(2) “Netting” amounts represent the impact of offsetting asset and liability positions held with the same counterparty.

(3) Includes reclassifications to conform to current period presentation.

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.

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 from pricing services are sourced from multiple vendors, and a vendor hierarchy is maintained by asset type based on historical pricing experience and vendor expertise. The Company generally receives prices from multiple pricing services for each security, but ultimately uses the price from the pricing service highest in the vendor hierarchy based on the respective asset type. 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. If the pricing information received from third party pricing services is 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. 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 service 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 over-ride the information from the pricing service or broker with an internally developed valuation. As of September 30, 2012 and December 31, 2011 over-rides on a net basis were not material. These estimates may use significant unobservable inputs, which reflect the Company’s own assumptions about the inputs market participants would use in pricing the asset. Pricing service over-rides, internally developed valuations and indicative broker quotes are generally included in Level 3 in the fair value hierarchy.

24

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

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 a discounted cash flow model. In cases where these models primarily use observable inputs, the securities have been reflected within Level 2. For certain private fixed maturities, the discounted cash flow model may also incorporate significant unobservable inputs, which reflect the Company’s own assumptions about the inputs market participants would use in pricing the asset. In these cases, a Level 3 classification is used.

Private fixed maturities also include debt investments in funds that, in addition to a stated coupon, pay a return based upon the results of the underlying portfolios. The fair values of these securities are determined by reference to the funds’ net asset value (“NAV”). Since the NAV at which the funds trade can be observed by redemption and subscription transactions between third parties, the fair values of these investments have been reflected within Level 2 in the fair value hierarchy.

Trading Account Assets—Trading account assets consist primarily of asset-backed, equity securities, and perpetual preferred stocks whose fair values are determined consistent with similar instruments described above under “Fixed Maturity Securities” and below under “Equity Securities.”

Equity Securities—Equity securities consist principally of investments in common and preferred stock of publicly traded companies, 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. 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. The fair values of perpetual preferred stock are based on inputs obtained from independent pricing services that are primarily based on indicative broker quotes, as the directly observable market inputs are not available. As a result, the fair values of perpetual preferred stock are classified as Level 3.

Derivative Instruments—Derivatives are recorded at fair value either as assets, within “Other long-term investments,” or as liabilities, within “Other liabilities,” except for embedded derivatives which are recorded with the associated host contract. The fair values of derivative contracts are determined based on quoted prices in active exchanges or through the use of valuation models. 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, liquidity and other factors. 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.

The majority of the Company’s derivative positions is traded in the over-the-counter (“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, non-performance risk, volatility, and other factors.

To reflect the market’s perception of its own and the counterparty’s non-performance risk, the Company incorporates additional spreads over London Interbank 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 first-to-default credit basket swaps and other structured products. These derivatives are valued based upon models with some significant unobservable market inputs or inputs from less actively traded markets. The fair values of first-to-default credit basket swaps are derived from relevant observable inputs (e.g. individual credit default spreads, interest rates, and recovery rates) and unobservable model-specific input values such as correlation between different credits within the same basket. Other structured options and derivatives are valued using simulation models such as the Monte Carlo and other techniques. Level 3 methodologies are validated through periodic comparison of the Company’s fair values to broker-dealer values. As of September 30, 2012 and December 31, 2011, there were derivatives with the fair value of $1.4 million and $1.0 million classified within Level 3, and all other derivatives were classified within Level 2. See Note 5 for more details on the fair value of derivative instruments by primary underlying.

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 the short-term investments category are typically not traded in active markets; however, their fair values are generally based on market observable inputs and, accordingly, these investments have been primarily classified within Level 2 in the fair value hierarchy.

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

Other Assets—Other assets carried at fair value include affiliated bonds within our legal entity whose fair value are determined consistent with similar securities described above under “Fixed Maturity Securities” managed by affiliated asset managers.

25

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

Reinsurance Recoverables—Reinsurance recoverables carried at fair value include the reinsurance of our living benefit guarantees on certain of our variable annuities. 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 embedded derivative guarantee.

Future Policy Benefits—The liability for future policy benefits primarily includes general account liabilities for guarantees on variable annuity contracts, 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 the GMAB, GMWB and GMIWB liabilities are calculated as the present value of future expected benefit payments to customers less the present value of assessed rider fees attributable to the embedded derivative feature. This methodology could result in either a liability or contra-liability balance, given changing capital market conditions and various policyholder behavior 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 judgment.

The significant inputs to the valuation models for the embedded derivatives associated with the optional living benefit features of the Company’s variable annuity products include capital market assumptions, such as interest rate and implied volatility assumptions, the Company’s market-perceived risk of its own non-performance (“NPR”), as well as various assumptions that are actuarially determined, including 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 implied volatility. In the risk neutral valuation, interest rates are used to both grow the policyholders’ account values as well as discount all projected future cash flows. The Company’s discount rate assumption is based on the LIBOR swap curve, and is adjusted for NPR, as discussed below. Assuming all other assumptions remain unchanged, a decline in interest rates will generally cause account values to grow more slowly, increasing future expected benefit payments, as well as decreasing the discounting impact in the present value calculation, both of which would cause increases in the fair value of the liability. The opposite impacts occur as interest rates rise. Implied volatility also impacts the estimate of future expected benefit payments as discussed below.

Actuarial assumptions are reviewed at least annually, and updated based upon historical experience giving consideration to any observable market data, including available industry studies or market transactions such as acquisitions and reinsurance transactions. Assumptions relating to contractholder behavior such as lapse, benefit utilization, withdrawal, and mortality rates, are based on experience by product type and/or year of contract issuance, as well as available industry studies. Unless a material change in contractholder behavior or mortality experience that the Company feels is indicative of a long term trend is observed in an interim periods, assumptions related to contractholder behavior and mortality are generally updated in the third quarter of each year by considering recent experience that has occurred during the period from the most recent update to the expected amounts or updates to industry studies. These assumptions require the use of management judgment and are discussed in further detail below.

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

	As of September 30, 2012
	Internal (1)		External (2)		Total
	(in thousands)
Corporate securities	$	92,063	$	3,327	$	95,390
Asset-backed securities		—		57,703		57,703
Equity securities		—		195		195
Other long-term Investments		1,442		315		1,757
Reinsurance recoverables		1,822,323		—		1,822,323
Total assets	$	1,915,828	$	61,540	$	1,977,368
Future policy benefits		1,886,648		—		1,886,648
Total liabilities	$	1,886,648	$	—	$	1,886,648

(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.

Quantitative Information Regarding Internally Priced Level 3 Assets and Liabilities—The table below presents quantitative information on significant internally priced Level 3 assets and liabilities for which the investment risks associated with market value changes are borne by the Company.

26

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

	As of September 30, 2012
	Fair Value		Valuation Techniques	Unobservable Inputs	Range (Weighted Average)
	(in thousands)
Assets:
Corporate securities	$	92,063	Discounted cash flow	Discount rate		3.20 - 17.50% (3.75	%)
			Cap at call price	Call price		100% (100	%)
Reinsurance recoverables	$	1,822,323	Fair values are determined in the same manner as future policy benefits
Liabilities:
Future policy benefits	$	1,886,648	Discounted cash flow	Lapse rate		0% - 14	%
				NPR spread		0.24% - 1.82	%
				Utilization rate		70% - 94	%
				Withdrawal rate		85% - 100	%
				Mortality rate (1)		0% - 13	%
				Equity Volatility curve		19% - 34	%

(1) 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%.

Sensitivity to Changes in Unobservable Inputs—The following is a general description of sensitivities of significant unobservable inputs and their impact on the fair value measurement, for the assets and liabilities reflected in the table above.

Corporate Securities—Internally priced corporate securities classified in Level 3 include certain below investment grade watchlist and distressed fixed maturity securities. For securities where discounted cash flows are used, the primary unobservable input is an internally developed discount rate. Significant increases (decreases) in the discount rate would result in a significantly lower (higher) fair value measurement. In isolation, an increase (decrease) in the value of these inputs would result in a higher (lower) fair value measurement.

Reinsurance Recoverables—Reinsurance recoverables carried at fair value include the reinsurance of our living benefit guarantees on certain of our variable annuities. 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 embedded derivative guarantee.

Future Policy Benefits—Future policy benefits classified as Level 3 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. As described above, the significant unobservable inputs to the valuation models for the embedded derivatives associated with the optional living benefit features of the Company’s variable annuity products include various assumptions that are actuarially determined, including lapse rates, benefit utilization rates, withdrawal rates and mortality rates as well as volatility assumptions and assumptions used to reflect NPR.

The Company’s dynamic lapse rate assumption adjusts the base lapse rate at the contract level based on a comparison of the actuarially calculated guaranteed amount and the current policyholder account value as well as other factors, such as the applicability of any surrender charges. The dynamic lapse adjustment reduces the base lapse rate based on the magnitude of the difference between the guaranteed amount and the account value. In-the-money contracts are those with a guaranteed benefit in excess of the current policyholder account value. Since in-the-money contracts are less likely to lapse, the dynamic lapse adjustment will reduce the lapse rate assumption for these contracts. For less in the money contracts, the lapse rate assumption will be closer to the base lapse rate. Lapse rates are also generally assumed to be lower for the period where surrender charges apply. A higher base lapse rate is applied to contracts in the year the surrender charge period expires.

To reflect NPR, the Company incorporates an additional spread over LIBOR into the discount rate used in the valuations of the embedded derivatives associated with its optional living benefit features. Since insurance liabilities are senior to debt, the Company believes that reflecting the financial strength ratings of the Company in the valuation of the liability or asset appropriately takes into consideration NPR. The additional spread over LIBOR is determined taking into consideration publicly available information relating to the financial strength of the Company. The Company adjusts these credit spreads to remove any illiquidity risk premium, which is subject to a floor based on a percentage of the credit spread. This additional spread, as mentioned in the table above, is applied at an individual contract level and only to those individual living benefit contracts in a liability position and generally not to those in a contra-liability position. An increase in the spread over LIBOR increases the discounting impact in the present value calculation and will generally cause a decrease in the fair value of the liability.

The Company’s benefit utilization rate assumption estimates the percentage of contracts that will utilize the benefit during the contract duration, including the estimated timing of the first lifetime income withdrawal by the contractholder. These assumptions vary based on the product type, the age of the contractholder, and the age of the contract. The utilization rate varies by product, based on the availability of an enhanced guarantee after a certain waiting period. For example, the utilization rates for a product with the opportunity to double the guaranteed value after a 10, 12 or 20 year accumulation period are adjusted based on contractholder experience related to such enhancement. Generally, the Company assumes a certain

27

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

percentage of contractholders will utilize the guaranteed benefit (depending on the product type, contractholder age and contract age) and will begin lifetime withdrawals at various time intervals from contract inception with the remaining contractholders either beginning lifetime withdrawals immediately or never utilizing the benefit. The impact of changes in these assumptions is highly dependent on the contract type and age of the contractholder at the time of the sale and the timing of the first lifetime income withdrawal.

