August 3, 2018 - 10-Q: Quarterly report [Sections 13 or 15(d)]

Form: 10-Q

Documents

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



¨	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 001-16707

Prudential Financial, Inc.

(Exact Name of Registrant as Specified in its Charter)



New Jersey	22-3703799
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

751 Broad Street

Newark, New Jersey 07102

(973) 802-6000

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of the Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the 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	x		Accelerated filer	¨
Non-accelerated filer	¨	(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 July 31, 2018, 417 million shares of the registrant’s Common Stock (par value $0.01) were outstanding.

Table of Contents

TABLE OF CONTENTS



		Page
PART I FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Unaudited Interim Consolidated Statements of Financial Position as of June 30, 2018 and December 31, 2017	1
	Unaudited Interim Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017	2
	Unaudited Interim Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2018 and 2017	3
	Unaudited Interim Consolidated Statements of Equity for the six months ended June 30, 2018 and 2017	4
	Unaudited Interim Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017	5
	Notes to Unaudited Interim Consolidated Financial Statements	6
	1. Business and Basis of Presentation	6
	2. Significant Accounting Policies and Pronouncements	7
	3. Investments	13
	4. Variable Interest Entities	28
	5. Derivative Instruments	29
	6. Fair Value of Assets and Liabilities	37
	7. Closed Block	63
	8. Income Taxes	65
	9. Short-Term and Long-Term Debt	66
	10. Employee Benefit Plans	68
	11. Equity	69
	12. Earnings Per Share	73
	13. Segment Information	75
	14. Commitments and Contingent Liabilities	79
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	83
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	159
Item 4.	Controls and Procedures	159
PART II OTHER INFORMATION
Item 1.	Legal Proceedings	160
Item 1A.	Risk Factors	160
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	160
Item 6.	Exhibits	161
GLOSSARY		162
SIGNATURES		164

Table of Contents

Forward-Looking Statements

Certain of the statements included in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Prudential Financial, Inc. and its subsidiaries. There can be no assurance that future developments affecting Prudential Financial, Inc. and its subsidiaries 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, morbidity experience or policyholder behavior experience that differs significantly from our expectations when we price our products; (3) changes in interest rates, equity prices and foreign currency exchange rates 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) U.S. state insurance laws and developments regarding group-wide supervision, capital and reserves, (e) insurer capital standards outside the U.S. and (f) 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 Financial, Inc. does not undertake 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 businesses and investment in our securities.

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PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Financial Position

June 30, 2018 and December 31, 2017 (in millions, except share amounts)



	June 30, 2018			December 31, 2017
ASSETS
Fixed maturities, available-for-sale, at fair value (amortized cost: 2018-$317,548; 2017-$312,385)(1)	$	341,151		$	346,780
Fixed maturities, held-to-maturity, at amortized cost (fair value: 2018-$2,388; 2017-$2,430)(1)	2,020			2,049
Fixed maturities, trading, at fair value (amortized cost: 2018-$2,980; 2017-$3,509)(1)(2)	2,916			3,507
Assets supporting experience-rated contractholder liabilities, at fair value(1)(2)	21,497			22,097
Equity securities, at fair value (cost: 2018-$5,374; 2017-$5,154)(1)(2)	7,191			7,329
Commercial mortgage and other loans (includes $330 and $593 measured at fair value under the fair value option at June 30, 2018 and December 31, 2017, respectively)(1)	58,622			56,045
Policy loans	11,935			11,891
Other invested assets (includes $5,138 and $3,159 measured at fair value at June 30, 2018 and December 31, 2017, respectively)(1)(2)	13,459			13,373
Short-term investments(2)	5,728			6,800
Total investments	464,519			469,871
Cash and cash equivalents(1)	14,918			14,490
Accrued investment income(1)	3,235			3,325
Deferred policy acquisition costs	19,643			18,992
Value of business acquired	2,027			1,591
Other assets(1)	16,860			17,250
Separate account assets	298,658			306,617
TOTAL ASSETS	$	819,860		$	832,136
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits	$	260,435		$	257,317
Policyholders’ account balances	149,359			148,189
Policyholders’ dividends	4,858			6,411
Securities sold under agreements to repurchase	9,540			8,400
Cash collateral for loaned securities	4,307			4,354
Income taxes	7,888			9,648
Short-term debt	2,056			1,380
Long-term debt	16,732			17,172
Other liabilities(1)	16,498			16,619
Notes issued by consolidated variable interest entities (includes $609 and $1,196 measured at fair value under the fair value option at June 30, 2018 and December 31, 2017, respectively)(1)	937			1,518
Separate account liabilities	298,658			306,617
Total liabilities	771,268			777,625
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 14)
EQUITY
Preferred Stock ($.01 par value; 10,000,000 shares authorized; none issued)	0			0
Common Stock ($.01 par value; 1,500,000,000 shares authorized; 660,111,339 shares issued at both June 30, 2018 and December 31, 2017)	6			6
Additional paid-in capital	24,763			24,769
Common Stock held in treasury, at cost (242,400,008 and 230,537,166 shares at June 30, 2018 and December 31, 2017, respectively)	(16,905		)	(16,284		)
Accumulated other comprehensive income (loss)	11,655			17,074
Retained earnings	28,713			28,671
Total Prudential Financial, Inc. equity	48,232			54,236
Noncontrolling interests	360			275
Total equity	48,592			54,511
TOTAL LIABILITIES AND EQUITY	$	819,860		$	832,136

__________


(1)	See Note 4 for details of balances associated with variable interest entities.


(2)	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 FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Operations

Three and Six Months Ended June 30, 2018 and 2017 (in millions, except per share amounts)



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
REVENUES
Premiums	$	7,438		$	8,326		$	14,749		$	14,807
Policy charges and fee income	1,480			725			2,984			2,258
Net investment income	4,096			4,089			8,094			8,150
Asset management and service fees	1,010			973			2,036			1,924
Other income (loss)	(54		)	420			(561		)	637
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities	(58		)	(53		)	(97		)	(110		)
Other-than-temporary impairments on fixed maturity securities transferred to Other comprehensive income	0			7			0			10
Other realized investment gains (losses), net	743			(1,046		)	1,207			(565		)
Total realized investment gains (losses), net	685			(1,092		)	1,110			(665		)
Total revenues	14,655			13,441			28,412			27,111
BENEFITS AND EXPENSES
Policyholders’ benefits	9,512			8,328			17,187			15,353
Interest credited to policyholders’ account balances	894			947			1,444			1,887
Dividends to policyholders	540			491			868			1,106
Amortization of deferred policy acquisition costs	613			84			1,201			523
General and administrative expenses	2,846			2,983			5,769			5,892
Total benefits and expenses	14,405			12,833			26,469			24,761
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURES	250			608			1,943			2,350
Total income tax expense (benefit)	68			125			420			520
INCOME (LOSS) BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURES	182			483			1,523			1,830
Equity in earnings of operating joint ventures, net of taxes	18			13			41			38
NET INCOME (LOSS)	200			496			1,564			1,868
Less: Income (loss) attributable to noncontrolling interests	3			5			4			8
NET INCOME (LOSS) ATTRIBUTABLE TO PRUDENTIAL FINANCIAL, INC.	$	197		$	491		$	1,560		$	1,860
EARNINGS PER SHARE
Basic earnings per share-Common Stock:
Net income (loss) attributable to Prudential Financial, Inc.	$	0.46		$	1.13		$	3.66		$	4.28
Diluted earnings per share-Common Stock:
Net income (loss) attributable to Prudential Financial, Inc.	$	0.46		$	1.12		$	3.62		$	4.21
Dividends declared per share of Common Stock	$	0.90		$	0.75		$	1.80		$	1.50

See Notes to Unaudited Interim Consolidated Financial Statements

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PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Comprehensive Income

Three and Six Months Ended June 30, 2018 and 2017 (in millions)



	Three Months Ended June 30,					Six Months Ended June 30,
	2018			2017		2018			2017
NET INCOME (LOSS)	$	200		$	496	$	1,564		$	1,868
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments for the period	(703		)	45		(41		)	597
Net unrealized investment gains (losses)	(3,326		)	2,491		(7,992		)	1,682
Defined benefit pension and postretirement unrecognized periodic benefit (cost)	75			55		129			99
Total	(3,954		)	2,591		(7,904		)	2,378
Less: Income tax expense (benefit) related to other comprehensive income (loss)	(838		)	872		(1,682		)	656
Other comprehensive income (loss), net of taxes	(3,116		)	1,719		(6,222		)	1,722
Comprehensive income (loss)	(2,916		)	2,215		(4,658		)	3,590
Less: Comprehensive income (loss) attributable to noncontrolling interests	(7		)	5		7			(11		)
Comprehensive income (loss) attributable to Prudential Financial, Inc.	$	(2,909	)	$	2,210	$	(4,665	)	$	3,601

See Notes to Unaudited Interim Consolidated Financial Statements

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PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Equity

Six Months Ended June 30, 2018 and 2017 (in millions)



	Prudential Financial, Inc. Equity
	Common Stock		Additional Paid-in Capital			Retained Earnings			Common Stock Held In Treasury			Accumulated Other Comprehensive Income (Loss)			Total Prudential Financial, Inc. Equity			Noncontrolling Interests			Total Equity
Balance, December 31, 2017	$	6	$	24,769		$	28,671		$	(16,284	)	$	17,074		$	54,236		$	275		$	54,511
Cumulative effect of adoption of ASU 2016-01						904						(847		)	57						57
Cumulative effect of adoption of ASU 2018-02						(1,653		)				1,653			0						0
Common Stock acquired									(750		)				(750		)				(750		)
Contributions from noncontrolling interests																		99			99
Distributions to noncontrolling interests																		(21		)	(21		)
Consolidations (deconsolidations) of noncontrolling interests																		0			0
Stock-based compensation programs			(6		)				129						123						123
Dividends declared on Common Stock						(769		)							(769		)				(769		)
Comprehensive income:
Net income (loss)						1,560									1,560			4			1,564
Other comprehensive income (loss), net of tax												(6,225		)	(6,225		)	3			(6,222		)
Total comprehensive income (loss)															(4,665		)	7			(4,658		)
Balance, June 30, 2018	$	6	$	24,763		$	28,713		$	(16,905	)	$	11,655		$	48,232		$	360		$	48,592

	Prudential Financial, Inc. Equity
	Common Stock		Additional Paid-in Capital			Retained Earnings			Common Stock Held In Treasury			Accumulated Other Comprehensive Income (Loss)			Total Prudential Financial, Inc. Equity			Noncontrolling Interests			Total Equity
Balance, December 31, 2016	$	6	$	24,606		$	21,946		$	(15,316	)	$	14,621		$	45,863		$	225		$	46,088
Cumulative effect of adoption of accounting changes			5			(5		)							0						0
Elimination of Gibraltar Life reporting lag						167									167						167
Common Stock acquired									(625		)				(625		)				(625		)
Contributions from noncontrolling interests																		8			8
Distributions to noncontrolling interests																		(27		)	(27		)
Consolidations (deconsolidations) of noncontrolling interests																		1			1
Stock-based compensation programs			60						200						260						260
Dividends declared on Common Stock						(655		)							(655		)				(655		)
Comprehensive income:
Net income (loss)						1,860									1,860			8			1,868
Other comprehensive income (loss), net of tax												1,741			1,741			(19		)	1,722
Total comprehensive income (loss)															3,601			(11		)	3,590
Balance, June 30, 2017	$	6	$	24,671		$	23,313		$	(15,741	)	$	16,362		$	48,611		$	196		$	48,807

See Notes to Unaudited Interim Consolidated Financial Statements

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PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Cash Flows

Six Months Ended June 30, 2018 and 2017 (in millions)



	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	1,564		$	1,868
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment (gains) losses, net	(1,110		)	665
Policy charges and fee income	(1,058		)	(1,263		)
Interest credited to policyholders’ account balances	1,444			1,887
Depreciation and amortization	48			107
(Gains) losses on assets supporting experience-rated contractholder liabilities, net(1)	596			(245		)
Change in:
Deferred policy acquisition costs	(203		)	(957		)
Future policy benefits and other insurance liabilities	5,762			3,949
Income taxes	(96		)	559
Derivatives, net	(1,041		)	(1,490		)
Other, net(1)	769			(369		)
Cash flows from (used in) operating activities(1)	6,675			4,711
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale	30,599			28,990
Fixed maturities, held-to-maturity	56			89
Fixed maturities, trading(1)	410			897
Assets supporting experience-rated contractholder liabilities(1)	9,650			17,636
Equity securities(1)	1,965			1,984
Commercial mortgage and other loans	2,572			2,630
Policy loans	1,176			1,309
Other invested assets(1)	908			591
Short-term investments(1)	18,190			17,329
Payments for the purchase/origination of:
Fixed maturities, available-for-sale	(34,922		)	(34,153		)
Fixed maturities, trading(1)	(483		)	(1,080		)
Assets supporting experience-rated contractholder liabilities(1)	(9,560		)	(17,580		)
Equity securities(1)	(1,826		)	(1,646		)
Commercial mortgage and other loans	(5,525		)	(4,494		)
Policy loans	(1,002		)	(915		)
Other invested assets	(1,154		)	(769		)
Short-term investments(1)	(17,138		)	(13,348		)
Acquisition of business, net of cash acquired	0			(64		)
Derivatives, net	(271		)	244
Other, net(1)	(134		)	(297		)
Cash flows from (used in) investing activities(1)	(6,489		)	(2,647		)
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholders’ account deposits	14,826			13,648
Policyholders’ account withdrawals	(14,076		)	(12,706		)
Net change in securities sold under agreements to repurchase and cash collateral for loaned securities	1,094			914
Cash dividends paid on Common Stock	(769		)	(653		)
Net change in financing arrangements (maturities 90 days or less)	(103		)	46
Common Stock acquired	(739		)	(612		)
Common Stock reissued for exercise of stock options	74			161
Proceeds from the issuance of debt (maturities longer than 90 days)	1,194			321
Repayments of debt (maturities longer than 90 days)	(848		)	(216		)
Other, net	(244		)	(451		)
Cash flows from (used in) financing activities	409			452
Effect of foreign exchange rate changes on cash balances	(71		)	110
NET INCREASE IN CASH, CASH EQUIVALENTS RESTRICTED CASH AND RESTRICTED CASH EQUIVALENT(1)	524			2,626
CASH, CASH EQUIVALENTS RESTRICTED CASH AND RESTRICTED CASH EQUIVALENT, BEGINNING OF YEAR(1)	14,536			14,181
CASH, CASH EQUIVALENTS RESTRICTED CASH AND RESTRICTED CASH EQUIVALENT, END OF PERIOD(1)	$	15,060		$	16,807
NON-CASH TRANSACTIONS DURING THE PERIOD
Treasury Stock shares issued for stock-based compensation programs	$	132		$	98
Significant Pension Risk Transfer transactions:
Assets received, excluding cash and cash equivalents	$	0		$	1,294
Liabilities assumed	977			1,685
Net cash received	$	977		$	391
Acquisition:
Assets acquired, excluding cash and cash equivalents	$	0		$	196
Liabilities assumed	0			132
Net cash paid on acquisition	$	0		$	64
RECONCILIATION TO STATEMENT OF FINANCIAL POSITION
Cash and cash equivalents	$	14,918		$	16,605
Restricted cash and restricted cash equivalents (included in “Other assets”)	142			202
Total cash, cash equivalents restricted cash and restricted cash equivalents	$	15,060		$	16,807

__________


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

See Notes to Unaudited Interim Consolidated Financial Statements

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements

1. BUSINESS AND BASIS OF PRESENTATION

Prudential Financial, Inc. (“Prudential Financial”) and its subsidiaries (collectively, “Prudential” or the “Company”) provide a wide range of insurance, investment management, and other financial products and services to both individual and institutional customers throughout the United States and in many other countries. Principal products and services provided include life insurance, annuities, retirement-related services, mutual funds and investment management.

The Company’s principal operations are comprised of five divisions, which together encompass seven segments, and its Corporate and Other operations. The U.S. Individual Solutions division consists of the Individual Annuities and Individual Life segments. The U.S. Workplace Solutions division consists of the Retirement and Group Insurance segments. The PGIM division is comprised of the PGIM segment, the global investment management businesses of the Company (retitled from the “Investment Management division” and the “Investment Management segment” effective in the second quarter of 2018). The International Insurance division is comprised of the International Insurance segment, and the Closed Block division is comprised of the Closed Block segment. The Closed Block division is accounted for as a divested business that is reported separately from the divested businesses that are included in the Company’s Corporate and Other operations. The Company’s Corporate and Other operations include corporate items and initiatives that are not allocated to business segments and businesses that have been or will be divested, excluding the Closed Block division.

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”). Intercompany balances and transactions have been eliminated. The Unaudited Interim Consolidated Financial Statements include the accounts of Prudential Financial, entities over which the Company exercises control, including majority-owned subsidiaries and variable interest entities (“VIEs”) in which the Company is considered the primary beneficiary. See Note 4 for more information on the Company’s consolidated variable interest entities.

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 Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Elimination of Gibraltar Life Reporting Lag

Prior to January 1, 2018, the Company’s Gibraltar Life Insurance Company, Ltd. (“Gibraltar Life”) consolidated operations used a November 30 fiscal year end for purposes of inclusion in the Company’s Consolidated Financial Statements. The result of this reporting date difference was a one-month reporting lag for Gibraltar Life. As a result, the Company’s unaudited interim consolidated balance sheet as of June 30 previously included the assets and liabilities of Gibraltar Life as of May 31, and the Company’s unaudited interim consolidated income statement previously included Gibraltar Life’s results of operations for the three and six months ended May 31.

