November 8, 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 September 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 every Interactive Data File required to be submitted 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 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	¨	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 October 31, 2018, 413 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 September 30, 2018 and December 31, 2017	1
	Unaudited Interim Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017	2
	Unaudited Interim Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017	3
	Unaudited Interim Consolidated Statements of Equity for the nine months ended September 30, 2018 and 2017	4
	Unaudited Interim Consolidated Statements of Cash Flows for the nine months ended September 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	14
	4. Variable Interest Entities	29
	5. Derivative Instruments	30
	6. Fair Value of Assets and Liabilities	38
	7. Closed Block	54
	8. Income Taxes	56
	9. Short-Term and Long-Term Debt	57
	10. Employee Benefit Plans	59
	11. Equity	60
	12. Earnings Per Share	64
	13. Segment Information	66
	14. Commitments and Contingent Liabilities	70
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	75
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	145
Item 4.	Controls and Procedures	145
PART II OTHER INFORMATION
Item 1.	Legal Proceedings	146
Item 1A.	Risk Factors	146
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	146
Item 6.	Exhibits	147
GLOSSARY		148
SIGNATURES		150

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) changes in tax laws, (b) fiduciary rule developments, (c) U.S. state insurance laws and developments regarding group-wide supervision, capital and reserves, (d) insurer capital standards outside the U.S. and (e) privacy and cybersecurity regulation; (8) technological changes which may adversely impact companies in our investment portfolio or cause insurance experience to deviate from our assumptions; (9) ratings downgrades; (10) market conditions that may adversely affect the sales or persistency of our products; (11) competition; and (12) reputational damage. Prudential 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.

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Financial Position

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



	September 30, 2018			December 31, 2017
ASSETS
Fixed maturities, available-for-sale, at fair value (amortized cost: 2018-$321,168; 2017-$312,385)(1)	$	340,970		$	346,780
Fixed maturities, held-to-maturity, at amortized cost (fair value: 2018-$2,287; 2017-$2,430)(1)	1,957			2,049
Fixed maturities, trading, at fair value (amortized cost: 2018-$3,162; 2017-$3,509)(1)(2)	3,083			3,507
Assets supporting experience-rated contractholder liabilities, at fair value(1)(2)	21,083			22,097
Equity securities, at fair value (cost: 2018-$5,149; 2017-$5,154)(1)(2)	7,058			7,329
Commercial mortgage and other loans (includes $401 and $593 measured at fair value under the fair value option at September 30, 2018 and December 31, 2017, respectively)(1)	59,336			56,045
Policy loans	11,928			11,891
Other invested assets (includes $5,206 and $3,159 measured at fair value at September 30, 2018 and December 31, 2017, respectively)(1)(2)	13,790			13,373
Short-term investments(2)	5,767			6,800
Total investments	464,972			469,871
Cash and cash equivalents(1)	12,466			14,490
Accrued investment income(1)	3,180			3,325
Deferred policy acquisition costs	19,789			18,992
Value of business acquired	1,962			1,591
Other assets(1)	16,938			17,250
Separate account assets	303,441			306,617
TOTAL ASSETS	$	822,748		$	832,136
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits	$	260,797		$	257,317
Policyholders’ account balances	149,130			148,189
Policyholders’ dividends	4,512			6,411
Securities sold under agreements to repurchase	9,176			8,400
Cash collateral for loaned securities	4,656			4,354
Income taxes	7,014			9,648
Short-term debt	2,393			1,380
Long-term debt	17,421			17,172
Other liabilities(1)	16,196			16,619
Notes issued by consolidated variable interest entities (includes $610 and $1,196 measured at fair value under the fair value option at September 30, 2018 and December 31, 2017, respectively)(1)	930			1,518
Separate account liabilities	303,441			306,617
Total liabilities	775,666			777,625
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 14)
EQUITY
Preferred Stock ($.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 September 30, 2018 and December 31, 2017)	6			6
Additional paid-in capital	24,810			24,769
Common Stock held in treasury, at cost (245,720,188 and 230,537,166 shares at September 30, 2018 and December 31, 2017, respectively)	(17,246		)	(16,284		)
Accumulated other comprehensive income (loss)	9,150			17,074
Retained earnings	30,005			28,671
Total Prudential Financial, Inc. equity	46,725			54,236
Noncontrolling interests	357			275
Total equity	47,082			54,511
TOTAL LIABILITIES AND EQUITY	$	822,748		$	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

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Operations

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
REVENUES
Premiums	$	8,810		$	7,795		$	23,559		$	22,602
Policy charges and fee income	1,498			1,502			4,482			3,760
Net investment income	4,046			4,076			12,140			12,226
Asset management and service fees	1,037			1,005			3,073			2,929
Other income (loss)	606			327			45			964
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities	(32		)	(22		)	(129		)	(132		)
Other-than-temporary impairments on fixed maturity securities transferred to Other comprehensive income	0			0			0			10
Other realized investment gains (losses), net	183			1,630			1,390			1,065
Total realized investment gains (losses), net	151			1,608			1,261			943
Total revenues	16,148			16,313			44,560			43,424
BENEFITS AND EXPENSES
Policyholders’ benefits	9,311			8,193			26,498			23,546
Interest credited to policyholders’ account balances	1,030			1,035			2,474			2,922
Dividends to policyholders	446			500			1,314			1,606
Amortization of deferred policy acquisition costs	563			643			1,764			1,166
General and administrative expenses	2,960			2,921			8,729			8,813
Total benefits and expenses	14,310			13,292			40,779			38,053
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURES	1,838			3,021			3,781			5,371
Total income tax expense (benefit)	184			800			604			1,320
INCOME (LOSS) BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURES	1,654			2,221			3,177			4,051
Equity in earnings of operating joint ventures, net of taxes	21			20			62			58
NET INCOME (LOSS)	1,675			2,241			3,239			4,109
Less: Income (loss) attributable to noncontrolling interests	3			3			7			11
NET INCOME (LOSS) ATTRIBUTABLE TO PRUDENTIAL FINANCIAL, INC.	$	1,672		$	2,238		$	3,232		$	4,098
EARNINGS PER SHARE
Basic earnings per share-Common Stock:
Net income (loss) attributable to Prudential Financial, Inc.	$	3.97		$	5.19		$	7.62		$	9.46
Diluted earnings per share-Common Stock:
Net income (loss) attributable to Prudential Financial, Inc.	$	3.90		$	5.09		$	7.51		$	9.29

See Notes to Unaudited Interim Consolidated Financial Statements

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Comprehensive Income

Three and Nine Months Ended September 30, 2018 and 2017 (in millions)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2018			2017		2018			2017
NET INCOME (LOSS)	$	1,675		$	2,241	$	3,239		$	4,109
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments for the period	(274		)	122		(315		)	719
Net unrealized investment gains (losses)	(3,150		)	153		(11,142		)	1,835
Defined benefit pension and postretirement unrecognized periodic benefit (cost)	71			62		200			161
Total	(3,353		)	337		(11,257		)	2,715
Less: Income tax expense (benefit) related to other comprehensive income (loss)	(843		)	101		(2,525		)	757
Other comprehensive income (loss), net of taxes	(2,510		)	236		(8,732		)	1,958
Comprehensive income (loss)	(835		)	2,477		(5,493		)	6,067
Less: Comprehensive income (loss) attributable to noncontrolling interests	(2		)	3		5			(8		)
Comprehensive income (loss) attributable to Prudential Financial, Inc.	$	(833	)	$	2,474	$	(5,498	)	$	6,075

See Notes to Unaudited Interim Consolidated Financial Statements

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Equity

Nine Months Ended September 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								(1,125		)				(1,125		)				(1,125		)
Contributions from noncontrolling interests																	102			102
Distributions to noncontrolling interests																	(26		)	(26		)
Consolidations (deconsolidations) of noncontrolling interests																	1			1
Stock-based compensation programs			41					163						204						204
Dividends declared on Common Stock					(1,149		)							(1,149		)				(1,149		)
Comprehensive income:
Net income (loss)					3,232									3,232			7			3,239
Other comprehensive income (loss), net of tax											(8,730		)	(8,730		)	(2		)	(8,732		)
Total comprehensive income (loss)														(5,498		)	5			(5,493		)
Balance, September 30, 2018	$	6	$	24,810	$	30,005		$	(17,246	)	$	9,150		$	46,725		$	357		$	47,082

	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								(937		)				(937		)				(937		)
Contributions from noncontrolling interests																	7			7
Distributions to noncontrolling interests																	(31		)	(31		)
Consolidations (deconsolidations) of noncontrolling interests																	(1		)	(1		)
Stock-based compensation programs			110					241						351						351
Dividends declared on Common Stock					(979		)							(979		)				(979		)
Comprehensive income:
Net income (loss)					4,098									4,098			11			4,109
Other comprehensive income (loss), net of tax											1,977			1,977			(19		)	1,958
Total comprehensive income (loss)														6,075			(8		)	6,067
Balance, September 30, 2017	$	6	$	24,721	$	25,227		$	(16,012	)	$	16,598		$	50,540		$	192		$	50,732

See Notes to Unaudited Interim Consolidated Financial Statements

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2018 and 2017 (in millions)