The Company’s withdrawal rate assumption estimates the magnitude of annual contractholder withdrawals relative to the maximum allowable amount under the contract. Larger differences in the withdrawal rate assumption compared to the contractual guaranteed income withdrawal percentage, either positive or negative, will generally result in a decrease in the fair value of the liability. Prior to the exhaustion of the contractholder’s total account value the Company assumes contractholders will withdraw a certain percentage of the maximum allowable amount under the contract and will withdraw the maximum once the contractholder account value is completely exhausted.

Based on historical experience the Company applies a set of age specific mortality rate adjustments compared to standard industry tables. For newly issued contracts, lower mortality rates are assumed in early durations. A mortality improvement assumption is also incorporated into the overall mortality table. Since the variable annuity living benefits generally provide for a minimum withdrawal benefit for life, increases in mortality rates will decrease the fair value of the liability, with the reverse being true with decreases in mortality rates.

Market volatility also impacts the estimate of future expected benefit payments. The Company uses an equity volatility curve based on third party inputs. The curve starts with first year implied volatility and grades to a long-term realized volatility. The first year implied volatility determines the overall slope of the equity volatility curve. An increase in implied volatility will generally increase future expected benefit payments, causing an increase in the fair value of the liability.

Transfers between Levels 1 and 2—During the three months ended September 30, 2012, $7.0 million of preferred stock was transferred from Level 1 to Level 2. Additionally, during the nine months ended September 30, 2012, $3.2 million of equity securities, available for sale, transferred from Level 1 to Level 2. The assets that transferred were mutual funds that were priced on a net asset value. These transfers were the result of an ongoing monitoring assessment of pricing inputs to ensure appropriateness of the level classification in the fair value hierarchy. There were no transfers between Levels 1 and 2 for the three and nine months ended September 30, 2011.

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 September 30, 2012
	Fixed Maturities Available- For-Sale - Corporate Securities			Fixed Maturities Available- For-Sale - Asset Backed Securities			Trading Account Assets- Equity Securities			Other  Long- Term Investments			Reinsurance Recoverables
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	92,461		$	51,766		$	197		$	305		$	1,761,274
Total gains or (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		1,567			—			—			(646	)		4,037
Asset management fees and other income		—			—			(2	)		10			—
Included in other comprehensive income (loss)		2,143			10			—			—			—
Net investment income		1,120			151			—			—			—
Purchases		—			7,992			—			2,089			57,012
Sales		—			—			—			—			—
Issuances		—			—			—			—			—
Settlements		(1,901	)		(2,216	)		—			(1	)		—
Transfers into Level 3 (1)		—			—			—			—			—
Transfers out of Level 3 (1)		—			—			—			—			—
Fair Value, end of period assets/(liabilities)	$	95,390		$	57,703		$	195		$	1,757		$	1,822,323
Unrealized gains (losses) for the period relating to those Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	—		$	—		$	—		$	—		$	16,488
Asset management fees and other income	$	—		$	—		$	(2	)	$	10		$	—
Interest credited to policyholder account	$	—		$	—		$	—		$	—		$	—

28

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

	Three Months Ended September 30, 2012
	Future Policy Benefits
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	(1,795,715	)
Total gains or (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		(31,202	)
Purchases		—
Sales		—
Issuances		(59,731	)
Settlements		—
Transfers into Level 3 (1)		—
Transfers out of Level 3 (1)		—
Fair Value, end of period assets/(liabilities)	$	(1,886,648	)
Unrealized gains (losses) for the period relating to those Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	(43,763	)
Interest credited to policyholders’ account balances	$	—
	Nine Months Ended September 30, 2012
	Fixed Maturities, Available-For- Sale  - Corporate Securities			Fixed Maturities, Available- For Sale - Asset Backed Securities			Trading Account Assets  - Equity Securities			Other Long- Term Investments			Reinsurance Recoverables
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	89,658		$	48,563		$	203		$	1,213		$	1,747,757
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		1,576			—			—			(1,623	)		(93,818	)
Asset management fees and other income		—			—			(8	)		12			—
Included in other comprehensive income (loss)		2,883			963			—			—			—
Net investment income		3,497			502			—			—			—
Purchases		5,400			15,492			—			2,149			168,384
Sales		(29	)		—			—			—			—
Issuances		—			—			—			—			—
Settlements		(7,896	)		(7,817	)		—			6			—
Transfers into Level 3 (1)		11,992			—			—			—			—
Transfers out of Level 3 (1)		(11,691	)		—			—			—			—
Fair Value, end of period assets/(liabilities)	$	95,390		$	57,703		$	195		$	1,757		$	1,822,323
Unrealized gains (losses) for the period relating to those Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	—		$	—		$	—		$	—		$	(55,459	)
Asset management fees and other income	$	—		$	—		$	(8	)	$	12		$	—
Interest credited to policyholder account balances	$	—		$	—		$	—		$	—		$	—

29

	Nine Months Ended September 30, 2012
	Future Policy Benefits
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	(1,783,595	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		73,429
Asset management fees and other income		—
Interest credited to policyholder account balances		—
Included in other comprehensive income (loss)		—
Net investment income		—
Issuances		(176,482	)
Settlements		—
Transfers into Level 3 (1)		—
Transfers out of Level 3 (1)		—
Fair Value, end of period assets/(liabilities)	$	(1,886,648	)
Unrealized gains (losses) for the period relating to those Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	34,583
Asset management fees and other income	$	—
Interest credited to policyholder account balances	$	—
	Three Months Ended September 30, 2011
	Fixed Maturities Available-For- Sale - Corporate Securities			Fixed Maturities Available-For- Sale - Asset Backed Securities			Equity Securities  - Available-For Sale			Other Long- Term Investments			Reinsurance Recoverable		Trading Account Assets - Equity Securities
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	93,700		$	53,890		$	230		$	186		$	118,635	$	—
Total gains or (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		—			—			—			65			1,665,947		—
Included in other comprehensive income (loss)		4,794			(834	)		—			(56	)		—		1
Net investment income		1,157			92			—			—			—		—
Purchases		450			—			—			219			53,547		—
Sales		—			—			—			—			—		—
Issuances		—			—			—			—			—		—
Settlements		(749	)		(1,433	)		—			—			—		—
Transfers into Level 3 (1)		19,600			—			—			—			—		—
Transfers out of Level 3 (1)		(8,129	)		—			—			—			—		—
Other (3)		—			—			(230	)		—			—		230
Fair Value, end of period assets/(liabilities)	$	110,823		$	51,715		$	—		$	414		$	1,838,129	$	231
Unrealized gains (losses) for the period relating to those Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	—		$	—		$	—		$	64		$	1,667,836	$	—
Asset management fees and other income	$	—		$	—		$	—		$	(27	)	$	—	$	2
Interest credited to policyholder account	$	—		$	—		$	—			—			—		—
	Three Months  Ended September 30, 2011
	Future Policy Benefits
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	(95,603	)
Total gains or (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		(1,722,775	)
Purchases		—
Sales		—
Issuances		(56,149	)
Settlements		—
Transfers into Level 3 (1)		—
Transfers out of Level 3 (1)		—
Fair Value, end of period assets/(liabilities)	$	(1,874,527	)
Unrealized gains (losses) for the period relating to Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	(1,724,423	)
Interest credited to policyholders’ account balances	$	—

30

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

	Nine Months Ended September 30, 2011
	Fixed Maturities Available-For- Sale - Corporate Securities			Fixed Maturities Available-For- Sale - Asset Backed Securities			Equity Securities  - Available-For- Sale			Other Long-Term Investments			Reinsurance Recoverable		Trading Account Assets- Equity Securities
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	74,255		$	53,857		$	—		$	—		$	186,735	$	—
Total gains or (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		35			—			—			251			1,491,815		—
Asset management fees and other income		—			—			—			(56	)		—		—
Included in other comprehensive income (loss)		5,334			297			—			—			—		1
Net investment income		3,394			333			—			—			—		—
Purchases		8,703			—			—			219			159,579		—
Sales		—			—			(746	)		—			—		—
Issuances		—			—			—			—			—		—
Settlements		(2,392	)		(2,772	)		—			—			—		—
Transfers into Level 3 (1)		51,134			—			976			—			—		—
Transfers out of Level 3 (1)		(29,640	)		—			—			—			—		—
Other (3)		—			—			(230	)		—			—		230
Fair Value, end of period assets/(liabilities)	$	110,823		$	51,715		$	—		$	414		$	1,838,129	$	231
Unrealized gains (losses) for the period relating to those Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	—		$	—		$	—		$	226		$	1,498,922	$	—
Asset management fees and other income	$	—		$	—		$	—		$	(56	)	$	—	$	2
	Nine Months Ended September 30, 2011
	Future Policy Benefits
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	(164,283	)
Total gains or (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		(1,543,017	)
Purchases		—
Sales		—
Issuances		(167,227	)
Settlements		—
Transfers into Level 3 (1)		—
Transfers out of Level 3 (1)		—
Fair Value, end of period assets/(liabilities)	$	(1,874,527	)
Unrealized gains (losses) for the period relating to Level 3 assets that were still held at the end of the period (2):
Included in earnings:
Realized investment gains (losses), net	$	(1,549,569	)
Interest credited to policyholders’ account balances	$	—

(1) Transfers into or out of level 3 are generally reported as the value as of the beginning of the quarter in which the transfer occurs.

(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) Other primarily represents reclasses of certain assets between reporting categories.

31

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

Transfers—Transfers into Level 3 are generally the result of unobservable inputs utilized within valuation methodologies and the use of broker quotes (that cannot be validated) for which information from third party pricing services (that can be validated) was previously utilized. Transfers out of Level 3 are generally due to the use of observable inputs in valuation methodologies as well as the utilization of pricing service information for certain assets that the Company is able to validate. Other significant transfers into and out of Level 3 are discussed below:

For the nine months ended September 30, 2011, the majority of the Equity Securities Available for Sale transfers into Level 3 were due to the determination that the pricing inputs for perpetual preferred stocks provided by third party pricing services were primarily based on indicative broker quotes which could not always be verified against directly observable market information. Perpetual preferred stocks were included in Equity Securities Available for Sale and subsequently transferred to Trading Account Assets.