Effective January 1, 2018, the Company converted its Gibraltar Life operations to a December 31 fiscal year end. This action eliminated the one-month reporting lag so that the reporting dates and periods of financial balances and results of Gibraltar Life are consistent with those of the Company. The establishment of a new fiscal year end for Gibraltar Life is considered a change in accounting principle to a preferable method and requires retrospective application. The Company believes this change in accounting principle is preferable given that it aligns the reporting dates of Prudential Financial and its subsidiaries which allows for more timely and consistent basis of reporting the financial position and results of Gibraltar Life. In order to effect this elimination, the Company restated prior periods’ equity which increased “Retained Earnings” by approximately $167 million as of December 31, 2015, 2016 and 2017. The impact to the Statements of Operations, Statements of Cash Flows, Statements of Comprehensive Income and other balance sheet captions, as a result of the elimination of the reporting lag, was not material for any of the periods presented.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Use of Estimates

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

The most significant estimates include those used in determining deferred policy acquisition costs (“DAC”) and related amortization; value of business acquired (“VOBA”) and its amortization; amortization of deferred sales inducements (“DSI”); measurement of goodwill and any related impairment; valuation of investments including derivatives and the recognition of other-than-temporary impairments (“OTTI”); future policy benefits including guarantees; pension and other postretirement benefits; provision for income taxes and valuation of deferred tax assets; and accruals for contingent liabilities, including estimates for losses in connection with unresolved legal 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 “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 Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

(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.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	December 31, 2017
	As previously reported		Reclassifications												As currently reported
Consolidated Statement of Financial Position Line Items	As previously reported		(1)			(2)			(3)			(4)			As currently reported
	(in millions)
Fixed maturities, available-for-sale, at fair value	$	346,780													$	346,780
Fixed maturities, held-to-maturity, at amortized cost	2,049														2,049
* Fixed maturities, trading, at fair value	0								3,507						3,507
Trading account assets supporting insurance liabilities, at fair value	22,097		(22,097		)										0
* Assets supporting experience-rated contractholder liabilities, at fair value	0		22,097												22,097
Other trading account assets, at fair value	5,752								(5,752		)				0
Equity securities, available-for-sale, at fair value	6,174					(6,174		)							0
* Equity securities, at fair value	0					6,174			1,155						7,329
Commercial mortgage and other loans	56,045														56,045
Policy loans	11,891														11,891
Other long-term investments	12,308											(12,308		)	0
* Other invested assets	0								1,065			12,308			13,373
Short-term investments	6,775								25						6,800
Total investments	$	469,871	$	0		$	0		$	0		$	0		$	469,871

* — New line item effective January 1, 2018.

Strikethrough — Eliminated line item effective January 1, 2018.

________


(1)	Retitled “Trading account assets supporting insurance liabilities, at fair value” to “Assets supporting experience-rated contractholder liabilities, at fair value” as equity securities are included in this line item, and they can no longer be described as trading.


(2)	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.


(3)	Eliminated the line item “Other trading account assets, at fair value” and reclassified each component to another line item.


(4)	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.



Summary of ASU 2016-01 Transition Impacts on the Consolidated Statement of Financial Position upon Adoption on January 1, 2018
(in millions)
	Increase / (Decrease)
Other invested assets	$	229
Total assets	$	229
Policyholders’ dividends	$	157
Income taxes	15
Total liabilities	172
Accumulated other comprehensive income (loss)	(847		)
Retained earnings	904
Total equity	57
Total liabilities and equity	$	229

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

(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 “Other trading account assets, at fair value.” These fixed maturities are primarily related to assets associated with consolidated variable interest entities for which the Company is the investment manager and the realized and unrealized gains and losses activity are generally offset by changes in the corresponding liabilities. Realized and unrealized gains and losses on these investments are reported in “Other income,” and interest and dividend income from these investments is reported in “Net investment income.”

Assets supporting experience-rated contractholder liabilities, at fair value is the new title of the financial statement line item formerly titled “Trading account assets supporting insurance liabilities, at fair value.” This financial statement line item includes invested assets that consist of fixed maturities, equity securities, and short-term investments and cash equivalents, that support certain products included in the Retirement and International Insurance segments which are experience-rated, meaning that the investment results associated with these products are expected to ultimately accrue to contractholders. Realized and unrealized gains and losses on these investments are reported in “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 “Other trading account asset, at fair value” were reclassified to “Equity securities, at fair value.” The retitled financial statement line item is comprised of common stock, mutual fund shares and non-redeemable preferred stock, which are carried at fair value. Realized and unrealized gains and losses on these investments are reported in “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 securities reported in the financial statement line item 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 item 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 item 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, derivative assets and other investments. LPs/LLCs interests are accounted for using either the equity method of accounting, or at fair value with changes in fair value reported in “Other income.” Prior to the adoption of the standard, the Company applied the cost method of accounting for certain LPs/LLCs interests 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 “Other income.” The Company consolidates LPs/LLCs in certain other instances where it is deemed to exercise control, or is considered the primary beneficiary of a variable interest entity. See Note 4 for additional information about VIEs.

REVENUES AND BENEFITS AND EXPENSES

Other income includes realized and unrealized gains or losses from investments reported as “Fixed maturities, trading,” “Assets supporting experience-rated contractholder liabilities, at fair value,” “Equity securities, at fair value,” and “Other invested assets” that are measured at fair value.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Adoption of ASU 2014-09

This section is meant to serve as an update to, and should be read in conjunction with, Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Effective January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), using a modified retrospective method. The core principle of this ASU is that an entity should recognize revenue 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 or services. This core principle is assessed via application of a five-step revenue recognition model that is detailed within the ASU.

There was no material impact to the financial statements at the date of adoption of this ASU. The prospective impact primarily affects revenue recognition policies pertaining to the Company’s investment management business. This revenue is classified within the “Asset management and service fees” line item in the Consolidated Statements of Operations. Adoption of this standard has no impact on revenues related to financial instruments and insurance contracts (some of which may be reflected within “Asset management and service fees”) given that these types of revenues were specifically scoped out of this ASU.

“Asset management and service fees” principally includes asset-based asset management fees (which continue to be recognized in the period in which the services are performed) and performance-based incentive fees. Under the previously existing guidance, the Company recorded performance-based incentive fee revenue when the contractual terms of the asset management fee arrangement were satisfied such that the performance fee was no longer subject to clawback or contingency. Under the new guidance, the Company will record this revenue when the contractual terms of the asset management fee arrangement have been satisfied and it is probable that a significant reversal in the amount of the fee will not occur. Under this principle the Company will continue to record a deferred performance-based incentive fee liability to the extent it receives cash related to the performance-based incentive fee prior to meeting the revenue recognition criteria delineated above.

For the three months and six months ended June 30, 2018, respectively, asset management and service fee revenues included $855 million and $1,717 million of asset-based management fees, $6 million and $11 million of performance-based incentive fees, and $149 million and $308 million of other fees. For the three months and six months ended June 30, 2017, respectively, asset management and service fee revenues included $816 million and $1,612 million of asset-based management fees, $5 million and $12 million of performance-based incentive fees, and $152 million and $300 million of other fees. These fees predominantly relate to investment management activities but also include certain asset-based fees associated with insurance contracts. In accordance with the provisions of the ASU, the comparative information for the prior period was not restated and continues to be reported under the accounting standards in effect for that period.

Other ASU adopted during the six months ended June 30, 2018

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



Standard	Description	Effective date and method of adoption	Effect on the financial statements or other significant matters

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.
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 increasing accumulated other comprehensive income and decreasing retained earnings, each by $1,653 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).

ASU issued but not yet adopted as of June 30, 2018

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



Standard	Description	Effective date and method of adoption	Effect on the financial statements or other significant matters

ASU 2016-02, Leases (Topic 842)	This ASU ensures that assets and liabilities from all outstanding lease contracts are recognized on the balance sheet (with limited exception). The ASU substantially changes a Lessee’s accounting for leases and requires the recording on balance sheet of a “right-of-use” asset and liability to make lease payments for most leases. A Lessee will continue to recognize expense in its income statement in a manner similar to the requirements under the current lease accounting standard. For Lessors, the standard modifies classification criteria and accounting for sales-type and direct financing leases and requires a Lessor to derecognize the carrying value of the leased asset that is considered to have been transferred to a Lessee and record a lease receivable and residual asset (“receivable and residual” approach). The standard also eliminates the real estate specific provisions of the current standard (i.e., sale-leaseback).	January 1, 2019 using either the modified retrospective method with a cumulative effect adjustment as of the earliest period presented or the optional transition method with a cumulative effect adjustment recorded as of the beginning of the fiscal year of adoption. Early adoption is permitted.	The Company is currently assessing the impact of the ASU on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements. Upon adoption, we expect to apply the optional transition method and record a right-of-use asset and liability on our balance sheet related to existing operating leases. Any new lease arrangements and/or significant modifications entered into subsequent to the adoption date will be accounted for in accordance with the new standard.
ASU 2016-13, Financial Instruments-Credit Losses (Topic326): 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 OTTI 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 the 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 OTTI 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 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment	This ASU simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test in current U.S. GAAP, which measures a goodwill impairment by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of the goodwill. Under the ASU, a goodwill impairment should be recorded for the amount by which the carrying amount of a reporting unit exceeds its fair value (capped by the total amount of goodwill allocated to the reporting unit).	January 1, 2020 using the prospective method (with early adoption permitted).	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.

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PRUDENTIAL FINANCIAL, INC.

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(4)
	(in millions)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	22,471	$	2,987	$	613	$	24,845	$	0
Obligations of U.S. states and their political subdivisions	9,548		771		40		10,279		0
Foreign government bonds	93,464		15,787		414		108,837		0
U.S. corporate public securities	79,744		4,674		2,058		82,360		(4		)
U.S. corporate private securities(1)	32,171		1,269		556		32,884		(11		)
Foreign corporate public securities	26,949		2,290		355		28,884		(5		)
Foreign corporate private securities	24,099		622		760		23,961		0
Asset-backed securities(2)	12,860		195		24		13,031		(172		)
Commercial mortgage-backed securities	13,093		58		305		12,846		0
Residential mortgage-backed securities(3)	3,149		118		43		3,224		(1		)
Total fixed maturities, available-for-sale(1)	$	317,548	$	28,771	$	5,168	$	341,151	$	(193	)

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	June 30, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in millions)
Fixed maturities, held-to-maturity:
Foreign government bonds	$	878	$	271	$	0	$	1,149
Foreign corporate public securities	662		67		0		729
Foreign corporate private securities(5)	85		3		0		88
Commercial mortgage-backed securities	0		0		0		0
Residential mortgage-backed securities(3)	395		27		0		422
Total fixed maturities, held-to-maturity(5)	$	2,020	$	368	$	0	$	2,388

__________


(1)	Excludes notes with amortized cost of $3,666 million (fair value, $3,666 million), which have been offset with the associated payables under a netting agreement.


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


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


(4)	Represents the amount of unrealized losses remaining in AOCI, from the impairment measurement date. Amount excludes $409 million of net unrealized gains on impaired available-for-sale securities and $1 million of net unrealized gains on impaired held-to-maturity securities relating to changes in the value of such securities subsequent to the impairment measurement date.


(5)	Excludes notes with amortized cost of $4,753 million (fair value, $4,754 million), which have been offset with the associated payables under a netting agreement.



	December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI(4)
	(in millions)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	22,837	$	3,647	$	346	$	26,138	$	0
Obligations of U.S. states and their political subdivisions	9,366		1,111		6		10,471		0
Foreign government bonds	88,062		15,650		293		103,419		0
U.S. corporate public securities	81,967		8,671		414		90,224		(10		)
U.S. corporate private securities(1)	31,852		2,051		169		33,734		(13		)
Foreign corporate public securities	26,389		3,118		99		29,408		(5		)
Foreign corporate private securities	23,322		1,242		337		24,227		0
Asset-backed securities(2)	11,965		278		10		12,233		(237		)
Commercial mortgage-backed securities	13,134		238		91		13,281		0
Residential mortgage-backed securities(3)	3,491		165		11		3,645		(2		)
Total fixed maturities, available-for-sale(1)	$	312,385	$	36,171	$	1,776	$	346,780	$	(267	)

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in millions)
Fixed maturities, held-to-maturity:
Foreign government bonds	$	865	$	265	$	0	$	1,130
Foreign corporate public securities	654		82		0		736
Foreign corporate private securities(5)	84		2		0		86
Commercial mortgage-backed securities	0		0		0		0
Residential mortgage-backed securities(3)	446		32		0		478
Total fixed maturities, held-to-maturity(5)	$	2,049	$	381	$	0	$	2,430

__________


(1)	Excludes notes with amortized cost of $2,660 million (fair value, $2,660 million), which have been offset with the associated payables under a netting agreement.


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


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


(4)	Represents the amount of unrealized losses remaining in AOCI, from the impairment measurement date. Amount excludes $553 million of net unrealized gains on impaired available-for-sale securities and $2 million of net unrealized gains on impaired held-to-maturity securities relating to changes in the value of such securities subsequent to the impairment measurement date.


(5)	Excludes notes with amortized cost of $4,627 million (fair value, $4,913 million), which have been offset with the associated payables under a netting agreement.

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 millions)
Fixed maturities(1):
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	5,105	$	125	$	4,940	$	488	$	10,045	$	613
Obligations of U.S. states and their political subdivisions	1,514		25		252		15		1,766		40
Foreign government bonds	5,039		221		2,737		193		7,776		414
U.S. corporate public securities	36,466		1,451		5,579		607		42,045		2,058
U.S. corporate private securities	14,045		382		2,242		174		16,287		556
Foreign corporate public securities	7,626		242		1,348		113		8,974		355
Foreign corporate private securities	9,568		357		3,161		403		12,729		760
Asset-backed securities	6,825		19		285		5		7,110		24
Commercial mortgage-backed securities	6,705		165		2,057		140		8,762		305
Residential mortgage-backed securities	1,149		29		292		14		1,441		43
Total	$	94,042	$	3,016	$	22,893	$	2,152	$	116,935	$	5,168

__________


(1)	Includes $13 million of fair value and less than $1 million of gross unrealized losses, which are not reflected in AOCI, on securities classified as held-to-maturity, as of June 30, 2018.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	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 millions)
Fixed maturities(1):
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	3,450	$	28	$	6,391	$	318	$	9,841	$	346
Obligations of U.S. states and their political subdivisions	44		0		287		6		331		6
Foreign government bonds	4,417		55		2,937		238		7,354		293
U.S. corporate public securities	7,914		110		6,831		304		14,745		414
U.S. corporate private securities	4,596		76		2,009		93		6,605		169
Foreign corporate public securities	2,260		21		1,678		78		3,938		99
Foreign corporate private securities	1,213		20		5,339		317		6,552		337
Asset-backed securities	564		2		366		8		930		10
Commercial mortgage-backed securities	2,593		17		2,212		74		4,805		91
Residential mortgage-backed securities	584		4		286		7		870		11
Total	$	27,635	$	333	$	28,336	$	1,443	$	55,971	$	1,776

__________


(1)	Includes $12 million of fair value and less than $1 million of gross unrealized losses, which are not reflected in AOCI, on securities classified as held-to-maturity, as of December 31, 2017.

As of June 30, 2018 and December 31, 2017, the gross unrealized losses on fixed maturity securities were composed of $4,639 million and $1,470 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 $529 million and $306 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. As of June 30, 2018, the $2,152 million of gross unrealized losses on fixed maturity securities of twelve months or more were concentrated in U.S. government bonds and in the Company’s corporate securities within the consumer non-cyclical and utility sectors. As of December 31, 2017, the $1,443 million of gross unrealized losses on fixed maturity securities of twelve months or more were concentrated in U.S. government bonds, foreign government bonds and in the Company’s corporate securities within the energy, utility and consumer non-cyclical sectors. In accordance with its policy described in Note 2 to the Consolidated 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:

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	June 30, 2018
	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Fixed maturities:
Due in one year or less	$	10,769	$	11,156	$	7	$	7
Due after one year through five years	50,932		53,917		171		176
Due after five years through ten years	63,671		66,989		572		636
Due after ten years(1)	163,074		179,988		875		1,147
Asset-backed securities	12,860		13,031		0		0
Commercial mortgage-backed securities	13,093		12,846		0		0
Residential mortgage-backed securities	3,149		3,224		395		422
Total	$	317,548	$	341,151	$	2,020	$	2,388

__________


(1)	Excludes available-for-sale notes with amortized cost of $3,666 million (fair value, $3,666 million) and held-to-maturity notes with amortized cost of $4,753 million (fair value, $4,754 million), which have been offset with the associated payables under a netting agreement.

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 millions)
Fixed maturities, available-for-sale:
Proceeds from sales(1)	$	9,489		$	8,157		$	19,074		$	15,887
Proceeds from maturities/prepayments	6,553			7,546			11,779			13,420
Gross investment gains from sales and maturities	410			410			784			801
Gross investment losses from sales and maturities	(187		)	(135		)	(444		)	(298		)
OTTI recognized in earnings(2)	(58		)	(46		)	(97		)	(100		)
Fixed maturities, held-to-maturity:
Proceeds from maturities/prepayments(3)	$	23		$	39		$	59		$	89

__________


(1)	Includes $254 million and $317 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 amounts remaining 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 impairment.


(3)	Includes $3 million and $0 million of non-cash related proceeds due to the timing of trade settlements for the six months ended June 30, 2018 and 2017, respectively.

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:

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	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 millions)
Credit loss impairments:
Balance, beginning of period	$	203		$	319		$	350		$	359
New credit loss impairments	0			0			7			7
Additional credit loss impairments on securities previously impaired	0			0			0			1
Increases due to the passage of time on previously recorded credit losses	4			6			4			7
Reductions for securities which matured, paid down, prepaid or were sold during the period	(42		)	(155		)	(7		)	(16		)
Reductions for securities impaired to fair value during the period(1)	0			(4		)	(11		)	(14		)
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected	(2		)	(3		)	(2		)	(3		)
Balance, end of period	$	163		$	163		$	341		$	341

__________


(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.

Assets Supporting Experience-Rated Contractholder Liabilities

The following table sets forth the composition of “Assets supporting experience-rated contractholder liabilities,” as of the dates indicated:



	June 30, 2018				December 31, 2017
	Amortized Cost or Cost		Fair Value		Amortized Cost or Cost		Fair Value
	(in millions)
Short-term investments and cash equivalents	$	340	$	340	$	245	$	245
Fixed maturities:
Corporate securities	13,263		13,140		13,816		14,073
Commercial mortgage-backed securities	2,390		2,350		2,294		2,311
Residential mortgage-backed securities(1)	888		867		961		966
Asset-backed securities(2)	1,470		1,493		1,363		1,392
Foreign government bonds	1,063		1,061		1,050		1,057
U.S. government authorities and agencies and obligations of U.S. states	579		619		357		410
Total fixed maturities	19,653		19,530		19,841		20,209
Equity securities	1,367		1,627		1,278		1,643
Total assets supporting experience-rated contractholder liabilities	$	21,360	$	21,497	$	21,364	$	22,097

__________


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


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

The net change in unrealized gains (losses) from assets supporting experience-rated contractholder liabilities still held at period end, recorded within “Other income,” was $(198) million and $183 million during the three months ended June 30, 2018 and 2017, respectively, and $(596) million and $229 million during the six months ended June 30, 2018 and 2017, respectively.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Equity Securities

The net change in unrealized gains (losses) from equity securities still held at period end, recorded within “Other income,” was $(80) million and $11 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 “Other income,” was $(271) million and $54 million during the six months ended June 30, 2018 and 2017, respectively.

Concentrations of Financial Instruments

The Company monitors its concentrations of financial instruments and mitigates credit risk by maintaining a diversified investment portfolio which limits exposure to any one issuer.

