STATE OF CONNECTICUT

Transcription

1 STATE OF CONNECTICUT INSURANCE DEPARTMENT ORDER ADOPTING REPORT OF EXAMINATION I, Anne Melissa Dowling, Deputy Insurance Commissioner of the State of Connecticut, having fully considered and reviewed the Examination Report (the "Report") of Prudential Annuities Life Assurance Corporation (the "Company") as of December 31, 2011, do hereby adopt the findings and recommendations contained therein based on the following findings and conclusions, TO WIT: 1. I, Anne Melissa Dowling, Deputy Insurance Commissioner ofthe State of Connecticut, and as such is charged with the duty of administering and enforcing the provisions of Title 38a of the Connecticut General Statutes (e.g.s.). 2. The Company is a domestic insurer authorized to transact the business of insurance in the State of Connecticut. 3. On April 26, 2013, the verified Report of the Company was filed with the Connecticut Insurance Department. 4. In accordance with e.g.s. 38a-14(e)(3), the Company was afforded a period ofthirty (30) days within which to submit to the Connecticut Insurance Department a written submission or rebuttal with respect to any matters contained in the Report.. 5. On May 28,2013, the Company notified the Department of certain responses and comments relating to matters contained in the Report. 6. Following review ofthe Report, it was deemed necessary and appropriate to modify the Report. A copy ofthe Report is attached hereto and incorporated herein as Exhibit A. P.O. Box 816 Hartford, CT An Equal Opportunity Employer

2 NOW, THEREFORE, it is ordered as follows: 1. That the Report of the Company hereby is adopted as filed with the Insurance Department. 2. That the Company shall comply with all of the recommendations set forth in the Report, and that failure by the Company to so comply shall result in sanctions or administrative action as provided by Title 38a ofthe C.G.S. Dated at Hartford, Connecticut, this 3 rd day of June, II ~~M Deputy Insurance Commissioner

3 Exhibit A EXAMINATION REPORT OF AS OF DECEMBER 31,2011 BY THE CONNECTICUT INSURANCE DEPARTMENT

4 TABLE OF CONTENTS Salutation Scope of Examination History Organizational Chart Management and Control Insurance Coverage Territory and Plan ofoperation Reinsurance Infonnation Technology Controls Accounts and Records Financial Statements: Assets Liabilities, Surplus and Other Funds Summary of Operations Capital and Surplus Account Aggregate Reserve for Life Contracts (General Account) Aggregate Reserve for Life, Annuity and Accident and Health Contracts (Separate Accounts) Liability for Deposit-Type Contracts (General Account) Liability for Deposit-Type Contracts (Separate Accounts) Common Capital Stock Gross Paid in and Contributed Surplus Unassigned Funds (Surplus) Separate Accounts Financial Statements: Assets

5 The Honorable Thomas B. Leonardi Insurance Commissioner State of Connecticut Insurance Department 153 Market Street, 6th Floor Hartford, Connecticut April 22, 2013 Dear Commissioner: In compliance with your instructions and pursuant to the requirements of section 38a-14 of the General Statutes of the State of Connecticut (CGS), the undersigned has made a financial examination ofthe condition and affairs of (hereinafter referred to as the Company or PALAC), a corporation with capital stock, incorporated under the laws of the State of Connecticut and having its statutory home office located at One Corporate Drive, Shelton, Connecticut. The report of such examination is submitted herewith. SCOPE OF EXAMINATION The previous examination of the Company was conducted by the Financial Regulation Division of the Connecticut Insurance Department (the Department) as of December 31, The current examination which covers the subsequent five-year period was conducted at the office of the Company's affiliate, Prudential Retirement Insurance and Annuity Company, located at 280 Trumbull Street, Hartford, Connecticut, in addition to the headquarters of its parent holding company, Prudential Financial, Inc. (PFI), located at 751 Broad Street, Newark. The Department participated in a coordinated multistate examination with the New Jersey Department of Banking and Insurance (NJ) which acted as lead state for the examination. The following companies were also part of the coordinated exam: Prudential Retirement Insurance and Annuity Company (CT) The Prudential Insurance Company ofamerica (NJ) Pruco Life Insurance Company ofnew Jersey (NJ) Pruco Life Insurance Company (AZ) Pruco Reinsurance Limited (AZ) Vantage Casualty Insurance Company (IN) As part of the examination planning procedures, the Department reviewed the following materials submitted by the Company: Annual Statement filings; Audit reports completed by the certified public accounting firm retained by the Company; Board ofdirector (Board) minutes;