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

	September 30, 2012										December 31, 2011
	Fair Value								Carrying Amount (1)		Fair Value		Carrying Amount
	Level 1		Level 2		Level 3		Total		Total		Total		Total
	(in thousands)
Assets:
Commercial mortgage and other loans	$	—	$	—	$	511,077	$	511,077	$	461,186	$	490,151	$	449,359
Policy loans		—		—		12,065		12,065		12,065		14,316		14,316
Cash		438		—		—		438		438		749		749
Accrued investment income		—		52,574		—		52,574		52,574		59,033		59,033
Other assets		—		13,352		—		13,352		13,352		12,237		12,237
Total assets	$	438	$	65,926	$	523,142	$	589,506	$	539,615	$	576,486	$	535,694
Liabilities:
Policyholders’ Account Balances - Investment contracts	$	—	$	—	$	74,331	$	74,331	$	71,895	$	66,659	$	66,176
Cash collateral for loaned securities		—		48,371		—		48,371		48,371		125,884		125,884
Short-term debt		—		83,502		—		83,502		83,502		27,803		27,803
Long-term debt		—		642,557		—		642,557		600,000		627,415		600,000
Other liabilities		—		137,693		—		137,693		137,693		169,139		169,139
Separate account liabilities - investment contracts		—		1,030		—		1,030		1,030		1,192		1,192
Total liabilities	$	—	$	913,153	$	74,331	$	987,484	$	942,491	$	1,018,092	$	990,194

(1) Carrying values presented herein differ from those in the Company’s Unaudited Interim Statement 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.

The fair values presented above for those financial instruments 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.

32

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

Cash, Accrued Investment Income 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, accrued investment income, and other assets that meet the definition of financial instruments, including receivables such as unsettled trades, accounts receivable. The Company believes that carrying value approximates fair value due to the short term until settlement of most of these assets.

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 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 non-performance risk. 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.

Short-Term and Long-Term Debt

The fair value of short-term and long-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 non-performance risk. 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 commercial paper issuances and other debt with a maturity of less than 90 days, the carrying value approximates fair value.

Cash Collateral for Loaned Securities

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

Other Liabilities

Other liabilities 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 investments contracts are reflected in the table above. Separate account liabilities are recorded at the amount credited to the contractholder, which equals the change in fair value of the corresponding separate account assets including contractholder deposit 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 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 anticipates acquiring and other anticipated transactions and commitments. 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 other parties 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. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty at each due date.

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. These hedges do not qualify for hedge accounting.

Foreign Exchange Contracts

Currency derivatives, including currency swaps, 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 swaps, the Company agrees with other parties 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.

33

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

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 can sell credit protection on an identified name, or a basket of names in a first to default structure, and in return receive a quarterly premium. With single name 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. With first to default baskets, the premium generally corresponds to a high proportion of the sum of the credit spreads of the names in the basket. If there is an event of default by the referenced name or one of the referenced names in a basket, 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. See credit derivatives written section for discussion of guarantees related to credit derivatives written. In addition to selling credit protection, the Company may purchase credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio.

Embedded Derivatives

The Company has sold variable annuity contracts that include certain optional living benefit features that are accounted for as embedded derivatives. The Company has reinsurance agreements to transfer the risk related to certain of these embedded derivatives to affiliates, Pruco Reinsurance, Ltd. (“Pruco Re”) and The Prudential Insurance Company of America. The embedded derivatives related to the living benefit features and the related reinsurance agreements are carried at fair value. Mark-to-market changes in the fair value of the underlying contractual guarantees are determined using valuation models as described in Note 7, and are recorded in “Realized investment gains (losses), net.”

The Company invests in fixed maturities that, in addition to a stated coupon, provide a return based upon the results of an underlying portfolio of fixed income investments and related investment activity. The Company accounts for these investments as available-for-sale fixed maturities containing embedded derivatives. Such embedded derivatives are marked to market through “Realized investment gains (losses), net,” based upon the change in value of the underlying portfolio.

The fair value of the living benefit feature embedded derivatives included in “Future policy benefits” was a liability of $1,887 million and $1,784 million as of September 30, 2012 and December 31, 2011, respectively. 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 $1,823 million and $1,748 million as of September 30, 2012 and December 31, 2011, respectively.

The table below provides a summary of the gross notional amount and fair value of derivatives contracts, excluding embedded derivatives which are recorded with the associated host, by the primary underlying. Many derivative instruments contain multiple underlyings.

	September 30, 2012							December 31, 2011
	Notional		Fair Value					Notional		Fair Value
	Amount		Assets		Liabilities			Amount		Assets		Liabilities
	(in thousands)
Qualifying Hedges
Currency/Interest Rate
Currency/Interest Rate	$	63,165	$	947	$	(2,417	)	$	47,702	$	867	$	(1,796	)
Total Qualifying Hedges	$	63,165	$	947	$	(2,417	)	$	47,702	$	867	$	(1,796	)
Non-qualifying Hedges
Interest Rate
Non Currency Swaps	$	2,132,950	$	172,636	$	(13,660	)	$	1,752,950	$	162,428	$	(8,546	)
Currency/Interest Rate
Foreign Currency Swaps		55,861		2,951		(4,321	)		62,280		2,852		(4,975	)
Credit
Credit Default Swaps		345,050		805		(1,650	)		399,050		1,737		(2,165	)
Equity
Equity Non Currency		169,085		1,069		(2,584	)		199,446		1,067		(4,838	)
Equity Options		9,564,450		18,782		(7,571	)		2,798,732		23,161		(17,692	)
Total Non-Qualifying Hedges	$	12,267,396	$	196,243	$	(29,786	)	$	5,212,458	$	191,245	$	(38,216	)
Total Derivatives (1)	$	12,330,561	$	197,190	$	(32,203	)	$	5,260,160	$	192,112	$	(40,012	)

(1) Excludes embedded derivatives which contain multiple underlyings. The fair value of these embedded derivatives was a liability of $1,887 million as of September 30, 2012 and a liability of $1,787 million as of December 31, 2011 included in “Future policy benefits” and “Fixed maturities, available-for-sale.”

34

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

Cash Flow Hedges

The Company uses currency swaps in its cash flow hedge accounting relationships. This instrument is only designated for hedge accounting in instances where the appropriate criteria are met. The Company does not use futures, options, credit, and 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:

	Three Months Ended September 30, 2012
	Realized Investment Gains/(Losses)			Net Investment Income			Other Income			Accumulated Other Comprehensive Income (1)
	(in thousands)
Qualifying hedges
Cash flow hedges
Currency/Interest Rate	$	—		$	(33	)	$	(4	)	$	(1,556	)
Total qualifying hedges		—			(33	)		(4	)		(1,556	)
Non-qualifying hedges
Interest Rate		(2,942	)		—			—			—
Currency/Interest Rate		(1,446	)		—			(7	)		—
Credit		(53	)		—			—			—
Equity		(21,383	)		—			—			—
Embedded Derivatives		(37,089	)		—			—			—
Total non-qualifying hedges		(62,913	)		—			(7	)		—
Total	$	(62,913	)	$	(33	)	$	(11	)	$	(1,556	)

(1) Amounts deferred in accumulated other comprehensive income (loss).

	Nine Months Ended September 30, 2012
	Realized Investment Gains/(Losses)			Net Investment Income			Other Income		Accumulated Other Comprehensive Income (1)
	(in thousands)
Qualifying hedges
Cash flow hedges
Currency/Interest Rate	$	—		$	(107	)	$	30	$	(494	)
Total cash flow hedges		—			(107	)		30		(494	)
Non-qualifying hedges
Interest Rate		22,912			—			—		—
Currency/Interest Rate		(296	)		—			20		—
Credit		140			—			—		—
Equity		(48,576	)		—			—		—
Embedded Derivatives		(51,769	)		—			—		—
Total non-qualifying hedges		(77,589	)		—			20		—
Total	$	(77,589	)	$	(107	)	$	50	$	(494	)

(1) Amounts deferred in accumulated other comprehensive income (loss).

35

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

	Three Months Ended September 30, 2011
	Realized Investment Gains/(Losses)			Net Investment Income			Other Income		Accumulated Other Comprehensive Income (1)
	(in thousands)
Qualifying hedges
Cash flow hedges
Currency/Interest Rate	$	—		$	(31	)	$	23	$	2,860
Total qualifying hedges		—			(31	)		23		2,860
Non-qualifying hedges
Interest Rate		88,278			—			—		—
Currency/Interest Rate		5,251			—			—		—
Credit		544			—			—		—
Equity		22,293			—			—		—
Embedded Derivatives		(69,635	)		—			—		—
Total non-qualifying hedges		46,731			—			—		—
Total	$	46,731		$	(31	)	$	23	$	2,860

(1) Amounts deferred in accumulated other comprehensive income (loss).

	Nine Months Ended September 30, 2011
	Realized Investment Gains/(Losses)			Net Investment Income			Other Income			Accumulated Other Comprehensive Income (1)
	(in thousands)
Qualifying hedges
Cash flow hedges
Currency/Interest Rate	$	—		$	(70	)	$	(28	)	$	1,122
Total cash flow hedges		—			(70	)		(28	)		1,122
Non-qualifying hedges
Interest Rate		103,706			—			—			—
Currency/Interest Rate		2,456			—			—			—
Credit		1,155			—			—			—
Equity		8,377			—			—			—
Embedded Derivatives		(91,243	)		—			—			—
Total non-qualifying hedges		24,451			—			—			—
Total	$	24,451		$	(70	)	$	(28	)	$	1,122

(1) Amounts deferred in accumulated other comprehensive income (loss).

For the three and nine months ended September 30, 2012 the ineffective portion of derivatives accounted for using hedge accounting was not material to the Company’s results of operations and 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.

36

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, 2011	$	(962	)
Net deferred gains (losses) on cash flow hedges from January 1 to September 30, 2012		(568	)
Amount reclassified into current period earnings		77
Balance, September 30, 2012	$	(1,453	)

As of September 30, 2012, 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 14 years. Income amounts deferred in “Accumulated other comprehensive income (loss)” as a result of cash flow hedges are included in “Net unrealized investment gains (losses)” in the Unaudited Interim Statements of Equity.

Credit Derivatives Written

The following table sets forth the composition of the Company’s credit derivatives where it has written credit protection, excluding embedded derivatives contained in externally-managed investments in European markets, by industry category as of the dates indicated.

	September 30, 2012				December 31, 2011
Industry	Notional		Fair Value		Notional		Fair Value
	(in thousands)
Corporate Securities:
Basic Industry	$	40,000	$	132	$	40,000	$	248
Capital Goods		90,000		220		90,000		315
Consumer Cyclical		20,000		56		20,000		120
Consumer Non-cyclical		120,000		284		120,000		655
Energy		20,000		58		20,000		101
Finance		—		—		54,000		95
Transportation		25,000		55		25,000		106
Total Credit Derivatives	$	315,000	$	805	$	369,000	$	1,640

The Company writes credit derivatives under which the Company is obligated to pay a related party counterparty the referenced amount of the contract and receive in return the defaulted security or similar security. The Company’s maximum amount at risk under these credit derivatives, assuming the value of the underlying referenced securities become worthless, is $315 million and $369 million notional of credit default swap (“CDS”) selling protection with an associated fair value of $1 million and $2 million, at September 30, 2012 and December 31, 2011, respectively. These credit derivatives generally have maturities of less than 1 year. At September 30, 2012 and December 31, 2011, the underlying credits had NAIC designation ratings of 1 and 2.