As of the dates indicated, the Company’s exposure to concentrations of credit risk of single issuers greater than 10% of the Company’s stockholders’ equity included securities of the U.S. government and certain U.S. government agencies and securities guaranteed by the U.S. government, as well as the securities disclosed below:



	June 30, 2018				December 31, 2017
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Investments in Japanese government and government agency securities:
Fixed maturities, available-for-sale	$	69,248	$	81,731	$	64,628	$	76,311
Fixed maturities, held-to-maturity	857		1,122		844		1,103
Fixed maturities, trading	23		23		23		23
Assets supporting experience-rated contractholder liabilities	676		686		657		667
Total	$	70,804	$	83,562	$	66,152	$	78,104



	June 30, 2018				December 31, 2017
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Investments in South Korean government and government agency securities:
Fixed maturities, available-for-sale	$	9,646	$	10,988	$	9,425	$	10,989
Fixed maturities, held-to-maturity	0		0		0		0
Fixed maturities, trading	0		0		0		0
Assets supporting experience-rated contractholder liabilities	15		15		15		15
Total	$	9,661	$	11,003	$	9,440	$	11,004

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PRUDENTIAL FINANCIAL, INC.

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 millions)			% of Total		Amount (in millions)			% of Total
Commercial mortgage and agricultural property loans by property type:
Office	$	13,435		23.2	%	$	12,670		22.9	%
Retail	8,707			15.1		8,543			15.5
Apartments/Multi-Family	16,194			28.0		15,465			28.0
Industrial	10,609			18.3		9,451			17.1
Hospitality	1,965			3.4		2,067			3.7
Other	3,784			6.5		3,888			7.0
Total commercial mortgage loans	54,694			94.5		52,084			94.2
Agricultural property loans	3,206			5.5		3,203			5.8
Total commercial mortgage and agricultural property loans by property type	57,900			100.0	%	55,287			100.0	%
Valuation allowance	(119		)			(100		)
Total net commercial mortgage and agricultural property loans by property type	57,781					55,187
Other loans:
Uncollateralized loans	666					663
Residential property loans	176					196
Other collateralized loans	4					5
Total other loans	846					864
Valuation allowance	(5		)			(6		)
Total net other loans	841					858
Total commercial mortgage and other loans(1)	$	58,622				$	56,045

__________


(1)	Includes loans held for sale which are carried at fair value and are collateralized primarily by apartment complexes. As of June 30, 2018 and December 31, 2017, the net carrying value of these loans was $330 million and $593 million, respectively.

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 (9%) and New York (8%) and included loans secured by properties in Europe (6%), Australia (1%) and Asia (1%).

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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



	June 30, 2018
	Commercial Mortgage Loans		Agricultural Property Loans		Residential Property Loans		Other Collateralized Loans		Uncollateralized Loans			Total
	(in millions)
Allowance for credit losses:
Balance, beginning of year	$	97	$	3	$	1	$	0	$	5		$	106
Addition to (release of) allowance for losses	19		0		0		0		(1		)	18
Charge-offs, net of recoveries	0		0		0		0		0			0
Change in foreign exchange	0		0		0		0		0			0
Total ending balance	$	116	$	3	$	1	$	0	$	4		$	124



	December 31, 2017
	Commercial Mortgage Loans			Agricultural Property Loans		Residential Property Loans			Other Collateralized Loans		Uncollateralized Loans			Total
	(in millions)
Allowance for credit losses:
Balance, beginning of year	$	96		$	2	$	2		$	0	$	6		$	106
Addition to (release of) allowance for losses	2			1		(1		)	0		(1		)	1
Charge-offs, net of recoveries	(1		)	0		0			0		0			(1		)
Change in foreign exchange	0			0		0			0		0			0
Total ending balance	$	97		$	3	$	1		$	0	$	5		$	106

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		Residential Property Loans		Other Collateralized Loans		Uncollateralized Loans		Total
	(in millions)
Allowance for credit losses:
Individually evaluated for impairment	$	20	$	0	$	0	$	0	$	0	$	20
Collectively evaluated for impairment	96		3		1		0		4		104
Total ending balance(1)	$	116	$	3	$	1	$	0	$	4	$	124

Recorded investment(2):
Individually evaluated for impairment	$	70	$	35	$	0	$	0	$	2	$	107
Collectively evaluated for impairment	54,624		3,171		176		4		664		58,639
Total ending balance(1)	$	54,694	$	3,206	$	176	$	4	$	666	$	58,746

__________


(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.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	December 31, 2017
	Commercial Mortgage Loans		Agricultural Property Loans		Residential Property Loans		Other Collateralized Loans		Uncollateralized Loans		Total
	(in millions)
Allowance for credit losses:
Individually evaluated for impairment	$	7	$	0	$	0	$	0	$	0	$	7
Collectively evaluated for impairment	90		3		1		0		5		99
Total ending balance(1)	$	97	$	3	$	1	$	0	$	5	$	106

Recorded investment(2):
Individually evaluated for impairment	$	75	$	39	$	0	$	0	$	2	$	116
Collectively evaluated for impairment	52,009		3,164		196		5		661		56,035
Total ending balance(1)	$	52,084	$	3,203	$	196	$	5	$	663	$	56,151

__________


(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 based upon the recorded investment gross of allowance for credit losses, as of the date indicated:

Commercial mortgage loans



	June 30, 2018
	Debt Service Coverage Ratio
	>1.2X		1.0X to <1.2X		< 1.0X		Total
	(in millions)
Loan-to-Value Ratio:
0%-59.99%	$	29,292	$	520	$	281	$	30,093
60%-69.99%	16,737		579		155		17,471
70%-79.99%	6,047		807		11		6,865
80% or greater	60		182		23		265
Total commercial mortgage loans	$	52,136	$	2,088	$	470	$	54,694

Agricultural property loans



	June 30, 2018
	Debt Service Coverage Ratio
	>1.2X		1.0X to <1.2X		< 1.0X		Total
	(in millions)
Loan-to-Value Ratio:
0%-59.99%	$	2,955	$	176	$	0	$	3,131
60%-69.99%	75		0		0		75
70%-79.99%	0		0		0		0
80% or greater	0		0		0		0
Total agricultural property loans	$	3,030	$	176	$	0	$	3,206

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Total commercial mortgage and agricultural property loans



	June 30, 2018
	Debt Service Coverage Ratio
	>1.2X		1.0X to <1.2X		< 1.0X		Total
	(in millions)
Loan-to-Value Ratio:
0%-59.99%	$	32,247	$	696	$	281	$	33,224
60%-69.99%	16,812		579		155		17,546
70%-79.99%	6,047		807		11		6,865
80% or greater	60		182		23		265
Total commercial mortgage and agricultural property loans	$	55,166	$	2,264	$	470	$	57,900

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

Commercial mortgage loans



	December 31, 2017
	Debt Service Coverage Ratio
	>1.2X		1.0X to <1.2X		< 1.0X		Total
	(in millions)
Loan-to-Value Ratio:
0%-59.99%	$	30,082	$	639	$	251	$	30,972
60%-69.99%	13,658		530		121		14,309
70%-79.99%	5,994		514		29		6,537
80% or greater	93		54		119		266
Total commercial mortgage loans	$	49,827	$	1,737	$	520	$	52,084

Agricultural property loans



	December 31, 2017
	Debt Service Coverage Ratio
	>1.2X		1.0X to <1.2X		< 1.0X		Total
	(in millions)
Loan-to-Value Ratio:
0%-59.99%	$	2,988	$	170	$	5	$	3,163
60%-69.99%	40		0		0		40
70%-79.99%	0		0		0		0
80% or greater	0		0		0		0
Total agricultural property loans	$	3,028	$	170	$	5	$	3,203

Total commercial mortgage and agricultural property loans



	December 31, 2017
	Debt Service Coverage Ratio
	>1.2X		1.0X to <1.2X		< 1.0X		Total
	(in millions)
Loan-to-Value Ratio:
0%-59.99%	$	33,070	$	809	$	256	$	34,135
60%-69.99%	13,698		530		121		14,349
70%-79.99%	5,994		514		29		6,537
80% or greater	93		54		119		266
Total commercial mortgage and agricultural property loans	$	52,855	$	1,907	$	525	$	55,287

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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 Past Due		Total Loans		Non-Accrual Status(2)
	(in millions)
Commercial mortgage loans	$	54,694	$	0	$	0	$	0	$	0	$	54,694	$	70
Agricultural property loans	3,190		0		0		16		16		3,206		23
Residential property loans	172		1		1		2		4		176		2
Other collateralized loans	4		0		0		0		0		4		0
Uncollateralized loans	666		0		0		0		0		666		0
Total	$	58,726	$	1	$	1	$	18	$	20	$	58,746	$	95

__________


(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 Consolidated 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 Past Due		Total Loans		Non-Accrual Status(2)
	(in millions)
Commercial mortgage loans	$	52,084	$	0	$	0	$	0	$	0	$	52,084	$	71
Agricultural property loans	3,201		0		0		2		2		3,203		23
Residential property loans	191		3		0		2		5		196		2
Other collateralized loans	5		0		0		0		0		5		0
Uncollateralized loans	663		0		0		0		0		663		0
Total	$	56,144	$	3	$	0	$	4	$	7	$	56,151	$	96

__________


(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 Consolidated 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 FINANCIAL, INC.

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 millions)
LPs/LLCs:
Equity method:
Private equity	$	2,927	$	2,954
Hedge funds	1,021		803
Real estate-related	1,171		972
Subtotal equity method	5,119		4,729
Fair value:
Private equity	1,608		1,325
Hedge funds	2,307		2,419
Real estate-related	293		247
Subtotal fair value(1)	4,208		3,991
Total LPs/LLCs	9,327		8,720
Real estate held through direct ownership(2)	2,278		2,409
Derivative instruments	820		1,214
Other(3)	1,034		1,030
Total other invested assets(4)	$	13,459	$	13,373

_________


(1)	As of December 31, 2017, $1,572 million was accounted for using the cost method.


(2)	As of June 30, 2018 and December 31, 2017, real estate held through direct ownership had mortgage debt of $751 million and $799 million, respectively.

(3)

Primarily includes strategic investments made by investment management operations, leveraged leases and member and activity stock held in the Federal Home Loan Banks of New York and Boston. For additional information regarding the Company’s holdings in the Federal Home Loan Banks of New York and Boston, see Note 14 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.


(4)	Prior period amounts have been reclassified to conform to current period presentation. For additional information, see Note 2.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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 millions)
Fixed maturities, available-for-sale(1)	$	3,001		$	2,856		$	5,955		$	5,651
Fixed maturities, held-to-maturity(1)	57			54			112			108
Fixed maturities, trading	30			45			61			87
Assets supporting experience-rated contractholder liabilities, at fair value	181			177			372			372
Equity securities, at fair value	59			114			94			204
Commercial mortgage and other loans	594			583			1,163			1,120
Policy loans	156			155			308			307
Other invested assets	163			248			304			580
Short-term investments and cash equivalents	82			46			154			90
Gross investment income	4,323			4,278			8,523			8,519
Less: investment expenses	(227		)	(189		)	(429		)	(369		)
Net investment income(2)	$	4,096		$	4,089		$	8,094		$	8,150

__________


(1)	Includes income on credit-linked notes which are reported on the same financial statement line item as related surplus notes, as conditions are met for right to offset.


(2)	Prior period amounts have been reclassified to conform to current period presentation.

Realized Investment Gains (Losses), Net

The following table sets forth “Realized investment gains (losses), net,” by investment type, for the periods indicated:



	Three Months Ended June 30,					Six Months Ended June 30,
	2018		2017			2018			2017
	(in millions)
Fixed maturities(1)	$	165	$	229		$	243		$	403
Equity securities(2)	0		164			0			420
Commercial mortgage and other loans	5		14			17			28
Investment real estate	60		6			62			12
LPs/LLCs	10		(10		)	16			(21		)
Derivatives(3)	445		(1,496		)	773			(1,507		)
Other	0		1			(1		)	0
Realized investment gains (losses), net	$	685	$	(1,092	)	$	1,110		$	(665	)

__________


(1)	Includes fixed maturity securities classified as available-for-sale and held-to-maturity and excludes fixed maturity securities classified as trading.


(2)	Effective January 1, 2018, realized gains (losses) on equity securities are recorded within “Other income.”


(3)	Includes the hedged items offset in qualifying fair value hedge accounting relationships.

Net Unrealized Gains (Losses) on Investments within AOCI

The following table sets forth net unrealized gains (losses) on investments, as of the dates indicated:

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	June 30, 2018			December 31, 2017
	(in millions)
Fixed maturity securities, available-for-sale—with OTTI	$	216		$	286
Fixed maturity securities, available-for-sale—all other	23,387			34,109
Equity securities, available-for-sale(1)	0			2,027
Derivatives designated as cash flow hedges(2)	99			(39		)
Other investments(3)	(9		)	15
Net unrealized gains (losses) on investments	$	23,693		$	36,398

__________


(1)	Effective January 1, 2018, unrealized gains (losses) on equity securities are recorded within “Other income.”


(2)	For more information on cash flow hedges, see Note 5.


(3)	As of June 30, 2018, there were no net unrealized losses on held-to-maturity securities that were previously transferred from available-for-sale. Includes net unrealized gains on certain joint ventures that are strategic in nature and are included in “Other assets.”

Repurchase Agreements and Securities Lending

In the normal course of business, the Company sells securities under agreements to repurchase and enters into securities lending transactions. The following table sets forth the composition of “Securities sold under agreements to repurchase,” as of the dates indicated:



	June 30, 2018						December 31, 2017
	Remaining Contractual Maturities of the Agreements						Remaining Contractual Maturities of the Agreements
	Overnight & Continuous		Up to 30 Days		Total		Overnight & Continuous		Up to 30 Days		Total
	(in millions)
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	8,394	$	775	$	9,169	$	911	$	7,349	$	8,260
U.S. corporate public securities	20		0		20		1		0		1
Foreign corporate public securities	0		0		0		0		0		0
Residential mortgage-backed securities	351		0		351		0		139		139
Equity securities	0		0		0		0		0		0
Total securities sold under agreements to repurchase(1)	$	8,765	$	775	$	9,540	$	912	$	7,488	$	8,400

__________


(1)	The Company did not have any agreements with remaining contractual maturities of thirty days or greater, as of the dates indicated.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The following table sets forth the composition of “Cash collateral for loaned securities” which represents the liability to return cash collateral received for the following types of securities loaned, as of the dates indicated:



	June 30, 2018						December 31, 2017
	Remaining Contractual Maturities of the Agreements						Remaining Contractual Maturities of the Agreements
	Overnight & Continuous		Up to 30 Days		Total		Overnight & Continuous		Up to 30 Days		Total
	(in millions)
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	142	$	161	$	303	$	87	$	35	$	122
Obligations of U.S. states and their political subdivisions	139		0		139		103		0		103
Foreign government bonds	368		0		368		335		0		335
U.S. corporate public securities	2,749		0		2,749		2,961		0		2,961
Foreign corporate public securities	612		0		612		655		0		655
Residential mortgage-backed securities	0		0		0		0		0		0
Equity securities	136		0		136		178		0		178
Total cash collateral for loaned securities(1)	$	4,146	$	161	$	4,307	$	4,319	$	35	$	4,354

__________


(1)	The Company did not have any agreements with remaining contractual maturities of thirty days or greater, as of the dates indicated.

4. VARIABLE INTEREST ENTITIES

In the normal course of its activities, the Company enters into relationships with various special-purpose entities and other entities that are deemed to be variable interest entities (“VIEs”). For additional information, see Note 5 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Consolidated Variable Interest Entities

The table below reflects the carrying amount and balance sheet caption in which the assets and liabilities of consolidated VIEs are reported. The liabilities primarily comprise obligations under debt instruments issued by the VIEs. The creditors of these VIEs do not have recourse to the Company in excess of the assets contained within the VIEs.



	Consolidated VIEs for which the Company is the Investment Manager(1)(2)				Other Consolidated VIEs(1)
	June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017
	(in millions)
Fixed maturities, available-for-sale	$	75	$	69	$	279	$	275
Fixed maturities, held-to-maturity	85		83		824		810
Fixed maturities, trading	1,071		1,623		0		0
Assets supporting experience-rated contractholder liabilities	0		0		9		9
Equity securities	38		28		0		0
Commercial mortgage and other loans	652		617		0		0
Other invested assets	1,316		1,390		84		97
Cash and cash equivalents	130		164		0		0
Accrued investment income	5		7		4		4
Other assets	445		440		141		150
Total assets of consolidated VIEs	$	3,817	$	4,421	$	1,341	$	1,345
Other liabilities	$	288	$	433	$	8	$	0
Notes issued by consolidated VIEs(3)	937		1,518		0		0
Total liabilities of consolidated VIEs	$	1,225	$	1,951	$	8	$	0

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

__________


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


(2)	Total assets of consolidated VIEs reflect $1,796 million and $1,716 million as of June 30, 2018 and December 31, 2017, respectively, related to VIEs whose beneficial interests are wholly-owned by consolidated subsidiaries.


(3)	Recourse is limited to the assets of the respective VIE and does not extend to the general credit of the Company. As of June 30, 2018 and December 31, 2017, the maturities of these obligations were greater than five years.

Unconsolidated Variable Interest Entities

The Company has determined that it is not the primary beneficiary of certain VIEs for which it is the investment manager. The Company’s maximum exposure to loss resulting from its relationship with unconsolidated VIEs for which it is the investment manager is limited to its investment in the VIEs, which was $858 million and $1,013 million at June 30, 2018 and December 31, 2017, respectively. These investments are reflected in “Fixed maturities, available-for-sale,” “Fixed maturities, trading,” “Equity securities” and “Other invested assets.” There are no liabilities associated with these unconsolidated VIEs on the Company’s Unaudited Interim Consolidated Statements of Financial Position.

In the normal course of its activities, the Company will invest in LPs/LLCs, which include hedge funds, private equity funds and real estate-related funds and may or may not be VIEs. The Company’s maximum exposure to loss on these investments, both VIEs and non-VIEs, is limited to the amount of its investment. The Company classifies these investments as “Other invested assets” and its maximum exposure to loss associated with these entities was $9,327 million and $8,720 million as of June 30, 2018 and December 31, 2017, respectively.

In addition, in the normal course of its activities, the Company will invest in structured investments including VIEs for which it is not the investment manager. These structured investments typically invest in fixed income investments and are managed by third-parties and include asset-backed securities, commercial mortgage-backed securities and residential mortgage-backed securities. The Company’s maximum exposure to loss on these structured investments, both VIEs and non-VIEs, is limited to the amount of its investment. See Note 3 for details regarding the carrying amounts and classification of these assets. The Company has not provided material financial or other support that was not contractually required to these structures. The Company has determined that it is not the primary beneficiary of these structures due to the fact that it does not control these entities.