6 Committee minutes; Management Discussion and Analysis; Statements of Actuarial Opinion; Internal audit reports; Financial and regulatory filings submitted to the Department; Documentation supporting Section 404 of the Sarbanes-Oxley Act (SOX); Documentation supporting Management's Report of Internal Control over Financial Reporting for 2011; and 10K reports filed with the Securities and Exchange Commission (the SEC). A review of the independent audit reports and a comprehensive analysis of the Company's financial statements and other filings submitted to the Financial Analysis Unit of the Department indicated no material concerns with respect to financial condition or regulatory compliance Issues. Risk & Regulatory Consulting, LLC (RRC) was engaged by the Department to perform the following key financial activities: investments; reinsurance; and annuity loss reserves. Workpapers prepared by the Company's independent auditors, PricewaterhouseCoopers, LLP (PwC), in connection with its annual statutory audit were reviewed and relied on to the extent deemed appropriate. The examination was conducted on a full scope, comprehensive basis in accordance with the procedures outlined in the National Association of Insurance Commissioners (NAIC) Financial Condition Examiners Handbook (Handbook). The Handbook requires that we plan and perform the examination to evaluate the financial condition and identify prospective risks of the Company by obtaining information about the Company, including corporate governance, identifying inherent risks within the Company, and evaluating system controls and procedures used to mitigate those risks. An examination also includes assessing the principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation, management compliance with the NAIC Accounting & Procedures Manual (Manual) and the NAIC Annual Statement Instructions (Instructions). All accounts and activities of the Company were considered in accordance with the risk-focused examination process. The examination considered prospective risks, those risks that existed at the balance sheet date that will impact future operations or risks associated with future business plans of the Company. Examination procedures were performed as deemed appropriate to evidence actions that the Company had taken to mitigate these risks. These risks were communicated to individuals in the Department responsible for ongoing monitoring. Comments in this report are generally limited to exceptions noted or to items considered to be of a material nature. 2

7 Failure of items in this report to add to totals or for totals to agree with captioned amounts is due to rounding. HISTORY The Company was incorporated under the laws of the state of Connecticut on May 21, 1969, and licensed on August 11, 1976, as the Hartford Variable Annuity Life Insurance Company of Connecticut. The predecessor company was incorporated under the laws of South Carolina on November 27, 1967, and was licensed December 11, 1967, as Liberty Investors Benefit Insurance Company. Its title was changed to ITT Variable Annuity Company on March 25, 1969, and then changed August 1, 1972, to Hartford Variable Life Insurance Company. The title, Hartford Variable Annuity Life Insurance Company (HVALIC) was adopted May 1, 1977, following the merger of the Hartford Variable Annuity Life Insurance Company of Connecticut and the former parent, Hartford Variable Annuity Life Insurance Company, Columbia, South Carolina. The merger was adopted to move HVALIC's state ofdomicile from South Carolina to Connecticut. On May 25, 1988, HVALIC was purchased and renamed American Skandia Life Assurance Corporation (ASLAC). ASLAC was a wholly owned subsidiary of American Skandia, Inc. (ASI), formerly American Skandia Investment Holding Corporation, a Delaware corporation, whose ultimate parent was Skandia Insurance Company, Ltd., (SICL) a Swedish corporation. On December 19, 2002, SICL entered into a definitive purchase agreement with PFI, a New Jersey corporation, whereby PFI would acquire ASLAC and certain of its affiliates (the Acquisition). On May 1, 2003, the initial phase of the Acquisition was consummated, including PFI's acquisition of 90% of the outstanding common stock of Skandia U.S., Inc. (SUSI), an indirect parent of ASLAC. On September 9, 2003, PFI acquired the remaining 10% of SUSI's outstanding common stock, whereupon ASLAC became a wholly owned subsidiary of PFL On June 23, 2005, SUSI amended its certificate of incorporation to change its name to Prudential Annuities Holding Company, Inc. (PAHC). PARC is wholly owned by PFL During 2007, the Company began the process of changing its name and the names of various legal entities including the American Skandia name, as required by the terms of the Acquisition. In addition, the Company's parent, Prudential Annuities, Inc. (PAl), made a $100 million capital contribution to the Company. As of January 1, 2008, the Company's name changed to Prudential Annuities Life Assurance Corporation, and during 2008, PAl contributed another $475 million in capital. 3

8 ORGANIZATIONAL CHART The following organizational chart presents the identities of and interrelationship among PALAC and its direct parent and affiliates as ofdecember 31, Prudential Financial, Inc. (New Jersey) Prudential Holdings, LLC (New Jersey) The Prudential Insurance Company of America (New Jersey) Prudential Annuities, Inc. (Delaware) Prudential Retirement Insurance and Annuity Company (Connecticut) 4

9 PRUDENTIAL ANNUITIES LlF~ ASSURANCE CORPORATION MANAGEMENT AND CONTROL By its articles of incorporation, the Company is: empowered to write life insurance, endowments, annuities, and accident and health insurance and to issue policies and contracts thereon with benefits payable in fixed or variable amounts, or both; to issue policies and contracts for any kind of insurance herein authorized, either with or without participation in profits; and to acquire and hold any or all of the shares or other securities of any insurance corporation or any other kind of corporation. In accordance with the Company's bylaws, the annual meetings of shareholders, for the election of directors and for the transaction of such other business as may properly come before the meeting, shall be held on the third Tuesday in February, or on such other date as the Board shall determine and at such time and place as shall be designated by the Board and stated in the notice of such annual meeting. Board of Directors The members of the Board need not be shareholders and shall be elected to their terms by a majority of the votes cast at a shareholders' meeting. The property and affairs of the Company are managed by a board of not less than three nor more than fifteen persons as may be decided from time to time by vote of the shareholders. The Board shall be responsible for the control and management of the affairs, property and interests of the Company and may exercise all powers of the Company except as are in the Certificate of Incorporation or by statute expressly conferred upon or reserved to the shareholders. The directors shall hold a meeting each year immediately following the annual meeting of the stockholders. Special meetings of the directors may be called by the chairman of the Board or the president and shall be called by the secretary when directed to do so in writing signed by at least a majority of the directors. At all meetings of the Board, the presence of a majority of the entire Board shall be necessary and sufficient to constitute a quorum for the transaction of business. The chairman of the Board may be elected from among the members of the Board. The chairman of the Board shall also be the chief executive officer of the Company and shall be responsible for overseeing the implementation of all orders and resolutions of the Board. Members of the Board serving the Company at December 31, 2011, were as follows: Name Stephen Pelletier Bernard J. Jacob Thomas J. Diemer Robert M. Falzon George M. Gannon Daniel O. Kane Title and Principal Business Affiliation President, PALAC Senior Vice President, Chief Financial Officer US Business The Prudential Insurance Company of America (PICA) Senior Vice President, Financial Management, PICA Treasurer, PICA Senior Vice President, Risk Management, PICA Actuary, Senior Vice President, PICA 5