The Company holds certain externally-managed investments in the European market which contain embedded derivatives whose fair value are primarily driven by changes in credit spreads. These investments are medium term notes that are collateralized by investment portfolios primarily consisting of investment grade European fixed income securities, including corporate bonds and asset-backed securities, and derivatives, as well as varying degrees of leverage. The notes have a stated coupon and provide a return based on the performance of the underlying portfolios and the level of leverage. The Company invests in these notes to earn a coupon through maturity, consistent with its investment purpose for other debt securities. The notes are accounted for under U.S. GAAP as available-for-sale fixed maturity securities with bifurcated embedded derivatives (total return swaps). Changes in the value of the fixed maturity securities are reported in Equity under the heading “Accumulated other comprehensive income (loss)” and changes in the market value of the embedded total return swaps are included in current period earnings in “Realized investment gains (losses), net.” The Company’s maximum exposure to loss from these interests was $0 million and $7 million at September 30, 2012 and December 31, 2011, respectively. The fair value of the embedded derivatives included in “Fixed maturities, available-for-sale” was a liability of $0 million and $3 million at September 30, 2012 and December 31, 2011, respectively.

In addition to writing credit protection, the Company has purchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio. As of September 30, 2012 and December 31, 2011, the Company had $30 million of outstanding notional amounts, respectively reported at fair value as a liability of $2 million, respectively.

Counterparty Credit Risk

The Company is exposed to credit-related losses in the event of non-performance by counterparties to financial derivative transactions. Generally, the credit exposure of the Company’s OTC derivative transactions is represented by the contracts with a positive fair value (market value) at the reporting date after taking into consideration the existence of netting agreements.

37

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

The Company has credit risk exposure to an affiliate, 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 where appropriate, see Note 7.

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. CONTINGENT LIABILITIES AND LITIGATION

Commitments

The Company had made commitments to fund $16.1 million of commercial loans as of September 30, 2012. The Company also made commitments to purchase or fund investments, mostly private fixed maturities, of $7.5 million as of September 30, 2012.

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.

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 flow 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 flow 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 businesses. Pending legal and regulatory actions include proceedings relating to aspects of the Company’s businesses and operations that are specific to it and proceedings that are typical of the businesses in which it operates, including in both cases businesses that have been either divested or placed in wind-down status. Some of these proceedings have been brought on behalf of various alleged classes of complainants. In certain of these matters, the plaintiffs 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, including matters discussed below. The Company estimates that as of September 30, 2012, 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 $6 million. The 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.

In March 2012, a qui tam action on behalf of the State of Minnesota, Total Asset Recovery v. MetLife Inc., et al., Prudential Financial Inc., The Prudential Insurance Company of America and Prudential Holdings, Inc., filed in the Fourth Judicial District, Hennepin County, in the State of Minnesota was served on the Company. The complaint alleges that the Company failed to escheat life insurance proceeds to the State of Minnesota in violation of the Minnesota False Claims Act and seeks injunctive relief, compensatory damages, civil penalties, treble damages, prejudgment interest, attorneys’ fees and costs. In June 2012, the Company filed a motion to dismiss the complaint.

In January 2012, a qui tam action on behalf of the State of Illinois, Total Asset Recovery Services v. Met Life Inc, et al., Prudential Financial, Inc., The Prudential Insurance Company of America, and Prudential Holdings, LLC, filed in the Circuit Court of Cook County, Illinois, was served on the Company. The complaint alleges that the Company failed to escheat life insurance proceeds to the State of Illinois in violation of the Illinois False Claims Whistleblower Reward and Protection Act and seeks injunctive relief, compensatory damages, civil penalties, treble damages, prejudgment interest, attorneys’ fees and costs. In April, 2012, the Company filed a motion to dismiss the complaint. In September 2012, the complaint was withdrawn without prejudice.

38

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

In January 2012, a Global Resolution Agreement entered into by the Company and a third party auditor became effective upon its acceptance by the unclaimed property departments of 20 states and jurisdictions. Under the terms of the Global Resolution Agreement, the third party auditor acting on behalf of the signatory states will compare expanded matching criteria to the Social Security Master Death File (“SSMDF”) to identify deceased insureds and contract holders where a valid claim has not been made. In February 2012, a Regulatory Settlement Agreement entered into by the Company to resolve a multi-state market conduct examination regarding its adherence to state claim settlement practices became effective upon its acceptance by the insurance departments of 20 states and jurisdictions. The Regulatory Settlement Agreement applies prospectively and requires the Company to adopt and implement additional procedures comparing its records to the SSMDF to identify unclaimed death benefits and proscribes procedures for identifying and locating beneficiaries once deaths are identified. Other jurisdictions that are not signatories to the Regulatory Settlement Agreement are considering proposals that would apply prospectively and require life insurance companies to take additional steps to identify unreported deceased policy and contract holders. These prospective changes and any escheatable property identified as a result of the audits and inquiries could result in: (1) additional payments of previously unclaimed death benefits; (2) the payment of abandoned funds to U.S. jurisdictions; and (3) changes in the Company’s practices and procedures for the identification of escheatable funds and beneficiaries, which would impact claim payments and reserves, among other consequences.

The Company is one of several companies subpoenaed by the New York Attorney General regarding its unclaimed property procedures. Additionally, the New York Department of Financial Services (“NYDFS”) has requested that 172 life insurers (including the Company) provide data to the NYDFS regarding use of the SSMDF. The New York Office of Unclaimed Funds recently notified the Company that it intends to conduct an audit of the Company’s compliance with New York’s unclaimed property laws. The Minnesota Attorney General has also requested information regarding the Company’s use of the SSMDF and its claim handling procedures and the Company is one of several companies subpoenaed by the Minnesota Department of Commerce, Insurance Division. In February 2012, the Massachusetts Office of the Attorney General requested information regarding the Company’s unclaimed property procedures.

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 flow 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 flow 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.

7. RELATED PARTY TRANSACTIONS

The Company is a party to numerous transactions and relationships with its affiliate Prudential Insurance and other affiliates. 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 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. General and administrative expenses also include allocations of stock compensation expenses related to a stock option program and a deferred compensation program sponsored by Prudential Financial.

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 $0.8 million for the three months ended September 30, 2012 and 2011, and $2 million for the nine months ended September 30, 2012 and 2011.

Prudential Insurance sponsors voluntary savings plans for the Company’s 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 $0.3 million and $0.4 million for the three months ended September 30, 2012 and 2011, respectively and $1 million for the nine months ended September 30, 2012 and 2011.

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 $84 million and $28 million of short-term debt outstanding with Prudential Funding, LLC as of September 30, 2012 and December 31, 2011, respectively. Total interest expense on short-term affiliated debt to the Company was $91 thousand and $35 thousand for the three months ended September 30, 2012 and 2011, respectively and $249 thousand and $199 thousand for the nine months ended September 30, 2012 and 2011, respectively.

39

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

The Company had long-term debt of $600 million outstanding with Prudential Financial as of September 30, 2012 and December 31, 2011. This loan has a fixed interest rate of 4.49% and matures on December 29, 2014. At September 30, 2011 the Company had a $175 million loan from Prudential Financial. This loan had an interest rate of 5.18%. The balance of this loan was paid off on December 14, 2011. Total interest expense on affiliated long-term debt was $7 million and $9 million for the three months ended September 30, 2012 and 2011, respectively and $20 million and $27 million for the nine months ended September 30, 2012 and 2011, 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.

40

Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

The following table provides information relating to fees ceded under these agreements which are included in “Realized investment gains (losses), net” on the Unaudited Interim Statement of Operations and Comprehensive Income for the dates indicated:

	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2012		2011		2012		2011
	(in thousands)
Pruco Reinsurance
Effective August 24, 2009
Highest Daily Lifetime 6 Plus (“HD6 Plus”)	$	12,436	$	11,759	$	36,885	$	35,160
Spousal Highest Daily Lifetime 6 Plus (“SHD6”)		5,368		5,060		15,948		15,025
Effective June 30, 2009
Highest Daily Lifetime 7 Plus (“HD7 Plus”)		13,259		12,577		39,228		37,521
Spousal Highest Daily Lifetime 7 Plus (“SHD7 Plus”)		7,023		6,599		20,717		19,661
Effective March 17, 2008
Highest Daily Lifetime 7 (“HD7”)		7,427		7,337		22,206		21,961
Spousal Highest Daily Lifetime 7 (“SHD7”)		2,276		2,257		6,812		6,722
Guaranteed Return Option Plus (“GRO Plus” & “GRO Plus II”) (1)		2,130		2,261		6,446		6,596
Highest Daily Guaranteed Return Option (“HD GRO”) (1)		824		850		2,503		2,591
Highest Daily Guaranteed Return Option (“HD GRO II”) (1)		840		837		2,530		2,468
Effective Since 2006
Highest Daily Lifetime Five (“HDLT5”)		3,284		3,441		9,951		10,574
Spousal Lifetime Five (“SLT5”)		2,638		2,688		7,959		8,427
Effective Since 2005
Lifetime Five (“LT5”) (2)		8,580		8,817		25,992		27,865
Guaranteed Return Option (“GRO”)		514		909		1,621		3,362
Total Fees Ceded to Pruco Reinsurance	$	66,599	$	65,392	$	198,798	$	197,933
Prudential Insurance
Effective Since 2004
Guaranteed Minimum Withdrawal Benefit (“GMWB”)		348		442		1,097		1,499
Total Fees Ceded to Prudential Insurance	$	348	$	442	$	1,097	$	1,499
Total Fees Ceded	$	66,947	$	65,834	$	199,895	$	199,432

(1) GRO Plus and HD GRO were amended effective January 1, 2010 to include an amended version of the GRO Plus and HD GRO benefit features (GRO Plus II and HD GRO II).

(2) Effective August 1, 2007, the Company amended this coinsurance agreement to include the reinsurance of business sold prior to May 6, 2005 that was previously reinsured to Prudential Insurance.

The Company’s reinsurance recoverables related to the above product reinsurance agreements were $1,823 million and $1,748 million as of September 30, 2012 and December 31, 2011, respectively. Realized gains (losses) ceded related to the mark-to-market on the reinsurance recoverables were ($6) million and $1,654 million for the three months ended September 30, 2012 and 2011, respectively; and $125 million and ($1,460) million for the nine months of September 30, 2012 and 2011, respectively. Changes in realized gains and losses ceded for the 2012 and 2011 periods were primarily due to changes in market conditions. The underlying asset is reflected in “Reinsurance recoverables” in the Company’s Unaudited Interim Statements of Financial Position.