5. DERIVATIVE INSTRUMENTS

Types of Derivative Instruments and Derivative Strategies

The Company utilizes various derivatives instruments and strategies to manage its risk. Commonly used derivative instruments include, but are not necessarily limited to:

•Interest rate contracts: futures, swaps, options, swaptions, caps and floors

•Equity contracts: futures, options and total return swaps

•Foreign exchange contracts: futures, options, forwards and swaps

•Credit contracts: single and index reference credit default swaps


•	Other contracts: to-be-announced (“TBA”) forward contracts, loan commitments, embedded derivatives and synthetic guaranteed investment contracts (“GICs”).

For detailed information on these contracts and the related strategies, see Note 21 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Primary Risks Managed by Derivatives

The table below provides a summary of the gross notional amount and fair value of derivatives contracts by the primary underlying risks, excluding embedded derivatives and associated reinsurance recoverables. Many derivative instruments contain multiple underlying risks. The fair value amounts below represent the gross fair value of derivative contracts prior to taking into account the netting effects of master netting agreements, cash collateral and non-performance risk (“NPR”). This netting impact results in total derivative assets of $812 million and $1,205 million as of June 30, 2018 and December 31, 2017, respectively, and total derivative liabilities of $676 million and $643 million as of June 30, 2018 and December 31, 2017, respectively, reflected in the Unaudited Interim Consolidated Statements of Financial Position.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



Primary Underlying Risk /Instrument Type	June 30, 2018							December 31, 2017
			Gross Fair Value							Gross Fair Value
	Notional		Assets		Liabilities			Notional		Assets		Liabilities
	(in millions)
Derivatives Designated as Hedge Accounting Instruments:
Interest Rate
Interest Rate Swaps	$	2,925	$	155	$	(74	)	$	3,204	$	271	$	(88	)
Foreign Currency
Foreign Currency Forwards	574		8		0			545		0		(8		)
Currency/Interest Rate
Foreign Currency Swaps	19,272		946		(645		)	17,732		766		(735		)
Total Qualifying Hedges	$	22,771	$	1,109	$	(719	)	$	21,481	$	1,037	$	(831	)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Swaps	$	150,392	$	5,891	$	(3,856	)	$	158,552	$	7,958	$	(3,509	)
Interest Rate Futures	18,311		2		(2		)	23,792		25		(1		)
Interest Rate Options	22,424		170		(259		)	18,456		167		(203		)
Interest Rate Forwards	2,628		10		0			1,498		6		(2		)
Foreign Currency
Foreign Currency Forwards	23,197		284		(182		)	23,905		164		(254		)
Foreign Currency Options	46		0		0			59		0		0
Currency/Interest Rate
Foreign Currency Swaps	13,537		740		(449		)	13,777		822		(414		)
Credit
Credit Default Swaps	1,390		18		(6		)	1,314		21		(5		)
Equity
Equity Futures	1,031		1		(9		)	710		2		(2		)
Equity Options	53,838		535		(534		)	36,007		588		(364		)
Total Return Swaps	19,712		254		(197		)	15,558		17		(369		)
Other
Other (2)	504		0		0			0		0		0
Synthetic GICs	77,495		2		0			77,290		0		(1		)
Total Non-Qualifying Derivatives	$	384,505	$	7,907	$	(5,494	)	$	370,918	$	9,770	$	(5,124	)
Total Derivatives(1)	$	407,276	$	9,016	$	(6,213	)	$	392,399	$	10,807	$	(5,955	)

__________


(1)	Excludes embedded derivatives and associated reinsurance recoverables which contain multiple underlying risks. The fair value of these embedded derivatives was a net liability of $6,651 million and $8,748 million as of June 30, 2018 and December 31, 2017, respectively, primarily included in “Future policy benefits.”


(2)	“Other” primarily includes derivative contracts used to balance the Company’s tail longevity and mortality risk. Under these contracts, the Company’s gain/loss is capped at the notional amount.

Most of the Company’s derivatives do not qualify for hedge accounting for various reasons. For example: (i) derivatives that economically hedge embedded derivatives do not qualify for hedge accounting because changes in the fair value of the embedded derivatives are already recorded in net income; (ii) derivatives that are utilized as macro hedges of the Company’s exposure to various risks typically do not qualify for hedge accounting because they do not meet the criteria required under portfolio hedge accounting rules; and (iii) synthetic GIC, which are product standalone derivatives, do not qualify as hedging instruments under hedge accounting rules.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Offsetting Assets and Liabilities

The following table presents recognized derivative instruments (excluding embedded derivatives and associated reinsurance recoverables), and repurchase and reverse repurchase agreements that are offset in the Unaudited Interim Consolidated Statements of Financial Position, and/or are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in the Unaudited Interim Consolidated Statements of Financial Position.



	June 30, 2018
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statements of Financial Position			Net Amounts Presented in the Statements of Financial Position		Financial Instruments/ Collateral(1)			Net Amount
	(in millions)
Offsetting of Financial Assets:
Derivatives(1)	$	8,933	$	(8,204	)	$	729	$	(457	)	$	272
Securities purchased under agreement to resell	2,339		0			2,339		(2,339		)	0
Total assets	$	11,272	$	(8,204	)	$	3,068	$	(2,796	)	$	272
Offsetting of Financial Liabilities:
Derivatives(1)	$	6,205	$	(5,537	)	$	668	$	(452	)	$	216
Securities sold under agreement to repurchase	9,540		0			9,540		(9,540		)	0
Total liabilities	$	15,745	$	(5,537	)	$	10,208	$	(9,992	)	$	216



	December 31, 2017
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statements of Financial Position			Net Amounts Presented in the Statements of Financial Position		Financial Instruments/ Collateral(1)			Net Amount
	(in millions)
Offsetting of Financial Assets:
Derivatives(1)	$	10,710	$	(9,600	)	$	1,110	$	(625	)	$	485
Securities purchased under agreement to resell	240		0			240		(240		)	0
Total assets	$	10,950	$	(9,600	)	$	1,350	$	(865	)	$	485
Offsetting of Financial Liabilities:
Derivatives(1)	$	5,948	$	(5,312	)	$	636	$	(588	)	$	48
Securities sold under agreement to repurchase	8,400		0			8,400		(8,400		)	0
Total liabilities	$	14,348	$	(5,312	)	$	9,036	$	(8,988	)	$	48

__________


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

For information regarding the rights of offset associated with the derivative assets and liabilities in the table above, see “—Counterparty Credit Risk” below. For securities purchased under agreements to resell and securities sold under agreements to repurchase, the Company monitors the value of the securities and maintains collateral, as appropriate, to protect against credit exposure. Where the Company has entered into repurchase and resale agreements with the same counterparty, in the event of default, the Company would generally be permitted to exercise rights of offset. For additional information on the Company’s accounting policy for securities repurchase and resale agreements, see Note 2 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2017.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Cash Flow, Fair Value and Net Investment Hedges

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

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



	Three Months Ended June 30, 2018
	Realized Investment Gains (Losses)			Net Investment Income			Other Income			Interest Expense		Interest Credited To Policyholders’ Account Balances			AOCI(1)
	(in millions)
Derivatives Designated as Hedge Accounting Instruments:
Fair value hedges
Interest Rate	$	5		$	(2	)	$	0		$	0	$	(28	)	$	0
Currency	1			0			0			0		0			0
Total fair value hedges	6			(2		)	0			0		(28		)	0
Cash flow hedges
Interest Rate	0			0			0			0		0			(1		)
Currency	0			0			0			0		0			18
Currency/Interest Rate	0			52			209			0		0			704
Total cash flow hedges	0			52			209			0		0			721
Net investment hedges
Currency	2			0			0			0		0			5
Currency/Interest Rate	0			0			0			0		0			0
Total net investment hedges	2			0			0			0		0			5
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	(432		)	0			0			0		0			0
Currency	(130		)	0			(1		)	0		0			0
Currency/Interest Rate	606			0			2			0		0			0
Credit	(1		)	0			0			0		0			0
Equity	(258		)	0			0			0		0			0
Other	(1		)	0			0			0		0			0
Embedded Derivatives	658			0			0			0		0			0
Total non-qualifying hedges	442			0			1			0		0			0
Total	$	450		$	50		$	210		$	0	$	(28	)	$	726

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30, 2018
	Realized Investment Gains (Losses)			Net Investment Income			Other Income		Interest Expense			Interest Credited to Policyholders’ Account Balances			AOCI(1)
	(in millions)
Derivatives Designated as Hedge Accounting Instruments:
Fair value hedges
Interest Rate	$	22		$	(6	)	$	0	$	0		$	(111	)	$	0
Currency	3			0			0		0			0			0
Total fair value hedges	25			(6		)	0		0			(111		)	0
Cash flow hedges
Interest Rate	0			0			0		(1		)	0			6
Currency	0			0			0		0			0			9
Currency/Interest Rate	0			100			118		0			0			123
Total cash flow hedges	0			100			118		(1		)	0			138
Net investment hedges
Currency	0			0			0		0			0			3
Currency/Interest Rate	0			0			0		0			0			0
Total net investment hedges	0			0			0		0			0			3
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	(1,947		)	0			0		0			0			0
Currency	279			0			0		0			0			0
Currency/Interest Rate	52			0			1		0			0			0
Credit	(5		)	0			0		0			0			0
Equity	(248		)	0			0		0			0			0
Other	(1		)	0			0		0			0			0
Embedded Derivatives	2,637			0			0		0			0			0
Total non-qualifying hedges	767			0			1		0			0			0
Total	$	792		$	94		$	119	$	(1	)	$	(111	)	$	141

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2017
	Realized Investment Gains (Losses)			Net Investment Income			Other Income			Interest Expense			Interest Credited To Policyholders’ Account Balances		AOCI(1)
	(in millions)
Derivatives Designated as Hedge Accounting Instruments:
Fair value hedges
Interest Rate	$	0		$	(5	)	$	0		$	0		$	0	$	0
Currency	(5		)	0			0			0			0		0
Total fair value hedges	(5		)	(5		)	0			0			0		0
Cash flow hedges
Interest Rate	0			0			0			(1		)	0		1
Currency/Interest Rate	0			49			(125		)	0			0		(340		)
Total cash flow hedges	0			49			(125		)	(1		)	0		(339		)
Net investment hedges
Currency	0			0			0			0			0		(3		)
Currency/Interest Rate	0			0			0			0			0		0
Total net investment hedges	0			0			0			0			0		(3		)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	1,110			0			0			0			0		0
Currency	(46		)	0			(2		)	0			0		0
Currency/Interest Rate	(53		)	0			0			0			0		0
Credit	6			0			0			0			0		0
Equity	(453		)	0			0			0			0		0
Other	0			0			0			0			0		0
Embedded Derivatives	(2,059		)	0			0			0			0		0
Total non-qualifying hedges	(1,495		)	0			(2		)	0			0		0
Total	$	(1,500	)	$	44		$	(127	)	$	(1	)	$	0	$	(342	)

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30, 2017
	Realized Investment Gains (Losses)			Net Investment Income			Other Income			Interest Expense			Interest Credited to Policyholders’ Account Balances		AOCI(1)
	(in millions)
Derivatives Designated as Hedge Accounting Instruments:
Fair value hedges
Interest Rate	$	7		$	(11	)	$	0		$	0		$	0	$	0
Currency	(2		)	0			0			0			0		0
Total fair value hedges	5			(11		)	0			0			0		0
Cash flow hedges
Interest Rate	0			0			0			(1		)	0		4
Currency/Interest Rate	0			93			(164		)	0			0		(540		)
Total cash flow hedges	0			93			(164		)	(1		)	0		(536		)
Net investment hedges
Currency	0			0			0			0			0		(7		)
Currency/Interest Rate	0			0			0			0			0		0
Total net investment hedges	0			0			0			0			0		(7		)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	964			0			0			0			0		0
Currency	(8		)	0			(1		)	0			0		0
Currency/Interest Rate	(141		)	0			(2		)	0			0		0
Credit	16			0			0			0			0		0
Equity	(1,157		)	0			0			0			0		0
Other	0			0			0			0			0		0
Embedded Derivatives	(1,182		)	0			0			0			0		0
Total non-qualifying hedges	(1,508		)	0			(3		)	0			0		0
Total	$	(1,503	)	$	82		$	(167	)	$	(1	)	$	0	$	(543	)

_________


(1)	Amounts deferred in AOCI.

For the six months ended June 30, 2018, the ineffective portion of derivatives accounted for using hedge accounting was a loss of $12 million and for the six months ended June 30, 2017, the ineffective portion of derivatives accounted for using hedge accounting was de minimis to the Company’s results of operations. Also, there were no material amounts reclassified into earnings relating to instances in which the Company discontinued cash flow hedge accounting because the forecasted transaction did not occur by the anticipated date or within the additional time period permitted by the authoritative guidance for the accounting for derivatives and hedging. In addition, there were no instances in which the Company discontinued fair value hedge accounting due to a hedged firm commitment no longer qualifying as a fair value hedge.

Presented below is a rollforward of current period cash flow hedges in AOCI before taxes:



	(in millions)
Balance, December 31, 2017	$	(39	)
Net deferred gains/(losses) on cash flow hedges from January 1 to June 30, 2018	385
Amount reclassified into current period earnings	(247		)
Balance, June 30, 2018	$	99

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The changes in fair value of cash flow hedges are deferred in AOCI and are included in “Net unrealized investment gains (losses)” in the Consolidated Statements of Comprehensive Income; these amounts are then reclassified to earnings when the hedged item affects earnings. Using June 30, 2018 values, it is estimated that a pre-tax gain of approximately $194 million will be reclassified from AOCI to earnings during the subsequent twelve months ending June 30, 2019, offset by amounts pertaining to the hedged items.

The Company’s exposure from the qualifying cash flow hedges reflects variability of future cash flows in foreign currency amounts related to both the forecasted transactions and the receipt or payment of interest on existing financial instruments. As of June 30, 2018, the maximum length of time over which these cash flow hedges are outstanding were 5 years and 40 years respectively.

For effective net investment hedges, the amounts, before applicable taxes, recorded in the cumulative translation adjustment account within AOCI were $529 million and $526 million as of June 30, 2018 and December 31, 2017, respectively.

Credit Derivatives

Credit derivatives, where the Company has written credit protection on a single name reference, had outstanding notional amounts of $110 million and $114 million as of June 30, 2018 and December 31, 2017, respectively. These credit derivatives are reported at fair value as an asset of $1 million and $2 million as of June 30, 2018 and December 31, 2017, respectively. As of June 30, 2018, the notional amount of these credit derivatives had the following NAIC ratings: $37 million in NAIC 1; $62 million in NAIC 2; $5 million in NAIC 3; $1 million in NAIC 4; $1 million in NAIC 5; and $4 million in NAIC 6. The Company has also written credit protection on certain index references with notional amounts of $1,135 million and $1,022 million as of June 30, 2018 and December 31, 2017, respectively. These credit derivatives are reported at fair value as an asset of $14 million and $18 million as of June 30, 2018 and December 31, 2017, respectively. As of June 30, 2018, the notional amount of these credit derivatives had the following NAIC ratings: $50 million in NAIC 1; $970 million in NAIC 3; and $115 million NAIC 6. NAIC designations are based on the lowest rated single name reference included in the index.

The Company’s maximum amount at risk under these credit derivatives equals the aforementioned notional amounts and assumes the value of the underlying referenced securities become worthless. These single name credit derivatives have maturities of less than 3 years, while the credit protection on the index references have maturities of less than 29 years.

In addition to writing credit protection, the Company has purchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio. As of June 30, 2018 and December 31, 2017, the Company had $145 million and $178 million of outstanding notional amounts reported at fair value as a liability of $2 million and $5 million, respectively.

Counterparty Credit Risk

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

Substantially all of the Company’s derivative agreements have zero thresholds which require daily full collateralization by the party in a liability position. In addition, certain of the Company’s derivative agreements contain credit-risk related contingent features; if the credit rating of one of the parties to the derivative agreement is to fall below a certain level, the party with positive fair value could request termination at the then fair value or demand immediate full collateralization from the party whose credit rating fell and is in a net liability position.

As of June 30, 2018, there were no net liability derivative positions with counterparties with credit risk-related contingent features; as such, all derivatives have been appropriately collateralized by the Company or the counterparty in accordance with the terms of the derivative agreements.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

6. FAIR VALUE OF ASSETS AND LIABILITIES

Fair Value Measurement—Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative fair value guidance establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level 1—Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities.

Level 2—Fair value is based on significant inputs, other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets and liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities, and other market observable inputs.

Level 3—Fair value is based on at least one significant unobservable input for the asset or liability. The assets and liabilities in this category may require significant judgment or estimation in determining the fair value.