	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	3,239		$	4,109
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment (gains) losses, net	(1,261		)	(943		)
Policy charges and fee income	(1,642		)	(1,880		)
Interest credited to policyholders’ account balances	2,474			2,922
Depreciation and amortization	45			271
(Gains) losses on assets supporting experience-rated contractholder liabilities, net(1)	586			(330		)
Change in:
Deferred policy acquisition costs	(353		)	(966		)
Future policy benefits and other insurance liabilities	9,513			6,465
Income taxes	(127		)	1,348
Derivatives, net	(2,587		)	(2,076		)
Other, net(1)	381			(134		)
Cash flows from (used in) operating activities(1)	10,268			8,786
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale	42,903			42,243
Fixed maturities, held-to-maturity	76			128
Fixed maturities, trading(1)	527			1,161
Assets supporting experience-rated contractholder liabilities(1)	20,122			29,360
Equity securities(1)	2,913			3,298
Commercial mortgage and other loans	4,056			3,808
Policy loans	1,730			1,830
Other invested assets(1)	1,151			945
Short-term investments(1)	25,652			21,572
Payments for the purchase/origination of:
Fixed maturities, available-for-sale	(53,071		)	(50,140		)
Fixed maturities, trading(1)	(760		)	(1,484		)
Assets supporting experience-rated contractholder liabilities(1)	(19,671		)	(29,235		)
Equity securities(1)	(2,543		)	(2,440		)
Commercial mortgage and other loans	(7,745		)	(6,195		)
Policy loans	(1,487		)	(1,392		)
Other invested assets	(1,713		)	(1,275		)
Short-term investments(1)	(24,613		)	(19,629		)
Acquisition of business, net of cash acquired	0			(64		)
Derivatives, net	(182		)	(61		)
Other, net(1)	(286		)	(652		)
Cash flows from (used in) investing activities(1)	(12,941		)	(8,222		)
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholders’ account deposits	21,319			20,399
Policyholders’ account withdrawals	(20,454		)	(19,798		)
Net change in securities sold under agreements to repurchase and cash collateral for loaned securities	1,078			903
Cash dividends paid on Common Stock	(1,147		)	(976		)
Net change in financing arrangements (maturities 90 days or less)	189			31
Common Stock acquired	(1,112		)	(927		)
Common Stock reissued for exercise of stock options	107			208
Proceeds from the issuance of debt (maturities longer than 90 days)	2,790			1,189
Repayments of debt (maturities longer than 90 days)	(1,705		)	(860		)
Other, net	(256		)	(472		)
Cash flows from (used in) financing activities	809			(303		)
Effect of foreign exchange rate changes on cash balances	(68		)	145
NET INCREASE IN CASH, CASH EQUIVALENTS RESTRICTED CASH AND RESTRICTED CASH EQUIVALENT(1)	(1,932		)	406
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)	$	12,604		$	14,587
NON-CASH TRANSACTIONS DURING THE PERIOD
Treasury Stock shares issued for stock-based compensation programs	$	134		$	102
Significant Pension Risk Transfer transactions:
Assets received, excluding cash and cash equivalents	$	332		$	2,124
Liabilities assumed	3,063			3,066
Net cash received	$	2,731		$	942
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	$	12,466		$	14,541
Restricted cash and restricted cash equivalents (included in “Other assets”)	138			46
Total cash, cash equivalents restricted cash and restricted cash equivalents	$	12,604		$	14,587

__________


(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

Table of Contents

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 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 U.S. Workplace Solutions division consists of the Retirement and Group Insurance segments. The U.S. Individual Solutions division consists of the Individual Annuities and Individual Life segments. 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 September 30 previously included the assets and liabilities of Gibraltar Life as of August 31, and the Company’s unaudited interim consolidated income statement previously included Gibraltar Life’s results of operations for the three and nine months ended August 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.

Table of Contents

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.

Table of Contents

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

Table of Contents

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.

Table of Contents

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 nine months ended September 30, 2018, respectively, asset management and service fee revenues included $876 million and $2,593 million of asset-based management fees, $10 million and $21 million of performance-based incentive fees, and $151 million and $459 million of other fees. For the three months and nine months ended September 30, 2017, respectively, asset management and service fee revenues included $848 million and $2,460 million of asset-based management fees, $7 million and $19 million of performance-based incentive fees, and $150 million and $450 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.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Other ASU adopted during the nine months ended September 30, 2018



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 September 30, 2018 — ASU 2018-12

ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the FASB on August 15, 2018 and is expected to have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements. The ASU is effective January 1, 2021 (with early adoption permitted), and will impact, at least to some extent, the accounting and disclosure requirements for all long-duration insurance and investment contracts issued by the Company. Outlined below are four key areas of change, although there are other less significant changes not noted below. In addition to the impacts to the balance sheet upon adoption, the Company also expects an impact to how earnings emerge thereafter.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



ASU 2018-12 Amended Topic	Description	Method of adoption	Effect on the financial statements or other significant matters

Cash flow assumptions used to measure the liability for future policy benefits for non-participating traditional and limited-pay insurance products	Requires an entity to review, and if necessary, update the cash flow assumptions used to measure the liability for future policy benefits, for both changes in future assumptions and actual experience, at least annually using a retrospective update method with a cumulative catch-up adjustment recorded in a separate line item in the Consolidated Statements of Operations.	An entity may choose one of two adoption methods for the liability for future policy benefits: (1) a modified retrospective transition method whereby the entity will apply the amendments to contracts in force as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or (2) a full retrospective transition method.	The options for method of adoption and the impacts of such methods are under assessment.
Discount rate assumption used to measure the liability for future policy benefits for non-participating traditional and limited-pay insurance products	Requires discount rate assumptions to be based on an upper-medium grade fixed income instrument yield and will be required to be updated each quarter with the impact recorded through Other Comprehensive Income (“OCI”).	As noted above, an entity may choose either a modified retrospective transition method or full retrospective transition method for the liability for future policy benefits. Under either method, for balance sheet remeasurement purposes, the liability for future policy benefits will be remeasured using current discount rates as of the beginning of the earliest period presented with the impact recorded as a cumulative effect adjustment to AOCI.	Upon adoption, under either transition method, there will be an adjustment to AOCI as a result of remeasuring in force contract liabilities using current upper-medium grade fixed income instrument yields. The adjustment upon adoption will largely reflect the difference between the discount rate locked-in at contract inception versus current discount rates at transition. The magnitude of such adjustment is currently being assessed.
Amortization of deferred acquisition costs (DAC) and other balances	Requires DAC and other balances, such as unearned revenue reserves and deferred sales inducements, to be amortized on a constant level basis over the expected term of the related contract, independent of expected profitability.	An entity may apply one of two adoption methods: (1) a modified retrospective transition method whereby the entity will apply the amendments to contracts in force as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or (2) if an entity chooses a full retrospective transition method for its future policy benefits, as described above, it is required to also use a retrospective transition method for DAC and other balances.	The options for method of adoption and the impacts of such methods are under assessment. Under the modified retrospective transition method, the Company would not expect a significant impact to the balance sheet, other than the impact of the removal of any related amounts in AOCI.
Market Risk Benefits	Requires an entity to measure all market risk benefits (e.g., living benefit and death benefit guarantees associated with variable annuities) at fair value with changes in value attributable to changes in an entity’s non-performance risk (“NPR”) recognized in OCI.	An entity will apply a retrospective transition method which will include a cumulative-effect adjustment on the balance sheet as of the earliest period presented.	Upon adoption, the Company expects an impact to retained earnings for the difference between the fair value and carrying value of benefits not currently measured at fair value (e.g., guaranteed minimum death benefits on variable annuities) and an impact from reclassifying the cumulative effect of changes in NPR from retained earnings to AOCI. The magnitude of such adjustments is currently being assessed.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Other ASU issued but not yet adopted as of September 30, 2018



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. We currently estimate that the amount of the asset and liability recorded upon adoption will be less than $750 million. 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.

Table of Contents

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:



	September 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	$	24,078	$	2,455	$	1,030	$	25,503	$	0
Obligations of U.S. states and their political subdivisions	9,784		631		92		10,323		0
Foreign government bonds	93,835		14,012		678		107,169		0
U.S. corporate public securities	80,894		4,444		2,054		83,284		(4		)
U.S. corporate private securities(1)	31,847		1,201		615		32,433		(10		)
Foreign corporate public securities	27,357		2,188		339		29,206		(3		)
Foreign corporate private securities	24,479		595		855		24,219		0
Asset-backed securities(2)	12,850		199		27		13,022		(166		)
Commercial mortgage-backed securities	13,065		41		323		12,783		0
Residential mortgage-backed securities(3)	2,979		108		59		3,028		(1		)
Total fixed maturities, available-for-sale(1)	$	321,168	$	25,874	$	6,072	$	340,970	$	(184	)

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	September 30, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in millions)
Fixed maturities, held-to-maturity:
Foreign government bonds	$	856	$	242	$	0	$	1,098
Foreign corporate public securities	647		62		0		709
Foreign corporate private securities(5)	83		2		0		85
Commercial mortgage-backed securities	0		0		0		0
Residential mortgage-backed securities(3)	371		24		0		395
Total fixed maturities, held-to-maturity(5)	$	1,957	$	330	$	0	$	2,287

__________


(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 $388 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, $4,753 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	)

Table of Contents

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:



	September 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	$	8,407	$	294	$	5,907	$	736	$	14,314	$	1,030
Obligations of U.S. states and their political subdivisions	3,221		72		262		20		3,483		92
Foreign government bonds	15,895		416		2,685		262		18,580		678
U.S. corporate public securities	35,457		1,395		7,371		659		42,828		2,054
U.S. corporate private securities	13,490		361		3,876		254		17,366		615
Foreign corporate public securities	7,068		218		1,543		121		8,611		339
Foreign corporate private securities	10,466		425		3,502		430		13,968		855
Asset-backed securities	6,416		23		314		4		6,730		27
Commercial mortgage-backed securities	6,626		150		2,711		173		9,337		323
Residential mortgage-backed securities	886		24		622		35		1,508		59
Total	$	107,932	$	3,378	$	28,793	$	2,694	$	136,725	$	6,072

__________


(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 September 30, 2018.

