10-Q 1 palacform10q-2q2018.htm 2Q 2018 10-Q Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________ 
FORM 10-Q
______________________________ 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from                      to                     
Commission File Number 033-44202
_____________________________________ 
Prudential Annuities Life Assurance Corporation
(Exact Name of Registrant as Specified in its Charter)
Arizona
 
06-1241288
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer Identification Number)
One Corporate Drive
Shelton, Connecticut 06484
(203) 926-1888
(Address and Telephone Number of Registrant’s Principal Executive Offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of the Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer", "accelerated filer", "smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
x
(Do not check if a smaller reporting company)
 
 
 
 
 
 
 
Smaller reporting company
¨
 
 
 
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of August 10, 2018, 25,000 shares of the registrant’s Common Stock (par value $100) consisting of 100 voting shares and 24,900 non-voting shares were outstanding. As of such date, Prudential Annuities, Inc., an indirect wholly-owned subsidiary of Prudential Financial, Inc., a New Jersey corporation, owned all of the Registrant’s Common Stock.
Prudential Annuities Life Assurance Corporation meets the conditions set
forth in General Instruction (H) (1) (a) and (b) on Form 10-Q and
is therefore filing this Form 10-Q in the reduced disclosure format.


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TABLE OF CONTENTS
 
 
 
 
Page
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 1.
 
Item 1A.
 
Item 6.



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FORWARD LOOKING STATEMENTS
Certain of the statements included in this Quarterly Report on Form 10-Q, including but not limited to those in Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Prudential Annuities Life Assurance Corporation. There can be no assurance that future developments affecting Prudential Annuities Life Assurance Corporation will be those anticipated by management. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (1) losses on investments or financial contracts due to deterioration in credit quality or value, or counterparty default; (2) losses on insurance products due to mortality experience or policyholder behavior experience that differs significantly from our expectations when we price our products; (3) changes in interest rates and equity prices that may (a) adversely impact the profitability of our products, the value of separate accounts supporting these products or the value of assets we manage, (b) result in losses on derivatives we use to hedge risk or increase collateral posting requirements and (c) limit opportunities to invest at appropriate returns; (4) guarantees within certain of our products, in particular our variable annuities, which are market sensitive and may decrease our earnings or increase the volatility of our results of operations or financial position; (5) liquidity needs resulting from (a) derivative collateral market exposure, (b) asset/liability mismatches, (c) the lack of available funding in the financial markets or (d) unexpected cash demands due to severe mortality calamity or lapse events; (6) financial or customer losses, or regulatory and legal actions, due to inadequate or failed processes or systems, human error or misconduct, and external events, such as (a) disruption of our systems and data, (b) an information security breach, (c) a failure to protect the privacy of sensitive data or (d) reliance on third-parties, including to distribute our products; (7) changes in the regulatory landscape, including related to (a) regulation under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (b) changes in tax laws, (c) fiduciary rule developments, (d) state insurance laws and developments regarding group-wide supervision, capital and reserves, and (e) privacy and cybersecurity regulation; (8) technological changes which may adversely impact companies in our investment portfolio or cause insurance experience to deviate from our assumptions; (9) ratings downgrades; (10) market conditions that may adversely affect the sales or persistency of our products; (11) competition; and (12) reputational damage. Prudential Annuities Life Assurance Corporation does not intend, and is under no obligation, to update any particular forward-looking statement included in this document. See “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2017 for discussion of certain risks relating to our business and investment in our securities.


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PART I - Financial Information
Item 1. Financial Statements                                     
Prudential Annuities Life Assurance Corporation
Unaudited Interim Consolidated Statements of Financial Position
June 30, 2018 and December 31, 2017 (in thousands, except share amounts)
 
June 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost, 2018: $9,745,836; 2017: $10,145,266)
$
9,386,801

 
$
10,110,786

Fixed maturities, trading, at fair value (amortized cost, 2018: $271,225; 2017: $161,393)(1)
270,750

 
166,360

Equity securities, at fair value (cost, 2018: $10,548; 2017: $11,614)(1)
14,680

 
15,375

Commercial mortgage and other loans
1,376,710

 
1,387,012

Policy loans
12,582

 
12,558

Short-term investments
285,452

 
711,071

Other invested assets (includes $7,298 and $151,481 measured at fair value at June 30, 2018 and December 31, 2017, respectively)(1)
211,819

 
335,811

Total investments
11,558,794

 
12,738,973

Cash and cash equivalents
1,380,913

 
1,639,939

Deferred policy acquisition costs
4,502,165

 
4,596,565

Accrued investment income
83,912

 
88,331

Reinsurance recoverables
520,111

 
563,428

Income taxes
1,126,161

 
1,116,735

Value of business acquired
35,938

 
35,109

Deferred sales inducements
951,447

 
1,020,786

Receivables from parent and affiliates
51,809

 
49,351

Other assets
108,594

 
121,086

Separate account assets
35,584,480

 
37,990,547

TOTAL ASSETS
$
55,904,324

 
$
59,960,850

LIABILITIES AND EQUITY
 
 
 
LIABILITIES
 
 
 
Future policy benefits
$
7,194,626

 
$
9,132,569

Policyholders’ account balances
4,964,987

 
4,846,152

Payables to parent and affiliates
123,883

 
36,026

Cash collateral for loaned securities
11,539

 
17,383

Short-term debt
187,800

 
43,734

Long-term debt
787,595

 
928,165

Reinsurance payables
247,971

 
262,588

Other liabilities
417,835

 
422,636

Separate account liabilities
35,584,480

 
37,990,547

Total liabilities
49,520,716

 
53,679,800

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 10)

 

EQUITY
 
 
 
Common stock, ($100 par value; 25,000 shares authorized, issued and outstanding)
2,500

 
2,500

Additional paid-in capital
6,595,436

 
7,145,436

Retained earnings/(accumulated deficit)
98,514

 
(776,762
)
Accumulated other comprehensive income (loss)
(312,842
)
 
(90,124
)
Total equity
6,383,608

 
6,281,050

TOTAL LIABILITIES AND EQUITY
$
55,904,324

 
$
59,960,850


(1)
Prior period amounts have been reclassified to conform to current period presentation. See "Adoption of ASU 2016-01" in Note 2 for details.