10 PRUDENTIAL ANNUITIES LIFb ASSURANCE CORPORATION Committees Pursuant to the bylaws, committees may be appointed by the Board, each ofwhich to the extent provided in the resolution establishing such committee and shall have the authority of the Board relating to the business and affairs of the Company under its control and supervision. Committees, including members at December 31, 2011, were as follows: Executive Committee The Executive Committee, comprised of three Board members, is empowered to have all of the power and authority of the Board except that the Committee does not have authority as to the following matters: The election or removal of any director of the Company; The determination of compensation for the directors serving on the Board or any committee; The adoption, amendment, or repeal ofthe bylaws; The amendment or repeal of any resolution of the Board; or The submission to shareholders of any action that requires shareholders' approval. The members ofthe Executive Committee serving the Company at December 31, 2011, were: Name Bernard J. Jacob Stephen Pelletier Robert Falzon Title Senior Vice President, Chief Financial Officer US Business President Senior Vice President and Treasurer Investment Committee The Investment Committee, comprised of eight officers, is empowered to review, evaluate, and advise the Board regarding quarterly summary fund transactions of the investment portfolio as rendered by the investment advisor from American Skandia Investment Services, Incorporated, an affiliate of the Company. The members of the Investment Committee at December 31, 2011, were: Name Genghui Wu Mike Long Tom Diemer Mark Sieb Leslie Laurita Michael A. Bohm Daniel O. Kane Craig R. Gardner Robert E. Boyle Title Chief Investment Officer former Chief Investment Officer Chief Financial Officer former Controller Controller Vice President, Financial Management Actuary, Senior Vice President Investment Senior Vice President Vice President, Financial Management and Deputy Controller 6

11 Audit Committee For PALAC, the full Board governs as PALAC's Audit Committee. The members ofthe Audit Committee serving the Company at December 31, 2011, were: Name Stephen Pelletier Thomas J. Diemer Robert M. Falzon George M. Gannon Bernard J. Jacob Daniel O. Kane Title President Executive Vice President, Financial Management Senior Vice President and Treasurer Senior Vice President, Risk Management Senior Vice President, ChiefFinancial Officer, US Business Actuary, Senior Vice President Officers The officers of the Company shall be the chief executive officer, the president, one or more vicepresidents, a secretary, a treasurer, a controller, an actuary, and such other officers, including a chairman ofthe Board, as the Board may from time to time deem advisable. The officers shall be elected by the Board at its regular annual meeting. The officers serving the Company at December 31,2011, were as follows: Name Stephen Pelletier Joseph D. Emanuel Robert M. Falzon Daniel O. Kane Thomas J. Diemer Bruce W. Ferris Timothy S. Cronin George M. Gannon Jacob M. Herschler Michael Long Stephen P. Marenakos Robert F. O'Donnell Yvonne F. Rocco Title President Secretary, Senior Vice President, Corporate Counsel Senior Vice President and Treasurer Actuary, Senior Vice President Executive Vice President, Financial Management Executive Vice President, Sales and Account Management Senior Vice President, Investment Management Senior Vice President, Risk Management Senior Vice President, Strategy and Communication Senior Vice President Senior Vice President, Operations and Systems Senior Vice President Senior Vice President, Human Resources INSURANCE COVERAGE The Company is covered by a fidelity bond maintained by PFI for itself and the majority owned affiliates and subsidiaries. The fidelity bond is part of a blended program issued by various insurers, led by ACE American Insurance Company. The aggregate limit of liability provides fidelity coverage above the prescribed minimum set forth by the NAIC's schedule of suggested minimum amounts. In addition to the fidelity bond insurance, the Company is protected by the following insurance coverages maintained by PFI: 7