Table of Contents

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 September 30, 2018 and December 31, 2017, the gross unrealized losses on fixed maturity securities were composed of $5,662 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 $410 million and $306 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. As of September 30, 2018, the $2,694 million of gross unrealized losses on fixed maturity securities of twelve months or more were concentrated in U.S. and foreign government bonds and in the Company’s corporate securities within the utility, consumer non-cyclical and energy 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 September 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 September 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:

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	September 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	$	10,146	$	10,588	$	25	$	25
Due after one year through five years	51,010		53,830		149		153
Due after five years through ten years	63,461		66,596		560		620
Due after ten years(1)	167,657		181,123		852		1,094
Asset-backed securities	12,850		13,022		0		0
Commercial mortgage-backed securities	13,065		12,783		0		0
Residential mortgage-backed securities	2,979		3,028		371		395
Total	$	321,168	$	340,970	$	1,957	$	2,287

__________


(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, $4,753 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 September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(in millions)
Fixed maturities, available-for-sale:
Proceeds from sales(1)	$	7,135		$	7,973		$	26,209		$	23,860
Proceeds from maturities/prepayments	4,941			5,068			16,720			18,488
Gross investment gains from sales and maturities	254			359			1,038			1,160
Gross investment losses from sales and maturities	(146		)	(109		)	(590		)	(407		)
OTTI recognized in earnings(2)	(32		)	(22		)	(129		)	(122		)
Fixed maturities, held-to-maturity:
Proceeds from maturities/prepayments(3)	$	17		$	39		$	76		$	128

__________


(1)	Includes $26 million and $105 million of non-cash related proceeds due to the timing of trade settlements for the nine months ended September 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 less than $1 million and $(1) million of non-cash related proceeds due to the timing of trade settlements for the nine months ended September 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:

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended September 30, 2018			Nine Months Ended September 30, 2018			Three Months Ended September 30, 2017			Nine Months Ended September 30, 2017
	(in millions)
Credit loss impairments:
Balance, beginning of period	$	163		$	319		$	341		$	359
New credit loss impairments	1			1			3			10
Additional credit loss impairments on securities previously impaired	0			0			0			1
Increases due to the passage of time on previously recorded credit losses	2			8			4			11
Reductions for securities which matured, paid down, prepaid or were sold during the period	(5		)	(160		)	(33		)	(49		)
Reductions for securities impaired to fair value during the period(1)	(1		)	(5		)	0			(14		)
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected	0			(3		)	(1		)	(4		)
Balance, end of period	$	160		$	160		$	314		$	314

__________


(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:



	September 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	$	194	$	194	$	245	$	245
Fixed maturities:
Corporate securities	13,021		12,892		13,816		14,073
Commercial mortgage-backed securities	2,319		2,274		2,294		2,311
Residential mortgage-backed securities(1)	854		826		961		966
Asset-backed securities(2)	1,315		1,336		1,363		1,392
Foreign government bonds	1,030		1,018		1,050		1,057
U.S. government authorities and agencies and obligations of U.S. states	824		858		357		410
Total fixed maturities	19,363		19,204		19,841		20,209
Equity securities	1,355		1,685		1,278		1,643
Total assets supporting experience-rated contractholder liabilities	$	20,912	$	21,083	$	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 $34 million and $66 million during the three months ended September 30, 2018 and 2017, respectively, and $(562) million and $295 million during the nine months ended September 30, 2018 and 2017, respectively.

Table of Contents

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 $92 million and $16 million during the three months ended September 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 $(266) million and $74 million during the nine months ended September 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:



	September 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	$	69,098	$	79,207	$	64,628	$	76,311
Fixed maturities, held-to-maturity	834		1,071		844		1,103
Fixed maturities, trading	22		21		23		23
Assets supporting experience-rated contractholder liabilities	634		635		657		667
Total	$	70,588	$	80,934	$	66,152	$	78,104



	September 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	$	10,053	$	11,726	$	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	$	10,068	$	11,741	$	9,440	$	11,004

Table of Contents

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:



	September 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	$	13,309		22.7	%	$	12,670		22.9	%
Retail	8,851			15.1		8,543			15.5
Apartments/Multi-Family	16,370			27.9		15,465			28.0
Industrial	11,151			19.0		9,451			17.1
Hospitality	1,948			3.3		2,067			3.7
Other	3,729			6.4		3,888			7.0
Total commercial mortgage loans	55,358			94.4		52,084			94.2
Agricultural property loans	3,289			5.6		3,203			5.8
Total commercial mortgage and agricultural property loans by property type	58,647			100.0	%	55,287			100.0	%
Valuation allowance	(117		)			(100		)
Total net commercial mortgage and agricultural property loans by property type	58,530					55,187
Other loans:
Uncollateralized loans	647					663
Residential property loans	161					196
Other collateralized loans	3					5
Total other loans	811					864
Valuation allowance	(5		)			(6		)
Total net other loans	806					858
Total commercial mortgage and other loans(1)	$	59,336				$	56,045

__________


(1)	Includes loans held for sale which are carried at fair value and are collateralized primarily by apartment complexes. As of September 30, 2018 and December 31, 2017, the net carrying value of these loans was $401 million and $593 million, respectively.

As of September 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 (27%), Texas (10%) and New York (8%) and included loans secured by properties in Europe (6%), Australia (1%) and Asia (1%)).

Table of Contents

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:



	September 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	17		0		0		0		(1		)	16
Charge-offs, net of recoveries	0		0		0		0		0			0
Change in foreign exchange	0		0		0		0		0			0
Total ending balance	$	114	$	3	$	1	$	0	$	4		$	122



	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:



	September 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	$	17	$	0	$	0	$	0	$	0	$	17
Collectively evaluated for impairment	97		3		1		0		4		105
Total ending balance(1)	$	114	$	3	$	1	$	0	$	4	$	122

Recorded investment(2):
Individually evaluated for impairment	$	67	$	59	$	0	$	0	$	2	$	128
Collectively evaluated for impairment	55,291		3,230		161		3		645		59,330
Total ending balance(1)	$	55,358	$	3,289	$	161	$	3	$	647	$	59,458

__________


(1)	As of September 30, 2018, there were no loans acquired with deteriorated credit quality.


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

Table of Contents

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



	September 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%	$	29,364	$	493	$	286	$	30,143
60%-69.99%	17,259		498		4		17,761
70%-79.99%	6,084		868		41		6,993
80% or greater	288		148		25		461
Total commercial mortgage loans	$	52,995	$	2,007	$	356	$	55,358

Agricultural property loans



	September 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%	$	3,090	$	135	$	0	$	3,225
60%-69.99%	64		0		0		64
70%-79.99%	0		0		0		0
80% or greater	0		0		0		0
Total agricultural property loans	$	3,154	$	135	$	0	$	3,289

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Total commercial mortgage and agricultural property loans



	September 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%	$	32,454	$	628	$	286	$	33,368
60%-69.99%	17,323		498		4		17,825
70%-79.99%	6,084		868		41		6,993
80% or greater	288		148		25		461
Total commercial mortgage and agricultural property loans	$	56,149	$	2,142	$	356	$	58,647

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:



	September 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	$	55,358	$	0	$	0	$	0	$	0	$	55,358	$	67
Agricultural property loans	3,269		0		5		15		20		3,289		22
Residential property loans	158		1		0		2		3		161		2
Other collateralized loans	3		0		0		0		0		3		0
Uncollateralized loans	647		0		0		0		0		647		0
Total	$	59,435	$	1	$	5	$	17	$	23	$	59,458	$	91

__________


(1)	As of September 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.

Table of Contents

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:



	September 30, 2018		December 31, 2017
	(in millions)
LPs/LLCs:
Equity method:
Private equity	$	2,999	$	2,954
Hedge funds	1,199		803
Real estate-related	1,179		972
Subtotal equity method	5,377		4,729
Fair value:
Private equity	1,693		1,325
Hedge funds	2,306		2,419
Real estate-related	286		247
Subtotal fair value(1)	4,285		3,991
Total LPs/LLCs	9,662		8,720
Real estate held through direct ownership(2)	2,265		2,409
Derivative instruments	813		1,214
Other(3)	1,050		1,030
Total other invested assets(4)	$	13,790	$	13,373

_________


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


(2)	As of September 30, 2018 and December 31, 2017, real estate held through direct ownership had mortgage debt of $759 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 September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(in millions)
Fixed maturities, available-for-sale(1)	$	2,981		$	2,873		$	8,936		$	8,524
Fixed maturities, held-to-maturity(1)	57			55			169			163
Fixed maturities, trading	44			38			105			125
Assets supporting experience-rated contractholder liabilities, at fair value	181			186			553			558
Equity securities, at fair value	29			104			123			308
Commercial mortgage and other loans	586			571			1,749			1,691
Policy loans	154			153			462			460
Other invested assets	152			245			456			825
Short-term investments and cash equivalents	91			51			245			141
Gross investment income	4,275			4,276			12,798			12,795
Less: investment expenses	(229		)	(200		)	(658		)	(569		)
Net investment income(2)	$	4,046		$	4,076		$	12,140		$	12,226

__________


(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 September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(in millions)
Fixed maturities(1)	$	76		$	228		$	319		$	631
Equity securities(2)	0			316			0			736
Commercial mortgage and other loans	16			21			33			49
Investment real estate	(1		)	0			61			12
LPs/LLCs	0			(1		)	16			(22		)
Derivatives(3)	62			1,044			835			(463		)
Other	(2		)	0			(3		)	0
Realized investment gains (losses), net	$	151		$	1,608		$	1,261		$	943

__________


(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:

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	September 30, 2018		December 31, 2017
	(in millions)
Fixed maturity securities, available-for-sale—with OTTI	$	204	$	286
Fixed maturity securities, available-for-sale—all other	19,598		34,109
Equity securities, available-for-sale(1)	0		2,027
Derivatives designated as cash flow hedges(2)	139		(39		)
Other investments(3)	4		15
Net unrealized gains (losses) on investments	$	19,945	$	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 September 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:



	September 30, 2018								December 31, 2017
	Remaining Contractual Maturities of the Agreements								Remaining Contractual Maturities of the Agreements
	Overnight & Continuous		Up to 30 Days		30 to 90 Days		Total		Overnight & Continuous		Up to 30 Days		30 to 90 Days		Total
	(in millions)
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	8,636	$	0	$	165	$	8,801	$	911	$	7,349	$	0	$	8,260
U.S. corporate public securities	20		0		0		20		1		0		0		1
Foreign corporate public securities	0		0		0		0		0		0		0		0
Residential mortgage-backed securities	355		0		0		355		0		139		0		139
Equity securities	0		0		0		0		0		0		0		0
Total securities sold under agreements to repurchase	$	9,011	$	0	$	165	$	9,176	$	912	$	7,488	$	0	$	8,400