Affiliated Asset Administration Fee Income

In accordance with an agreement with AST Investment Services, Inc., formerly known as American Skandia Investment Services, Inc, the Company receives fee income calculated on contractholder separate account balances invested in the Advanced Series Trust, formerly known as American Skandia Trust. Income received from AST Investment Services, Inc. related to this agreement was $56 million and $59 million, for the three months ended September 30, 2012 and 2011, respectively and $169 million and $189 million for the nine months ended September 30, 2012 and 2011, respectively. These revenues are recorded as “Asset administration fees and other income” in the Unaudited Interim Statements of Operations and Comprehensive Income.

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.

Purchase/sale of fixed maturities and commercial mortgage loans from/to an affiliate

During the second and fourth quarters of 2011, the Company sold fixed maturity securities to an affiliated company in various transactions. These securities had an amortized cost of $143 million and a fair value of $151 million. The net difference between historic amortized cost and the fair value was $8 million and was recorded as a realized investment gain on the Company’s Unaudited Interim Statement of Operations and Comprehensive Income. During the second quarter of 2011 the Company also sold commercial mortgage loans to an affiliated company. These loans had an amortized cost of $49 million and a fair value of $54 million. The net difference between historic amortized cost and the fair value was $5 million and was recorded as a realized gain on the Company’s Unaudited Interim Statement of Operations and Comprehensive Income.

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Prudential Annuities Life Assurance Corporation

Notes to Unaudited Interim Financial Statements

During first quarter of 2012, the Company sold fixed maturity securities to Prudential Financial. These securities had an amortized cost of $123 million and a fair value of $141 million. The net difference between historic amortized cost and the fair value was accounted for as an increase of $11 million to additional paid-in capital, net of taxes.

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

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 with the reduced disclosure format.

This 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”), formerly known as American Skandia Life Assurance Corporation, as of September 30, 2012 compared with December 31, 2011, and its results of operations for the three and nine months ended September 30, 2012 and 2011. You should read the following analysis of our financial condition and results of operations in conjunction with the audited Financial Statements, and the “Risk Factors” section included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, the statements under “Forward Looking Statements”, and the Unaudited Interim Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

General

The Company was established in 1988 and has been a significant 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 investment performance of the registered investment companies supporting the variable annuity contracts, which is principally correlated to equity market performance, can significantly impact the market for the Company’s products.

Products

The Company has sold a wide array of annuities, including deferred and immediate variable annuities that are registered with the United States Securities and Exchange Commission (the “SEC”), which may also include (1) fixed interest rate allocation options, subject to a market value adjustment, and registered with 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, but it no longer actively sells such policies.

Beginning in March 2010, the Company ceased offering its existing 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 in each of Pruco Life Insurance Company and Pruco Life Insurance Company of New Jersey (which are affiliates of the Company within the Prudential Annuities business unit of Prudential Financial, Inc. (“Prudential Financial”)). However, subject to applicable contractual provisions and administrative rules, the Company continues to accept certain subsequent purchase payments on inforce contracts under existing annuity products. Effective in September of 2012, the Company announced the suspension of additional customer deposits for variable annuities with certain older optional living benefit riders.

The Company’s variable annuities provide its customers with tax-deferred asset accumulation together with a base death benefit and a suite of optional guaranteed death and living benefits. The benefit features contractually guarantee the contractholder a return of no less than (1) total deposits made to the contract less any partial withdrawals (“return of net deposits”), (2) total deposits made to the contract less any partial withdrawals plus a minimum return (“minimum return”), and/or (3) the highest contract value on a specified date minus any withdrawals (“contract value”). These guarantees may include benefits that are payable in the event of death, annuitization or at specified dates during the accumulation period and withdrawal and income benefits payable during specified periods. Our optional living benefits guarantee, among other features, the ability to make withdrawals based on the highest daily contract value plus a minimum return, credited for a period of time. This highest daily guaranteed contract value is a notional amount that forms the basis for determination of periodic withdrawals for the life of the contractholder, and cannot be accessed as a lump-sum surrender value.

Our variable annuity investment options provide our customers with the opportunity to invest in proprietary and non-proprietary mutual funds, frequently under asset allocation programs, and fixed-rate accounts. The investments made by customers in the proprietary and non-proprietary mutual funds generally represent separate account interests that provide a return linked to an underlying investment portfolio. The general account investments made in the fixed-rate accounts are credited with interest at rates we determine, subject to certain minimums. We also offered fixed annuities that provide a guarantee of principal and interest credited at rates we determine, subject to certain contractual minimums. Certain investments made in the fixed-rate accounts of our variable annuities and certain fixed annuities impose a market value adjustment if the invested amount is not held to maturity. Based on the contractual terms the market value adjustment can be positive, resulting in an additional amount for the contractholder, or negative, resulting in a deduction from the contractholder’s account value or redemption proceeds.

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, timing of annuitization and withdrawals, contract lapses and contractholder mortality. 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. As part of our risk management strategy we hedge or limit our exposure to certain of these risks primarily through a combination of product design elements, such as an asset transfer feature, externally purchased hedging instruments and affiliated reinsurance arrangements with Pruco Re and Prudential Insurance. Our returns can also vary by contract based on our risk management strategy, including the impact of any capital markets movements that we may hedge in the affiliate, the impact on that portion of our variable annuity contracts with the asset transfer feature, the impact of risks we have deemed suitable to retain and the impact of risks that are not able to be hedged.

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As of September 30, 2012 approximately $40.0 billion or 82% of total variable annuity account values contain a living benefit feature, compared to approximately $38.6 billion or 81% as of December 31, 2011. As of September 30, 2012 approximately $32.0 billion or 80% of variable annuity account values with living benefit features included an asset transfer feature in the product design, compared to approximately $30.6 billion or 79% as of December 31, 2011. The asset transfer feature, included in the design of certain optional living benefits, transfers assets between certain variable investments selected by the annuity contractholder and, depending on the benefit feature, a fixed rate account in the general account or a bond portfolio within a separate account. The asset transfer feature associated with the most recently sold products transfers assets between certain variable investments selected by the annuity contractholder and a designated bond portfolio within the separate account. The transfers are based on the static mathematical formula used with the particular optional benefit which considers a number of factors, including the impact of investment performance on the contractholder’s total account value. In general, negative investment performance may result in transfers to either a fixed rate account in the general account or a bond portfolio within the separate account, and positive investment performance may result in transfers to contractholder-selected variable investments. Overall, the asset transfer feature helps to mitigate our exposure to equity market risk and market volatility. Other product design elements we utilize for certain products to manage these risks include asset allocation restrictions and minimum issuance age requirements.

As mentioned above, in addition to our asset transfer feature, we also manage certain risks associated with our variable annuity products through hedging programs and affiliated reinsurance agreements. Primarily in the reinsurance affiliate, derivatives are purchased that replicate the net change in a hedging target, discussed further below. The hedging program uses a range of exchange-traded and over the counter equity and interest rate derivatives. The instruments include, but are not limited to: interest rate swaps, swaptions, floors and caps as well as equity options, total return swaps and equity futures to hedge certain capital market risks present in the hedge target. In addition to mitigating risk and income statement volatility, the hedging program is also focused on a long-term goal of accumulating assets that could be used to pay claims under these benefits irrespective of market path, recognizing that, under the terms of the contracts, payment of such claims are not expected to begin until some point in the future.

Under U.S. GAAP the liability for the optional living benefit features is accounted for as an embedded derivative and recorded at fair value. The fair value is calculated as the present value of future expected benefit payments to customers less the present value of assessed rider fees attributable to the feature using option pricing techniques. See Note 4 to the Unaudited Interim Consolidated Financial Statements for additional information regarding the methodology and assumptions used in calculating the fair value under U.S. GAAP.

As noted above, the hedge program, primarily in the reinsurance affiliate, utilizes a hedge target that is grounded in a U.S. GAAP/capital markets valuation framework, with three notable modifications.

• The impact of the market’s perception of non-performance risk (“NPR”) is excluded to maximize protection against the entire projected claim irrespective of the possibility of our own default.

• A credit spread is added to the risk-free rate of return assumption used under U.S. GAAP to estimate future growth of bond investments in the customer separate account funds to better replicate the projected returns within those funds.

• The equity volatility assumption is adjusted to remove certain risk margins required under U.S. GAAP valuation which are used in the projection of customer account values, as we believe the impact driven by these margins can be temporary and does not reflect the true economic value.

The hedging strategy also includes a program managed at the Prudential Financial parent company level that more broadly addresses equity market exposure of the overall statutory capital of Prudential Financial as a whole, under stress scenarios. The Company owns a portion of the derivatives related to this program. The program focuses on tail risk in order to protect statutory capital in a cost-effective manner under stress scenarios. Prudential Financial assesses the composition of the hedging program on an ongoing basis and may change it from time to time based on an evaluation of its risk position or other factors.

Significant Accounting Policies

For information on the Company’s significant accounting policies, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Application of Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or 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, results of operations and financial position as reported in the Unaudited Interim Financial Statements could change significantly.

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

• Deferred policy acquisition and other costs, including value of business acquired;

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

• Policyholder liabilities;

• Taxes on income; and

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

In the first quarter of 2012, we revised the treatment of the results of the living benefits hedging program in our best estimate of total gross profits used to calculate the amortization of deferred policy acquisition costs (“DAC”) and deferred sales inducements (“DSI”) associated with certain of our variable annuity contracts. In 2011, we included the difference between the change in the fair value of hedge positions and the change in the value of the hedge target liability, primarily in the reinsurance affiliate, in our best estimate of gross profits used to determine amortization rates only to the extent this net amount was determined by management to be other-than-temporary. Beginning with the first quarter of 2012, we are including these impacts in our best estimate of total gross profits used for determining amortization rates each quarter without regard to the permanence of the changes.

Additionally, in the third quarter of each year, we perform an annual comprehensive review and update of the assumptions used in estimating gross profits for future periods. The near-term future rate of return assumptions used in evaluating DAC and DSI for our domestic variable annuity and variable life insurance products are derived using a reversion to the mean approach, a common industry practice. Under this approach, we consider the actual historical economic returns over a period of time and initially adjust future projected returns over the next four years (the “near-term”) so that the assets are projected to grow at the long-term expected rate of return for the entire period. If the near-term projected future rate of return is greater than our near-term maximum future rate of return, we use our maximum future rate of return.

As of September 30, 2012, our variable annuities business utilizes distinct rates of return for equity and fixed income investments. Assumptions for this business reflect an 8.0% long-term equity expected rate of return and a near-term mean reversion equity rate of return of 8.5%. As of September 30, 2012, all contract groups within our variable annuities business utilized these rates, as the near-term mean reversion equity rate of return was less than our 13% maximum. Fixed income expected rates of return include a risk free return plus a credit spread and consider the duration and credit profile of the respective bond funds. Fixed income returns reflect a grading from current rates up to long term rates over a ten year period. The weighted average fixed income expected rate of return after the ten year grading period is 5.4%.