12 Insurance Coverage Errors & Omissions Directors and Officers Liability Fidelity Bond Employment Practices Liability Fiduciary Liability Property General Liability Automobile Liability Primary Insurance Company Westchester Fire Insurance Company ACE American Insurance Company Westchester Fire Insurance Company ACE American Insurance Company ACE American Insurance Company Lexington Insurance Company Travelers Property Casualty Company of America Travelers Property Casualty Company of America TERRITORY AND PLAN OF OPERATION The Company is licensed to sell a wide array of variable annuity contracts for the individual market in all 50 states, the District of Columbia, Puerto Rico, and Canada. These contracts consist of deferred and immediate variable annuities that are registered with the SEC, which may also include (1) fixed interest rate allocation options subject to a market adjustment and registered with the SEC and (2) fixed-rate allocation options not subject to market value adjustment and not registered with the SEC. In addition, the Company has in force a relatively small block of variable life insurance policies that it no longer actively sells. Beginning in March 2010, the Company ceased offering its existing variable annuity products (and where offered, the companion market value adjustment option), to new investors. However, subject to applicable contractual provisions and administrative rules, the Company will continue to accept subsequent purchase payments on inforce contracts under existing annuity products. At that time, the Prudential Annuities business unit of PFI launched a new product in each of Pruco Life Insurance Company and Pruco Life Insurance Company of New Jersey (which are affiliates of the Company). 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. The Company's products were sold primarily to individuals to provide for a tax deferred asset accumulation for long-term savings and retirement, together with a base death benefit and a variety of optional guaranteed death living benefits. REINSURANCE The Company cedes insurance in order to fund the cash strain generated from commission costs on current sales and to limit its risk exposure. The Company utilizes both affiliated and unaffiliated reinsurance arrangements. Unaffiliated arrangements are primarily modified coinsurance reinsurance agreements whereby the reinsurer shares in the experience of a specified book ofbusiness. The Company participates m remsurance with two affiliated companies, PICA and Pruco Reinsurance (Pruco Re). Affiliated arrangements use automatic coinsurance reinsurance 8

13 agreements which cover all significant risks under the policies reinsured. The Company is not relieved of its primary obligation to the policyholder as a result of these reinsurance agreements which include the reinsurance of the Company's Guaranteed Minimum Withdrawal Benefit (GMWB) feature, the Guaranteed Return Option (GRO) feature, Guaranteed Return Option Plus (GRO Plus) feature, Highest Daily Guaranteed Return Option (HD GRO) feature, Lifetime Five (LT5) feature, Highest Daily Lifetime 5 (HDLT5) feature, Highest Daily Lifetime Six Plus (HD6+) feature, Highest Daily Lifetime Seven (HD7) feature, and Highest Daily Lifetime Seven Plus (HDL7+) feature. During 2008, the Company entered into the following reinsurance agreements with affiliate, Pruco Re as part of its risk management and capital management strategies: 1. Effective March 17, 2008, a coinsurance agreement providing 100% reinsurance of its HD7 and Spousal HD7 benefit features sold on certain of its annuities. 2. Effective March 17, 2008, a coinsurance agreement providing 100% reinsurance of its GRO Plus benefit feature sold on certain of its annuities. This agreement was amended effective January 1,2010, to include a form of the GRO Plus benefit feature on business issued after November 16, Effective March 17, 2008, a coinsurance agreement providing 100% reinsurance of its HD GRO benefit feature sold on certain of its annuities. This agreement was amended effective January 1, 2010, to include a form of the HD GRO benefit feature on business issued after November 16,2009. During 2009, the Company entered into the following reinsurance agreements with affiliate, Pruco Re as part of its risk management and capital management strategies: 1. Effective August 24, 2009, a coinsurance agreement providing 100% reinsurance of its HD6+ and Spousal HD6+ benefit features sold on certain of its annuities. 2. Effective June 30, 2009, a coinsurance agreement providing 100% reinsurance of its HD7+ and Spousal HD7+ benefit feature sold on certain of its annuities. The Company has a Trust Agreement with Pruco Re whereby Pruco Re holds deposited assets in an account with a total value no less than 102% of the reserve credit taken by the Company. In the event Pruco Re cannot fulfill its obligation, PALAC can draw funds directly from the trust account to reimburse itself for Pruco Re's share of benefits or losses PALAC has paid and to pay any other amounts that are due under the terms and provisions ofthe reinsurance treaties. Effective April 1, 1993, the Company entered into an Automatic Modified Coinsurance Agreement with Transamerica Occidental Life Insurance Company which provided reinsurance for various group deferred and individual deferred annuities originally issued by ASLAC. Effective January 1, 1998, the Company entered into a Modified Coinsurance Agreement with Transamerica Occidental Life Insurance Company which provided a 50% quota share of cumulative direct premiums less than $500 million, a 35% quota share of cumulative direct premiums greater than $500 million and less than $1 billion, and a 15% quota share of cumulative direct premiums greater than $1 billion for variable life products originally issued by ASLAC. 9