Table of Contents

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:



	September 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	$	122	$	50	$	172	$	87	$	35	$	122
Obligations of U.S. states and their political subdivisions	113		0		113		103		0		103
Foreign government bonds	511		0		511		335		0		335
U.S. corporate public securities	2,858		0		2,858		2,961		0		2,961
Foreign corporate public securities	830		0		830		655		0		655
Residential mortgage-backed securities	0		0		0		0		0		0
Equity securities	172		0		172		178		0		178
Total cash collateral for loaned securities(1)	$	4,606	$	50	$	4,656	$	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)
	September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017
	(in millions)
Fixed maturities, available-for-sale	$	70	$	69	$	269	$	275
Fixed maturities, held-to-maturity	83		83		803		810
Fixed maturities, trading	1,078		1,623		0		0
Assets supporting experience-rated contractholder liabilities	0		0		9		9
Equity securities	39		28		0		0
Commercial mortgage and other loans	627		617		0		0
Other invested assets	1,409		1,390		90		97
Cash and cash equivalents	163		164		0		0
Accrued investment income	5		7		3		4
Other assets	419		440		171		150
Total assets of consolidated VIEs	$	3,893	$	4,421	$	1,345	$	1,345
Other liabilities	$	310	$	433	$	7	$	0
Notes issued by consolidated VIEs(3)	930		1,518		0		0
Total liabilities of consolidated VIEs	$	1,240	$	1,951	$	7	$	0

Table of Contents

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 “Adoption of ASU 2016-01” in Note 2 for details.


(2)	Total assets of consolidated VIEs reflect $1,843 million and $1,716 million as of September 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 September 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 $798 million and $1,013 million at September 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 $9,662 million and $8,720 million as of September 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, forwards, 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 $806 million and $1,205 million as of September 30, 2018 and December 31, 2017, respectively, and total derivative liabilities of $686 million and $643 million as of September 30, 2018 and December 31, 2017, respectively, reflected in the Unaudited Interim Consolidated Statements of Financial Position.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



Primary Underlying Risk /Instrument Type	September 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	$	2,854	$	112	$	(75	)	$	3,204	$	271	$	(88	)
Interest Rate Forwards	476		4		0			0		0		0
Foreign Currency
Foreign Currency Forwards	740		12		(2		)	545		0		(8		)
Currency/Interest Rate
Foreign Currency Swaps	19,768		951		(591		)	17,732		766		(735		)
Total Qualifying Hedges	$	23,838	$	1,079	$	(668	)	$	21,481	$	1,037	$	(831	)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Swaps	$	145,055	$	5,605	$	(4,444	)	$	158,552	$	7,958	$	(3,509	)
Interest Rate Futures	18,732		28		(15		)	23,792		25		(1		)
Interest Rate Options	21,952		162		(347		)	18,456		167		(203		)
Interest Rate Forwards	3,902		11		(25		)	1,498		6		(2		)
Foreign Currency
Foreign Currency Forwards	22,949		319		(369		)	23,905		164		(254		)
Foreign Currency Options	4		0		0			59		0		0
Currency/Interest Rate
Foreign Currency Swaps	13,509		764		(409		)	13,777		822		(414		)
Credit
Credit Default Swaps	3,784		72		(4		)	1,314		21		(5		)
Equity
Equity Futures	454		0		0			710		2		(2		)
Equity Options	55,369		845		(750		)	36,007		588		(364		)
Total Return Swaps	17,800		41		(309		)	15,558		17		(369		)
Other
Other(1)	515		0		0			0		0		0
Synthetic GICs	78,512		2		0			77,290		0		(1		)
Total Non-Qualifying Derivatives	$	382,537	$	7,849	$	(6,672	)	$	370,918	$	9,770	$	(5,124	)
Total Derivatives(2)	$	406,375	$	8,928	$	(7,340	)	$	392,399	$	10,807	$	(5,955	)

__________


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


(2)	Excludes embedded derivatives and associated reinsurance recoverables which contain multiple underlying risks. The fair value of these embedded derivatives was a net liability of $5,360 million and $8,748 million as of September 30, 2018 and December 31, 2017, respectively, primarily included in “Future policy benefits.”

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.

Table of Contents

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.



	September 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)	$	8,845	$	(8,121	)	$	724	$	(222	)	$	502
Securities purchased under agreement to resell	2,101		0			2,101		(2,101		)	0
Total assets	$	10,946	$	(8,121	)	$	2,825	$	(2,323	)	$	502
Offsetting of Financial Liabilities:
Derivatives(1)	$	7,331	$	(6,654	)	$	677	$	(640	)	$	37
Securities sold under agreement to repurchase	9,176		0			9,176		(9,176		)	0
Total liabilities	$	16,507	$	(6,654	)	$	9,853	$	(9,816	)	$	37



	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.

Table of Contents

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 September 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	$	6		$	(2	)	$	0		$	0	$	(39	)	$	0
Currency	(1		)	0			0			0		0			0
Total fair value hedges	5			(2		)	0			0		(39		)	0
Cash flow hedges
Interest Rate	0			0			0			0		0			7
Currency	0			0			0			0		0			4
Currency/Interest Rate	0			56			42			0		0			29
Total cash flow hedges	0			56			42			0		0			40
Net investment hedges
Currency	0			0			0			0		0			0
Currency/Interest Rate	0			0			0			0		0			0
Total net investment hedges	0			0			0			0		0			0
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	(960		)	0			0			0		0			0
Currency	(139		)	0			(1		)	0		0			0
Currency/Interest Rate	226			0			1			0		0			0
Credit	15			0			0			0		0			0
Equity	(674		)	0			0			0		0			0
Other	1			0			0			0		0			0
Embedded Derivatives	1,596			0			0			0		0			0
Total non-qualifying hedges	65			0			0			0		0			0
Total	$	70		$	54		$	42		$	0	$	(39	)	$	40

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Nine Months Ended September 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	$	28		$	(8	)	$	0	$	0		$	(150	)	$	0
Currency	1			0			0		0			0			0
Total fair value hedges	29			(8		)	0		0			(150		)	0
Cash flow hedges
Interest Rate	0			0			0		(1		)	0			13
Currency	0			0			0		0			0			13
Currency/Interest Rate	0			156			159		0			0			152
Total cash flow hedges	0			156			159		(1		)	0			178
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	(2,906		)	0			0		0			0			0
Currency	141			0			0		0			0			0
Currency/Interest Rate	278			0			2		0			0			0
Credit	10			0			0		0			0			0
Equity	(923		)	0			0		0			0			0
Other	0			0			0		0			0			0
Embedded Derivatives	4,233			0			0		0			0			0
Total non-qualifying hedges	833			0			2		0			0			0
Total	$	862		$	148		$	161	$	(1	)	$	(150	)	$	181

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended September 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	$	3		$	(4	)	$	0		$	0		$	0	$	0
Currency	(2		)	0			0			0			0		0
Total fair value hedges	1			(4		)	0			0			0		0
Cash flow hedges
Interest Rate	0			0			0			(1		)	0		1
Currency/Interest Rate	0			50			(108		)	0			0		(447		)
Total cash flow hedges	0			50			(108		)	(1		)	0		(446		)
Net investment hedges
Currency	0			0			0			0			0		(2		)
Currency/Interest Rate	0			0			0			0			0		0
Total net investment hedges	0			0			0			0			0		(2		)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	137			0			0			0			0		0
Currency	(113		)	0			1			0			0		0
Currency/Interest Rate	(93		)	0			(2		)	0			0		0
Credit	(8		)	0			0			0			0		0
Equity	(604		)	0			0			0			0		0
Other	0			0			0			0			0		0
Embedded Derivatives	1,726			0			0			0			0		0
Total non-qualifying hedges	1,045			0			(1		)	0			0		0
Total	$	1,046		$	46		$	(109	)	$	(1	)	$	0	$	(448	)

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Nine Months Ended September 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	$	11		$	(15	)	$	0		$	0		$	0	$	0
Currency	(4		)	0			0			0			0		0
Total fair value hedges	7			(15		)	0			0			0		0
Cash flow hedges
Interest Rate	0			0			0			(2		)	0		5
Currency/Interest Rate	0			142			(272		)	0			0		(988		)
Total cash flow hedges	0			142			(272		)	(2		)	0		(983		)
Net investment hedges
Currency	0			0			0			0			0		(9		)
Currency/Interest Rate	0			0			0			0			0		0
Total net investment hedges	0			0			0			0			0		(9		)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	1,101			0			0			0			0		0
Currency	(121		)	0			0			0			0		0
Currency/Interest Rate	(233		)	0			(4		)	0			0		0
Credit	8			0			0			0			0		0
Equity	(1,761		)	0			0			0			0		0
Other	0			0			0			0			0		0
Embedded Derivatives	544			0			0			0			0		0
Total non-qualifying hedges	(462		)	0			(4		)	0			0		0
Total	$	(455	)	$	127		$	(276	)	$	(2	)	$	0	$	(992	)

_________


(1)	Amounts deferred in AOCI.

For the nine months ended September 30, 2018, the ineffective portion of derivatives accounted for using hedge accounting was a loss of $13 million and for the nine months ended September 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 September 30, 2018	549
Amount reclassified into current period earnings	(371		)
Balance, September 30, 2018	$	139

Table of Contents

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 Unaudited Interim Consolidated Statements of Comprehensive Income; these amounts are then reclassified to earnings when the hedged item affects earnings. Using September 30, 2018 values, it is estimated that a pre-tax gain of approximately $218 million will be reclassified from AOCI to earnings during the subsequent twelve months ending September 30, 2019, offset by amounts pertaining to the hedged items.

The exposures the Company is hedging with these qualifying cash flow hedges include the variability of future cash flows from forecasted transactions denominated in foreign currencies, the purchases of invested assets, and the receipt or payment of variable interest on existing financial instruments. The maximum length of time over which the Company is hedging its exposure to the variability in future cash flows for forecasted transactions is 5 years.