See Notes to Unaudited Interim Consolidated Financial Statements

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Prudential Annuities Life Assurance Corporation
Unaudited Interim Consolidated Statements of Operations and Comprehensive Income (Loss)
Three and Six Months Ended June 30, 2018 and 2017 (in thousands)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
REVENUES
 
 
 
 
 
 
 
Premiums
$
13,295

 
$
17,334

 
$
34,329

 
$
36,161

Policy charges and fee income
547,343

 
553,097

 
1,102,633

 
1,090,403

Net investment income
100,160

 
104,108

 
196,871

 
206,357

Asset administration fees and other income
98,603

 
105,869

 
198,140

 
204,671

Realized investment gains (losses), net:
 
 
 
 
 
 
 
Other-than-temporary impairments on fixed maturity securities
(151
)
 
(2,073
)
 
(437
)
 
(4,733
)
Other-than-temporary impairments on fixed maturity securities transferred to other comprehensive income (loss)
0

 
(100
)
 
0

 
(95
)
Other realized investment gains (losses), net
10,010

 
(1,504,901
)
 
568,986

 
(1,492,761
)
Total realized investment gains (losses), net
9,859

 
(1,507,074
)
 
568,549

 
(1,497,589
)
Total revenues
769,260

 
(726,666
)
 
2,100,522

 
40,003

BENEFITS AND EXPENSES
 
 
 
 
 
 
 
Policyholders’ benefits
28,667

 
49,422

 
63,693

 
66,195

Interest credited to policyholders’ account balances
62,020

 
(125,315
)
 
131,590

 
(89,932
)
Amortization of deferred policy acquisition costs
167,392

 
(371,567
)
 
323,825

 
(306,175
)
Commission expense
216,356

 
214,580

 
451,677

 
436,993

General, administrative and other expenses
43,184

 
67,638

 
86,161

 
114,618

Total benefits and expenses
517,619

 
(165,242
)
 
1,056,946

 
221,699

INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES
251,641

 
(561,424
)
 
1,043,576

 
(181,696
)
Income tax expense (benefit)
49,095

 
(160,841
)
 
205,351

 
(43,471
)
NET INCOME (LOSS)
$
202,546

 
$
(400,583
)
 
$
838,225

 
$
(138,225
)
Other comprehensive income (loss), before tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(361
)
 
53

 
(1,128
)
 
64

Net unrealized investment gains (losses)
(58,039
)
 
181,013

 
(234,318
)
 
235,360

Total
(58,400
)
 
181,066

 
(235,446
)
 
235,424

Less: Income tax expense (benefit) related to other comprehensive income (loss)
(12,265
)
 
63,372

 
(49,445
)
 
82,398

Other comprehensive income (loss), net of tax
(46,135
)
 
117,694

 
(186,001
)
 
153,026

Comprehensive income (loss)
$
156,411

 
$
(282,889
)
 
$
652,224

 
$
14,801















See Notes to Unaudited Interim Consolidated Financial Statements

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Prudential Annuities Life Assurance Corporation
Unaudited Interim Consolidated Statements of Equity
Six Months Ended June 30, 2018 and 2017 (in thousands)
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings / (Accumulated Deficit)
 
Accumulated Other Comprehensive Income (Loss)
 
Total Equity  
Balance, December 31, 2017
$
2,500

 
$
7,145,436

 
$
(776,762
)
 
$
(90,124
)
 
$
6,281,050

Cumulative effect of adoption of ASU 2016-01
 
 
 
 
337

 
(3
)
 
334

Cumulative effect of adoption of ASU 2018-02
 
 
 
 
36,714

 
(36,714
)
 
0

Return of capital
 
 
(550,000
)
 
 
 
 
 
(550,000
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
838,225

 
 
 
838,225

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
(186,001
)
 
(186,001
)
Total comprehensive income (loss)

 

 

 

 
652,224

Balance, June 30, 2018
$
2,500

 
$
6,595,436

 
$
98,514

 
$
(312,842
)
 
$
6,383,608

 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings / (Accumulated Deficit)
 
Accumulated Other Comprehensive Income (Loss)
 
Total Equity  
Balance, December 31, 2016
$
2,500

 
$
8,095,436

 
$
(693,258
)
 
$
(314,948
)
 
$
7,089,730

Return of capital
 
 
(100,000
)
 
 
 
 
 
(100,000
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
(138,225
)
 
 
 
(138,225
)
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
153,026

 
153,026

Total comprehensive income (loss)

 

 

 

 
14,801

Balance, June 30, 2017
$
2,500

 
$
7,995,436

 
$
(831,483
)
 
$
(161,922
)
 
$
7,004,531















See Notes to Unaudited Interim Consolidated Financial Statements

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Prudential Annuities Life Assurance Corporation
Unaudited Interim Consolidated Statements of Cash Flows
Six Months Ended June 30, 2018 and 2017 (in thousands)
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income (loss)
$
838,225

 
$
(138,225
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

Policy charges and fee income
(1,487
)
 
(663
)
Realized investment (gains) losses, net
(568,549
)
 
1,497,589

Depreciation and amortization
3,748

 
(4,690
)
Interest credited to policyholders’ account balances
131,590

 
(89,932
)
Change in:


 


Future policy benefits
516,173

 
484,283

Accrued investment income
4,419

 
143

Net receivables from/payables to parent and affiliates
(5,627
)
 
3,516

Deferred sales inducements
(1,130
)
 
(534
)
Deferred policy acquisition costs
149,133

 
(446,552
)
Income taxes
39,928

 
(306,403
)
Reinsurance recoverables, net
(16,443
)
 
7,319

Derivatives, net
(1,599,193
)
 
(60,561
)
Deferred (gain)/loss on reinsurance
(14,645
)
 
21,386

Other, net
77,195

 
50,281

Cash flows from (used in) operating activities
(446,663
)
 
1,016,957

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from the sale/maturity/prepayment of:

 

Fixed maturities, available-for-sale
1,684,043

 
581,713

Fixed maturities, trading(1)
99,590

 
23

Equity securities(1)
3,040

 
1,653

Commercial mortgage and other loans
105,318

 
39,646

Policy loans
447

 
846

Other invested assets(1)
2,678

 
69,666

Short-term investments
707,632

 
1,530,778

Payments for the purchase/origination of:


 


Fixed maturities, available for sale
(1,327,238
)
 
(757,926
)
Fixed maturities, trading
(208,007
)
 
0

Equity securities(1)
(1,625
)
 
(1,135
)
Commercial mortgage and other loans
(102,854
)
 
(167,107
)
Policy loans
(104
)
 
(295
)
Other invested assets(1)
(30,323
)
 
(3,830
)
Short-term investments
(281,476
)
 
(585,836
)
Notes receivable from parent and affiliates, net
2,919

 
635

Derivatives, net
19,801

 
(12,616
)
Other, net
(69
)
 
2,989

Cash flows from (used in) investing activities
673,772

 
699,204

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Cash collateral for loaned securities
(5,844
)
 
9,679

Net increase/(decrease) in short-term borrowing
3,497

 
(28,101
)
Drafts outstanding
1,754

 
(6,703
)
Distribution to Parent
(550,000
)
 
(100,000
)
Policyholders' account deposits
1,444,673

 
1,253,531

Ceded policyholders' account deposits
(27,870
)
 
(3,925
)
Policyholders' account withdrawals
(1,368,264
)
 
(1,323,972
)
Ceded policyholders' account withdrawals
15,919

 
13,562

Cash flows from (used in) financing activities
(486,135
)
 
(185,929
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(259,026
)
 
1,530,232

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
1,639,939

 
1,848,039

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
1,380,913

 
$
3,378,271


(1)
Prior period amounts have been reclassified to conform to current period presentation. See Note 2 for details.

Significant Non-Cash Transactions

There were no significant non-cash transactions for the six months ended June 30, 2018 and 2017.
See Notes to Unaudited Interim Consolidated Financial Statements

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




1.    BUSINESS AND BASIS OF PRESENTATION

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

PALAC has one subsidiary, which began operating in 2018 for the purpose of holding agricultural properties in the State of Florida. PALAC and its subsidiary are together referred to as the "Company”, "we" or "our" and all financial information is shown on a consolidated basis.

The Company has developed long-term savings and retirement products, which were distributed through its affiliated broker/dealer company, Prudential Annuities Distributors, Inc. (“PAD”). The Company issued variable and fixed deferred and immediate annuities for individuals and groups in the United States of America, District of Columbia and Puerto Rico. In addition, the Company has a relatively small in force block of variable life insurance policies. The Company stopped actively selling such products in March 2010.

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

The Company has resumed offering annuity products to new investors (except in New York). It launched a new fixed index annuity in January 2018 and a new deferred income annuity in March 2018.

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.

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

Variable Annuities Recapture

Through March 31, 2016, the Company reinsured the majority of its variable annuity living benefit guarantees to its affiliated companies, Pruco Reinsurance, Ltd. ("Pruco Re") and Prudential Insurance. Effective April 1, 2016, the Company recaptured the risks related to its variable annuity living benefit guarantees that were previously reinsured to Pruco Re and Prudential Insurance. In addition, the Company reinsured the variable annuity base contracts, along with the living benefit guarantees, from Pruco Life, excluding the PLNJ business which was reinsured to Prudential Insurance, under coinsurance and modified coinsurance agreements. This reinsurance agreement covers new and in force business and excludes business reinsured externally. The product risks related to the reinsured business are being managed in the Company. In addition, the living benefit hedging program related to the reinsured living benefit guarantees is being managed within the Company. These series of transactions are collectively referred to as the "Variable Annuities Recapture".


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


Basis of Presentation

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

In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations have been made. All such adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Company’s Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

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 deferred 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 accruals for contingent liabilities, including estimates for losses in connection with unresolved legal and regulatory matters.

Reclassifications

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

2.    SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS

Recent Accounting Pronouncements
Changes to U.S. GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of accounting standards updates ("ASU") to the FASB Accounting Standards Codification. The Company considers the applicability and impact of all ASU. ASU listed below include those that have been adopted during the current fiscal year and/or those that have been issued but not yet adopted as of the date of this filing. ASU not listed below were assessed and determined to be either not applicable or not material.

Adoption of ASU 2016-01

Effective January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities using a modified retrospective method. Adoption of this ASU impacted the Company’s accounting and presentation related to equity investments. The most significant impact is that the changes in fair value of equity securities previously classified as “available for sale” are to be reported in net income within “Asset administration fees and other income” in the Consolidated Statements of Operations. Prior to this, the changes in fair value on equity securities classified as “available for sale” were reported in “Accumulated other comprehensive income”.

The impacts of this ASU on the Company’s Consolidated Financial Statements can be categorized as follows: (1) Changes to the presentation within the Consolidated Statements of Financial Position; (2) Cumulative-effect Adjustment Upon Adoption; and (3) Changes to Accounting Policies. Each of these components is described below. This section is meant to serve as an update to, and should be read in conjunction with Note 2 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

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



(1) Changes to the presentation within the Consolidated Statements of Financial Position

Because of the fundamental accounting changes as described in section "(3) Changes to Accounting Policies" below, the Company determined that changes to the presentation of certain balances in the investment section of the Company’s Consolidated Statements of Financial Position were also necessary to maintain clarity and logical presentation. The table below illustrates these changes by presenting the balances as previously reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 and the reclassifications that were made, along with a footnote explanation of each reclassification.
 
December 31, 2017
 
As previously reported
 
Reclassifications
 
As currently reported
Statement of Financial Position Line Items
 
(1)
 
(2)
 
(3)
 
 
(in thousands)
Fixed maturities, available-for-sale, at fair value
$
10,110,786

 
 
 
 
 
 
 
$
10,110,786

*Fixed maturities, trading, at fair value
0

 
 
 
166,360

 
 
 
166,360

Trading account assets, at fair value
181,717

 
 
 
(181,717
)
 
 
 
0

Equity securities, available-for-sale, at fair value
18

 
(18
)
 
 
 
 
 
0

*Equity securities, at fair value
0

 
18

 
15,357

 
 
 
15,375

Commercial mortgage and other loans
1,387,012

 
 
 
 
 
 
 
1,387,012

Policy loans
12,558

 
 
 
 
 
 
 
12,558

Short-term investments
711,071

 
 
 
 
 
 
 
711,071

Other long-term investments
335,811

 
 
 
 
 
(335,811
)
 
0

*Other invested assets
0

 
 
 
 
 
335,811

 
335,811

Total investments
$
12,738,973

 
$
0

 
$
0

 
$
0

 
$
12,738,973

* - New line item effective January 1, 2018.
Strikethrough - Eliminated line item effective January 1, 2018.