14 INFORMATION TECHNOLOGY CONTROLS NJ engaged EisnerAmper Accountants and Advisors (EA) to conduct an evaluation of PFI's Infonnation Technology (IT) systems, infrastructure, and general controls. The Department placed reliance on the work perfonned by EA as part ofthe coordinated multistate examination. As the foundation ofits risk based review, EA conducted the IT review incorporating Control Objectives for Infonnation and Related Technology (COBiT) version 4.1 with the Handbook requirements, Exhibit C Part 1 - Infonnation Technology Planning Questionnaire (ltpq) and Exhibit C - Part 2 - Evaluation of Controls in Infonnation Technology Work Program, to provide broader scope of coverage for key risks. The IT review identified and assessed the Company's internal controls, policies, and procedures established by (and for) the respective IT environments within PFI's federated model. The scope ofthe review included the identification, evaluation, and assessment ofthe system of controls over data input, processing, and output. The review of the Company's IT controls included (but was not limited to) the following financially significant systems: Annuities Valuation Infonnation System (AVIS), Variable Product Administration System (VPAS), Triton, Unit Value Trade System (UVTS) and LifeCad. The key IT Controls tested included but were not limited to the following areas: Management controls, such as authorization assignments, privileges, approvals, and compliance, including compliance with Company policies; Administrative and organizational controls, such as physical and logical access, business continuity and disaster recovery provisions, system development, and program change controls; and Accounting controls, such as data input, data processing and data output. There were no material findings that affected the overall reliance on the Company's IT controls. ACCOUNTS AND RECORDS The Company's general ledger account balances are maintained on Oracle and are updated by both manual and automated journal entries. Detailed analyses were perfonned on the individual annual statement accounts throughout the examination. The examination team reviewed the internal controls over financial reporting to ensure that the Company maintained a process to produce reliable financial statements. In addition, the examiners reviewed the general ledger detail, all significant nonstandard journal entries, and entries made solely to prepare the NAIC Annual Statement for significant unusual entries. 10

15 FINANCIAL STATEMENTS The following statements reflect the assets, liabilities, surplus and other funds of the Company and its summary of operations and capital and surplus account as of December 31, 2011, as reported by the Company and as determined by this examination. Bonds Common stocks Mortgage loans on real estate - First liens Cash ($-53,620,076) cash equivalents ($8,112,008) and short-term investments ($98,963,188) Contract loans Derivatives Other invested assets (Schedule BA) Receivables for securities Subtotals, cash and invested assets Investment income due and accrued Premiums and considerations- uncollected premiums and agents' balances in the course of collection Reinsurance - amounts recoverable from remsurers Reinsurance - other amounts receivable under reinsurance contracts Current federal and foreign income tax recoverable and interest thereon Net deferred tax asset Guaranty funds receivable or on deposit Furniture and equipment, including health care delivery assets Receivable from parent, subsidiaries and affiliates Aggregate write-ins for other than invested assets Total assets, excluding separate accounts, segregated accounts and protected cell accounts From separate accounts, segregated accounts and protected cell accounts ASSETS Ledger Assets $2,043,340,087 9,874, ,347,950 53,455,120 14,316, ,895,150 31,553,696 6,293,758 2,551,076,604 33,675,987 (23,321,887) 2,010,488 5,801,847 14,706, ,424,811 1,431,483 86,432 18,451,693 6,548,501 2,798,892,936 Assets Not Admitted $92,613,820 86,432 6,548,501 Net Admitted Assets $2,043,340,087 9,874, ,347,950 53,455,120 14,316, ,895,150 31,553,696 6,293,758 2,551,076,604 33,675,987 (23,321,887) 2,010,488 5,801,847 14,706,977 95,810,991 1,431,483 18,451,693 99,248,753 2,699,644,183 46,468,614,424 46,468,614,424 Totals $49,267,507,360 $99.248,753 $49,168,258,607 11

16 LIABILITIES, SURPLUS AND OTHER FUNDS Aggregate reserve for life policies and contracts Liability for deposit-type contracts Contract claims - life Other amounts payable on reinsurance Interest maintenance reserve Commissions to agents due or accrued General expenses due or accrued Transfers to separate accounts due or accrued Taxes, licenses and fees due or accrued, excluding federal income taxes Unearned investment income Amounts withheld or retained by company as agent or trustee Remittances and items not allocated Liability for benefits for employees and agents ifnot included above Borrowed money Miscellaneous liabilities - asset valuation reserve Miscellaneous liabilities- reinsurance in unauthorized companies Miscellaneous liabilities - payable to parent, subsidiaries and affiliates Aggregate write-ins for liabilities Total Liabilities, excluding separate accounts business From separate accounts statement Total Liabilities Common capital stock Gross paid in and contributed surplus Aggregate write-ins for special surplus funds Unassigned funds (surplus) Surplus Total capital and surplus Total $ 3,052,489,275 66,242, ,597 6,529,277 9,028,901 10,211,013 28,827,016 (1,956,020,191) 548,152 6,715 3,438,733 54,994,331 6,720, ,021,644 13,531, ,100 58,391,395 34,382,105 2,028,027,738 46,468,614,424 48,496,642,162 2,500, ,959,570 60,164,309 54,992, ,116, ,616,445 $49,168,258,607 12