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 September 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 $109 million and $114 million as of September 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 September 30, 2018 and December 31, 2017, respectively. As of September 30, 2018, the notional amount of these credit derivatives had the following NAIC ratings: $36 million in NAIC 1; $62 million in NAIC 2; $6 million in NAIC 3; $1 million in NAIC 4; $1 million in NAIC 5; and $3 million in NAIC 6. The Company has also written credit protection on certain index references with notional amounts of $3,555 million and $1,022 million as of September 30, 2018 and December 31, 2017, respectively. These credit derivatives are reported at fair value as an asset of $68 million and $18 million as of September 30, 2018 and December 31, 2017, respectively. As of September 30, 2018, the notional amount of these credit derivatives had the following NAIC ratings: $50 million in NAIC 1; $3,305 million in NAIC 3; and $200 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 5 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 September 30, 2018 and December 31, 2017, the Company had $120 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 September 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.

Table of Contents

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.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	As of September 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	$	25,434	$	69	$			$	25,503
Obligations of U.S. states and their political subdivisions	0		10,318		5					10,323
Foreign government bonds	0		107,041		128					107,169
U.S. corporate public securities	0		83,125		159					83,284
U.S. corporate private securities(2)	0		30,990		1,443					32,433
Foreign corporate public securities	0		29,134		72					29,206
Foreign corporate private securities	0		23,570		649					24,219
Asset-backed securities(3)	0		12,049		973					13,022
Commercial mortgage-backed securities	0		12,440		343					12,783
Residential mortgage-backed securities	0		2,936		92					3,028
Subtotal	0		337,037		3,933					340,970
Assets supporting experience-rated contractholder liabilities:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	0		663		0					663
Obligations of U.S. states and their political subdivisions	0		195		0					195
Foreign government bonds	0		797		221					1,018
Corporate securities	0		12,484		408					12,892
Asset-backed securities(3)	0		1,262		74					1,336
Commercial mortgage-backed securities	0		2,274		0					2,274
Residential mortgage-backed securities	0		826		0					826
Equity securities	1,397		286		2					1,685
All other(5)	0		57		3					60
Subtotal	1,397		18,844		708					20,949
Fixed maturities, trading	0		2,897		186					3,083
Equity securities	5,505		705		711					6,921
Commercial mortgage and other loans	0		401		0					401
Other invested assets(6)	28		8,897		117		(8,121		)	921
Short-term investments	3,860		1,099		6					4,965
Cash equivalents	646		4,103		0					4,749
Other assets	0		0		0					0
Separate account assets(7)(8)	45,276		230,933		1,637					277,846
Total assets	$	56,712	$	604,916	$	7,298	$	(8,121	)	$	660,805
Future policy benefits(9)	$	0	$	0	$	5,231	$			$	5,231
Other liabilities	18		7,325		136		(6,654		)	825
Notes issued by consolidated VIEs	0		0		610					610
Total liabilities	$	18	$	7,325	$	5,977	$	(6,654	)	$	6,666

Table of Contents

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 $1,467 million and $4,288 million as of September 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 September 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.

Table of Contents

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 September 30, 2018 and December 31, 2017, the fair values of such investments were $4,285 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 September 30, 2018 and December 31, 2017, the fair value of such investments was $25,595 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 September 30, 2018, the net embedded derivative liability position of $5.2 billion includes $1.2 billion of embedded derivatives in an asset position and $6.4 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 September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	(in millions)
Transferred from Level 1 to Level 2	$	5	$	35	$	185	$	98
Transferred from Level 2 to Level 1	$	5	$	11	$	16	$	94

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 September 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)	$	1,108	Discounted cash flow	Discount rate	0.64%	-	22.52%	7.59%	Decrease
			Market comparables	EBITDA multiples(3)	4.5X		8.5X	8.2X	Increase
			Liquidation	Liquidation value	5.54%	-	57.12%	43.27%	Increase
Separate account assets-commercial mortgage loans(4)	$	790	Discounted cash flow	Spread	1.05%	-	2.39%	1.16%	Decrease
Liabilities:
Future policy benefits(5)	$	5,231	Discounted cash flow	Lapse rate(6)	1%	-	13%		Decrease
				Spread over LIBOR(7)	0.16%	-	1.21%		Decrease
				Utilization rate(8)	50%	-	97%		Increase
				Withdrawal rate	See table footnote (9) below.
				Mortality rate(10)	0%	-	15%		Decrease
				Equity volatility curve	14%	-	22%		Increase

Table of Contents

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 September 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 50 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.

Table of Contents

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. During the second quarter of 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.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended September 30, 2018
	Fair Value, beginning of period			Total realized and unrealized gains (losses)			Purchases		Sales			Issuances			Settlements			Other(6)			Transfers into Level 3(7)		Transfers out of Level 3(7)			Fair Value, end of period			Unrealized gains (losses) for assets still held(8)
	(in millions)
Fixed maturities, available-for-sale:
U.S. government	$	67		$	0		$	2	$	0		$	0		$	0		$	0		$	0	$	0		$	69		$	0
U.S. states	5			0			0		0			0			0			0			0		0			5			0
Foreign government	137			0			0		0			0			0			(3		)	0		(6		)	128			0
Corporate securities(2)	2,691			(17		)	118		(13		)	0			(323		)	(6		)	60		(187		)	2,323			(17		)
Structured securities(3)	1,664			(10		)	520		(226		)	0			(221		)	(4		)	0		(315		)	1,408			0
Assets supporting experience-rated contractholder liabilities:
Foreign government	221			0			0		0			0			0			0			0		0			221			(1		)
Corporate securities(2)	488			(12		)	26		0			0			(75		)	0			3		(22		)	408			(13		)
Structured securities(3)	107			0			3		0			0			(21		)	0			0		(15		)	74			(1		)
Equity securities	4			0			0		(2		)	0			0			0			0		0			2			0
All other activity	5			0			31		0			0			(33		)	0			0		0			3			0
Other assets:
Fixed maturities, trading	173			4			18		(9		)	0			0			1			0		(1		)	186			4
Equity securities	783			3			19		(46		)	0			(40		)	(8		)	2		(2		)	711			(1		)
Other invested assets	122			1			0		(3		)	0			0			(3		)	0		0			117			0
Short-term investments	1			0			22		0			0			(17		)	0			0		0			6			0
Cash equivalents	2			0			0		0			0			(2		)	0			0		0			0			0
Other assets	0			0			0		0			0			0			0			0		0			0			0
Separate account assets(4)	1,816			26			67		(6		)	0			(66		)	0			12		(212		)	1,637			24
Liabilities:
Future policy benefits	(6,585		)	1,645			0		0			(291		)	0			0			0		0			(5,231		)	1,585
Other liabilities	(60		)	(55		)	9		0			(33		)	3			0			0		0			(136		)	(56		)
Notes issued by consolidated VIEs	(609		)	(1		)	0		0			0			0			0			0		0			(610		)	(2		)



	Three Months Ended September 30, 2018
	Total realized and unrealized gains (losses)													Unrealized gains (losses) for assets still held(8)
	Realized investment gains (losses), net			Other income			Interest credited to policyholders’		Included in other comprehensive income (losses)			Net investment income		Realized investment gains (losses), net			Other income			Interest credited to policyholders’
	(in millions)
Fixed maturities, available-for-sale	$	(6	)	$	0		$	0	$	(26	)	$	5	$	(17	)	$	0		$	0
Assets supporting experience-rated contractholder liabilities	0			(15		)	0		0			3		0			(15		)	0
Other assets:
Fixed maturities, trading	0			3			0		0			1		0			4			0
Equity securities	0			3			0		0			0		0			(1		)	0
Other invested assets	0			1			0		0			0		0			0			0
Short-term investments	0			0			0		0			0		0			0			0
Cash equivalents	0			0			0		0			0		0			0			0
Other assets	0			0			0		0			0		0			0			0
Separate account assets(4)	0			0			25		0			1		0			0			24
Liabilities:
Future policy benefits	1,645			0			0		0			0		1,585			0			0
Other liabilities	(55		)	0			0		0			0		(56		)	0			0
Notes issued by consolidated VIEs	(1		)	0			0		0			0		(2		)	0			0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Nine Months Ended September 30, 2018(1)
	Fair Value, beginning of period			Total realized and unrealized gains (losses)			Purchases		Sales			Issuances			Settlements			Other(6)			Transfers into Level 3(7)		Transfers out of Level 3(7)			Fair Value, end of period			Unrealized gains (losses) for assets still held(8)
	(in millions)
Fixed maturities, available-for-sale:
U.S. government	$	52		$	0		$	17	$	0		$	0		$	0		$	0		$	0	$	0		$	69		$	0
U.S. states	5			0			0		0			0			0			0			0		0			5			0
Foreign government	148			(2		)	0		0			0			0			(6		)	20		(32		)	128			0
Corporate securities(2)	2,776			(35		)	493		(17		)	0			(778		)	(25		)	189		(280		)	2,323			(47		)
Structured securities(3)	6,716			(34		)	2,508		(570		)	0			(1,538		)	2			1,133		(6,809		)	1,408			0
Assets supporting experience-rated contractholder liabilities:
Foreign government	223			1			0		0			0			(3		)	0			0		0			221			(3		)
Corporate securities(2)	462			(21		)	91		0			0			(144		)	0			43		(23		)	408			(23		)
Structured securities(3)	722			(2		)	22		0			0			(163		)	0			33		(538		)	74			(2		)
Equity securities	4			1			0		(3		)	0			0			0			0		0			2			1
All other activity	7			0			74		0			0			(78		)	0			0		0			3			0
Other assets:
Fixed maturities, trading	156			7			67		(51		)	0			(3		)	4			12		(6		)	186			7
Equity securities	795			5			61		(78		)	0			(79		)	7			5		(5		)	711			(1		)
Other invested assets	137			5			1		(15		)	0			0			(11		)	0		0			117			3
Short-term investments	8			(1		)	44		0			0			(43		)	(2		)	0		0			6			(1		)
Cash equivalents	0			0			9		0			0			(9		)	0			0		0			0			0
Other assets	13			(13		)	0		0			0			0			0			0		0			0			(13		)
Separate account assets(4)	2,122			15			557		(28		)	0			(327		)	0			236		(938		)	1,637			20
Liabilities:
Future policy benefits	(8,720		)	4,354			0		0			(865		)	0			0			0		0			(5,231		)	4,088
Other liabilities	(50		)	(92		)	27		0			(33		)	11			1			0		0			(136		)	(91		)
Notes issued by consolidated VIEs	(1,196		)	(1		)	0		0			0			0			587			0		0			(610		)	(1		)