For a discussion of Company’s valuation methodologies for assets and liabilities measured at fair value and the fair value hierarchy, see Note 20 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	As of June 30, 2018
	Level 1		Level 2		Level 3		Netting(1)			Total
	(in millions)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	0	$	24,778	$	67	$			$	24,845
Obligations of U.S. states and their political subdivisions	0		10,274		5					10,279
Foreign government bonds	0		108,700		137					108,837
U.S. corporate public securities	0		82,244		116					82,360
U.S. corporate private securities(2)	0		31,067		1,817					32,884
Foreign corporate public securities	0		28,819		65					28,884
Foreign corporate private securities	0		23,268		693					23,961
Asset-backed securities(3)	0		11,742		1,289					13,031
Commercial mortgage-backed securities	0		12,562		284					12,846
Residential mortgage-backed securities	0		3,133		91					3,224
Subtotal	0		336,587		4,564					341,151
Assets supporting experience-rated contractholder liabilities:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	0		420		0					420
Obligations of U.S. states and their political subdivisions	0		199		0					199
Foreign government bonds	0		840		221					1,061
Corporate securities	0		12,652		488					13,140
Asset-backed securities(3)	0		1,386		107					1,493
Commercial mortgage-backed securities	0		2,350		0					2,350
Residential mortgage-backed securities	0		867		0					867
Equity securities	1,356		267		4					1,627
All other(5)	0		39		5					44
Subtotal	1,356		19,020		825					21,201
Fixed maturities trading	0		2,743		173					2,916
Equity securities	5,617		654		783					7,054
Commercial mortgage and other loans	0		330		0					330
Other invested assets(6)	3		9,009		122		(8,204		)	930
Short-term investments	2,342		1,789		1					4,132
Cash equivalents	1,141		4,423		2					5,566
Other assets	0		3		0					3
Separate account assets(7)(8)	43,335		228,246		1,816					273,397
Total assets	$	53,794	$	602,804	$	8,286	$	(8,204	)	$	656,680
Future policy benefits(9)	$	0	$	0	$	6,585	$			$	6,585
Other liabilities	15		6,204		60		(5,537		)	742
Notes issued by consolidated VIEs	0		0		609					609
Total liabilities	$	15	$	6,204	$	7,254	$	(5,537	)	$	7,936

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	As of December 31, 2017
	Level 1		Level 2		Level 3		Netting(1)			Total
	(in millions)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	0	$	26,086	$	52	$			$	26,138
Obligations of U.S. states and their political subdivisions	0		10,466		5					10,471
Foreign government bonds	0		103,271		148					103,419
U.S. corporate public securities	0		90,115		109					90,224
U.S. corporate private securities(2)	0		31,845		1,889					33,734
Foreign corporate public securities	0		29,329		79					29,408
Foreign corporate private securities	0		23,528		699					24,227
Asset-backed securities(3)	0		5,629		6,604					12,233
Commercial mortgage-backed securities	0		13,268		13					13,281
Residential mortgage-backed securities	0		3,547		98					3,645
Subtotal	0		337,084		9,696					346,780
Assets supporting experience-rated contractholder liabilities(4):
U.S. Treasury securities and obligations of U.S. government authorities and agencies	0		201		0					201
Obligations of U.S. states and their political subdivisions	0		208		0					208
Foreign government bonds	0		834		223					1,057
Corporate securities	0		13,611		462					14,073
Asset-backed securities(3)	0		670		722					1,392
Commercial mortgage-backed securities	0		2,311		0					2,311
Residential mortgage-backed securities	0		965		1					966
Equity securities	1,381		258		4					1,643
All other(5)	25		105		7					137
Subtotal	1,406		19,163		1,419					21,988
Fixed maturities trading(4)	0		3,351		156					3,507
Equity securities(4)	5,978		556		795					7,329
Commercial mortgage and other loans	0		593		0					593
Other invested assets(4)(6)	32		10,768		137		(9,600		)	1,337
Short-term investments(4)	3,931		1,850		8					5,789
Cash equivalents(4)	1,900		6,398		0					8,298
Other assets	0		1		13					14
Separate account assets(7)(8)	45,397		232,874		2,122					280,393
Total assets	$	58,644	$	612,638	$	14,346	$	(9,600	)	$	676,028
Future policy benefits(9)	$	0	$	0	$	8,720	$			$	8,720
Other liabilities	4		5,946		50		(5,312		)	688
Notes issued by consolidated VIEs	0		0		1,196					1,196
Total liabilities	$	4	$	5,946	$	9,966	$	(5,312	)	$	10,604

__________


(1)	“Netting” amounts represent cash collateral of $2,667 million and $4,288 million as of June 30, 2018 and December 31, 2017, respectively, and the impact of offsetting asset and liability positions held with the same counterparty, subject to master netting arrangements.


(2)	Excludes notes with both fair value and carrying amount of $3,666 million and $2,660 million, as of June 30, 2018 and December 31, 2017, respectively, which have been offset with the associated payables under a netting agreement.


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


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


(5)	All other represents cash equivalents and short-term investments.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


(6)	Other invested assets excluded from the fair value hierarchy include certain hedge funds, private equity funds and other funds for which fair value is measured at net asset value (“NAV”) per share (or its equivalent) as a practical expedient. At June 30, 2018 and December 31, 2017, the fair values of such investments were $4,208 million and $1,969 million respectively.

(7)

Separate account assets included in the fair value hierarchy exclude investments in entities that calculate NAV per share (or its equivalent) as a practical expedient. Such investments excluded from the fair value hierarchy include investments in real estate, hedge funds and other invested assets. At June 30, 2018 and December 31, 2017, the fair value of such investments was $25,261 million and $26,224 million, respectively.

(8)

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

(9)

As of June 30, 2018, the net embedded derivative liability position of $6.6 billion includes $1.0 billion of embedded derivatives in an asset position and $7.6 billion of embedded derivatives in a liability position. As of December 31, 2017, the net embedded derivative liability position of $8.7 billion includes $0.9 billion of embedded derivatives in an asset position and $9.6 billion of embedded derivatives in a liability position.

Transfers between Levels 1 and 2—Transfers between levels are made to reflect changes in observability of inputs and market activity. Transfers into or out of any level are generally reported at the value as of the beginning of the quarter in which the transfers occur for any such assets still held at the end of the quarter. Periodically there are transfers between Level 1 and Level 2 for assets held in the Company’s Separate account. The fair value of foreign common stock held in the Company’s Separate account may reflect differences in market levels between the close of foreign trading markets and the close of U.S. trading markets for the respective day. Dependent on the existence of such a timing difference, the assets may move between Level 1 and Level 2. The following table presents the transfers between Level 1 and Level 2 for dates indicated below:



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
	(in millions)
Transferred from Level 1 to Level 2	$	10	$	17	$	180	$	63
Transferred from Level 2 to Level 1	$	3	$	27	$	10	$	83

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



	As of June 30, 2018
	Fair Value		Valuation Techniques	Unobservable Inputs	Minimum		Maximum	Weighted Average	Impact of Increase in Input on Fair Value(1)
	(in millions)
Assets:
Corporate securities(2)	$	1,359	Discounted cash flow	Discount rate	0.63%	-	20.82%	7.20%	Decrease
			Market comparables	EBITDA multiples(3)	4.5X		8.0X	6.6X	Increase
			Liquidation	Liquidation value	6.40%	-	17.80%	15.24%	Increase
Separate account assets-commercial mortgage loans(4)	$	790	Discounted cash flow	Spread	1.05%	-	2.73%	1.15%	Decrease
Liabilities:
Future policy benefits(5)	$	6,585	Discounted cash flow	Lapse rate(6)	1%	-	13%		Decrease
				Spread over LIBOR(7)	0.19%	-	1.28%		Decrease
				Utilization rate(8)	54%	-	97%		Increase
				Withdrawal rate	See table footnote (9) below.
				Mortality rate(10)	0%	-	15%		Decrease
				Equity volatility curve	15%	-	22%		Increase

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	As of December 31, 2017
	Fair Value		Valuation Techniques	Unobservable Inputs	Minimum		Maximum	Weighted Average	Impact of Increase in Input on Fair Value(1)
	(in millions)
Assets:
Corporate securities(2)	$	1,352	Discounted cash flow	Discount rate	0.65%	-	22%	7.20%	Decrease
			Market comparables	EBITDA multiples(3)	7.4X	-	7.4X	7.4X	Increase
			Liquidation	Liquidation value	13.10%	-	25.00%	14.68%	Increase
Separate account assets-commercial mortgage loans(4)	$	821	Discounted cash flow	Spread	1.08%	-	2.78%	1.20%	Decrease
Liabilities:
Future policy benefits(5)	$	8,720	Discounted cash flow	Lapse rate(6)	1%	-	12%		Decrease
				Spread over LIBOR(7)	0.12%	-	1.10%		Decrease
				Utilization rate(8)	52%	-	97%		Increase
				Withdrawal rate	See table footnote (9) below.
				Mortality rate(10)	0%	-	14%		Decrease
				Equity volatility curve	13%	-	24%		Increase

__________


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


(2)	Includes assets classified as fixed maturities available-for-sale, assets supporting experience-rated contractholder liabilities and fixed maturities trading.


(3)	Represents multiples of earnings before interest, taxes, depreciation and amortization (“EBITDA”), and are amounts used when the Company has determined that market participants would use such multiples when valuing the investments.


(4)	Changes in the fair value of separate account assets are borne by customers and thus are offset by changes in separate account liabilities on the Company’s Unaudited Interim Consolidated Statements of Financial Position. As a result, changes in value associated with these investments are not reflected in the Company’s Unaudited Interim Consolidated Statements of Operations.

(5)

Future policy benefits primarily represent general account liabilities for the living benefit features of the Company’s variable annuity contracts which are accounted for as embedded derivatives. Since the valuation methodology for these liabilities uses a range of inputs that vary at the contract level over the cash flow projection period, presenting a range, rather than weighted average, is a more meaningful representation of the unobservable inputs used in the valuation.


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

(7)

The spread over the London Inter-Bank Offered Rate (“LIBOR”) swap curve represents the premium added to the proxy for the risk-free rate (LIBOR) to reflect our estimates of rates that a market participant would use to value the living benefit contracts in both the accumulation and payout phases. This spread includes an estimate of NPR, which is the risk that the obligation will not be fulfilled by the Company. NPR is primarily estimated by utilizing the credit spreads associated with issuing funding agreements, adjusted for any illiquidity risk premium. In order to reflect the financial strength ratings of the Company, credit spreads associated with funding agreements, as opposed to credit spread associated with debt, are utilized in developing this estimate because both funding agreements and living benefit contracts are insurance liabilities and are therefore senior to debt.

(8)

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

(9)

The withdrawal rate assumption estimates the magnitude of annual contractholder withdrawals relative to the maximum allowable amount under the contract. These assumptions vary based on the age of the contractholder, the tax status of the contract and the duration since the contractholder began lifetime withdrawals. As of June 30, 2018 and December 31, 2017, the minimum withdrawal rate assumption is 78% and the maximum withdrawal rate assumption may be greater than 100%. The fair value of the liability will generally increase the closer the withdrawal rate is to 100% and decrease as the withdrawal rate moves further away from 100%.

(10)

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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Interrelationships Between Unobservable Inputs—In addition to the sensitivities of fair value measurements to changes in each unobservable input in isolation, as reflected in the table above, interrelationships between these inputs may also exist, such that a change in one unobservable input may give rise to a change in another or multiple inputs. For the discussion of the relationships between unobservable inputs as well as market factors that may affect the range of inputs used in the valuation of Level 3 assets and liabilities, see Note 20 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Changes in Level 3 Assets and Liabilities—The following tables describe changes in fair values of Level 3 assets and liabilities as of the dates indicated, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at the end of their respective periods. When a determination is made to classify assets and liabilities within Level 3, the determination is based on significance of the unobservable inputs in the overall fair value measurement. All transfers are based on changes in the observability of the valuation inputs, including the availability of pricing service information that the Company can validate. All transfers are generally reported at the value as of the beginning of the quarter in which transfers occur for any such assets still held at the end of the quarter. For the three months ended June 30, 2018, $5,078 million of investments in collateralized loan obligations (“CLOs”) reported as “Asset-backed securities” were transferred from Level 3 to Level 2 as market activity, liquidity and overall observability of valuation inputs of CLOs have increased. For further information on valuation processes, see Note 20 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.



	Three Months Ended June 30, 2018
	Fixed Maturities Available-For-Sale
	U.S. government		U.S. states		Foreign government			Corporate securities(2)			Structured securities(3)
	(in millions)
Fair Value, beginning of period	$	59	$	5	$	128		$	2,735		$	6,899
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0		0		0			(20		)	1
Included in other comprehensive income (loss)	0		0		(2		)	(11		)	(12		)
Net investment income	0		0		0			2			2
Purchases	8		0		0			257			441
Sales	0		0		0			(3		)	(278		)
Issuances	0		0		0			0			0
Settlements	0		0		0			(286		)	(668		)
Foreign currency translation	0		0		(4		)	(9		)	(25		)
Other(6)	0		0		0			(22		)	1
Transfers into Level 3(7)	0		0		15			69			62
Transfers out of Level 3(7)	0		0		0			(21		)	(4,759		)
Fair Value, end of period	$	67	$	5	$	137		$	2,691		$	1,664
Unrealized gains (losses) for assets still held(8):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0	$	0		$	(21	)	$	0

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2018
	Assets Supporting Experience-Rated Contractholder Liabilities
	Foreign government			Corporate securities(2)			Structured securities(3)			Equity securities			All other activity
	(in millions)
Fair Value, beginning of period	$	220		$	468		$	664		$	5		$	7
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			0			0			0			0
Other income	2			(11		)	(2		)	0			0
Net investment income	2			1			0			0			0
Purchases	0			41			16			0			24
Sales	0			0			0			(1		)	0
Issuances	0			0			0			0			0
Settlements	(3		)	(51		)	(129		)	0			(26		)
Foreign currency translation	0			0			0			0			0
Other(6)	0			0			0			0			0
Transfers into Level 3(7)	0			40			5			0			0
Transfers out of Level 3(7)	0			0			(447		)	0			0
Fair Value, end of period	$	221		$	488		$	107		$	4		$	5
Unrealized gains (losses) for assets still held(8):
Included in earnings:
Realized investment gains (losses), net	$	0		$	0		$	0		$	0		$	0
Other income	$	2		$	(10	)	$	(1	)	$	0		$	0

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2018
	Fixed maturities trading			Equity securities			Other invested assets			Short-term investments			Cash equivalents
	(in millions)
Fair Value, beginning of period	$	204		$	785		$	144		$	10		$	0
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	1			0			(4		)	0			0
Other income	4			(12		)	0			0			0
Included in other comprehensive income (loss)	0			0			0			0			0
Net investment income	0			0			0			0			0
Purchases	9			35			0			8			9
Sales	(38		)	(15		)	(12		)	0			0
Issuances	0			0			0			0			0
Settlements	(3		)	(2		)	0			(14		)	(7		)
Foreign currency translation	(2		)	(15		)	0			(1		)	0
Other(6)	0			4			(6		)	(2		)	0
Transfers into Level 3(7)	1			3			0			0			0
Transfers out of Level 3(7)	(3		)	0			0			0			0
Fair Value, end of period	$	173		$	783		$	122		$	1		$	2
Unrealized gains (losses) for assets still held(8):
Included in earnings:
Realized investment gains (losses), net	$	0		$	0		$	(3	)	$	0		$	0
Other income	$	0		$	(15	)	$	0		$	0		$	0

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2018
	Other assets		Separate account assets(4)			Future policy benefits			Other liabilities			Notes issued by consolidated VIEs
	(in millions)
Fair Value, beginning of period	$	0	$	2,360		$	(6,981	)	$	(56	)	$	(612	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0		0			683			(18		)	3
Other Income	0		0			0			0			0
Interest credited to policyholders’ account balances	0		22			0			0			0
Net investment income	0		0			0			0			0
Purchases	0		253			0			8			0
Sales	0		(14		)	0			0			0
Issuances	0		0			(287		)	0			0
Settlements	0		(140		)	0			6			0
Foreign currency translation	0		0			0			0			0
Other(6)	0		0			0			0			0
Transfers into Level 3(7)	0		29			0			0			0
Transfers out of Level 3(7)	0		(694		)	0			0			0
Fair Value, end of period	$	0	$	1,816		$	(6,585	)	$	(60	)	$	(609	)
Unrealized gains (losses) for assets/liabilities still held(8):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0		$	612		$	(18	)	$	3
Other income	$	0	$	0		$	0		$	0		$	0
Interest credited to policyholders’ account balances	$	0	$	21		$	0		$	0		$	0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30, 2018(1)
	Fixed Maturities Available-For-Sale
	U.S. government		U.S. states		Foreign government			Corporate securities(2)			Structured securities(3)
	(in millions)
Fair Value, beginning of period	$	52	$	5	$	148		$	2,776		$	6,716
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0		0		0			(27		)	14
Included in other comprehensive income (loss)	0		0		(2		)	5			(42		)
Net investment income	0		0		0			4			4
Purchases	15		0		0			375			1,988
Sales	0		0		0			(4		)	(344		)
Issuances	0		0		0			0			0
Settlements	0		0		0			(455		)	(1,317		)
Foreign currency translation	0		0		(3		)	3			1
Other(6)	0		0		0			(22		)	5
Transfers into Level 3(7)	0		0		20			129			1,133
Transfers out of Level 3(7)	0		0		(26		)	(93		)	(6,494		)
Fair Value, end of period	$	67	$	5	$	137		$	2,691		$	1,664
Unrealized gains (losses) for assets still held(8):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0	$	0		$	(30	)	$	0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30, 2018(1)
	Assets Supporting Experience-Rated Contractholder Liabilities
	Foreign government			Corporate securities(2)			Structured securities(3)			Equity securities			All other activity
	(in millions)
Fair Value, beginning of period	$	223		$	462		$	722		$	4		$	7
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			0			0			0			0
Other income	(2		)	(10		)	(2		)	1			0
Net investment income	3			1			0			0			0
Purchases	0			65			19			0			43
Sales	0			0			0			(1		)	0
Issuances	0			0			0			0			0
Settlements	(3		)	(69		)	(142		)	0			(45		)
Foreign currency translation	0			0			0			0			0
Other(6)	0			0			0			0			0
Transfers into Level 3(7)	0			40			33			0			0
Transfers out of Level 3(7)	0			(1		)	(523		)	0			0
Fair Value, end of period	$	221		$	488		$	107		$	4		$	5
Unrealized gains (losses) for assets still held(8):
Included in earnings:
Realized investment gains (losses), net	$	0		$	0		$	0		$	0		$	0
Other income	$	(2	)	$	(9	)	$	(1	)	$	1		$	0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30, 2018(1)
	Fixed maturities trading			Equity securities			Other invested assets			Short-term investments			Cash equivalents
	(in millions)
Fair Value, beginning of period	$	156		$	795		$	137		$	8		$	0
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	1			0			4			(1		)	0
Other income	2			2			0			0			0
Included in other comprehensive income (loss)	0			0			0			0			0
Net investment income	0			0			0			0			0
Purchases	49			42			1			22			9
Sales	(42		)	(32		)	(12		)	0			0
Issuances	0			0			0			0			0
Settlements	(3		)	(39		)	0			(26		)	(7		)
Foreign currency translation	3			6			0			0			0
Other(6)	0			9			(8		)	(2		)	0
Transfers into Level 3(7)	12			3			0			0			0
Transfers out of Level 3(7)	(5		)	(3		)	0			0			0
Fair Value, end of period	$	173		$	783		$	122		$	1		$	2
Unrealized gains (losses) for assets still held(8):
Included in earnings:
Realized investment gains (losses), net	$	0		$	0		$	2		$	(1	)	$	0
Other income	$	4		$	(1	)	$	0		$	0		$	0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30, 2018(1)
	Other assets			Separate account assets(4)			Future policy benefits			Other liabilities			Notes issued by consolidated VIEs
	(in millions)
Fair Value, beginning of period	$	13		$	2,122		$	(8,720	)	$	(50	)	$	(1,196	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	(13		)	0			2,709			(37		)	0
Other Income	0			0			0			0			0
Interest credited to policyholders’ account balances	0			(11		)	0			0			0
Net investment income	0			0			0			0			0
Purchases	0			490			0			18			0
Sales	0			(22		)	0			0			0
Issuances	0			0			(574		)	0			0
Settlements	0			(261		)	0			8			0
Foreign currency translation	0			0			0			0			0
Other(6)	0			0			0			1			587
Transfers into Level 3(7)	0			224			0			0			0
Transfers out of Level 3(7)	0			(726		)	0			0			0
Fair Value, end of period	$	0		$	1,816		$	(6,585	)	$	(60	)	$	(609	)
Unrealized gains (losses) for assets/liabilities still held(8):
Included in earnings:
Realized investment gains (losses), net	$	(13	)	$	0		$	2,529		$	(36	)	$	0
Other income	$	0		$	0		$	0		$	0		$	0
Interest credited to policyholders’ account balances	$	0		$	(5	)	$	0		$	0		$	0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2017
	Fixed Maturities Available-For-Sale
	U.S. government		U.S. states		Foreign government			Corporate securities(2)			Structured securities(3)
	(in millions)
Fair Value, beginning of period	$	10	$	5	$	136		$	2,111		$	5,911
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0		0		0			(17		)	57
Included in other comprehensive income (loss)	0		0		2			(16		)	(13		)
Net investment income	0		0		0			2			2
Purchases	22		0		(1		)	88			1,659
Sales	0		0		0			(3		)	(385		)
Issuances	0		0		0			0			0
Settlements	0		0		0			(388		)	(994		)
Foreign currency translation	0		0		(4		)	0			13
Other(6)	0		0		0			0			0
Transfers into Level 3(7)	0		0		11			28			998
Transfers out of Level 3(7)	0		0		(1		)	(143		)	(504		)
Fair Value, end of period	$	32	$	5	$	143		$	1,662		$	6,744
Unrealized gains (losses) for assets still held(8):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0	$	0		$	(31	)	$	0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2017
	Assets Supporting Experience-Rated Contractholder Liabilities(5)
	Foreign government			Corporate securities(2)			Structured securities(3)
	(in millions)
Fair Value, beginning of period	$	227		$	174		$	676
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			0			0
Other income	1			(1		)	2
Net investment income	2			1			1
Purchases	0			28			28
Sales	0			0			(9		)
Issuances	0			0			0
Settlements	(2		)	(55		)	(113		)
Foreign currency translation	0			0			0
Other(6)	0			0			0
Transfers into Level 3(7)	0			1			165
Transfers out of Level 3(7)	0			0			(129		)
Fair Value, end of period	$	228		$	148		$	621
Unrealized gains (losses) for assets still held(8):
Included in earnings:
Realized investment gains (losses), net	$	0		$	0		$	0
Other income	$	2		$	(2	)	$	2