The weighted average rate of return assumptions for these businesses consider many factors specific to each business, including asset durations, asset allocations and other factors. We update the near term rates of return and our estimate of total gross profits each quarter to reflect the result of the reversion to the mean approach, which assumes a convergence to the long-term expected rates of return. 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. The new required rate of amortization is also applied prospectively to future gross profits in calculating amortization in future periods.

Additional information regarding the critical accounting estimates listed above may also be found in our Annual Report on Form 10-K for the year ended December 31, 2011, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Accounting Policies & Pronouncements—Application of Critical Accounting Estimates.”

Changes in Financial Position

2012 versus 2011

Total assets increased by $1.5 billion, from $52.3 billion at December 31, 2011 to $53.8 billion at September 30, 2012. Separate account assets increased $2.2 billion primarily driven by market appreciation and the impact of the asset transfer feature which moved customer account values from the general account to the separate account due to favorable markets in 2012. DAC and DSI increased by $162 million and $68 million, respectively, resulting primarily from the impact of the mark-to-market of the reinsured liability for living benefit embedded derivatives and related hedge positions, as well favorable assumption unlockings. Partially offsetting these increases, total investments decreased by $816 million primarily related to asset sales associated with policyholder liability surrenders and the asset transfer feature which moved customer account values from the general account to the separate account due to favorable markets in 2012.

Total liabilities increased by $1.4 billion, from $51.2 billion at December 31, 2011 to $52.6 billion at September 30, 2012. Separate account liabilities increased by $2.2 billion offsetting the increase in separate accounts assets above. Partially offsetting the above increase was a $919 million decrease in Policyholder’s account balance driven by account value run off due to the discontinuation of new sales and the asset transfer feature which moved customer account values to the separate account due to favorable markets, as discussed above.

Total equity increased by $0.2 billion from $1.0 billion at December 31, 2011 to $1.2 billion at September 30, 2012. The increase in total equity was primarily driven by net income of $445 million, partially offset by a $248 million dividend to our ultimate parent, Prudential Financial, Inc. (“Prudential Financial”).

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Results of Operations

2012 versus 2011 Three Month Comparison

Net Income

Net income increased $750 million from a loss of $440 million for the third quarter of 2011 to income of $310 million for the third quarter of 2012. The increase was driven by a $1,132 million increase in income from operations before income taxes, as discussed below, partially offset by a $382 million increase in income tax expense.

The increase in income from operations before taxes was primarily driven by lower amortization of DAC and DSI primarily related to the impact of the mark-to-market of the reinsured liability for living benefit embedded derivatives and related hedge positions, as discussed below. Also contributing to the increase was a favorable variance related to adjustments to the amortization of DAC and DSI, and to the reserves for the GMDB and GMIB features of our variable annuity products, primarily driven by the impact to the estimated profitability of the business of quarterly adjustments to reflect current period market performance and experience, as well as the annual review and update of assumptions. Results for both years include the impact of these items which are discussed in more detail below.

Excluding the items discussed above, income from operations before taxes decreased $90 million compared to third quarter of 2011, primarily driven by an unfavorable variance related to differences between the mark-to-market of the non-reinsured portion of the living benefit embedded derivative liability and related hedge positions, primarily due to NPR gains in the prior year quarter driven by Pre-NPR reserve increases resulting from unfavorable markets. Also contributing to the decrease was a decline in fees driven by lower average annuity account values invested in the separate account driven by negative net flows as a result of contractholder surrenders. There are limited offsetting inflows due to the discontinuation of new sales discussed above.

We amortize DAC and other costs over the expected lives of the contracts based on the level and timing of gross profits on the underlying product. In calculating gross profits, we consider mortality, persistency, and other elements as well as rates of return on investments associated with these contracts and include profits and losses related to these contracts 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 and other costs amortization pattern representative of the total economics of the products.

As mentioned above, included in the favorable variance from lower amortization of DAC and DSI, was $686 million of lower amortization, primarily related to the impact of the mark-to-market of the reinsured liability for living benefit embedded derivatives and related hedge positions. This impact primarily relates to changes in the valuation of the reinsured living benefit liabilities related to NPR, which we and the reinsurance affiliate believe to be non-economic, and choose not to hedge, as discussed above, and by differences between the change in fair value of the hedge target liability and the change in the fair value of the hedge assets in the reinsurance affiliate.

To reflect the NPR of our affiliates in the valuation of the embedded derivative liabilities, we incorporate an additional spread over LIBOR into the discount rate used in the valuation. The favorable variance from DAC and DSI amortization was driven by NPR losses in the reinsurance affiliate in the third quarter of 2012, which resulted in an amortization benefit compared to NPR gains in the third quarter of 2011 resulting in amortization expense. Negative NPR adjustments in the reinsurance affiliate in 2012 were primarily driven by a tightening of NPR spreads. NPR gains in the reinsurance affiliate in the third quarter of 2011 were driven by a higher base embedded derivative liability before NPR due to significant declines in risk-free interest rates and equity markets.

As shown in the following table, the income from operations for the third quarter 2012 included $340 million of net benefits from adjustments to the amortization of DAC and DSI and the reserves for the GMDB and GMIB features of our variable annuity products compared to $219 million of net charges in the third quarter of 2011.

	Three Months Ended September 30, 2012							Three Months Ended September 30, 2011
	Amortization of DAC and Other Costs (1)		Reserves for GMDB / GMIB (2)			Total		Amortization of DAC and Other Costs (1)			Reserves for GMDB / GMIB (2)			Total
	(in thousands)
Quarterly market performance adjustment	$	13,670	$	8,564		$	22,234	$	(77,849	)	$	(67,308	)	$	(145,157	)
Annual review/assumption update		122,132		(64,624	)		57,508		(28,513	)		5,649			(22,864	)
Quarterly adjustment for current period experience (3)		260,129		59			260,188		(48,993	)		(2,428	)		(51,421	)
Total	$	395,931	$	(56,001	)	$	339,930	$	(155,355	)	$	(64,087	)	$	(219,442	)

(1) Amounts reflect (charges) or benefits for (increases) or decreases, respectively, in the amortization of deferred policy acquisition, or DAC, and other costs.

(2) Amounts reflect (charges) or benefits for reserve (increases) or decreases, respectively, related to the guaranteed minimum death and income benefit, or GMDB / GMIB, features of our variable annuity products.

(3) Represents the impact of differences between actual gross profits for the period and the previously estimated expected gross profits for the period, as well as updates for current and future expected claims costs associated with the GMDB/GMIB features of our variable annuity products.

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The $22 million of net benefits and $145 million of net charges in the third quarter of 2012 and 2011, respectively, were primarily driven by the impact of market performance on customer accounts relative to our assumptions. Actual returns were higher than expected in the third quarter of 2012, which drove positive cumulative impacts to both the amortization of DAC and other costs and the reserves for the GMDB and GMIB features of our variable annuity contracts. Actual returns were lower than expected in the third quarter of 2011, which drove negative cumulative impacts for these items.

The $58 million net benefit and $23 million net charge in the third quarter of 2012 and 2011, respectively, relate to our annual review and update of assumptions, and reflect the impact of industry studies and our actual experience. The $58 million net benefit in the third quarter of 2012 was driven by the impacts of updates to our actuarial assumptions and other refinements, partially offset by lowering of economic assumptions, primarily reflecting reductions to our long-term interest and equity rate of return assumptions. The $23 million net charge in the third quarter of 2011 was also driven by the impacts of updates to both economic and actuarial assumptions.

The $260 million of net benefits in the third quarter of 2012 and $51 million of net charges in the third quarter of 2011, shown in the table above, reflect the quarterly adjustments for current period experience and other updates, also referred to as experience true-up adjustments. The favorable variance related to the amortization of DAC and DSI was primarily driven by differences in the change of the fair value of the hedge target liability and the change in the fair value of the hedge assets in the reinsurance affiliate, primarily due to differences in market conditions. For additional information regarding the net hedging impacts that are included in our best estimate of gross profits used to set amortization rates, see “—Accounting Policies & Pronouncements—Application of Critical Accounting Estimates.”

In addition to the current period impacts reflected in the table above, the changes to the estimated profitability of our business will also drive changes in our GMDB and GMIB reserves and the amortization of DAC and DSI in future periods.

For weighted average rate of return assumptions as of September 30, 2012, see “—Accounting Policies & Pronouncements—Application of Critical Accounting Estimates.” For additional information on our policy for amortizing DAC and other costs, and for estimating future expected claims costs associated with the GMDB and GMIB features of our variable annuity products, see our Annual Report on Form 10-K for the year ended December 31, 2011, under “—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Accounting Policies & Pronouncements—Application of Critical Accounting Estimates.”

Revenues

Revenues decreased $134 million, from $414 million for the third quarter of 2011 to $280 million for the third quarter of 2012.

Realized investment gains/losses, net, decreased by $117 million from a gain of $56 million for third quarter of 2011 to a loss of $61 million for the third quarter of 2012. This decrease was primarily driven by an unfavorable variance in the mark-to-market related to the embedded derivatives associated with our non-reinsured living benefit features and related hedges, as discussed above.

Policy charges and fee income and asset management fees and other income decreased by $14 million from $278 million for the third quarter of 2011 to $264 million for the third quarter of 2012. The decrease was primarily driven by a lower fees and asset management income due to lower average variable annuity asset balances in the third quarter of 2012 invested in the separate accounts due to negative net flows as a result of contractholder surrenders. There are limited offsetting inflows due to the discontinuation of new sales.

Benefits and Expenses

Benefits and expenses decreased $1,266 million from an expense of $1,134 million for the third quarter of 2011 to a benefit of $132 million for the third quarter of 2012.

Amortization of deferred policy acquisition costs decreased by $808 million, from an expense of $578 million for the third quarter of 2011 to a benefit of $230 million for third quarter of 2012, primarily due to lower DAC amortization related to the impact of the mark-to-market of the reinsured liability for living benefit embedded derivatives and related hedge positions and the impact of our quarterly adjustments to reflect current period experience and market performance as well as our annual assumption update, as discussed above.

Interest credited to policyholders’ account balances decreased $419 million, from an expense of $346 million for the third quarter of 2011 to a benefit of $73 million for third quarter of 2012, due to lower DSI amortization primarily related to the impact of the mark-to-market of the reinsured liability for living benefit embedded derivatives and related hedge positions and the impact of our quarterly adjustments to reflect current period experience and market performance as well as our annual assumption update, as discussed above. Also, interest credited to policyholders’ account balances decreased due to lower average crediting rates due to crediting rate resets.