(1)
Retitled “Equity securities, available-for-sale, at fair value” to “Equity securities, at fair value” as equity securities can no longer be described as available-for-sale.
(2)
Eliminated the line item “Trading account assets, at fair value” and reclassified each component to another line item.
(3)
Retitled “Other long-term investments” to “Other invested assets”.

(2) Cumulative-effect Adjustment Upon Adoption

The provisions of ASU 2016-01 require that the Company apply the amendments through a cumulative-effect adjustment to the Consolidated Statements of Financial Position as of the beginning of the fiscal year of adoption. The following table illustrates the impact on the Company’s Consolidated Statement of Financial Position as a result of recording this cumulative-effect adjustment on January 1, 2018.

10

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


Summary of ASU 2016-01 Transition Impacts on the Consolidated Statement
of Financial Position upon Adoption on January 1, 2018
(in thousands)
 
Increase / (Decrease)
Other invested assets
$
423

Total assets
$
423

Income taxes
$
89

Total liabilities
89

Accumulated other comprehensive income (loss)
(3
)
Retained earnings
337

Total equity
334

Total liabilities and equity
$
423


(3) Changes to Accounting Policies

This section summarizes the changes in our accounting policies resulting from the adoption of ASU 2016-01 as well as an update to the components of the financial statement line items impacted by the Company’s Consolidated Statements of Financial Position presentation changes described above.

ASSETS

Fixed maturities, trading is a new financial statement line item comprised of fixed maturities that are carried at fair value. Prior to the adoption of the standard, these fixed maturities were reported in “Trading account assets, at fair value”. Realized and unrealized gains and losses on these investments are reported in “Asset administration fees and other income”, and interest and dividend income from these investments is reported in “Net investment income”.

Equity securities, at fair value is the new title of the financial statement line item formerly titled “Equity securities, available for sale, at fair value”. As a result of the adoption of the standard, equity securities previously reported in “Trading account assets, at fair value” were reclassified to “Equity securities, at fair value”. The retitled financial statement line is comprised of common stock, mutual fund shares, and preferred stock, which are carried at fair value. Realized and unrealized gains and losses on these investments are reported in “Asset administration fees and other income”, and dividend income is reported in “Net investment income” on the ex-dividend date. Prior to the adoption of the standard, for the equity investments reported in the financial statement line formerly titled “Equity securities, available for sale, at fair value”, the associated net realized gains and losses were included in “Realized investment gains (losses), net” and the associated net unrealized gains and losses were included in “Accumulated other comprehensive income (loss)” (“AOCI”). In addition, with the adoption of the standard, the identification of OTTI for these investments is no longer needed as all of these investments are now measured at fair value with changes in fair value reported in earnings.

Other invested assets is the new title of the financial statement line formerly titled “Other long-term investments”. Investments previously reported in “Other long-term investments” were reclassified to “Other invested assets”. The retitled financial statement line consists of the Company’s non-coupon investments in Limited Partnerships and Limited Liability Companies ("LPs/LLCs") (other than operating joint ventures), wholly-owned investment real estate and derivative assets. LPs/LLCs interests are accounted for using either the equity method of accounting, or at fair value with changes in fair value reported in “Asset administration fees and other income”. Prior to the adoption of the standard, the Company applied the cost method of accounting for certain LPs/LLCs interest when its partnership interest was considered minor. The standard effectively eliminated the cost method of accounting for these equity investments. The Company’s income from investments in LPs/LLCs accounted for using the equity method, other than the Company’s investments in operating joint ventures, 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 (including assessment for OTTI), the Company uses financial information provided by the investee, generally on a one to three month lag. For the investments reported at fair value with changes in fair value reported in current earnings, the associated realized and unrealized gains and losses are reported in “Asset administration fees and other income”.


11

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


REVENUES AND BENEFITS AND EXPENSES

Asset administration fees and other income principally includes asset-based asset management fees, which are recognized in the period in which the services are performed. This financial statement line also includes realized and unrealized gains or losses from investments reported as “Fixed maturities, trading”, “Equity securities, at fair value”, and “Other invested assets” that are measured at fair value.

Other ASU adopted during the six months ended June 30, 2018.
Standard
 
Description
 
Effective date and method of adoption
 
Effect on the financial statements or other significant matters
ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
 
The ASU is based on the core principle that revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The standard also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, and assets recognized from the costs to obtain or fulfill a contract with a customer. Revenue recognition for insurance contracts and financial instruments is explicitly scoped out of the standard.
 
January 1, 2018 using the modified retrospective method which will
include a cumulative-effect
adjustment on the
balance sheet as of
the beginning of the fiscal year of
adoption.
 
Adoption of the ASU did not have an impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.
ASU 2016-15,
Statement of Cash
Flows (Topic 230):
Classification of Certain Cash Receipts and Cash
Payments (a
Consensus of the
Emerging Issues
Task Force)
 
This ASU addresses diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard provides clarity on the treatment of eight specifically defined types of cash inflows and outflows.
 
January 1, 2018 using the retrospective method (with early adoption permitted provided that all amendments are adopted in the same period).
 
Adoption of the ASU did not have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.

12

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


ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash
 
In November 2016, the FASB issued this ASU to address diversity in practice from entities classifying and presenting transfers between cash and restricted cash as operating, investing, or financing activities, or as a combination of those activities in the Statement of Cash Flows. The ASU requires entities to show the changes in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents in the Statement of Cash Flows. As a result, transfers between such categories will no longer be presented in the Statement of Cash Flows.
 
January 1, 2018 using the retrospective method (with early adoption permitted).
 