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2017
	Fixed maturities trading(5)			Equity securities(5)			Other invested assets (5)			Short-term investments		Cash equivalents
	(in millions)
Fair Value, beginning of period	$	106		$	811		$	79		$	1	$	6
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			4			(1		)	0		0
Other income	5			(1		)	0			0		0
Included in other comprehensive income (loss)	0			(2		)	0			0		0
Net investment income	0			0			0			0		0
Purchases	16			10			0			0		0
Sales	(7		)	(6		)	0			0		0
Issuances	0			0			0			0		0
Settlements	(2		)	(1		)	0			0		(6		)
Foreign currency translation	2			5			0			0		0
Other(6)	3			(4		)	(1		)	0		(4		)
Transfers into Level 3(7)	1			0			0			1		4
Transfers out of Level 3(7)	(27		)	0			0			0		0
Fair Value, end of period	$	97		$	816		$	77		$	2	$	0
Unrealized gains (losses) for assets/liabilities still held(8):
Included in earnings:
Realized investment gains (losses), net	$	0		$	3		$	(2	)	$	0	$	0
Other income	$	4		$	12		$	0		$	0	$	0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2017
	Other assets		Separate account assets(4)			Future policy benefits			Other liabilities			Notes issued by consolidated VIEs
	(in millions)
Fair Value, beginning of period	$	0	$	1,975		$	(7,640	)	$	(27	)	$	(1,854	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	30		0			(2,112		)	(6		)	1
Other Income	0		0			0			0			0
Interest credited to policyholders’ account balances	0		22			0			0			0
Net investment income	0		1			0			0			0
Purchases	9		383			0			0			0
Sales	0		(68		)	0			0			0
Issuances	0		0			(279		)	0			0
Settlements	0		(175		)	0			(1		)	0
Foreign currency translation	0		0			0			0			0
Other(6)	0		0			0			0			0
Transfers into Level 3(7)	0		63			0			0			0
Transfers out of Level 3(7)	0		(94		)	0			0			0
Fair Value, end of period	$	39	$	2,107		$	(10,031	)	$	(34	)	$	(1,853	)
Unrealized gains (losses) for assets/liabilities still held(8):
Included in earnings:
Realized investment gains (losses), net	$	30	$	0		$	(2,173	)	$	(4	)	$	1
Other Income	$	0	$	0		$	0		$	0		$	0
Interest credited to policyholders’ account balances	$	0	$	16		$	0		$	0		$	0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30, 2017
	Fixed Maturities Available-For-Sale
	U.S. government		U.S. states		Foreign government			Corporate securities(2)			Structured securities(3)
	(in millions)
Fair Value, beginning of period	$	0	$	5	$	124		$	2,173		$	4,555
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0		0		0			27			59
Included in other comprehensive income (loss)	0		0		2			(3		)	(13		)
Net investment income	0		0		0			11			5
Purchases	22		0		0			122			2,441
Sales	0		0		0			(144		)	(395		)
Issuances	0		0		0			0			0
Settlements	0		0		0			(447		)	(1,414		)
Foreign currency translation	0		0		1			9			25
Other(6)	10		0		0			(10		)	(1		)
Transfers into Level 3(7)	0		0		18			126			2,645
Transfers out of Level 3(7)	0		0		(2		)	(202		)	(1,163		)
Fair Value, end of period	$	32	$	5	$	143		$	1,662		$	6,744
Unrealized gains (losses) for assets still held(8):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0	$	0		$	(40	)	$	0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30, 2017
	Assets Supporting Experience-Rated Contractholder Liabilities(5)
	Foreign government			Corporate securities(2)			Structured securities(3)
	(in millions)
Fair Value, beginning of period	$	227		$	154		$	290
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			0			0
Other income	0			3			2
Net investment income	3			1			1
Purchases	0			59			218
Sales	0			(2		)	(9		)
Issuances	0			0			0
Settlements	(2		)	(85		)	(121		)
Foreign currency translation	0			0			0
Other(6)	0			0			0
Transfers into Level 3(7)	0			22			398
Transfers out of Level 3(7)	0			(4		)	(158		)
Fair Value, end of period	$	228		$	148		$	621
Unrealized gains (losses) for assets still held(8):
Included in earnings:
Realized investment gains (losses), net	$	0		$	0		$	0
Other income	$	0		$	0		$	2

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30, 2017
	Fixed maturities trading(5)			Equity securities(5)			Other invested assets (5)			Short-term investments		Cash equivalents
	(in millions)
Fair Value, beginning of period	$	76		$	752		$	8		$	1	$	0
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			4			(1		)	0		0
Other income	4			20			0			0		0
Included in other comprehensive income (loss)	0			9			0			0		0
Net investment income	0			0			0			0		2
Purchases	31			32			0			0		0
Sales	(8		)	(34		)	0			0		0
Issuances	0			0			0			0		0
Settlements	(12		)	(7		)	0			0		(6		)
Foreign currency translation	3			14			0			0		0
Other(6)	4			(4		)	70			0		0
Transfers into Level 3(7)	27			31			0			1		4
Transfers out of Level 3(7)	(28		)	(1		)	0			0		0
Fair Value, end of period	$	97		$	816		$	77		$	2	$	0
Unrealized gains (losses) for assets/liabilities still held(8):
Included in earnings:
Realized investment gains (losses), net	$	0		$	3		$	(5	)	$	0	$	0
Other income	$	5		$	33		$	0		$	0	$	0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30, 2017
	Other assets		Separate account assets(4)			Future policy benefits			Other liabilities			Notes issued by consolidated VIEs
	(in millions)
Fair Value, beginning of period	$	0	$	1,849		$	(8,238	)	$	(22	)	$	(1,839	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	22		0			(1,237		)	(12		)	(14		)
Other Income	0		0			0			0			0
Interest credited to policyholders’ account balances	0		46			0			0			0
Net investment income	0		1			0			0			0
Purchases	17		538			0			0			0
Sales	0		(72		)	0			0			0
Issuances	0		0			(554		)	0			0
Settlements	0		(381		)	0			0			0
Foreign currency translation	0		0			(2		)	0			0
Other(6)	0		0			0			0			0
Transfers into Level 3(7)	0		254			0			0			0
Transfers out of Level 3(7)	0		(128		)	0			0			0
Fair Value, end of period	$	39	$	2,107		$	(10,031	)	$	(34	)	$	(1,853	)
Unrealized gains (losses) for assets/liabilities still held(8):
Included in earnings:
Realized investment gains (losses), net	$	22	$	0		$	(1,365	)	$	(12	)	$	(14	)
Other Income	$	0	$	0		$	0		$	0		$	0
Interest credited to policyholders’ account balances	$	0	$	40		$	0		$	0		$	0

__________


(1)	Current period amounts include one additional month of activity related to the elimination of Gibraltar Life’s reporting lag.


(2)	Includes U.S. corporate public, U.S. corporate private, foreign corporate public and foreign corporate private securities. Prior period amounts were aggregated to conform to current period presentation.


(3)	Includes asset-backed, commercial mortgage-backed and residential mortgage-backed securities. Prior period amounts were aggregated to conform to current period presentation.

(4)


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


(6)	Other, for the period ended June 30, 2018, primarily represents deconsolidation of a VIE and reclassifications of certain assets between reporting categories. Other, for the period ended June 30, 2017, primarily represents consolidations of VIE and reclassifications of certain assets between reporting categories.


(7)	Transfers into or out of Level 3 are generally reported at the value as of the beginning of the quarter in which the transfers occur for any such assets still held at the end of the quarter.


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

Derivative Fair Value Information

The following tables present the balances of derivative assets and liabilities measured at fair value on a recurring basis, as of the date indicated, by primary underlying risk. These tables include NPR and exclude embedded derivatives and associated reinsurance recoverables. The derivative assets and liabilities shown below are included in “Other invested assets” or “Other liabilities” in the tables contained within the sections “—Assets and Liabilities by Hierarchy Level” and “—Changes in Level 3 Assets and Liabilities,” above.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	As of June 30, 2018
	Level 1		Level 2		Level 3		Netting(1)			Total
	(in millions)
Derivative Assets:
Interest Rate	$	2	$	6,225	$	2	$			$	6,229
Currency	0		293		0					293
Credit	0		18		0					18
Currency/Interest Rate	0		1,686		0					1,686
Equity	1		787		2					790
Other	0		0		0					0
Netting(1)							(8,204		)	(8,204		)
Total derivative assets	$	3	$	9,009	$	4	$	(8,204	)	$	812
Derivative Liabilities:
Interest Rate	$	2	$	4,189	$	0	$			$	4,191
Currency	0		181		0					181
Credit	0		6		0					6
Currency/Interest Rate	0		1,095		0					1,095
Equity	9		731		0					740
Other	0		0		0					0
Netting(1)							(5,537		)	(5,537		)
Total derivative liabilities	$	11	$	6,202	$	0	$	(5,537	)	$	676



	As of December 31, 2017
	Level 1		Level 2		Level 3		Netting(1)			Total
	(in millions)
Derivative Assets:
Interest Rate	$	25	$	8,399	$	0	$			$	8,424
Currency	0		165		0					165
Credit	0		21		0					21
Currency/Interest Rate	0		1,588		0					1,588
Equity	2		595		10					607
Other	0		0		0					0
Netting(1)							(9,600		)	(9,600		)
Total derivative assets	$	27	$	10,768	$	10	$	(9,600	)	$	1,205
Derivative Liabilities:
Interest Rate	$	1	$	3,800	$	3	$			$	3,804
Currency	0		262		0					262
Credit	0		5		0					5
Currency/Interest Rate	0		1,149		0					1,149
Equity	2		733		0					735
Other	0		0		0					0
Netting(1)							(5,312		)	(5,312		)
Total derivative liabilities	$	3	$	5,949	$	3	$	(5,312	)	$	643

__________


(1)	“Netting” amounts represent cash collateral and the impact of offsetting asset and liability positions held with the same counterparty, subject to master netting agreement.

Changes in Level 3 derivative assets and liabilities—The following tables provide a summary of the changes in fair value of Level 3 derivative assets and liabilities as of the dates indicated, as well as the portion of gains or losses included in income, attributable to unrealized gains or losses related to those assets and liabilities still held at the end of their respective periods.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2018						Six Months Ended June 30, 2018
	Net Derivative- Equity			Net Derivative- Interest Rate			Net Derivative- Equity			Net Derivative- Interest Rate
	(in millions)
Fair Value, beginning of period	$	6		$	6		$	10		$	(3	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			(4		)	1			5
Other income	0			0			0			0
Purchases	0			0			0			0
Sales	0			0			0			0
Issuances	0			0			0			0
Settlements	0			0			0			0
Foreign currency translation	0			0			0			0
Other(1)	(4		)	0			(9		)	0
Transfers into Level 3(2)	0			0			0			0
Transfers out of Level 3(2)	0			0			0			0
Fair Value, end of period	$	2		$	2		$	2		$	2
Unrealized gains (losses) for assets still held:
Included in earnings:
Realized investment gains (losses), net	$	0		$	4		$	0		$	5
Other income	$	0		$	0		$	0		$	0



	Three Months Ended June 30, 2017					Six Months Ended June 30, 2017
	Net Derivative- Equity		Net Derivative- Interest Rate			Net Derivative- Equity		Net Derivative- Interest Rate
	(in millions)
Fair Value, beginning of period	$	0	$	3		$	0	$	4
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0		0			0		(1		)
Other income	0		0			0		0
Purchases	0		0			0		0
Sales	0		0			0		0
Issuances	0		0			0		0
Settlements	0		0			0		0
Other	0		0			0		0
Transfers into Level 3(2)	0		0			0		0
Transfers out of Level 3(2)	0		0			0		0
Fair Value, end of period	$	0	$	3		$	0	$	3
Unrealized gains (losses) for assets still held:
Included in earnings:
Realized investment gains (losses), net	$	0	$	(1	)	$	0	$	(1	)
Other income	$	0	$	0		$	0	$	0

__________


(1)	Represents conversion of warrants to equity shares.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


(2)	Transfers into or out of Level 3 are generally reported at the value as of the beginning of the quarter in which the transfers occur for any such positions still held at the end of the quarter.

Nonrecurring Fair Value Measurements—The following table represents information for assets measured at fair value on a nonrecurring basis. The fair value measurement is nonrecurring as these assets are measured at fair value only when there is a triggering event (e.g., an evidence of impairment). Assets included in the table are those that were impaired during the respective reporting periods and that are still held as of the reporting date. The estimated fair values for these amounts were determined using significant unobservable inputs (Level 3).



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	(in millions)
Realized investment gains (losses) net:
Commercial mortgage loans(1)	$	(13	)	$	0		$	(13	)	$	0
Mortgage servicing rights(2)	$	2		$	4		$	4		$	6
Cost method investments(3)	$	0		$	(7	)	$	0		$	(17	)



	June 30, 2018		December 31, 2017
	(in millions)
Carrying value after measurement as of period end:
Commercial mortgage loans(1)	$	51	$	64
Mortgage servicing rights(2)	$	68	$	60
Cost method investments(3)	$	0	$	150

__________


(1)	Commercial mortgage loans are valued based on discounted cash flows utilizing market rates or the fair value of the underlying real estate collateral.

(2)

Mortgage servicing rights are valued using a discounted cash flow model. The model incorporates assumptions for servicing revenues, which are adjusted for expected prepayments, delinquency rates, escrow deposit income and estimated loan servicing expenses. The discount rates incorporated into the model are determined based on the estimated returns a market participant would require for this business plus a liquidity and risk premium. This estimate includes available relevant data from any active market sales of mortgage servicing rights.


(3)	Due to the adoption of ASU 2016-01 effective January 1, 2018, LPs/LLCs (formerly accounted for under the cost method) are carried at fair value at each reporting date with changes in fair value reported in “Other income.” Therefore, these assets are no longer reported in this table because they are no longer carried at fair value on a non-recurring basis.

Fair Value Option

The fair value option allows the Company to elect fair value as an alternative measurement for selected financial assets and financial liabilities not otherwise reported at fair value. Such elections have been made by the Company to help mitigate volatility in earnings that result from different measurement attributes. Electing the fair value option also allows the Company to achieve consistent accounting for certain assets and liabilities. Changes in fair value are reflected in “Realized investment gains (losses), net” for commercial mortgage and other loans and “Other income” for other invested assets and notes issued by consolidated VIEs. Changes in fair value due to instrument-specific credit risk are estimated using changes in credit spreads and quality ratings for the period reported. Interest income on commercial mortgage and other loans is included in “Net investment income.” Interest income on these loans is recorded based on the effective interest rates as determined at the closing of the loan.

The following tables present information regarding assets and liabilities where the fair value option has been elected.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018		2017
	(in millions)
Assets:
Other invested assets(2):
Changes in fair value	$	0		$	23		$	0	$	77
Liabilities:
Notes issued by consolidated VIEs:
Changes in fair value	$	(3	)	$	(1	)	$	0	$	14



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
	(in millions)
Commercial mortgage and other loans:
Interest income	$	4	$	3	$	6	$	5
Notes issued by consolidated VIEs:
Interest expense	$	9	$	22	$	18	$	44



	June 30, 2018		December 31, 2017
	(in millions)
Commercial mortgage and other loans(1):
Fair value as of period end	$	330	$	593
Aggregate contractual principal as of period end	$	327	$	582
Other invested assets(2):
Fair value as of period end	$	0	$	1,945
Notes issued by consolidated VIEs:
Fair value as of period end	$	609	$	1,196
Aggregate contractual principal as of period end	$	632	$	1,233

__________


(1)	As of June 30, 2018, for loans for which the fair value option has been elected, there were no loans in non-accrual status and none of the loans were more than 90 days past due and still accruing.


(2)	Effective January 1, 2018, LPs/LLCs are reported at fair value due to adoption of ASU 2016-01, which in prior period were reported at fair value option. See Note 2 for details.