17 SUMMARY OF OPERATIONS Premiums and annuity considerations for life and accident and health contracts Net investment income Amortization of interest maintenance reserve Separate Accounts net gain from operations, excluding unrealized gain (loss) Commissions and expense allowances on reinsurance ceded Reserve adjustments on reinsurance ceded Miscellaneous income - income from fees associated with investment management, administration and contract guarantees from separate accounts Miscellaneous income - aggregate write-ins for miscellaneous income $837,374, ,718,878 11,476,232 61,194,884 4,727,953 (75,494,235) 1,048,577, ,816,920 Total 2,363,392,445 Death benefits 1,870,197 Annuity benefits 533,330,029 Surrender benefits and withdrawals for life contracts 3,999,446,944 Interest and adjustments on contracts or deposit-type contract funds 5,767,632 Increase in aggregate reserves for life and accident and health contracts 57,023,708 Totals 4,597,438,510 Commissions on premiums, annuity considerations and deposit-type funds 184,320,762 General insurance expenses 189,326,123 Insurance taxes, licenses and fees, excluding federal income taxes 5,603,483 Net transfers to (from) separate accounts, net ofreinsurance (2,918,277,927) Aggregate write-ins for deductions 65,634,203 Totals 2,124,045,154 Net gain from operations before dividends to policyholders and federal income taxes Federal and foreign income taxes incurred Net gain from operations after dividends to policyholders and federal income taxes and before realized capital gains (losses) Net realized capital gains (losses) Net income 239,347,291 24,216, ,130,938 (38,155,309) $176,975,629 CAPITAL AND SURPLUS ACCOUNT Capital and surplus, December 31, 2010 $935,896,026 Net income 176,975,629 Change in net unrealized gains (losses) 64,454,619 Change in net unrealized foreign exchange capital gain (loss) (52,955) Change in net deferred income tax 11,611,433 Change in non-admitted assets and related items 22,051,453 Change in liability for reinsurance in unauthorized companies (136,169) Change in reserve on account of change in valuation basis 5,628,281 Change in asset valuation reserve 44,433,452 Surplus (contributed to) withdrawn from separate accounts during period 61,194,888 Other changes in surplus in separate accounts statement (61,194,888) Surplus adjustment - paid in (92,251,758) Dividends to stockholders (495,581,384) Aggregate write-ins for gains and losses in surplus (1,412,182) Net change in capital and surplus for the year (264,279,581 ) Capital and surplus, December 31, current year $671,616,445 13

18 AGGREGATE RESERVE FOR LIFE CONTRACTS (General Account) AGGREGATE RESERVE FOR LIFE, ANNUITY AND ACCIDENT AND HEALTH CONTRACTS (Separate Accounts) LIABILITY FOR DEPOSIT-TYPE CONTRACTS (General Account) LIABILITY FOR DEPOSIT-TYPE CONTRACTS (Separate Accounts) $3,052,489,275 $44,308,682,470 $66,242,486 $75,790,443 Genera laccount E x hob" I It 5 - A.eereeate Reserves for L'f I e Contracts Product Product Description Variable Deferred Variable annuity products that provide both guaranteed Annuities (AG43) minimum death benefits and guaranteed living benefits Other - AG43 Margin Additional reserve above the minimum required reserves for Reserve the newness of the valuation method and the inherent limitations ofthe modeling process Fixed Payout Annuities with life contingencies (CARVM) Other - AAT Reserve Variable Life Insurance Base (CRVM) Variable Payout Annuities, with life contingencies (AG43) DCP Contracts with life contingencies Variable Life Insurance DB/lCOS (CRVM) 12/31/2011 Balance $2,435,657,853 $427,000,000 The single premium fixed immediate annuity inforce consists $97,774,409 of fixed and "adjustable" immediate annuities. The benefit types offered include certain only and life with a certain period. Represents the additional market value adjustment (MVA) $65,000,000 AAT reserve established Single and flexible payment variable life products $16,937,626 Consist ofcertain only and life with certain period annuities. $6,449,197 The majority of this variable immediate annuity offers guaranteed income floor. Contracts that are in a death claim pending status - death $3,003,688 benefit reserve Single and flexible payment variable life products $666,501 Total Balance: $3,052,489,274 Separate Account Exhibit 3 - Aggregate Reserve for Life, Annuity and Accident and Health Contracts Product Product Description 12/31/2011 Balance Variable Deferred Variable annuity products that provide both guaranteed $44,032,015,414 Annuities (AG43) minimum death benefits and guaranteed living benefits DCP Contracts with life Contracts that are in a death claim pending status - death $124,978,625 contingencies benefit reserve Variable Life Insurance Base (CRVM) Single and flexible payment variable life products $80,981,183 Variable Payout Annuities, with life contingencies (AG43) Modified Guaranteed Annuities (AG33) Consist of certain only and life with certain period annuities. $61,137,404 The majority of this variable immediate annuity offers guaranteed income floor. Variable deferred annuity products sold by the company have $9,569,845 a MVA fixed account provision. Total Balance: $44,308,682,471 14