Policyholders’ benefits decreased $15 million, from $93 million for the third quarter of 2011 to $78 million for the third quarter of 2012, primarily due to the adjustments to the reserves for the GMDB/GMIB benefit features of our variable annuity products to reflect current period experience and market performance as well as our annual assumption update, as discussed above.

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2012 versus 2011 Nine Month Comparison

Net Income

Net income increased $729 million from a net loss of $284 million for the nine months ended September 30, 2011 to income of $445 million for the nine months ended September 30, 2012. The increase is driven by $1,117 million higher income from operations before income taxes, partially offset by $388 million increase in income tax expense, as discussed below.

The increase in income from operations before taxes was primarily driven by lower amortization of DAC and DSI primarily related to the impact of the mark-to-market of the reinsured liability for living benefit embedded derivatives and related hedge positions, as discussed below. Also contributing to the increase was a favorable variance related to adjustments to the amortization of DAC and DSI, and to the reserves for the GMDB and GMIB features of our variable annuity products, primarily driven by the impact to the estimated profitability of the business of quarterly adjustments to reflect current period market performance and experience, as well as the annual review and update of assumptions Results for both years include the impact of these items which are discussed in more detail below.

Excluding the items discussed above, income from operations before taxes decreased $167 million compared to the nine months ended September 30, 2011, primarily driven by a decline in fees driven by lower average annuity account values invested in the separate account driven by negative net flows as a result of contractholder surrenders. There are limited offsetting inflows due to the discontinuation of new sales discussed above. Also contributing to the decrease was an unfavorable variance related to differences between the mark-to-market of the non-reinsured portion of the living benefit embedded derivative liability and related hedge positions primarily due to NPR gains in the prior year driven by Pre-NPR reserve increases resulting from unfavorable markets.

We amortize DAC and other costs over the expected lives of the contracts based on the level and timing of gross profits on the underlying product. In calculating gross profits, we consider mortality, persistency, and other elements as well as rates of return on investments associated with these contracts and include profits and losses related to these contracts 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 and other costs amortization pattern representative of the economics of the products.

As mentioned above, included in the favorable variance from lower amortization of DAC and DSI, was $711 million of lower amortization primarily related to the impact of the mark-to-market of the reinsured liability for living benefit embedded derivatives and related hedge positions. Lower amortization primarily relates to changes in the valuation of the reinsured living benefit liabilities related NPR, which we and the reinsurance affiliate believe to be non-economic, and choose not to hedge, as discussed above, and differences between the change in the fair value of the hedge target liability and the change in the fair value of the hedge assets in the reinsurance affiliate due to differences in market performance.

To reflect the NPR of our affiliates in the valuation of the embedded derivative liabilities, we incorporate an additional spread over LIBOR into the discount rate used in the valuation. The favorable variance from DAC and DSI amortization was driven by NPR losses in the reinsurance affiliate in the third quarter of 2012, which resulted in an amortization benefit compared to NPR gains in the third quarter of 2011 resulting in amortization expense. Negative NPR adjustments in the reinsurance affiliate in 2012 were primarily driven by a tightening of NPR spreads. NPR gains in the reinsurance affiliate in the third quarter of 2011 were driven by a higher base embedded derivative liability before NPR due to significant declines in risk-free interest rates and equity markets.

As shown in the following table, the income from operations for the nine months ended September 30, 2012 included $374 million of net benefits from adjustments to the amortization of DAC and DSI and the reserves for the GMDB and GMIB features of our variable annuity products compared to $224 million of net charges for the nine months ended September 30, 2011.

	Nine Months Ended September 30, 2012							Nine Months Ended September 30, 2011
	Amortization of DAC and Other Costs (1)		Reserves for GMDB / GMIB (2)			Total		Amortization of DAC and Other Costs (1)			Reserves for GMDB / GMIB (2)			Total
	(in thousands)
Quarterly market performance adjustment	$	19,906		21,643		$	41,549	$	(75,657	)		(62,473	)	$	(138,130	)
Annual Review/assumption update		122,132		(64,624	)		57,508		(28,513	)		5,649			(22,864	)
Quarterly adjustment for current period experience (3)		272,365		2,506			274,871		(65,541	)		2,172			(63,369	)
Total	$	414,403	$	(40,475	)	$	373,928	$	(169,711	)	$	(54,652	)	$	(224,363	)

(1) Amounts reflect (charges) or benefits for (increases) or decreases, respectively, in the amortization of deferred policy acquisition, or DAC, and other costs.

(2) Amounts reflect (charges) or benefits for reserve (increases) or decreases, respectively, related to the guaranteed minimum death and income benefit, or GMDB / GMIB, features of our variable annuity products.

(3) Represents the impact of differences between actual gross profits for the period and the previously estimated expected gross profits for the period, as well as updates for current and future expected claims costs associated with the GMDB/GMIB features of our variable annuity products.

The $42 million of net benefits and $138 million of net charges for the first nine months of 2012 and 2011, respectively, were primarily driven by the impact of market performance on customer accounts relative to our assumptions. Actual returns were higher than expected in 2012, which drove positive cumulative impacts to both the amortization of DAC and other costs and the reserves for the GMDB and GMIB features of our variable annuity contracts. Actual returns were lower than expected in 2011, which drove negative cumulative impacts for these items.

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The $58 million net benefit and $23 million net charge in the third quarter of 2012 and 2011, respectively, relate to our annual review and update of assumptions, and reflect the impact of industry studies and our actual experience. The $58 million net benefit in the third quarter of 2012 was driven by the impacts of updates to our actuarial assumptions and other refinements, partially offset by lowering of economic assumptions, primarily reflecting reductions to our long-term interest and equity rate of return assumptions. The $23 million net charge in the third quarter of 2011 was also driven by the impacts of updates to both economic and actuarial assumptions.

The $275 million benefit for the nine months ended September 30, 2012 and the $63 million charge for the nine months ended September 30, 2011 shown in the table above reflect the quarterly adjustments for current period experience, also referred to as actual experience true-up adjustments. The favorable variance related to the amortization of DAC and DSI was primarily driven by differences in the change of the fair value of the hedge target liability and the change in the fair value of the assets in the reinsurance affiliate, primarily due to differences in market conditions.

In addition to the current period impacts reflected in the table above, the changes to the estimated profitability of our business will also drive changes in our GMDB and GMIB reserves and the amortization of DAC and DSI in future periods.

Revenues

Revenues decreased $219 million, from $1,188 million for the nine months ended September 30, 2011 to $969 million for the nine months ended September 30, 2012.

Realized investment gains/losses, net, decreased by $146 million from a gain of $84 million for the nine months ended September 30, 2011 to a loss of $62 million for the nine months ended September 30, 2012. This decrease was primarily driven by an unfavorable variance in the mark-to-market related to the embedded derivatives associated with our non-reinsured living benefit features and related hedges, as discussed above.

Policy charges and fee income and Asset management fees and other income decreased $51 million, from $851 million for the nine months ended September 30, 2011 to $800 million for the nine months ended September 30, 2012 driven by lower fee and asset management income primarily driven by an decrease in average variable annuity asset balances invested in separate accounts, as discussed above. Partially offsetting the above decrease was a favorable variance of $42 million from lower market value adjustments related to the Company’s market value adjusted investment option (the “MVA option”) driven by differences in market conditions and transfers of assets to the separate account primarily due to the asset transfer feature.

Net investment income decreased $17 million from $231 million for the nine months ended September 30, 2011 to $214 million for the nine months ended September 30, 2012 as a result of lower reinvestment yields over the past year due to the low interest environment as well as lower general account assets due to the asset transfer feature, as discussed above.

Benefits and Expenses

Benefits and expenses decreased $1,335 million from $1,702 million for the nine months ended September 30, 2011 to $367 million for the nine months ended September 30, 2012.

Amortization of deferred policy acquisition costs decreased by $838 million, from an expense of $718 million for the nine months ended September 30, 2011 to a benefit of $120 million for the nine months ended September 30, 2012, primarily due to lower DAC amortization related to the impact of the mark-to-market of the reinsured liability for living benefit embedded derivatives and related hedge positions and quarterly adjustments to reflect current period experience and market performance as well as our annual assumption update, as discussed above.

Interest credited to policyholders’ account balances decreased $450 million, from $516 million for the nine months ended September 30, 2011 to $66 million for the nine months ended September 30, 2012, due to lower DSI amortization primarily related to the impact of the mark-to-market of the reinsured liability for living benefit embedded derivatives and related hedge positions and quarterly adjustments to reflect current period experience and market performance as well as our annual assumption update, as discussed above. Also contributing to the decrease was lower interest credited to policyholders’ account balances due to lower crediting rates driven by crediting rate resets as well as lower policyholder account balances due to the asset transfer feature.

Policyholders’ benefits decreased $24 million, from $135 million for the nine months ended September 30, 2011 to $111 million for the nine months ended September 30, 2012, primarily due to the adjustments to the reserves for the GMDB/GMIB benefit features of our variable annuity products related to our quarterly adjustments to reflect current period experience and market performance as well as our annual assumption update, as discussed above.

Income Taxes

The income tax provision amounted to an expense of $157 million and a benefit of $231 million for the nine months ended September 30, 2012 and 2011, respectively. The increase in income tax expense is primarily driven by pre-tax income in the current period compared to a pre-tax loss in the prior period.

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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 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 is not currently under audit by the IRS or any state or local jurisdiction for the years prior to 2009. The statute of limitations for the tax years 2009 through 2011 are still open for IRS examination. 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.

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 2011, current year results, and was adjusted to take into account the current year’s equity market performance. 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.

In August 2007, the IRS released Revenue Ruling 2007-54, which included, among other items, guidance on the methodology to be followed in calculating the DRD related to variable life insurance and annuity contracts. In September 2007, the IRS released Revenue Ruling 2007-61. Revenue Ruling 2007-61 suspended Revenue Ruling 2007-54 and informed taxpayers that the U.S. Treasury Department and the IRS intend to address through new guidance the issues considered in Revenue Ruling 2007-54, including the methodology to be followed in determining the DRD related to variable life insurance and annuity contracts. On February 13, 2012, the Obama Administration released the “General Explanations of the Administration’s Revenue Proposals.” One proposal would change 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 consolidated net income. These activities had no impact on the Company’s 2011 or first three quarters of 2012 results.

In 2009, the Company joined in filing the consolidated federal tax return with its parent, Prudential Financial. For tax years 2009 through 2011, the Company is participating in the IRS’s Compliance Assurance Program (“CAP”). Under CAP, the IRS assigns an examination team to review completed transactions contemporaneously during these tax years in order to reach agreement with the Company on how they should be reported in the tax returns. If disagreements arise, accelerated resolutions programs are available to resolve the disagreements in a timely manner before the tax returns are filed. It is management’s expectation this program will shorten the time period between the filing of the Company’s federal income tax returns and the IRS’s completion of its examination of the returns.