Fair Value of Financial Instruments

The table below presents the carrying amount and fair value by fair value hierarchy level of certain financial instruments that are not reported at fair value. The financial instruments presented below are reported at carrying value on the Company’s Unaudited Interim Consolidated Statements of Financial Position. In some cases, as described below, the carrying amount equals or approximates fair value.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	June 30, 2018(1)
	Fair Value								Carrying Amount(2)
	Level 1		Level 2		Level 3		Total		Total
	(in millions)
Assets:
Fixed maturities, held-to-maturity(3)	$	0	$	1,481	$	907	$	2,388	$	2,020
Assets supporting experience-rated contractholders liabilities	111		185		0		296		296
Commercial mortgage and other loans	0		128		57,928		58,056		58,292
Policy loans	0		0		11,935		11,935		11,935
Other invested assets	0		49		0		49		49
Short-term investments	1,573		23		0		1,596		1,596
Cash and cash equivalents	7,189		2,163		0		9,352		9,352
Accrued investment income	0		3,235		0		3,235		3,235
Other assets	143		2,538		551		3,232		3,232
Total assets	$	9,016	$	9,802	$	71,321	$	90,139	$	90,007
Liabilities:
Policyholders’ account balances—investment contracts	$	0	$	31,938	$	66,840	$	98,778	$	99,783
Securities sold under agreements to repurchase	0		9,540		0		9,540		9,540
Cash collateral for loaned securities	0		4,307		0		4,307		4,307
Short-term debt	0		2,047		41		2,088		2,056
Long-term debt(5)	1,310		14,852		1,822		17,984		16,732
Notes issued by consolidated VIEs	0		0		328		328		328
Other liabilities	0		6,359		579		6,938		6,938
Separate account liabilities—investment contracts	0		72,450		26,148		98,598		98,598
Total liabilities	$	1,310	$	141,493	$	95,758	$	238,561	$	238,282

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	December 31, 2017(1)
	Fair Value								Carrying Amount(2)
	Level 1		Level 2		Level 3		Total		Total
	(in millions)
Assets:
Fixed maturities, held-to-maturity(3)	$	0	$	1,484	$	946	$	2,430	$	2,049
Assets supporting experience-rated contractholders liabilities(4)	58		51		0		109		109
Commercial mortgage and other loans	0		129		56,619		56,748		55,452
Policy loans	1		0		11,890		11,891		11,891
Short-term investments	989		22		0		1,011		1,011
Cash and cash equivalents	5,997		195		0		6,192		6,192
Accrued investment income	0		3,325		0		3,325		3,325
Other assets	45		2,385		685		3,115		3,115
Total assets	$	7,090	$	7,591	$	70,140	$	84,821	$	83,144
Liabilities:
Policyholders’ account balances—investment contracts	$	0	$	33,045	$	67,141	$	100,186	$	99,948
Securities sold under agreements to repurchase	0		8,400		0		8,400		8,400
Cash collateral for loaned securities	0		4,354		0		4,354		4,354
Short-term debt	0		1,384		0		1,384		1,380
Long-term debt(5)	1,296		16,369		2,095		19,760		17,172
Notes issued by consolidated VIEs	0		0		322		322		322
Other liabilities	0		6,002		715		6,717		6,717
Separate account liabilities—investment contracts	0		71,336		30,490		101,826		101,826
Total liabilities	$	1,296	$	140,890	$	100,763	$	242,949	$	240,119

__________

(1)

The information presented as of December 31, 2017, excludes certain hedge funds, private equity funds and other funds that were accounted for using the cost method and for which the fair value was measured at NAV per share (or its equivalent) as a practical expedient. The fair value and the carrying value of these cost method investments were $1,795 million and $1,571 million, respectively. Due to the adoption of ASU 2016-01 effective January 1, 2018, these assets are carried at fair value at each reporting date with changes in fair value reported in “Other income.” Therefore, as of June 30, 2018, these assets are excluded from this table but are reported in the fair value recurring measurement table.


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


(3)	As of June 30, 2018, excludes notes with fair value and carrying amount of $4,754 million and $4,753 million, respectively. As of December 31, 2017, excludes notes with fair value and carrying amount of $4,913 million and $4,627 million, respectively. These amounts have been offset with the associated payables under a netting agreement.


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


(5)	As of June 30, 2018, includes notes with fair value and carrying amount of $8,420 million and $8,419 million, respectively. As of December 31, 2017, includes notes with fair value and carrying amount of $7,577 million and $7,287 million, respectively. These amounts have been offset with the associated receivables under a netting agreement.

7. CLOSED BLOCK

On December 18, 2001, the date of demutualization, Prudential Insurance established a closed block for certain in force participating insurance policies and annuity products, along with corresponding assets used for the payment of benefits and policyholders’ dividends on these products, (collectively the “Closed Block”), and ceased offering these participating products. The recorded assets and liabilities were allocated to the Closed Block at their historical carrying amounts. The Closed Block forms the principal component of the Closed Block division. For more information on the Closed Block, see Note 12 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2017.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

As of June 30, 2018 and December 31, 2017, the Company recognized a policyholder dividend obligation of $2,685 million and $1,790 million, respectively, to Closed Block policyholders for the excess of actual cumulative earnings over expected cumulative earnings. Additionally, accumulated net unrealized investment gains that have arisen subsequent to the establishment of the Closed Block have been reflected as a policyholder dividend obligation of $1,170 million and $3,656 million at June 30, 2018 and December 31, 2017, respectively, to be paid to Closed Block policyholders unless offset by future experience, with a corresponding amount reported in AOCI.

Closed Block liabilities and assets designated to the Closed Block, as well as maximum future earnings to be recognized from these liabilities and assets, are as follows:



	June 30, 2018			December 31, 2017
	(in millions)
Closed Block liabilities
Future policy benefits	$	48,518		$	48,870
Policyholders’ dividends payable	835			829
Policyholders’ dividend obligation	3,855			5,446
Policyholders’ account balances	5,097			5,146
Other Closed Block liabilities	4,712			5,070
Total Closed Block liabilities	63,017			65,361
Closed Block assets
Fixed maturities, available-for-sale, at fair value	39,170			41,043
Fixed maturities, trading, at fair value(1)	190			339
Equity securities, at fair value(1)	2,149			2,340
Commercial mortgage and other loans	8,898			9,017
Policy loans	4,469			4,543
Other invested assets(1)	3,335			3,159
Short-term investments	364			632
Total investments	58,575			61,073
Cash and cash equivalents	803			789
Accrued investment income	469			474
Other Closed Block assets	424			249
Total Closed Block assets	60,271			62,585
Excess of reported Closed Block liabilities over Closed Block assets	2,746			2,776
Portion of above representing accumulated other comprehensive income:
Net unrealized investment gains (losses)	1,132			3,627
Allocated to policyholder dividend obligation	(1,170		)	(3,656		)
Future earnings to be recognized from Closed Block assets and Closed Block liabilities	$	2,708		$	2,747

__________


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

Information regarding the policyholder dividend obligation is as follows:



	Six Months Ended June 30, 2018
	(in millions)
Balance, December 31, 2017	$	5,446
Cumulative-effect adjustment from the adoption of ASU 2016-01(1)	157
Impact from earnings allocable to policyholder dividend obligation	(75		)
Change in net unrealized investment gains (losses) allocated to policyholder dividend obligation	(1,673		)
Balance, June 30, 2018	$	3,855

__________


(1)	See Note 2 for details.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Closed Block revenues and benefits and expenses are as follows for the periods indicated:



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	(in millions)
Revenues
Premiums	$	602		$	670		$	1,152		$	1,275
Net investment income	593			676			1,190			1,326
Realized investment gains (losses), net	110			81			108			354
Other income (loss)	85			26			107			60
Total Closed Block revenues	1,390			1,453			2,557			3,015
Benefits and Expenses
Policyholders’ benefits	778			855			1,506			1,644
Interest credited to policyholders’ account balances	33			32			66			65
Dividends to policyholders	508			473			816			1,066
General and administrative expenses	92			97			184			194
Total Closed Block benefits and expenses	1,411			1,457			2,572			2,969
Closed Block revenues, net of Closed Block benefits and expenses, before income taxes	(21		)	(4		)	(15		)	46
Income tax expense (benefit)	(36		)	(17		)	(45		)	20
Closed Block revenues, net of Closed Block benefits and expenses and income taxes	$	15		$	13		$	30		$	26

8. INCOME TAXES

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

The Company’s income tax provision, on a consolidated basis, amounted to an income tax expense of $420 million, or 21.6% of income (loss) before income taxes and equity in earnings of operating joint ventures, in the first six months of 2018, compared to $520 million, or 22.1%, in the first six months of 2017. The Company’s current effective tax rates differed from the U.S. statutory rate of 21% primarily due to non-taxable investment income, tax credits and foreign earnings taxed at higher rates than the U.S. statutory rate. The Company’s prior effective tax rates differed from the U.S statutory rate in effect at that time of 35% primarily due to non-taxable investment income, tax credits and foreign earnings taxed at lower rates than the U.S. statutory rate.

U.S. Tax Cuts and Jobs Act of 2017 (“Tax Act of 2017”). On December 22, 2017, the Tax Act of 2017 was enacted into U.S. law. As a result, the Company recognized a $2,880 million tax benefit in “Total income tax expense (benefit)” in the Company’s Consolidated Statements of Operations for the year ended December 31, 2017. In accordance with SEC Staff Accounting Bulletin 118, the Company recorded the effects of the Tax Act of 2017 as reasonable estimates due to the need for further analysis of the provisions within the Tax Act of 2017 and collection, preparation and analysis of relevant data necessary to complete the accounting. The Company has not fully completed its accounting for the tax effects of the Tax Act of 2017. As the Company completes the collection, preparation and analysis of data relevant to the Tax Act of 2017, and interprets any additional guidance issued by the Internal Revenue Service (“IRS”), U.S. Department of the Treasury, or other standard-setting organizations, the Company may make adjustments to these provisional amounts. These adjustments may materially impact the Company’s provision for income taxes in the period in which the adjustments are made. During the first six months of 2018, the Company recognized additional refinements of our provisional estimates.

The cumulative financial statement impact related to the Tax Act of 2017 as of June 30, 2018 was as follows:

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Twelve Months Ended December 31, 2017			Six Months Ended June 30, 2018			Total
	(in millions)
Deferred tax revaluation from 35% to 21%	$	(1,592	)	$	(3	)	$	(1,595	)
Adoption of modified territorial system	(1,785		)	(24		)	(1,809		)
Deemed repatriation	497			0			497
Total provision for income tax expense (benefit)	$	(2,880	)	$	(27	)	$	(2,907	)

9. SHORT-TERM AND LONG-TERM DEBT

Short-term Debt

The table below presents the Company’s short-term debt as of the dates indicated:



	June 30, 2018			December 31, 2017
	($ in millions)
Commercial paper:
Prudential Financial	$	19		$	50
Prudential Funding, LLC	516			500
Subtotal commercial paper	535			550
Current portion of long-term debt(1)	1,521			830
Total short-term debt(2)	$	2,056		$	1,380
Supplemental short-term debt information:
Portion of commercial paper borrowings due overnight	$	122		$	277
Daily average commercial paper outstanding	$	1,389		$	1,110
Weighted average maturity of outstanding commercial paper, in days	16			22
Weighted average interest rate on outstanding short-term debt(3)	1.65		%	0.99		%

__________

(1) Includes $41 million that has recourse only to real estate investment property at June 30, 2018.

(2) Includes Prudential Financial debt of $1,499 million and $880 million at June 30, 2018 and December 31, 2017, respectively.

(3) Excludes the current portion of long-term debt.

Prudential Financial and certain subsidiaries have access to other sources of liquidity, including: membership in the Federal Home Loan Banks, commercial paper programs and a contingent financing facility in the form of a put option agreement. The Company also maintains syndicated, unsecured committed credit facilities as an alternative source of liquidity. At June 30, 2018, no amounts were drawn on the credit facilities. For additional information on these alternative sources of liquidity, see Note 14 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Long-term Debt

The table below presents the Company’s long-term debt as of the dates indicated:

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	June 30, 2018		December 31, 2017
	June 30, 2018		December 31, 2017
	(in millions)
Fixed-rate notes:
Surplus notes	$	841	$	840
Surplus notes subject to set-off arrangements(1)	6,319		5,187
Senior notes	9,126		8,882
Mortgage debt(2)	240		226
Floating-rate notes:
Surplus notes	0		0
Surplus notes subject to set-off arrangements(1)	2,100		2,100
Senior notes	29		29
Mortgage debt(3)	470		573
Junior subordinated notes(4)	6,026		6,622
Subtotal	25,151		24,459
Less: assets under set-off arrangements(1)	8,419		7,287
Total long-term debt(5)	$	16,732	$	17,172

__________


(1)	The surplus notes have corresponding assets where rights to set-off exist, thereby reducing the amount of surplus notes included in long-term debt.


(2)	Includes $105 million and $107 million of debt denominated in foreign currency at June 30, 2018 and December 31, 2017, respectively.


(3)	Includes $213 million and $245 million of debt denominated in foreign currency at June 30, 2018 and December 31, 2017, respectively.


(4)	Includes Prudential Financial debt of $5,970 million and subsidiary debt of $56 million denominated in foreign currency at June 30, 2018.


(5)	Includes Prudential Financial debt of $14,953 million and $15,304 million at June 30, 2018 and December 31, 2017, respectively.

At June 30, 2018 and December 31, 2017, the Company was in compliance with all debt covenants related to the borrowings in the table above.

Surplus Notes

During the first quarter of 2018, the Company established a new $1.6 billion captive financing facility to finance non-economic reserves required under Regulation XXX. Similar to the Company’s other captive financing facilities, a captive reinsurance subsidiary issues surplus notes under the facility in exchange for credit-linked notes issued by a special-purpose affiliate that are held to support non-economic reserves. The credit-linked notes are redeemable for cash upon the occurrence of a liquidity stress event affecting the captive and external counterparties have agreed to fund these payments. As of June 30, 2018, $100 million of surplus notes were outstanding under the facility and no credit-linked note payments have been required.

During the second quarter of 2018, the Company amended its captive financing facility initially established in March 2017 for the financing of non-economic reserves required under Guideline AXXX to increase the maximum potential size of the facility to $2 billion. The Company also increased the principal amount of surplus notes outstanding under the facility by $820 million. As of June 30, 2018, an aggregate of $1.5 billion of surplus notes were outstanding under this facility and no credit-linked note payments have been required.

Under each of the above transactions, because valid rights of set-off exist, interest and principal payments on the surplus notes and on the credit-linked notes are settled on a net basis, and the surplus notes are reflected in the Company’s total consolidated borrowings on a net basis.

Senior Notes

Medium-Term Notes. Prudential Financial maintains a medium-term notes program under its shelf registration statement with an authorized issuance capacity of $20.0 billion. As of June 30, 2018, the outstanding balance of the Company’s medium-term notes was $8.7 billion, an increase of $1 billion from December 31, 2017. The increase was due to the issuance in the first quarter of $600 million of notes with an interest rate of 3.878% maturing in March 2028 and $400 million of notes with an interest rate of 4.418% maturing in March 2048.

Table of Contents

Mortgage Debt. As of June 30, 2018, the Company’s subsidiaries had mortgage debt of $751 million that has recourse only to real estate property held for investment by those subsidiaries. This represents a decrease of $48 million from December 31, 2017, due to $77 million of prepayment activity and $6 million from foreign currency exchange rate fluctuations, partially offset by new borrowings of $35 million.

Junior Subordinated Notes. In April 2018, the Company redeemed all of its $600 million 8.875% junior subordinated notes due 2068 and incurred a make-whole fee of $6 million.

10. EMPLOYEE BENEFIT PLANS

Pension and Other Postretirement Plans

The Company has funded and non-funded non-contributory defined benefit pension plans (“Pension Benefits”), which cover substantially all of its employees. For some employees, benefits are based on final average earnings and length of service, while benefits for other employees are based on an account balance that takes into consideration age, service and earnings during their career.

The Company provides certain health care and life insurance benefits for its retired employees, their beneficiaries and covered dependents (“Other Postretirement Benefits”). The health care plan is contributory; the life insurance plan is non-contributory. Substantially all of the Company’s U.S. employees may become eligible to receive Other Postretirement Benefits if they retire after age 55 with at least 10 years of service or under certain circumstances after age 50 with at least 20 years of continuous service.

Net periodic (benefit) cost included in “General and administrative expenses” includes the following components:



	Three Months Ended June 30,
	Pension Benefits						Other Postretirement Benefits
	2018			2017			2018			2017
	(in millions)
Components of net periodic (benefit) cost
Service cost	$	79		$	71		$	6		$	5
Interest cost	112			119			17			21
Expected return on plan assets	(205		)	(195		)	(27		)	(26		)
Amortization of prior service cost	(1		)	(1		)	0			0
Amortization of actuarial (gain) loss, net	54			48			5			9
Settlements	0			0			0			0
Special termination benefits	1			0			0			0
Net periodic (benefit) cost	$	40		$	42		$	1		$	9

	Six Months Ended June 30,
	Pension Benefits						Other Postretirement Benefits
	2018			2017			2018			2017
	(in millions)
Components of net periodic (benefit) cost
Service cost	$	158		$	142		$	12		$	10
Interest cost	224			238			35			41
Expected return on plan assets	(409		)	(390		)	(54		)	(51		)
Amortization of prior service cost	(2		)	(2		)	0			0
Amortization of actuarial (gain) loss, net	107			96			9			18
Settlements	0			0			0			0
Special termination benefits	1			3			0			0
Net periodic (benefit) cost	$	79		$	87		$	2		$	18

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

11. EQUITY

The changes in the number of shares of Common Stock issued, held in treasury and outstanding, are as follows for the periods indicated:



	Common Stock
	Issued	Held In Treasury		Outstanding
	(in millions)
Balance, December 31, 2017	660.1	237.5		422.6
Common Stock issued	0.0	0.0		0.0
Common Stock acquired	0.0	7.0		(7.0	)
Stock-based compensation programs(1)	0.0	(2.1	)	2.1
Balance, June 30, 2018	660.1	242.4		417.7

__________


(1)	Represents net shares issued from treasury pursuant to the Company’s stock-based compensation programs.

In December 2017, Prudential Financial’s Board of Directors authorized the Company to repurchase at management’s discretion up to $1.5 billion of its outstanding Common Stock during the period from January 1, 2018 through December 31, 2018. As of June 30, 2018, 7.0 million shares of the Company’s Common Stock were repurchased under this authorization at a total cost of $750 million.

The timing and amount of share repurchases are determined by management based upon market conditions and other considerations, and repurchases may be effected in the open market, through derivative, accelerated repurchase and other negotiated transactions and through prearranged trading plans complying with Rule 10b5-1(c) under the Securities Exchange Act of 1934 (the “Exchange Act”). Numerous factors could affect the timing and amount of any future repurchases under the share repurchase authorization, including increased capital needs of the Company due to changes in regulatory capital requirements, opportunities for growth and acquisitions, and the effect of adverse market conditions on the segments.