Adoption of the ASU did not have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.
ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

 
In February 2018, this ASU was issued following the enactment of the Tax Act of 2017. This ASU allows an entity to elect a reclassification from accumulated other comprehensive income to retained earnings for stranded effects resulting from the Tax Act of 2017.

 
January 1, 2019 with early adoption permitted. The ASU should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act of 2017 is recognized.

 
The Company early adopted the ASU effective January 1, 2018 and elected to apply the ASU in the period of adoption subsequent to recording the adoption impacts of ASU 2016-01 as described above. As a result, the Company reclassified stranded effects resulting from the Tax Act of 2017 by decreasing accumulated other comprehensive income and increasing retained earnings, each
by $36.7 million. Stranded effects unrelated to the Tax Act of 2017 are generally released from accumulated other comprehensive income when an entire portfolio of the type of item related to the
stranded effect is liquidated, sold or extinguished (i.e., portfolio approach).


13

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


ASU issued but not yet adopted as of June 30, 2018
Standard
 
Description
 
Effective date and method of adoption
 
Effect on the financial statements or other significant matters
ASU 2016-13,
Financial Instruments-Credit Losses (Topic 326):
Measurement of
Credit Losses on
Financial
Instruments
 
This ASU provides a new current expected credit loss model to account for credit losses on certain financial assets and off-balance sheet exposures (e.g., loans held for investment, debt securities held to maturity, reinsurance receivables, net investments in leases and loan commitments). The model requires an entity to estimate lifetime credit losses related to such financial assets and exposures based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The standard also modifies the current other-than-temporary impairment standard for available-for-sale debt securities to require the use of an allowance rather than a direct write down of the investment, and replaces existing standard for purchased credit deteriorated loans and debt securities.
 
January 1, 2020 using the modified retrospective method which will
include a cumulative-effect
adjustment on the
balance sheet as of
the beginning of the fiscal year of
adoption. However,
prospective application is required for purchased credit deteriorated assets previously accounted for under ASU 310-30 and for debt securities for which an other-than-temporary-impairment was recognized prior to the date of adoption. Early
adoption is permitted
beginning January 1, 2019.
 
The Company is currently assessing the impact of the ASU on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.
ASU 2017-08,
Receivables -
Nonrefundable Fees
and Other Costs
(Subtopic 310-20)
Premium
Amortization on
Purchased Callable
Debt Securities
 
This ASU requires certain premiums on callable debt securities to be amortized to the earliest call date.

 
January 1, 2019 using the modified
retrospective method (with early adoption
permitted) which will include a
cumulative-effect
adjustment on the
balance sheet as of
the beginning of the fiscal year of
adoption.
 
The Company does not expect the adoption of the ASU to have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.

ASU 2017-12,
Derivatives and
Hedging (Topic
815): Targeted
Improvements to
Accounting for
Hedging Activities
 
This ASU makes targeted changes to the existing hedge accounting model to better portray the economics of an entity’s risk management activities and to simplify the use of hedge accounting.
 
January 1, 2019 using the modified
retrospective method (with early adoption permitted) which will include a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption.
 
The Company does not expect the adoption of the ASU to have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.

14

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


3.    INVESTMENTS

Fixed Maturity Securities

The following tables set forth information relating to fixed maturity securities (excluding investments classified as trading), as of the dates indicated:
 
June 30, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
OTTI
in AOCI(3)
 
(in thousands)
Fixed maturities, available-for-sale:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
4,454,929

 
$
12,894

 
$
348,894

 
$
4,118,929

 
$
0

Obligations of U.S. states and their political subdivisions
134,520

 
864

 
2,271

 
133,113

 
0

Foreign government bonds
194,442

 
4,527

 
4,108

 
194,861

 
0

Public utilities
565,135

 
12,771

 
13,044

 
564,862

 
0

Redeemable preferred stock
29,465

 
0

 
639

 
28,826

 
0

All other U.S. public corporate securities
1,445,435

 
29,964

 
37,128

 
1,438,271

 
0

All other U.S. private corporate securities
862,681

 
16,630

 
18,876

 
860,435

 
0

All other foreign public corporate securities
285,294

 
2,217

 
5,674

 
281,837

 
0

All other foreign private corporate securities
632,478

 
15,099

 
12,458

 
635,119

 
0

Asset-backed securities(1)
543,879

 
3,832

 
1,276

 
546,435

 
(16
)
Commercial mortgage-backed securities
503,358

 
1,733

 
14,160

 
490,931

 
0

Residential mortgage-backed securities(2)
94,220

 
1,155

 
2,193

 
93,182

 
0

Total fixed maturities, available-for-sale
$
9,745,836

 
$
101,686

 
$
460,721

 
$
9,386,801

 
$
(16
)

(1)
Includes credit-tranched securities collateralized by loan obligations, sub-prime mortgages, auto loans, credit cards, education loans and other asset types.
(2)
Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
(3)
Represents the amount of unrealized losses remaining in AOCI, from the impairment measurement date. Amount excludes $0.6 million of net unrealized gains on impaired available-for-sale securities relating to changes in the value of such securities subsequent to the impairment measurement date.


15

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


 
December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
OTTI
in AOCI(3)
 
(in thousands)
Fixed maturities, available-for-sale:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
5,059,168

 
$
9,109

 
$
236,627

 
$
4,831,650

 
$
0

Obligations of U.S. states and their political subdivisions
102,709

 
2,089

 
158

 
104,640

 
0

Foreign government bonds
133,859

 
6,878

 
432

 
140,305

 
0

Public utilities
567,829

 
31,414

 
2,058

 
597,185

 
0

Redeemable preferred stock
29,504

 
615

 
59

 
30,060

 
0

All other U.S. public corporate securities
1,473,761

 
77,379

 
3,416

 
1,547,724

 
0

All other U.S. private corporate securities
938,144

 
35,327

 
3,795

 
969,676

 
0

All other foreign public corporate securities
194,201

 
5,663

 
918

 
198,946

 
0

All other foreign private corporate securities
638,785

 
38,030

 
3,231

 
673,584

 
0

Asset-backed securities(1)
341,277

 
4,438

 
128

 
345,587

 
(17
)
Commercial mortgage-backed securities
502,695

 
7,334

 
4,345

 
505,684

 
0

Residential mortgage-backed securities(2)
163,334

 
2,950

 
539

 
165,745

 
(4
)
Total fixed maturities, available-for-sale
$
10,145,266

 
$
221,226

 
$
255,706

 
$
10,110,786

 
$
(21
)

(1)
Includes credit-tranched securities collateralized by loan obligations, sub-prime mortgages, auto loans, credit cards, education loans and other asset types.
(2)
Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
(3)
Represents the amount of unrealized losses remaining in AOCI, from the impairment measurement date. Amount excludes $12.3 million of net unrealized gains on impaired available-for-sale securities relating to changes in the value of such securities subsequent to the impairment measurement date.
 