	Nine Months Ended September 30, 2018(1)
	Total realized and unrealized gains (losses)													Unrealized gains (losses) for assets still held(8)
	Realized investment gains (losses), net			Other income			Interest credited to policyholders’		Included in other comprehensive income (losses)			Net investment income		Realized investment gains (losses), net			Other income			Interest credited to policyholders’
	(in millions)
Fixed maturities, available-for-sale	$	(19	)	$	0		$	0	$	(65	)	$	13	$	(47	)	$	0		$	0
Assets supporting experience-rated contractholder liabilities	0			(28		)	0		0			7		0			(27		)	0
Other assets:
Fixed maturities, trading	1			5			0		0			1		0			7			0
Equity securities	0			5			0		0			0		0			(1		)	0
Other invested assets	4			1			0		0			0		2			1			0
Short-term investments	(1		)	0			0		0			0		(1		)	0			0
Cash equivalents	0			0			0		0			0		0			0			0
Other assets	(13		)	0			0		0			0		(13		)	0			0
Separate account assets(4)	0			0			14		0			1		0			0			20
Liabilities:
Future policy benefits	4,354			0			0		0			0		4,088			0			0
Other liabilities	(92		)	0			0		0			0		(91		)	0			0
Notes issued by consolidated VIEs	(1		)	0			0		0			0		(1		)	0			0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended September 30, 2017(9)
	Fair Value, beginning of period			Total realized and unrealized gains (losses)			Purchases		Sales			Issuances			Settlements			Other(6)			Transfers into Level 3(7)		Transfers out of Level 3(7)			Fair Value, end of period			Unrealized gains (losses) for assets still held(8)
	(in millions)
Fixed maturities, available-for-sale:
U.S. government	$	32		$	0		$	9	$	0		$	0		$	0		$	0		$	0	$	0		$	41		$	0
U.S. states	5			0			7		0			0			0			0			0		0			12			0
Foreign government	143			(1		)	0		0			0			0			8			3		0			153			0
Corporate securities(2)	1,662			(23		)	36		(1		)	0			(51		)	(44		)	223		(51		)	1,751			(10		)
Structured securities(3)	6,744			16			1,131		(207		)	0			(605		)	7			698		(684		)	7,100			0
Assets supporting experience-rated contractholder liabilities(5):
Foreign government	228			1			0		0			0			0			0			0		0			229			0
Corporate securities(2)	148			(11		)	10		0			0			(14		)	(3		)	43		(2		)	171			(10		)
Structured securities(3)	621			0			156		0			0			(122		)	0			114		(42		)	727			1
Equity securities	0			1			0		0			0			0			3			0		0			4			1
All other activity	0			0			18		0			0			(13		)	0			0		0			5			0
Other assets:
Fixed maturities, trading(5)	97			0			12		(1		)	0			(1		)	1			53		(2		)	159			(2		)
Equity securities(5)	816			6			12		(10		)	0			(37		)	31			2		0			820			2
Other invested assets(5)	77			(1		)	0		0			0			(1		)	11			10		0			96			(2		)
Short-term investments	2			0			12		0			0			(8		)	(1		)	0		0			5			0
Cash equivalents	0			0			93		0			0			0			0			0		0			93			0
Other assets	39			(47		)	8		0			0			0			0			0		0			0			(47		)
Separate account assets(4)	2,107			11			465		(12		)	0			(174		)	0			48		(162		)	2,283			13
Liabilities:
Future policy benefits	(10,031		)	1,777			0		0			(283		)	0			0			0		0			(8,537		)	1,698
Other liabilities	(34		)	13			0		0			0			(18		)	0			0		0			(39		)	1
Notes issued by consolidated VIEs	(1,853		)	12			0		0			0			0			647			0		0			(1,194		)	12



	Three Months Ended September 30, 2017(9)
	Total realized and unrealized gains (losses)													Unrealized gains (losses) for assets still held(8)
	Realized investment gains (losses), net			Other income			Interest credited to policyholders’		Included in other comprehensive income (losses)			Net investment income		Realized investment gains (losses), net			Other income			Interest credited to policyholders’
	(in millions)
Fixed maturities, available-for-sale	$	(8	)	$	0		$	0	$	(5	)	$	5	$	(10	)	$	0		$	0
Assets supporting experience-rated contractholder liabilities(5)	0			(10		)	0		0			1		0			(8		)	0
Other assets:
Fixed maturities, trading(5)	0			(1		)	0		0			1		0			(2		)	0
Equity securities(5)	(2		)	4			0		4			0		(2		)	4			0
Other invested assets(5)	(1		)	0			0		0			0		(2		)	0			0
Short-term investments	0			0			0		0			0		0			0			0
Cash equivalents	0			0			0		0			0		0			0			0
Other assets	(47		)	0			0		0			0		(47		)	0			0
Separate account assets(4)	0			0			11		0			0		0			0			13
Liabilities:
Future policy benefits	1,777			0			0		0			0		1,698			0			0
Other liabilities	(6		)	0			19		0			0		(6		)	0			7
Notes issued by consolidated VIEs	12			0			0		0			0		12			0			0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Nine Months Ended September 30, 2017(9)
	Fair Value, beginning of period			Total realized and unrealized gains (losses)			Purchases		Sales			Issuances			Settlements			Other(6)			Transfers into Level 3(7)		Transfers out of Level 3(7)			Fair Value, end of period			Unrealized gains (losses) for assets still held(8)
	(in millions)
Fixed maturities, available-for-sale:
U.S. government	$	0		$	0		$	31	$	0		$	0		$	0		$	10		$	0	$	0		$	41		$	0
U.S. states	5			0			7		0			0			0			0			0		0			12			0
Foreign government	124			1			0		0			0			0			9			21		(2		)	153			0
Corporate securities(2)	2,173			12			158		(145		)	0			(498		)	(45		)	349		(253		)	1,751			(50		)
Structured securities(3)	4,555			67			3,572		(602		)	0			(2,019		)	31			3,343		(1,847		)	7,100			0
Assets supporting experience-rated contractholder liabilities(5):
Foreign government	227			4			0		0			0			(2		)	0			0		0			229			0
Corporate securities(2)	154			(7		)	69		(2		)	0			(99		)	(3		)	65		(6		)	171			(10		)
Structured securities(3)	290			3			374		(9		)	0			(243		)	0			512		(200		)	727			3
Equity securities	0			1			0		0			0			0			3			0		0			4			1
All other activity	0			0			18		0			0			(13		)	0			0		0			5			0
Other assets:
Fixed maturities, trading(5)	76			4			43		(9		)	0			(13		)	8			80		(30		)	159			5
Equity securities(5)	752			39			44		(44		)	0			(44		)	41			33		(1		)	820			35
Other invested assets(5)	8			(2		)	0		0			0			(1		)	81			10		0			96			(3		)
Short-term investments	1			0			12		0			0			(8		)	(1		)	1		0			5			0
Cash equivalents	0			2			93		0			0			(6		)	0			4		0			93			0
Other assets	0			(25		)	25		0			0			0			0			0		0			0			(25		)
Separate account assets(4)	1,849			58			1,003		(84		)	0			(555		)	0			302		(290		)	2,283			53
Liabilities:
Future policy benefits	(8,238		)	540			0		0			(837		)	0			(2		)	0		0			(8,537		)	345
Other liabilities	(22		)	1			0		0			0			(18		)	0			0		0			(39		)	1
Notes issued by consolidated VIEs	(1,839		)	(2		)	0		0			0			0			647			0		0			(1,194		)	(2		)



	Nine Months Ended September 30, 2017(9)
	Total realized and unrealized gains (losses)													Unrealized gains (losses) for assets still held(8)
	Realized investment gains (losses), net			Other income			Interest credited to policyholders’		Included in other comprehensive income (losses)			Net investment income		Realized investment gains (losses), net			Other income			Interest credited to policyholders’
	(in millions)
Fixed maturities, available-for-sale	$	78		$	0		$	0	$	(19	)	$	21	$	(50	)	$	0		$	0
Assets supporting experience-rated contractholder liabilities(5)	0			(5		)	0		0			6		0			(6		)	0
Other assets:
Fixed maturities, trading(5)	0			3			0		0			1		0			5			0
Equity securities(5)	2			24			0		13			0		(3		)	38			0
Other invested assets(5)	(2		)	0			0		0			0		(3		)	0			0
Short-term investments	0			0			0		0			0		0			0			0
Cash equivalents	0			0			0		0			2		0			0			0
Other assets	(25		)	0			0		0			0		(25		)	0			0
Separate account assets	0			0			57		0			1		0			0			53
Liabilities:
Future policy benefits	540			0			0		0			0		345			0			0
Other liabilities	(18		)	0			19		0			0		(18		)	0			19
Notes issued by consolidated VIEs	(2		)	0			0		0			0		(2		)	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.


(3)	Includes asset-backed, commercial mortgage-backed and residential mortgage-backed securities.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

(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 September 30, 2018, primarily represents deconsolidation of a VIE and reclassifications of certain assets between reporting categories and foreign currency translation. Other, for the period ended September 30, 2017, primarily represents consolidations of VIE, reclassifications of certain assets between reporting categories and foreign currency translation.


(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.


(9)	Prior period amounts have been updated to conform to current period presentation.

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.