Accumulated Other Comprehensive Income (Loss)

The balance of and changes in each component of “Accumulated other comprehensive income (loss) attributable to Prudential Financial, Inc.” for the six months ended June 30, 2018 and 2017, are as follows:



	Accumulated Other Comprehensive Income (Loss) Attributable to Prudential Financial, Inc.
	Foreign Currency Translation Adjustment			Net Unrealized Investment Gains (Losses)(1)			Pension and Postretirement Unrecognized Net Periodic Benefit (Cost)			Total Accumulated Other Comprehensive Income (Loss)
	(in millions)
Balance, December 31, 2017	$	(269	)	$	19,968		$	(2,625	)	$	17,074
Change in OCI before reclassifications	(44		)	(7,502		)	15			(7,531		)
Amounts reclassified from AOCI	0			(490		)	114			(376		)
Income tax benefit (expense)	6			1,704			(28		)	1,682
Cumulative effect of adoption of ASU 2016-01	0			(847		)	0			(847		)
Cumulative effect of adoption of ASU 2018-02	(231		)	2,282			(398		)	1,653
Balance, June 30, 2018	$	(538	)	$	15,115		$	(2,922	)	$	11,655

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Accumulated Other Comprehensive Income (Loss) Attributable to Prudential Financial, Inc.
	Foreign Currency Translation Adjustment			Net Unrealized Investment Gains (Losses)(1)			Pension and Postretirement Unrecognized Net Periodic Benefit (Cost)			Total Accumulated Other Comprehensive Income (Loss)
	(in millions)
Balance, December 31, 2016	$	(973	)	$	18,171		$	(2,577	)	$	14,621
Change in OCI before reclassifications	614			2,502			(13		)	3,103
Amounts reclassified from AOCI	2			(820		)	112			(706		)
Income tax benefit (expense)	(77		)	(544		)	(35		)	(656		)
Balance, June 30, 2017	$	(434	)	$	19,309		$	(2,513	)	$	16,362

__________


(1)	Includes cash flow hedges of $99 million and $(39) million as of June 30, 2018 and December 31, 2017, respectively, and $780 million and $1,316 million as of June 30, 2017 and December 31, 2016, respectively.

Reclassifications out of Accumulated Other Comprehensive Income (Loss)



	Three Months Ended June 30,						Six Months Ended June 30,						Affected line item in Consolidated Statements of Operations
	2018			2017			2018			2017			Affected line item in Consolidated Statements of Operations
	(in millions)
Amounts reclassified from AOCI(1)(2):
Foreign currency translation adjustment:
Foreign currency translation adjustments	$	0		$	(2	)	$	0		$	(3	)	Realized investment gains (losses), net
Foreign currency translation adjustments	0			1			0			1			Other income
Total foreign currency translation adjustment	0			(1		)	0			(2		)
Net unrealized investment gains (losses):
Cash flow hedges—Interest rate	2			(1		)	2			(2		)	(3)
Cash flow hedges—Currency	3			0			0			0			(3)
Cash flow hedges—Currency/Interest rate	294			(62		)	245			(1		)	(3)
Net unrealized investment gains (losses) on available-for-sale securities	165			393			243			823
Total net unrealized investment gains (losses)	464			330			490			820			(4)
Amortization of defined benefit pension items:
Prior service cost	1			1			2			2			(5)
Actuarial gain (loss)	(59		)	(57		)	(116		)	(114		)	(5)
Total amortization of defined benefit pension items	(58		)	(56		)	(114		)	(112		)
Total reclassifications for the period	$	406		$	273		$	376		$	706

__________


(1)	All amounts are shown before tax.


(2)	Positive amounts indicate gains/benefits reclassified out of AOCI. Negative amounts indicate losses/costs reclassified out of AOCI.


(3)	See Note 5 for additional information on cash flow hedges.


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


(5)	See Note 10 for information on employee benefit plans.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Net Unrealized Investment Gains (Losses)

Net unrealized investment gains (losses) on securities classified as available-for-sale and certain other invested assets and other assets are included in the Company’s Unaudited Interim Consolidated Statements of Financial Position as a component of AOCI. Changes in these amounts include reclassification adjustments to exclude from “Other comprehensive income (loss)” those items that are included as part of “Net income” for a period that had been part of “Other comprehensive income (loss)” in earlier periods. The amounts for the periods indicated below, split between amounts related to fixed maturity securities on which an OTTI loss has been recognized, and all other net unrealized investment gains (losses), are as follows:

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



	Net Unrealized Gains (Losses) on Investments			DAC, DSI, VOBA and Reinsurance Recoverables			Future Policy Benefits, Policyholders’ Account Balances and Reinsurance Payables		Policyholders’ Dividends			Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related to Net Unrealized Investment Gains (Losses)
	(in millions)
Balance, December 31, 2017	$	286		$	(2	)	$	3	$	(46	)	$	(94	)	$	147
Net investment gains (losses) on investments arising during the period	(13		)									6			(7		)
Reclassification adjustment for (gains) losses included in net income	(56		)									25			(31		)
Reclassification adjustment for OTTI losses excluded from net income(1)	(1		)									0			(1		)
Impact of net unrealized investment (gains) losses on DAC, DSI, VOBA and reinsurance recoverables				0								0			0
Impact of net unrealized investment (gains) losses on future policy benefits and policyholders’ account balances and reinsurance payables							0					0			0
Impact of net unrealized investment (gains) losses on policyholders’ dividends									22			(9		)	13
Balance, June 30, 2018	$	216		$	(2	)	$	3	$	(24	)	$	(72	)	$	121

__________


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

All Other Net Unrealized Investment Gains (Losses) in AOCI

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Net Unrealized Gains (Losses) on Investments(1)			DAC, DSI, VOBA and Reinsurance Recoverables			Future Policy Benefits, Policyholders’ Account Balances and Reinsurance Payables			Policyholders’ Dividends			Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related to Net Unrealized Investment Gains (Losses)
	(in millions)
Balance, December 31, 2017	$	36,112		$	(1,580	)	$	(1,243	)	$	(3,631	)	$	(9,837	)	$	19,821
Net investment gains (losses) on investments arising during the period	(10,160		)										2,857			(7,303		)
Reclassification adjustment for (gains) losses included in net income	(434		)										196			(238		)
Reclassification adjustment for OTTI losses excluded from net income(2)	1												0			1
Impact of net unrealized investment (gains) losses on DAC, DSI, VOBA and reinsurance recoverables				825									(118		)	707
Impact of net unrealized investment (gains) losses on future policy benefits and policyholders’ account balances and reinsurance payables							165						(265		)	(100		)
Impact of net unrealized investment (gains) losses on policyholders’ dividends										1,659			(818		)	841
Cumulative effect of adoption of ASU 2016-01	(2,042		)							813			212			(1,017		)
Cumulative effect of adoption of ASU 2018-02													2,282			2,282
Balance, June 30, 2018	$	23,477		$	(755	)	$	(1,078	)	$	(1,159	)	$	(5,491	)	$	14,994

__________


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


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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

12. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of the basic and diluted per share computations of Common Stock based on the consolidated earnings of Prudential Financial for the periods indicated, is as follows:



	Three Months Ended June 30,
	2018					2017
	Income		Weighted Average Shares	Per Share Amount		Income		Weighted Average Shares	Per Share Amount
	(in millions, except per share amounts)
Basic earnings per share
Net income (loss)	$	200				$	496
Less: Income (loss) attributable to noncontrolling interests	3					5
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards	4					6
Net income (loss) attributable to Prudential Financial available to holders of Common Stock	$	193	419.5	$	0.46	$	485	428.3	$	1.13
Effect of dilutive securities and compensation programs
Add: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Basic	$	4				$	6
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Diluted	4					7
Stock options			1.5					2.1
Deferred and long-term compensation programs			1.1					1.0
Exchangeable Surplus Notes	6		5.9			5		5.8
Diluted earnings per share
Net income (loss) attributable to Prudential Financial available to holders of Common Stock	$	199	428.0	$	0.46	$	489	437.2	$	1.12

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30,
	2018					2017
	Income		Weighted Average Shares	Per Share Amount		Income		Weighted Average Shares	Per Share Amount
	(in millions, except per share amounts)
Basic earnings per share
Net income (loss)	$	1,564				$	1,868
Less: Income (loss) attributable to noncontrolling interests	4					8
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards	18					23
Net income (loss) attributable to Prudential Financial available to holders of Common Stock	$	1,542	420.8	$	3.66	$	1,837	429.1	$	4.28
Effect of dilutive securities and compensation programs
Add: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Basic	$	18				$	23
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Diluted	18					23
Stock options			1.7					2.2
Deferred and long-term compensation programs			1.1					1.0
Exchangeable Surplus Notes	11		5.9			9		5.8
Diluted earnings per share
Net income (loss) attributable to Prudential Financial available to holders of Common Stock	$	1,553	429.5	$	3.62	$	1,846	438.1	$	4.21

Unvested share-based payment awards that contain nonforfeitable rights to dividends are participating securities and included in the computation of earnings per share pursuant to the two-class method. Under this method, earnings attributable to Prudential Financial are allocated between Common Stock and the participating awards, as if the awards were a second class of stock. During periods of net income available to holders of Common Stock, the calculation of earnings per share excludes the income attributable to participating securities in the numerator and the dilutive impact of these securities from the denominator. In the event of a net loss available to holders of Common Stock, undistributed earnings are not allocated to participating securities and the denominator excludes the dilutive impact of these securities as they do not share in the losses of the Company. Undistributed earnings allocated to participating unvested share-based payment awards for the three and six months ended June 30, 2018 and 2017, as applicable, were based on 4.9 million and 5.3 million of such awards, respectively, weighted for the period they were outstanding.

Stock options and shares related to deferred and long-term compensation programs that are considered antidilutive are excluded from the computation of diluted earnings per share. Stock options are considered antidilutive based on application of the treasury stock method or in the event of a net loss available to holders of Common Stock. Shares related to deferred and long-term compensation programs are considered antidilutive in the event of a net loss available to holders of Common Stock. For the periods indicated, the number of stock options and shares related to deferred and long-term compensation programs that were considered antidilutive and were excluded from the computation of diluted earnings per share, weighted for the portion of the period they were outstanding, are as follows:

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30,
	2018			2017
	Shares	Exercise Price Per Share		Shares	Exercise Price Per Share
	(in millions, except per share amounts, based on weighted average)
Antidilutive stock options based on application of the treasury stock method	0.8	$	108.61	0.4	$	110.26
Antidilutive stock options due to net loss available to holders of Common Stock	0.0			0.0
Antidilutive shares based on application of the treasury stock method	0.0			0.0
Antidilutive shares due to net loss available to holders of Common Stock	0.0			0.0
Total antidilutive stock options and shares	0.8			0.4



	Six Months Ended June 30,
	2018			2017
	Shares	Exercise Price Per Share		Shares	Exercise Price Per Share
	(in millions, except per share amounts, based on weighted average)
Antidilutive stock options based on application of the treasury stock method	0.5	$	108.35	0.3	$	110.32
Antidilutive stock options due to net loss available to holders of Common Stock	0.0			0.0
Antidilutive shares based on application of the treasury stock method	0.0			0.3
Antidilutive shares due to net loss available to holders of Common Stock	0.0			0.0
Total antidilutive stock options and shares	0.5			0.6

In September 2009, the Company issued $500 million of surplus notes with an interest rate of 5.36% per annum which are exchangeable at the option of the note holders for shares of Common Stock. The initial exchange rate for the surplus notes was 10.1235 shares of Common Stock per each $1,000 principal amount of surplus notes. This was equivalent to 5.1 million shares and an initial exchange price per share of Common Stock of $98.78. The exchange rate is subject to customary anti-dilution adjustments and is accordingly revalued during the fourth quarter of each year. As of June 30, 2018, the exchange rate is equal to 11.7643 shares of Common Stock per each $1,000 principal amount of surplus notes. This is equivalent to 5.88 million shares and an exchange price per share of Common Stock of $85.00. In calculating diluted earnings per share under the if-converted method, the potential shares that would be issued assuming a hypothetical exchange, weighted for the period the notes are outstanding, are added to the denominator, and the related interest expense, net of tax, is excluded from the numerator, if the overall effect is dilutive.

13. SEGMENT INFORMATION

Segments

The Company’s principal operations are comprised of five divisions, which together encompass seven segments, and its Corporate and Other operations. The U.S. Individual Solutions division consists of the Individual Annuities and Individual Life segments. The U.S. Workplace Solutions division consists of the Retirement and Group Insurance segments. The PGIM division consists of the PGIM segment. The International Insurance division consists of the International Insurance segment. The Closed Block division consists of the Closed Block segment. The Closed Block division is accounted for as a divested business that is reported separately from the divested businesses that are included in Corporate and Other operations. The Company’s Corporate and Other operations include corporate items and initiatives that are not allocated to business segments and businesses that have been or will be divested.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Adjusted Operating Income

The Company analyzes the operating performance of each segment using “adjusted operating income.” Adjusted operating income does not equate to “Income (loss) before income taxes and equity in earnings of operating joint ventures” or “Net income (loss)” as determined in accordance with U.S. GAAP but is the measure of segment profit or loss used by the Company’s chief operating decision maker to evaluate segment performance and allocate resources, and consistent with authoritative guidance, is the measure of segment performance presented below. Adjusted operating income is calculated by adjusting each segment’s “Income (loss) before income taxes and equity in earnings of operating joint ventures” for the following items:


•	realized investment gains (losses), net, and related adjustments;


•	charges related to realized investment gains (losses), net;


•	net investment gains (losses) on assets supporting experience-rated contractholder liabilities and changes in experience-rated contractholder liabilities due to asset value changes;


•	divested businesses; and


•	equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests.

These items are important to an understanding of overall results of operations. Adjusted operating income is not a substitute for income determined in accordance with U.S. GAAP, and the Company’s definition of adjusted operating income may differ from that used by other companies. The Company, however, believes that the presentation of adjusted operating income as measured for management purposes enhances the understanding of results of operations by highlighting the results from ongoing operations and the underlying profitability factors of its businesses. For more information on these reconciling items, see Note 22 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Beginning in the first quarter of 2018, as a result of the adoption of ASU 2016-01 (see Note 2), changes in the fair value of equity securities are included in net income, but are excluded from adjusted operating income. These changes in fair value are classified as related adjustments within “realized investment gains (losses), net, and related adjustments” reconciling item in the tables below.

Reconciliation of adjusted operating income and net income (loss)

The table below reconciles “adjusted operating income before income taxes” to “income before income taxes and equity in earnings of operating joint ventures”:

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	(in millions)
Adjusted operating income before income taxes by segment:
Individual Annuities	$	507		$	612		$	1,026		$	1,080
Individual Life	43			(557		)	79			(439		)
Total U.S. Individual Solutions division(1)	550			55			1,105			641
Retirement	277			308			594			705
Group Insurance	82			136			137			170
Total U.S. Workplace Solutions division(1)	359			444			731			875
PGIM	254			218			486			414
Total PGIM division(1)	254			218			486			414
International Insurance	784			823			1,640			1,622
Total International Insurance division	784			823			1,640			1,622
Corporate and Other operations	(286		)	(312		)	(580		)	(664		)
Total Corporate and Other	(286		)	(312		)	(580		)	(664		)
Total segment adjusted operating income before income taxes	1,661			1,228			3,382			2,888
Reconciling items:
Realized investment gains (losses), net, and related adjustments	393			(1,377		)	480			(1,443		)
Charges related to realized investment gains (losses), net	(116		)	698			(139		)	802
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net	(193		)	201			(596		)	245
Change in experience-rated contractholder liabilities due to asset value changes	85			(145		)	503			(157		)
Divested businesses:
Closed Block division	(31		)	(18		)	(40		)	16
Other divested businesses	(1,526		)	35			(1,598		)	41
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests	(23		)	(14		)	(49		)	(42		)
Consolidated income (loss) before income taxes and equity in earnings of operating joint ventures	$	250		$	608		$	1,943		$	2,350

__________


(1)	Prior period divisional subtotals are presented on a basis consistent with the Company’s new organizational structure effective in the fourth quarter of 2017. Individual segment results and consolidated totals remain unchanged. See Note 22 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

The Individual Annuities segment results reflect DAC as if the individual annuity business is a stand-alone operation. The elimination of intersegment costs capitalized in accordance with this policy is included in consolidating adjustments within Corporate and Other operations.

Reconciliation of select financial information

The table below presents revenues and total assets for the Company’s reportable segments for the periods or as of the dates indicated:

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Revenues												Total Assets
	Three Months Ended June 30,						Six Months Ended June 30,						June 30, 2018		December 31, 2017
	2018			2017			2018			2017
	(in millions)
Individual Annuities	$	1,266		$	1,306		$	2,518		$	2,521		$	176,798	$	183,666
Individual Life	1,451			654			2,876			2,099			84,320		83,985
Total U.S. Individual Solutions division(1)	2,717			1,960			5,394			4,620			261,118		267,651
Retirement	2,988			3,607			5,077			5,544			177,753		183,629
Group Insurance	1,424			1,362			2,840			2,745			40,940		41,575
Total U.S. Workplace Solutions division(1)	4,412			4,969			7,917			8,289			218,693		225,204
PGIM	816			787			1,642			1,543			47,253		49,944
Total PGIM division(1)	816			787			1,642			1,543			47,253		49,944
International Insurance	5,288			5,483			11,328			10,892			217,537		211,647
Total International Insurance division	5,288			5,483			11,328			10,892			217,537		211,647
Corporate and Other operations	(190		)	(171		)	(363		)	(309		)	14,476		14,556
Total Corporate and Other	(190		)	(171		)	(363		)	(309		)	14,476		14,556
Total	13,043			13,028			25,918			25,035			759,077		769,002
Reconciling items:
Realized investment gains (losses), net, and related adjustments	393			(1,377		)	480			(1,443		)
Charges related to realized investment gains (losses), net	(92		)	(69		)	(163		)	(91		)
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net	(193		)	201			(596		)	245
Divested businesses:
Closed Block division	1,388			1,449			2,551			3,006			60,783		63,134
Other divested businesses	143			228			275			409
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests	(27		)	(19		)	(53		)	(50		)
Total per Unaudited Interim Consolidated Financial Statements	$	14,655		$	13,441		$	28,412		$	27,111		$	819,860	$	832,136

__________


(1)	Prior period divisional subtotals are presented on a basis consistent with the Company’s new organizational structure effective in the fourth quarter of 2017. Individual segment results and consolidated totals remain unchanged. See Note 22 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Management has determined the intersegment revenues with reference to market rates. Intersegment revenues are eliminated in consolidation in Corporate and Other. The PGIM segment revenues include intersegment revenues, primarily consisting of asset-based management and administration fees, as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
	(in millions)
PGIM segment intersegment revenues	$	185	$	181	$	369	$	353

Segments may also enter into internal derivative contracts with other segments. For adjusted operating income, each segment accounts for the internal derivative results consistent with the manner in which that segment accounts for other similar external derivatives.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

14. COMMITMENTS AND CONTINGENT LIABILITIES

Commitments and Guarantees

Commercial Mortgage Loan Commitments


						</

Description

Effective date and method of adoption

Effect on the financial statements or other significant matters

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.