Liquidity and Capital Resources

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 operation of our business, fund business growth, and provide a cushion to withstand adverse circumstances. The ability to generate and maintain sufficient liquidity and capital depends on the profitability of our business, general economic conditions and our access to the capital markets through affiliates as described herein.

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 quarterly planning process. We believe that cash flows from the sources of funds presently available to us are sufficient to satisfy the current liquidity requirements of Prudential Financial, and the Company, including reasonably foreseeable stress scenarios.

Our capital management framework is primarily based on statutory risk based capital measures. In addition, we continue to use an economic capital framework for making certain capital decisions.

Capital Protection Framework

We employ a “Capital Protection Framework” to ensure the availability of capital resources to maintain adequate capitalization and competitive risk based capital ratios, including under reasonably foreseeable stress scenarios. The Capital Protection Framework incorporates the potential impact from market related stresses, including equity markets, interest rates, and credit losses. Potential sources of capital include on-balance sheet capital and proceeds from derivatives, reinsurance and contingent sources of capital. Although we continue to enhance our approach, we believe we currently have sufficient resources to maintain adequate capitalization and competitive risk based capital ratios under reasonably foreseeable stress scenarios.

Regulation under the Dodd-Frank Act

On October 19, 2012, Prudential Financial received notice that it is under consideration by the Financial Stability Oversight Council (the “Council”) for a proposed determination that it should be subject to stricter prudential regulatory standards and supervision by the Board of Governors of the Federal Reserve System pursuant to the Dodd-Frank Act (a “Covered Company”). The notice of consideration indicates that Prudential Financial is being reviewed in stage 3 of the three-stage process described in the Council’s interpretative guidance for Covered Company determinations and does not constitute a notice of a proposed determination. The prudential standards under the Dodd-Frank Act include requirements regarding risk-based

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capital and leverage, liquidity, stress-testing and other matters. See Item 1. Business -“Regulatory Environment” and Item IA. Risk Factors in Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 for information regarding the potential effects of the Dodd-Frank Act on the Company and its affiliates, including as a result of these stricter prudential standards.

The Company paid an extra-ordinary dividend of $270 million, $318 million and $248 million to our ultimate parent, Prudential Financial, on June 30, 2011, November 30, 2011 and June 29, 2012, respectively.

General 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. The results are affected substantially by the overall asset type and quality of our investments.

Cash Flow

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, and payments in connection with financing activities. As discussed above, in March 2010, the Company ceased offering its existing variable annuity products to new investors upon the launch of a new product line by certain affiliates. Therefore, the Company expects to continue to see the overall level of cash flows to decrease going forward as the book of business runs off.

We believe that the cash flows from our operations are adequate to satisfy our current liquidity requirements including under reasonably foreseeable stress scenarios. The continued adequacy of this liquidity will depend upon factors such as future securities market conditions, changes in interest rate levels, customer behavior, policyholder perceptions of our financial strength, and the relative safety of competing products, each of which could lead to reduced cash inflows or increased cash outflows. In addition, market volatility can impact the level of capital required to support our businesses. Our cash flows from investment activities result from repayments of principal, proceeds from maturities and sales of invested assets and investment income, net of amounts reinvested. The primary liquidity risks with respect to these cash flows are the risk of default by debtors or bond insurers, our counterparties’ willingness to extend repurchase and/or securities lending arrangements, commitments to invest and market volatility. We closely manage these risks through our credit risk management process and regular monitoring of our liquidity position.

In managing our liquidity, we also consider the risk of policyholder and contractholder withdrawals of funds earlier than our assumptions when selecting assets to support these contractual obligations. We use surrender charges and other contract provisions to mitigate the extent, timing and profitability impact of withdrawals of funds by customers from annuity contracts and deposit liabilities.

Gross account withdrawals amounted to approximately $1,803 million and $2,168 million as of September 30, 2012 and 2011, respectively. Because these withdrawals were consistent with our assumptions in asset/liability management, the associated cash outflows did not have a material adverse impact on our overall liquidity.

Liquid Assets

Liquid assets include cash, cash equivalents, short-term investments, fixed maturities that are not designated as held-to-maturity and public equity securities. As of September 30, 2012 and December 31, 2011, the Company had liquid assets of $4.7 billion and $5.6 billion, respectively, which includes a portion financed with asset-based financing. The portion of liquid assets comprised of cash and cash equivalents and short-term investments was $0.2 billion as of September 30, 2012 and December 31, 2011. We consider attributes of the various categories of liquid assets (for example, type of asset and credit quality) in calculating internal liquidity measures in order to evaluate the adequacy of our operations’ liquidity under a variety of stress scenarios. We believe that the liquidity profile of our assets is sufficient to satisfy current liquidity requirements, including under reasonably foreseeable stress scenarios.

Given the size and liquidity profile of our investment portfolios, we believe that claim experience varying from our projections does not constitute a significant liquidity risk. Our asset/liability management process takes into account the expected maturity of investments and expected claim payments as well as the specific nature and risk profile of the liabilities.

Prudential Funding, LLC

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

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Capital

The Risk Based Capital, or RBC, ratio is a primary measure by which we evaluate the capital adequacy of the Company. Prudential Financial manages its domestic insurance subsidiaries RBC ratios to a level that is consistent with the ratings targets for those subsidiaries. RBC is determined by statutory guidelines and formulas that consider 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. The RBC ratio calculations are intended to assist insurance regulators in measuring the adequacy of an insurer’s statutory capitalization. The RBC ratio is an annual calculation, however, as of September 30, 2012, we estimate that the RBC ratios for the Company would exceed the minimum level required by applicable insurance regulations. 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.

The level of statutory capital 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, credit quality migration of investment portfolio, among other items. Further, the recapture of business subject to reinsurance arrangements due to defaults by, or credit quality migration affecting, the reinsurers could result in higher required statutory capital levels. The level of statutory capital of the Company is also affected by statutory accounting rules which are subject to change by insurance regulators.

As part of its Capital Protection Framework, Prudential Financial has developed a broad view of the impact of market distress on the statutory capital of Prudential Financial and its subsidiaries, as a whole. The framework includes programs designed to mitigate the impact of a severe equity market stress event on the statutory capital of Prudential Financial and its subsidiaries, as whole. The program focuses on tail risk to protect statutory capital in a cost-effective manner under stress scenarios. To support this tail risk, in addition to holding on-balance sheet and other contingent sources of capital, we purchase equity index-linked derivatives that are designed to mitigate the impact of a severe equity market stress event on statutory capital. Prudential Financial assesses the composition of the hedging program on an ongoing basis and may change it from time to time based on an evaluation of its risk position or other factors.

Additionally, we also manage certain risks associated with our variable annuity products through affiliated reinsurance arrangements. We reinsure variable annuity living benefit guarantees to a captive reinsurance company, Pruco Re. Effective as of July 1, 2011, Pruco Re domiciled from Bermuda to Arizona. At this time, Pruco Re continues to maintain the statutory reserve credit trust for business reinsured from the Company.

Arizona Department of Insurance reinsurance credit reserve requirements can move materially in either direction due to changes in equity markets and interest rates, actuarial assumptions and other factors. Higher statutory reinsurance credit reserve requirements would require Pruco Re to deposit additional assets in the statutory reserve credit trusts, while lower statutory reinsurance credit reserve requirements would allow assets to be removed from the statutory reserve credit trusts. We expect Pruco Re would satisfy those additional needs through a combination of funding the reinsurance credit trusts with available cash, loans from Prudential Financial and/or affiliates and by re-hypothecating assets that were otherwise pledged to Pruco Re under hedging positions related to our living benefit features. Pruco Re also continues to evaluate other options to address reserve credit needs such as obtaining letters of credit. Favorable equity markets in the first nine months of 2012 led to a decrease in our need to fund the captive reinsurance trusts by an amount of $136 million.

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 and Exchange Act of 1934, as amended, or the “Exchange Act”, as of September 30, 2012. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2012, 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 September 30, 2012 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

We are subject to legal and regulatory actions in the ordinary course of our businesses, including class action lawsuits. Our pending legal and regulatory actions include proceedings specific to the Company and proceedings generally applicable to business practices in the industry in which we operate. We may be subject to class action lawsuits and other litigation alleging, among other things, that we made improper or inadequate disclosures in connection with the sale of annuity products or charged excessive or impermissible fees on these products, recommended unsuitable products to customers, mishandled customer accounts or breached fiduciary duties to customers. We are also subject to litigation arising out of our general business activities, such as our investments and contracts, and could be exposed to claims or litigation concerning certain business or process patents. Regulatory authorities from time to time make inquiries and conduct investigations and examinations relating particularly to us and our products. In addition, we, along with other participants in the business in which we engage, 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 our pending legal and regulatory actions, parties are seeking large and/or indeterminate amounts, including punitive or exemplary damages. The outcome of litigation or regulatory matter, and the amount or range of potential loss at any particular time, is inherently uncertain.

For additional information regarding our litigation and regulatory matters accrual methodology and our estimated range of reasonably possible losses in excess of accruals established, as well as additional discussion on our litigation and regulatory matters referred to below, see Note 6 to the Unaudited Interim Financial Statements included herein.

In September 2012, the Complaint filed in Total Asset Recovery v. MetLife, Inc., et al., Prudential Financial, Inc., The Prudential Insurance Company of America and Prudential Holdings, LLC, filed in the Circuit Court of Cook County, Illinois, was withdrawn without prejudice.

Our litigation and regulatory matters are subject to many uncertainties, and given their complexity and scope, their outcome cannot be predicted. It is possible that our results of operations or cash flow in a particular quarterly or annual period could be materially affected by an ultimate unfavorable resolution of pending litigation or regulatory matters depending, in part, upon the results of operations or cash flow 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 our 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 our financial position. See Note 6 to the Unaudited Interim Financial Statements included herein for additional discussion of our litigation and regulatory matters and audits and inquiries concerning the Company’s handling of unclaimed property.

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, 2011. 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 and in our Annual Report on Form 10-K for the year ended December 31, 2011.

The risk factor contained in our 2011 Form 10-K titled “The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act will subject us to substantial additional federal regulation and we cannot predict the effect on our business, results of operations, cash flows or financial condition” is hereby updated to note that on October 19, 2012, Prudential Financial received notice that it is under consideration by the Financial Stability Oversight Council for designation as a non-bank financial company to be subject to stricter prudential regulatory standards and supervision by the Board of Governors of the Federal Reserve System pursuant to the Dodd-Frank Act.

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Item 6. Exhibits

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.

In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to the Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or Exchange Act, except as shall be expressly set forth by specific reference in such filing.

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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/ Thomas J. Diemer
	Thomas J. Diemer
	Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

November 13, 2012

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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.

In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to the Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or Exchange Act, except as shall be expressly set forth by specific reference in such filing.

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