	As of September 30, 2018
	Level 1		Level 2		Level 3		Netting(1)			Total
	(in millions)
Derivative Assets:
Interest Rate	$	28	$	5,893	$	2	$			$	5,923
Currency	0		331		0					331
Credit	0		72		0					72
Currency/Interest Rate	0		1,715		0					1,715
Equity	0		886		0					886
Other	0		0		0					0
Netting(1)							(8,121		)	(8,121		)
Total derivative assets	$	28	$	8,897	$	2	$	(8,121	)	$	806
Derivative Liabilities:
Interest Rate	$	15	$	4,891	$	0	$			$	4,906
Currency	0		371		0					371
Credit	0		4		0					4
Currency/Interest Rate	0		1,000		0					1,000
Equity	0		1,059		0					1,059
Other	0		0		0					0
Netting(1)							(6,654		)	(6,654		)
Total derivative liabilities	$	15	$	7,325	$	0	$	(6,654	)	$	686

Table of Contents

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)
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.



	Three Months Ended September 30, 2018
	Fair Value, beginning of period		Total realized and unrealized gains (losses) (4)		Purchases		Sales		Issuances		Settlements		Other(1)			Transfers into Level 3 (2)		Transfers out of Level 3 (2)		Fair Value, end of period		Unrealized gains (losses) for assets still held (4)
	(in millions)
Net Derivative - Equity	$	2	$	0	$	0	$	0	$	0	$	0	$	(2	)	$	0	$	0	$	0	$	0
Net Derivative - Interest Rate	2		0		0		0		0		0		0			0		0		2		4



	Nine Months Ended September 30, 2018
	Fair Value, beginning of period			Total realized and unrealized gains (losses) (4)		Purchases		Sales		Issuances		Settlements		Other(1)			Transfers into Level 3 (2)		Transfers out of Level 3 (2)		Fair Value, end of period		Unrealized gains (losses) for assets still held (4)
	(in millions)
Net Derivative - Equity	$	10		$	1	$	0	$	0	$	0	$	0	$	(11	)	$	0	$	0	$	0	$	0
Net Derivative - Interest Rate	(3		)	5		0		0		0		0		0			0		0		2		5

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended September 30, 2017(5)
	Fair Value, beginning of period		Total realized and unrealized gains (losses) (4)			Purchases		Sales		Issuances		Settlements		Other(3)		Transfers into Level 3 (2)		Transfers out of Level 3 (2)		Fair Value, end of period		Unrealized gains (losses) for assets still held (4)
	(in millions)
Net Derivative - Equity	$	0	$	0		$	0	$	0	$	0	$	0	$	10	$	0	$	0	$	10	$	0
Net Derivative - Interest Rate	3		(2		)	0		0		0		0		0		0		0		1		(3		)



	Nine Months Ended September 30, 2017(5)
	Fair Value, beginning of period		Total realized and unrealized gains (losses) (4)			Purchases		Sales		Issuances		Settlements		Other(3)		Transfers into Level 3 (2)		Transfers out of Level 3 (2)		Fair Value, end of period		Unrealized gains (losses) for assets still held (4)
	(in millions)
Net Derivative - Equity	$	0	$	0		$	0	$	0	$	0	$	0	$	10	$	0	$	0	$	10	$	0
Net Derivative - Interest Rate	4		(3		)	0		0		0		0		0		0		0		1		(3		)

__________


(1)	Represents conversion of warrants to equity shares.


(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.


(3)	Related to warrants received in restructuring a certain asset that resulted in reclassification of reporting category.


(4)	Total realized and unrealized gains (losses) as well as unrealized gains (losses) for assets still held at the end of the period are recorded in “Realized investment gains (losses), net.”


(5)	Prior period amounts have been updated to conform to current period presentation.

Nonrecurring Fair Value Measurements—The following tables represent 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 September 30,					Nine Months Ended September 30,
	2018		2017			2018			2017
	(in millions)
Realized investment gains (losses) net:
Commercial mortgage loans(1)	$	3	$	0		$	(10	)	$	0
Mortgage servicing rights(2)	$	2	$	2		$	6		$	8
Cost method investments(3)	$	0	$	(7	)	$	0		$	(24	)



	September 30, 2018		December 31, 2017
	(in millions)
Carrying value after measurement as of period end:
Commercial mortgage loans(1)	$	50	$	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.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

(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.



	Three Months Ended September 30,					Nine Months Ended September 30,
	2018		2017			2018		2017
	(in millions)
Assets:
Other invested assets(2):
Changes in fair value	$	0	$	33		$	0	$	110
Liabilities:
Notes issued by consolidated VIEs:
Changes in fair value	$	1	$	(12	)	$	1	$	2



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	(in millions)
Commercial mortgage and other loans:
Interest income	$	4	$	5	$	10	$	10
Notes issued by consolidated VIEs:
Interest expense	$	9	$	16	$	27	$	60

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	September 30, 2018		December 31, 2017
	(in millions)
Commercial mortgage and other loans(1):
Fair value as of period end	$	401	$	593
Aggregate contractual principal as of period end	$	396	$	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	$	610	$	1,196
Aggregate contractual principal as of period end	$	632	$	1,233

__________


(1)	As of September 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.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	September 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	$	1,413	$	874	$	2,287	$	1,957
Assets supporting experience-rated contractholders liabilities	16		118		0		134		134
Commercial mortgage and other loans	0		121		58,427		58,548		58,935
Policy loans	0		0		11,928		11,928		11,928
Other invested assets	0		43		0		43		43
Short-term investments	780		22		0		802		802
Cash and cash equivalents	5,719		1,998		0		7,717		7,717
Accrued investment income	0		3,180		0		3,180		3,180
Other assets	138		2,609		499		3,246		3,246
Total assets	$	6,653	$	9,504	$	71,728	$	87,885	$	87,942
Liabilities:
Policyholders’ account balances—investment contracts	$	0	$	31,513	$	66,540	$	98,053	$	99,314
Securities sold under agreements to repurchase	0		9,176		0		9,176		9,176
Cash collateral for loaned securities	0		4,656		0		4,656		4,656
Short-term debt	0		1,866		669		2,535		2,393
Long-term debt(5)	1,848		15,441		1,223		18,512		17,421
Notes issued by consolidated VIEs	0		0		320		320		320
Other liabilities	0		6,139		525		6,664		6,664
Separate account liabilities—investment contracts	0		73,624		26,433		100,057		100,057
Total liabilities	$	1,848	$	142,415	$	95,710	$	239,973	$	240,001

Table of Contents

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 September 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 September 30, 2018, excludes notes with fair value and carrying amount of $4,753 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 September 30, 2018, includes notes with fair value and carrying amount of $8,419 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.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

As of September 30, 2018 and December 31, 2017, the Company recognized a policyholder dividend obligation of $2,676 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 $829 million and $3,656 million at September 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:



	September 30, 2018			December 31, 2017
	(in millions)
Closed Block liabilities
Future policy benefits	$	48,349		$	48,870
Policyholders’ dividends payable	874			829
Policyholders’ dividend obligation	3,505			5,446
Policyholders’ account balances	5,078			5,146
Other Closed Block liabilities	4,383			5,070
Total Closed Block liabilities	62,189			65,361
Closed Block assets
Fixed maturities, available-for-sale, at fair value	39,005			41,043
Fixed maturities, trading, at fair value(1)	201			339
Equity securities, at fair value(1)	2,146			2,340
Commercial mortgage and other loans	8,915			9,017
Policy loans	4,438			4,543
Other invested assets(1)	3,345			3,159
Short-term investments	107			632
Total investments	58,157			61,073
Cash and cash equivalents	435			789
Accrued investment income	487			474
Other Closed Block assets	378			249
Total Closed Block assets	59,457			62,585
Excess of reported Closed Block liabilities over Closed Block assets	2,732			2,776
Portion of above representing accumulated other comprehensive income:
Net unrealized investment gains (losses)	790			3,627
Allocated to policyholder dividend obligation	(829		)	(3,656		)
Future earnings to be recognized from Closed Block assets and Closed Block liabilities	$	2,693		$	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:



	Nine Months Ended September 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	(84		)
Change in net unrealized investment gains (losses) allocated to policyholder dividend obligation	(2,014		)
Balance, September 30, 2018	$	3,505

__________


(1)	See Note 2 for details.

Table of Contents

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 September 30,					Nine Months Ended September 30,
	2018			2017		2018			2017
	(in millions)
Revenues
Premiums	$	528		$	577	$	1,680		$	1,852
Net investment income	562			671		1,752			1,997
Realized investment gains (losses), net	(4		)	107		104			461
Other income (loss)	166			25		273			85
Total Closed Block revenues	1,252			1,380		3,809			4,395
Benefits and Expenses
Policyholders’ benefits	676			727		2,182			2,371
Interest credited to policyholders’ account balances	33			35		99			100
Dividends to policyholders	424			478		1,240			1,544
General and administrative expenses	91			95		275			289
Total Closed Block benefits and expenses	1,224			1,335		3,796			4,304
Closed Block revenues, net of Closed Block benefits and expenses, before income taxes	28			45		13			91
Income tax expense (benefit)	12			30		(33		)	50
Closed Block revenues, net of Closed Block benefits and expenses and income taxes	$	16		$	15	$	46		$	41

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 $604 million, or 16.0% of income (loss) before income taxes and equity in earnings of operating joint ventures, in the first nine months of 2018, compared to $1,320 million, or 24.6%, in the first nine months of 2017. The Company’s 2018 effective tax rate 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 and unique items described below that were recorded in the periods in which they occurred. The Company’s 2017 effective tax rate differed from the U.S statutory rate of 35% primarily due to non-taxable investment income, tax credits and foreign earnings taxed at lower rates than the U.S. statutory rate.