19 GeneraIAeeount E x h'b' I It 7 - D eposlt 'T ype contraets Product Product Description Fixed Payout Annuities, The single premium fixed immediate annuity inforce consists without life contingencies of fixed and "adjustable" immediate annuities. The benefit (CARVM) types offered include certain only and life with a certain period. Variable Payout Annuities, without life contingencies AG43 12/ Balance $66,194,272 Consist of certain only and life with certain period annuities. $48,214 The majority of this variable immediate annuity offers guaranteed income floor. Total Balance: $66,242,486 separa t e Aeeoun te x h'b't4 I I - D eposl 'ttype Contraets Product Fixed Payout Annuities, without life contingencies (CARVM) DCP Contracts, without life contingencies Product Description The single premium fixed immediate annuity inforce consists of fixed and "adjustable" immediate annuities. The benefit types offered include certain only and life with a certain period. Contracts that are in a death claim pending status - death benefit reserve Total Balance: 12/ Balance $75,460,439 $330,004 $75,790,443 The Company has sold a wide array of annuities, including deferred and immediate variable annuities that are registered with 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 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 annuity products (and where offered, the companion market value and adjustment option) to new investors upon the launch of a new product 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 PFI). However, subject to applicable contractual provisions and administrative rules, the Company will continue to accept subsequent purchase payments on inforce contracts under existing annuity products. RRC performed a reserve, pricing, liquidity, and market risk assessment to ensure that: The actual losses or other contractual payments reflected in the corresponding reserves were not greater than the carried liabilities; Pricing practices were appropriate for risks assumed; The Company was able to meet contractual obligations as they became due, without incurring unacceptable losses; and Movement in market prices, such as interest rates, foreign exchange rates, or equity prices would not adversely affect the reported and/or market value of investments. In performing the comprehensive actuarial analysis as ofdecember 31,2011, the following items were completed: 15

20 Review and analysis ofthe statutory annual statements for 2011 and other recent years covered under the examination period; Risk assessment of the various actuarial areas and products and risk attribute ratings requested by the examiners; Review and analysis of the Company's actuarial reserve methods and assumptions and detailed analysis supporting the December 31,2011 reserves by major product groupmg; Interviews with the Company's line ofbusiness actuaries responsible for the reserve liabilities to discuss information relevant to the reserve analysis; Review ofreserves for compliance with applicable State of Connecticut statutory requirements; Review and analysis of the 2011 Statement ofactuarial Opinion and supporting actuarial memoranda prepared for or by the Company's appointed actuary; Review of methods and assumptions used to prepare the asset adequacy analysis / cash flow testing; Review of the Actuarial Opinion Memorandum for years 2007 through 2011; and Review of the 2011 AG-43 Actuarial Memorandum. Assessment of Reserve Risk Based on the review, the Company's reserve provisions specified in the Annual Statement for the year ended December 31, 2011, meet the minimum requirement of the Department and are adequate to mature obligations with respect to policies and contracts that provide material guaranteed benefits. In aggregate, reserves are believed to be based on the conservative end of actuarial assumptions, with almost $0.5 billion ofdiscretionary reserves. Assessment of Pricing and Underwriting Risk The Company has conducted extensive mortality and surrender studies used in reserving and pricing its annuity products. RRC found no indications of unmitigated material pricing or underwriting risks. The Company is earning reasonable profits on the mortality and expense fees charged. Assessment of Liquidity Risk From an actuarial view, the Company does not appear to have material liquidity risk. The investment specialist working in concert with the financial examination team reviewed this risk in greater detail. The Company uses a hedging program and an auto-rebalancing product feature to mitigate liquidity risks. When appropriate, risks are ceded to another captive related entity under the Prudential Financial umbrella (Pruco Re), which uses a clearly defined hedging strategy to manage market risks. The Company has issued variable products which reduce disintermediation risk. 16

21 Assessment of Market Risk Market risk was reviewed by the investment specialist working in concert with the financial examination team. RRC's actuary assisted the investment specialist as needed. The asset adequacy study and AG 43 Memorandum indicate the Company has adequately controlled its market risk. For its annuity products, the Company has pioneered an auto-rebalancing feature that helps reduce the market risk of the products. A review by the Department of the Company's underlying data integrity concluded that there were no indications of any significant inaccuracies or inconsistencies in the underlying data used in the development ofreserves. Based upon the risk-based assessment and review procedures performed, no material findings affecting policyholders' surplus were noted which affected the Company's ability to manage its pricing, reserving or liquidity risk. COMMON CAPITAL STOCK $2,500,000 At December 31, 2011, there were 25,000 shares of common capital stock authorized, issued and outstanding, having a par value of$100 per share. All ofthe outstanding shares ofthe Company are owned by PAl, a Delaware Corporation. All the outstanding shares ofpal are ultimately owned by PFI. GROSS PAID IN AJ'il) CONTRffimED SURPLUS $553,959,570 The following exhibit reflects the balance ofthis account during the period under review: 2011 $553,959, $506,211, $646,211, $646,211, $171,190,390 The increase during 2008 was the result of a contribution from PFI for $475,000,000, while the decreased during 2010 was predominately the result of an extraordinary dividend paid to PFI. UNASSIGNED FUNDS (SURPLUS) $54,992,566 The following exhibit reflects the balance of this account during the period under review: 2011 $54,992, $365,608, $170,349, $(15,346,806) 2007 $264,658,256 17