16

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


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

 
June 30, 2018
 
Less than Twelve Months
 
Twelve Months or More
 
Total
 
Fair Value  
 
Gross
  Unrealized  
Losses
 
Fair Value  
 
Gross
  Unrealized  
Losses
 
Fair Value  
 
Gross
  Unrealized  
Losses
 
(in thousands)
Fixed maturities, available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
186,994

 
$
536

 
$
3,338,339

 
$
348,358

 
$
3,525,333

 
$
348,894

Obligations of U.S. states and their political subdivisions
92,525

 
1,842

 
12,986

 
429

 
105,511

 
2,271

Foreign government bonds
147,070

 
3,895

 
2,952

 
213

 
150,022

 
4,108

Public utilities
314,310

 
11,150

 
24,570

 
1,894

 
338,880

 
13,044

Redeemable preferred stock
28,826

 
639

 
0

 
0

 
28,826

 
639

All other U.S. public corporate securities
826,065

 
32,893

 
100,365

 
4,235

 
926,430

 
37,128

All other U.S. private corporate securities
478,104

 
13,884

 
80,405

 
4,992

 
558,509

 
18,876

All other foreign public corporate securities
169,608

 
4,824

 
23,202

 
850

 
192,810

 
5,674

All other foreign private corporate securities
263,331

 
9,240

 
39,711

 
3,218

 
303,042

 
12,458

Asset-backed securities
195,728

 
1,276

 
0

 
0

 
195,728

 
1,276

Commercial mortgage-backed securities
238,172

 
7,715

 
125,108

 
6,445

 
363,280

 
14,160

Residential mortgage-backed securities
50,005

 
1,206

 
25,475

 
987

 
75,480

 
2,193

Total fixed maturities, available-for-sale
$
2,990,738

 
$
89,100

 
$
3,773,113

 
$
371,621

 
$
6,763,851

 
$
460,721

 
 
December 31, 2017
 
Less than Twelve Months
 
Twelve Months or More
 
Total
 
Fair Value  
 
Gross
  Unrealized  
Losses
 
Fair Value  
 
Gross
  Unrealized  
Losses
 
Fair Value  
 
Gross
  Unrealized  
Losses
 
(in thousands)
Fixed maturities, available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
13,174

 
$
23

 
$
4,550,472

 
$
236,604

 
$
4,563,646

 
$
236,627

Obligations of U.S. states and their political subdivisions
6,669

 
26

 
13,311

 
132

 
19,980

 
158

Foreign government bonds
37,466

 
428

 
143

 
4

 
37,609

 
432

Public utilities
84,260

 
1,357

 
22,420

 
701

 
106,680

 
2,058

Redeemable preferred stock
10,522

 
59

 
0

 
0

 
10,522

 
59

All other U.S. public corporate securities
206,988

 
1,034

 
118,002

 
2,382

 
324,990

 
3,416

All other U.S. private corporate securities
221,753

 
2,173

 
83,365

 
1,622

 
305,118

 
3,795

All other foreign public corporate securities
66,004

 
578

 
23,186

 
340

 
89,190

 
918

All other foreign private corporate securities
78,200

 
536

 
89,675

 
2,695

 
167,875

 
3,231

Asset-backed securities
30,234

 
128

 
0

 
0

 
30,234

 
128

Commercial mortgage-backed securities
113,423

 
1,225

 
129,458

 
3,120

 
242,881

 
4,345

Residential mortgage-backed securities
26,916

 
166

 
24,833

 
373

 
51,749

 
539

Total fixed maturities, available-for-sale
$
895,609

 
$
7,733

 
$
5,054,865

 
$
247,973

 
$
5,950,474

 
$
255,706


17

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


As of June 30, 2018 and December 31, 2017, the gross unrealized losses on fixed maturity securities were composed of $453.0 million and $253.0 million, respectively, related to "1" highest quality or "2" high quality securities based on the National Association of Insurance Commissioners (“NAIC”) or equivalent rating and $7.7 million and $2.7 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. As of June 30, 2018, the $371.6 million of gross unrealized losses on fixed maturities of twelve months or more were concentrated in U.S. government bonds, commercial mortgage-backed securities and in the Company’s corporate securities within the consumer non-cyclical, utility and consumer cyclical sectors. As of December 31, 2017, the $248.0 million of gross unrealized losses on fixed maturities of twelve months or more were concentrated in U.S. government bonds, commercial mortgage-backed securities and in the Company’s corporate securities within the consumer non-cyclical and finance sectors. In accordance with its policy described in Note 2 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017, the Company concluded that an adjustment to earnings for OTTI for these fixed maturity securities was not warranted at either June 30, 2018 or December 31, 2017. These conclusions were based on a detailed analysis of the underlying credit and cash flows on each security. Gross unrealized losses are primarily attributable to general credit spread widening, increases in interest rates and foreign currency exchange rate movements. As of June 30, 2018, the Company did not intend to sell these securities, and it was not more likely than not that the Company would be required to sell these securities before the anticipated recovery of the remaining amortized cost basis.

The following table sets forth the amortized cost and fair value of fixed maturities by contractual maturities, as of the date indicated:
 
June 30, 2018
 
Amortized Cost
 
Fair Value
 
(in thousands)
Fixed maturities, available-for-sale:
 
 
 
Due in one year or less
$
237,808

 
$
239,220

Due after one year through five years
1,251,310

 
1,250,232

Due after five years through ten years
1,410,333

 
1,419,452

Due after ten years
5,704,928

 
5,347,349

Asset-backed securities
543,879

 
546,435

Commercial mortgage-backed securities
503,358

 
490,931

Residential mortgage-backed securities
94,220

 
93,182

Total fixed maturities, available-for-sale
$
9,745,836

 
$
9,386,801


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

The following table sets forth the sources of fixed maturity proceeds and related investment gains (losses), as well as losses on impairments of fixed maturities, for the periods indicated:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Fixed maturities, available-for-sale
 
 
 
 
 
 
 
Proceeds from sales(1)
$
208,266

 
$
100,642

 
$
1,442,919

 
$
267,476

Proceeds from maturities/prepayments
124,502

 
202,107

 
240,359

 
323,972

Gross investment gains from sales and maturities
17,465

 
3,685

 
17,577

 
3,760

Gross investment losses from sales and maturities
(1,480
)
 
(242
)
 
(75,105
)
 
(675
)
OTTI recognized in earnings(2)
(151
)
 
(2,173
)
 
(437
)
 
(4,828
)

(1)
Includes $(0.8) million and $9.7 million of non-cash related proceeds due to the timing of trade settlements for the six months ended June 30, 2018 and 2017, respectively.
(2)
Excludes the portion of OTTI recorded in “Other comprehensive income (loss)” ("OCI"), representing any difference between the fair value of the impaired debt security and the net present value of its projected future cash flows at the time of the impairment.


18

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


The following table sets forth a rollforward of pre-tax amounts remaining in OCI related to fixed maturity securities with credit loss impairments recognized in earnings, for the periods indicated:
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
 
(in thousands)
Credit loss impairments:
 
Balance, beginning of period
$
791

 
$
792

 
$
806

 
$
1,325

New credit loss impairments
0

 
0

 
366

 
366

Additional credit loss impairments on securities previously impaired
0

 
0

 
0

 
0

Increases due to the passage of time on previously recorded credit losses
0

 
1

 
5

 
8

Reductions for securities which matured, paid down, prepaid or were sold during the period
(38
)
 
(40
)
 
(15
)
 
(15
)
Reductions for securities impaired to fair value during the period(1)
0

 
0

 
(961
)
 
(1,481
)
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected
0

 
0

 
(1
)
 
(3
)
Assets transferred to parent and affiliates
0

 
0

 
0

 
0

Balance, end of period
$
753

 
$
753

 
$
200

 
$
200


(1)
Represents circumstances where the Company determined in the current period that it intends to sell the security or it is more likely than not that it will be required to sell the security before recovery of the security's amortized cost.

Equity Securities

The net change in unrealized gains (losses) from equity securities still held at period end, recorded within “Asset administration fees and other income,” was $(0.4) million and $0.5 million during the three months ended June 30, 2018 and 2017, respectively.

The net change in unrealized gains (losses) from equity securities still held at period end, recorded within “Asset administration fees and other income,” was $0.4 million and $0.9 million during the six months ended June 30, 2018 and 2017, respectively.

19

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


Commercial Mortgage and Other Loans

The following table sets forth the composition of "Commercial mortgage and other loans," as of the dates indicated:
 
June 30, 2018
 
December 31, 2017
 
Amount
(in thousands)
 
% of
Total
 
Amount
(in thousands)
 
% of
Total
Commercial mortgage and agricultural property loans by property type:
 
 
 
 
 
 
 
Apartments/Multi-Family
$
321,621

 
23.3
%
 
$
348,718

 
25.0
%
Hospitality
3,709

 
0.3

 
3,782

 
0.3

Industrial
365,468

 
26.5

 
327,987

 
23.6

Office
301,236

 
21.8

 
294,072

 
21.2

Other
136,045

 
9.9

 
139,362

 
10.0

Retail
196,383

 
14.2

 
216,544

 
15.6

Total commercial mortgage loans
1,324,462

 
96.0

 
1,330,465

 
95.7

Agricultural property loans
55,173

 
4.0

 
59,197

 
4.3

Total commercial mortgage and agricultural property loans by property type
1,379,635

 
100.0
%
 
1,389,662

 
100.0
%
Valuation allowance
(2,925
)
 
 
 
(2,650
)
 
 
Total commercial mortgage and other loans
$
1,376,710

 
 
 
$
1,387,012

 
 

As of June 30, 2018, the commercial mortgage and agricultural property loans were secured by properties geographically dispersed throughout the United States (with the largest concentrations in California (28%), Texas (13%) and New York (6%)) and included loans secured by properties in Europe (11%) and Australia (3%).

The following tables set forth the activity in the allowance for credit losses for commercial mortgage and other loans, as of the dates indicated:
 
June 30, 2018
 
Commercial Mortgage Loans
 
Agricultural Property Loans
 
Total
 
(in thousands)
Allowance for credit losses:
 
 
 
 
 
Balance, beginning of year
$
2,616

 
$
34

 
$
2,650

Addition to (release of) allowance for losses
276

 
(1
)
 
275

Charge-offs, net of recoveries
0

 
0

 
0

Total ending balance
$
2,892

 
$
33

 
$
2,925


 
December 31, 2017
 
Commercial Mortgage Loans
 
Agricultural Property Loans
 
Total
 
(in thousands)
Allowance for credit losses:
 
 
 
 
 
Balance, beginning of year
$
2,267

 
$
22

 
$
2,289

Addition to (release of) allowance for losses
349

 
12

 
361

Charge-offs, net of recoveries
0

 
0

 
0

Total ending balance
$
2,616

 
$
34

 
$
2,650



20

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


The following tables set forth the allowance for credit losses and the recorded investment in commercial mortgage and other loans, as of the dates indicated:
 
June 30, 2018
 
Commercial Mortgage Loans
 
Agricultural Property Loans
 
Total
 
(in thousands)
Allowance for credit losses:
 
 
 
 
 
Individually evaluated for impairment
$
0

 
$
0

 
$
0

Collectively evaluated for impairment
2,892

 
33

 
2,925

Total ending balance(1)
$
2,892

 
$
33

 
$
2,925

Recorded investment(2):
 
 
 
 
 
Individually evaluated for impairment
$
0

 
$
4,355

 
$
4,355

Collectively evaluated for impairment
1,324,462

 
50,818

 
1,375,280

Total ending balance(1)
$
1,324,462

 
$
55,173

 
$
1,379,635


(1)
As of June 30, 2018, there were no loans acquired with deteriorated credit quality.
(2)
Recorded investment reflects the carrying value gross of related allowance.
 