22 PRUDENTIAL ANNUITIES LIFE ASSlJRANCE CORPORATION The change in unassigned funds during the exam period is representative of net income, unrealized losses and the payment ofordinary dividends. The large decreases and increases during the examination period are mostly attributable to the following; $323 million net loss due increases in separate account CARVM reserves, minimum death benefit guarantees and a decrease in mortality and expenses charges all brought on by unfavorable financial market conditions Increase in net income year over year, return of favorable market conditions and a decrease in commission and expenses driven by annuity sales declines. SEPARATE ACCOUNTS Under the authority granted by Section 38a-459 of the CGS, the Company has established Separate Accounts to which it can allocate certain amounts received under variable and fixed annuities and variable life insurance products. The allocation is in accordance with the provisions of Section 38a-433 of the CGS. The amounts allocated to separate accounts may be invested in any class of loans or investments and are not subject to the limitations imposed by Sections 38a-l 02 to 102h inclusive of the CGS, pertaining to unqualified loans or investments. All separate accounts are owned by the Company, but are segregated from the assets of the general account. Separate Account assets and liabilities are reported at estimated fair value and represent segregated funds which are invested for certain policyholders and other customers. The assets consist of equity securities, fixed maturities, short-term investments, and cash and cash equivalents. Separate account assets are predominately shares of American Skandia Trust, comanaged by ASIS and Prudential Investments LLC, which utilize various fund managers as subadvisors. The remaining assets are shares in other mutual funds which are managed by independent investment firms. The contract holder has the option of directing funds to a wide variety of investment options, most of which invest in mutual funds. The investment risk on the variable portion of a contract is borne by the contract holder, except to the extent of any guarantees by the Company, which are not separate account liabilities. Fixed options with minimum guaranteed interest rates are also available. The Company bears the credit risk with the investments that support these fixed options. Separate account liabilities represent reserves established to meet contractual withdrawal and future benefit payments of annuity and life insurance contracts. Reserves for separate account annuity and life insurance contracts are computed using CARVM and CRVM, respectively. The excess of the separate account liabilities for contract owners' account values over reserves calculated using CARVM and CRVM is included as part of transfers to separate accounts due or accrued, net. The following Separate Account financial statements, as filed by the Company and as determined by this examination, reflect the value of assets, liabilities, surplus and other funds as of December 31, 2011, and the net income and changes in surplus for the year then ended. 18

23 Bonds Preferred stocks Common stocks Mortgage loans on real estate Cash Short-term investments Other invested assets Subtotals-Cash and invested assets Investment income due and accrued Receivables for securities ASSETS $ 3,105,743,997 7,088,008 42,942,758, ,706, ,637,642 15,668,220 46,435,602,704 33,006,717 5,003 Totals $46.468, LIABILITIES AND SURPLUS Aggregate reserve for life and annuity policies and contracts Liability for premium and other contact deposit funds Investment expenses due or accrued Other transfers to general account due or accrued (net) (including $1,670,921,628 accrued expense allowances recognized in reserves) Remittances and items not allocated Derivatives Payable for securities Aggregate write-ins for liabilities $44,308,682,470 75,790, ,143 1,957,727,791 59,361 1,444,469 29,712,143 95,003,604 Total liabilities 46,468,614,424 Totals $ SUBSEQUENT EVENTS On June 1,2012, Prudential, a PFI company signed an agreement with General Motors Company (GM) that will allow Prudential to assume certain salaried retiree benefit obligations as part of GM's plan to reduce pension obligations by approximately $26 billion. It is expected that by year-end 2012, GM will purchase a group annuity contract from Prudential, giving Prudential responsibility for providing benefits to GM's salaried retirees covered by the agreement, who retire before December 1,2011. It was announced in September 2012, that Prudential is going to purchase The Hartford's Individual Life Insurance Unit for $1. 5 billion. The deal was finalized on January 2, Also, in 2012, due to the current low interest rates and uncertainty around interest rates in the future, Prudential decided to exit the individual Long-Term Care market. During the third quarter of 2012, the Company suspended additional company deposits for inforce variable annuity contracts with certain optional living benefit riders. 19

24 PRUDENTIAL ANNUITIES LIFE ASST.-TRANCE CORPORATION CONCLUSION The results of the examination disclosed that as of December 31, 2011, the Company had (including Separate Accounts) admitted assets of $49,168,258,607, liabilities of $48,496,642,162, and capital and surplus of $671,616,445. During the period under examination, admitted assets decreased by $5,519,909,573, liabilities decreased by $5,255,629,992, and capital and surplus decreased by $264,279,581. It was determined that the Company's assets were fairly stated in accordance with guidance outlined in the Manual and were acceptable under 38a-l02 of the CGS. The established liabilities were adequate to cover the Company's obligations to the policyholders. 20

25 PRUDENTIAL ANNlJITIES LIFE ASSURANCE CORPORATION SIGNATURE In addition to the undersigned, the following members of the Department participated in this examination: Mark Murphy, CFE; Lisa Pagliaro, AFE; Mike Estabrook, AFE; Keith Kleindienst; Sharon Altieri, CPA; and Joe Marcantonio, AES, AFE, CISA. The professional services firm of RRC also participated in this examination. I, Jeffrey Prosperi, CFE, CPA, do solemnly swear that the foregoing report of examination is hereby represented to be a full and true statement of the condition and affairs of the subject insurer as of December 31, 2011, to the best ofmy information, knowledge and belief. Respectfully subij!ted) l ~ : Je y s " CFE EX' iner In-Charge Insurance Certified Financial Examiner State of Connecticut Insurance Department State of Connecticut ss. Hartford County ofhartford J % SubsLi?d and sworn to before me, r'iui1'1u''j tn, n)e/'c,,~notary of ~(, I,2013. Public, on this J<P -; day My CommJssion Exp. June 30,