December 31, 2017
 
Commercial Mortgage Loans
 
Agricultural Property Loans
 
Total
 
(in thousands)
Allowance for credit losses:
 
 
 
 
 
Individually evaluated for impairment
$
0

 
$
0

 
$
0

Collectively evaluated for impairment
2,616

 
34

 
2,650

Total ending balance(1)
$
2,616

 
$
34

 
$
2,650

Recorded investment(2):
 
 
 
 
 
Individually evaluated for impairment
$
1,571

 
$
4,865

 
$
6,436

Collectively evaluated for impairment
1,328,894

 
54,332

 
1,383,226

Total ending balance(1)
$
1,330,465

 
$
59,197

 
$
1,389,662


(1)
As of December 31, 2017, there were no loans acquired with deteriorated credit quality.
(2)
Recorded investment reflects the carrying value gross of related allowance.

The following tables set forth certain key credit quality indicators for commercial mortgage and agricultural property loans, based upon the recorded investment gross of allowance for credit losses, as of the dates indicated:
 
June 30, 2018
 
Debt Service Coverage Ratio
 
 
 
≥ 1.2X
 
1.0X to <1.2X
 
< 1.0X
 
Total
 
(in thousands)
Loan-to-Value Ratio:
 
 
 
 
 
 
 
0%-59.99%
$
613,628

 
$
17,924

 
$
0

 
$
631,552

60%-69.99%
525,861

 
19,109

 
0

 
544,970

70%-79.99%
190,187

 
11,893

 
0

 
202,080

80% or greater
0

 
1,033

 
0

 
1,033

Total commercial mortgage and agricultural property loans
$
1,329,676

 
$
49,959

 
$
0

 
$
1,379,635


21

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


 
December 31, 2017
 
Debt Service Coverage Ratio
 
 
 
≥ 1.2X
 
1.0X to <1.2X
 
< 1.0X
 
Total
 
(in thousands)
Loan-to-Value Ratio:
 
 
 
 
 
 
 
0%-59.99%
$
667,338

 
$
14,426

 
$
4,566

 
$
686,330

60%-69.99%
503,922

 
1,329

 
0

 
505,251

70%-79.99%
182,368

 
13,281

 
0

 
195,649

80% or greater
1,387

 
0

 
1,045

 
2,432

Total commercial mortgage and agricultural property loans
$
1,355,015

 
$
29,036

 
$
5,611

 
$
1,389,662


The following tables set forth an aging of past due commercial mortgage and other loans based upon the recorded investment gross of allowance for credit losses, as well as the amount of commercial mortgage and other loans on non-accrual status, as of the dates indicated:
 
June 30, 2018
 
Current
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or More Past Due(1)
 
Total Loans
 
Non-Accrual Status(2)
 
(in thousands)
Commercial mortgage loans
$
1,324,462

 
$
0

 
$
0

 
$
0

 
$
1,324,462

 
$
0

Agricultural property loans
55,173

 
0

 
0

 
0

 
55,173

 
0

Total
$
1,379,635

 
$
0

 
$
0

 
$
0

 
$
1,379,635

 
$
0


(1)
As of June 30, 2018, there were no loans in this category accruing interest.
(2)
For additional information regarding the Company's policies for accruing interest on loans, see Note 2 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.
 
December 31, 2017
 
Current
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or More Past Due(1)
 
Total Loans
 
Non-Accrual Status(2)
 
(in thousands)
Commercial mortgage loans
$
1,330,465

 
$
0

 
$
0

 
$
0

 
$
1,330,465

 
$
0

Agricultural property loans
59,197

 
0

 
0

 
0

 
59,197

 
0

Total
$
1,389,662

 
$
0

 
$
0

 
$
0

 
$
1,389,662

 
$
0


(1)
As of December 31, 2017, there were no loans in this category accruing interest.
(2)
For additional information regarding the Company's policies for accruing interest on loans, see Note 2 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

For both the three and six months ended June 30, 2018, there were no commercial mortgage and other loans acquired, other than those through direct origination, and there were $83 million of commercial mortgage and other loans sold. For the three and six months ended June 30, 2017, there were no commercial mortgage and other loans acquired, other than those through direct origination, and there were no commercial mortgage and other loans sold.



22

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


Other Invested Assets

The following table sets forth the composition of “Other invested assets,” as of the dates indicated:
 
June 30, 2018
 
December 31, 2017
 
(in thousands)
LPs/LLCs:
 
 
 
Equity method:
 
 
 
Private equity
$
26,283

 
$
25,801

Hedge funds
123,655

 
106,474

Real estate-related
47,326

 
46,043

Subtotal equity method
197,264

 
178,318

Fair value:
 
 
 
Private equity
4,324

 
3,500

Hedge funds
267

 
302

Real estate-related
2,623

 
2,512

Subtotal fair value(1)
7,214

 
6,314

Total LPs/LLCs
204,478

 
184,632

Real estate held through direct ownership
7,257

 
0

Derivative instruments
84

 
151,179

Total other invested assets(2)
$
211,819

 
$
335,811


(1)
As of December 31, 2017, $6.0 million was accounted for under the cost method.
(2)
Prior period amounts have been reclassified to conform to current period presentation. For additional information, see Note 2.

Net Investment Income

The following table sets forth "Net investment income" by investment type, for the periods indicated:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Fixed maturities, available-for-sale
$
77,885

 
$
82,013

 
$
153,936

 
$
163,655

Fixed maturities, trading
484

 
1,063

 
1,085

 
2,104

Equity securities, at fair value
108

 
85

 
176

 
149

Commercial mortgage and other loans
12,758

 
12,128

 
26,251

 
23,536

Policy loans
236

 
740

 
371

 
696

Short-term investments and cash equivalents
7,358

 
7,753

 
13,885

 
12,918

Other invested assets
4,880

 
4,176

 
8,510

 
10,947

Gross investment income
103,709

 
107,958

 
204,214

 
214,005

Les