2018 Industry Issue Resolution (IIR) - In August 2018, the Internal Revenue Service (“IRS”) released an IIR to provide guidance on the tax reserving for guaranteed benefits within variable annuity contracts and principle-based reserves on certain life insurance contracts. Adopting the IIR methodology resulted in an accelerated deduction for the Company’s 2017 tax return, that would have otherwise been deductible in future years. Prior to the adoption of this IIR, the Company accounted for these future deductions as deferred tax assets measured using the current 21% corporate income tax rate. Upon adoption of the IIR, the tax benefits were revalued using the 35% tax rate applicable for the 2017 tax year in which they will now be recognized resulting in a reduction in income tax expense of $198 million for the first nine months of 2018.

Resolution of tax audit issues - During the third quarter of 2018, the Company reached an agreement with the IRS to resolve outstanding tax audit issues for tax years 2015 and 2016 and partially for 2017 which resulted in a $40 million increase to our income tax expense for the first nine months of 2018.

Brazil Full Inclusion - During the third quarter of 2018, the Company made a tax election, effective for the 2017 tax year, to subject earnings from its insurance operations in Brazil to tax in the U.S. in the tax year earned, net of related tax credits. This election will have the effect of reducing the rate at which the Company will incur taxes on these earnings from the 45% tax rate in Brazil to the 21% tax rate in the U.S., which in turn will reduce the amount of associated income tax expense in 2018 and

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

thereafter. In conjunction with this election, the Company remeasured its related deferred tax assets from the previous 45% rate in Brazil to the new rate of 21% in the U.S., which resulted in additional income tax expense in the current quarter. The net effect of the lower tax rate and the remeasurement of the deferred tax assets was a net increase in income tax expense of $51 million for the first nine months of 2018.

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 using 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 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 nine months of 2018, the Company recognized a $144 million reduction in income tax expense primarily related to refinements of our provisional estimates of earnings of affiliated foreign companies subject to the one-time toll charge.

The financial statement impact related to the adoption of Tax Act of 2017 for the twelve months ended December 31, 2017 and nine months ended September 30, 2018 was as follows:



	Twelve Months Ended December 31, 2017			Nine Months Ended September 30, 2018			Total
	(in millions)
Deferred tax revaluation from tax law change	$	(1,592	)	$	16		$	(1,576	)
Adoption of modified territorial system	(1,785		)	(24		)	(1,809		)
Deemed repatriation	497			(136		)	361
Total provision for income tax expense (benefit)	$	(2,880	)	$	(144	)	$	(3,024	)

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:



	September 30, 2018			December 31, 2017
	($ in millions)
Commercial paper:
Prudential Financial	$	25		$	50
Prudential Funding, LLC	719			500
Subtotal commercial paper	744			550
Current portion of long-term debt(1)	1,649			830
Total short-term debt(2)	$	2,393		$	1,380
Supplemental short-term debt information:
Portion of commercial paper borrowings due overnight	$	207		$	277
Daily average commercial paper outstanding	$	1,396		$	1,110
Weighted average maturity of outstanding commercial paper, in days	11			22
Weighted average interest rate on outstanding short-term debt(3)	1.76		%	0.99		%

__________

(1) Includes $49 million and $0 million that has recourse only to real estate investment property at September 30, 2018 and December 31, 2017, respectively.

(2) Includes Prudential Financial debt of $1,124 million and $880 million at September 30, 2018 and December 31, 2017, respectively.

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

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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 September 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:



	September 30, 2018		December 31, 2017
	September 30, 2018		December 31, 2017
	(in millions)
Fixed-rate notes:
Surplus notes	$	341	$	840
Surplus notes subject to set-off arrangements(1)	6,319		5,187
Senior notes	8,777		8,882
Mortgage debt(2)	239		226
Floating-rate notes:
Surplus notes subject to set-off arrangements(1)	2,100		2,100
Senior notes	29		29
Mortgage debt(3)	471		573
Junior subordinated notes(4)	7,564		6,622
Subtotal	25,840		24,459
Less: assets under set-off arrangements(1)	8,419		7,287
Total long-term debt(5)	$	17,421	$	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 $103 million and $107 million of debt denominated in foreign currency at September 30, 2018 and December 31, 2017, respectively.


(3)	Includes $211 million and $245 million of debt denominated in foreign currency at September 30, 2018 and December 31, 2017, respectively.


(4)	Includes Prudential Financial debt of $7,509 million and subsidiary debt of $55 million denominated in foreign currency at September 30, 2018.


(5)	Includes Prudential Financial debt of $16,142 million and $15,304 million at September 30, 2018 and December 31, 2017, respectively.

At September 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 September 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 September 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.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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 September 30, 2018, the outstanding balance of the Company’s medium-term notes was $7.9 billion, an increase of $300 million 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, offset by $700 million of maturities in August 2018.

Mortgage Debt. As of September 30, 2018, the Company’s subsidiaries had mortgage debt of $759 million that has recourse only to real estate property held for investment by those subsidiaries. This represents a decrease of $40 million from December 31, 2017, due to $77 million of prepayment activity and $10 million from foreign currency exchange rate fluctuations, partially offset by new borrowings of $46 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.

In August 2018, Prudential Financial issued $565 million of 5.625% fixed rate junior subordinated notes in a public offering. The notes are considered hybrid capital securities that receive enhanced equity treatment from certain of the rating agencies. The notes have a maturity date of August 15, 2058. Interest is payable quarterly at a fixed rate of 5.625%. Prudential Financial may redeem the notes in whole, but not in part, at any time prior to August 15, 2023, within 90 days after the occurrence of a “tax event,” a “regulatory capital event” or a “rating agency event,” as these terms are defined in the indenture agreement, at a redemption price equal to (i) in the case of a “tax event” or a “regulatory capital event,” their principal amount plus accrued and unpaid interest or (ii) in the case of a “rating agency event,” 102% of their principal amount plus accrued and unpaid interest. On or after August 15, 2023, Prudential Financial may redeem the notes, in whole or in part, at their principal amount plus accrued and unpaid interest.

In September 2018, Prudential Financial issued $1 billion of 5.7% fixed-to-floating rate junior subordinated notes in a public offering. The notes are considered hybrid capital securities that receive enhanced equity treatment from certain of the rating agencies. The notes have a maturity date of September 15, 2048. Interest is payable semi-annually at a fixed rate of 5.7% until September 15, 2028, from which date interest is payable quarterly at a floating rate of 3-month LIBOR plus 2.665%. Prudential Financial may redeem the notes in whole, but not in part, at any time prior to September 15, 2028, within 90 days after the occurrence of a “tax event,” a “regulatory capital event” or a “rating agency event,” as these terms are defined in the indenture agreement, at a redemption price equal to (i) in the case of a “tax event” or a “regulatory capital event,” their principal amount plus accrued and unpaid interest or (ii) in the case of a “rating agency event,” 102% of their principal amount plus accrued and unpaid interest. On or after September 15, 2028, Prudential Financial may redeem the notes, in whole or in part, at their principal amount plus accrued and unpaid interest.

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.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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



	Three Months Ended September 30,
	Pension Benefits						Other Postretirement Benefits
	2018			2017			2018			2017
	(in millions)
Components of net periodic (benefit) cost:
Service cost	$	78		$	71		$	6		$	5
Interest cost	112			119			17			20
Expected return on plan assets	(204		)	(195		)	(27		)	(25		)
Amortization of prior service cost	(1		)	(1		)	0			0
Amortization of actuarial (gain) loss, net	53			48			4			9
Settlements	5			7			0			0
Special termination benefits	0			0			0			0
Net periodic (benefit) cost	$	43		$	49		$	0		$	9

	Nine Months Ended September 30,
	Pension Benefits						Other Postretirement Benefits
	2018			2017			2018			2017
	(in millions)
Components of net periodic (benefit) cost:
Service cost	$	236		$	213		$	18		$	15
Interest cost	336			357			52			61
Expected return on plan assets	(613		)	(585		)	(81		)	(76		)
Amortization of prior service cost	(3		)	(3		)	0			0
Amortization of actuarial (gain) loss, net	160			144			13			27
Settlements	5			7			0			0
Special termination benefits	1			3			0			0
Net periodic (benefit) cost	$	122		$	136		$	2		$	27

During the nine months ended September 30, 2018, the Company made cash contributions of $45 million to its postretirement plans and anticipates making an additional $5 million of cash contributions during the remainder of 2018.

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	10.8		(10.8	)
Stock-based compensation programs(1)	0.0	(2.6	)	2.6
Balance, September 30, 2018	660.1	245.7		414.4

__________


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

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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 September 30, 2018, 10.8 million shares of the Company’s Common Stock were repurchased under this authorization at a total cost of $1.125 billion.

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.

Dividends declared per share of Common Stock are as follows for the periods indicated:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Dividends declared per share of Common Stock	$	0.90	$	0.75	$	2.70	$	2.25

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 nine months ended September 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	(314		)	(10,452		)	30			(10,736		)
Amounts reclassified from AOCI	1			(690		)	170			(519		)
Income tax benefit (expense)	15			2,555			(45		)	2,525
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, September 30, 2018	$	(798	)	$	12,816		$	(2,868	)	$	9,150



	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	735			3,164			(7		)	3,892
Amounts reclassified from AOCI	3			(1,329		)	168			(1,158		)
Income tax benefit (expense)	(95		)	(606		)	(56		)	(757		)
Balance, September 30, 2017	$	(330	)	$	19,400		$	(2,472	)	$	16,598

__________


(1)	Includes cash flow hedges of $139 million and $(39) million as of September 30, 2018 and December 31, 2017, respectively, and $333 million and $1,316 million as of September 30, 2017 and December 31, 2016, respectively.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Reclassifications out of Accumulated Other Comprehensive Income (Loss)



	Three Months Ended September 30,						Nine Months Ended September 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	$	(1	)	$	(1	)	$	(1	)	$	(4	)	Realized investment gains (losses), net
Foreign currency translation adjustments	0			0			0			1			Other income
Total foreign currency translation adjustment	(1		)	(1		)	(1		)	(3		)
Net unrealized investment gains (losses):
Cash flow hedges—Interest rate	0			0			2			(2		)	(3)
Cash flow hedges—Currency	2			0			2			0			(3)
Cash flow hedges—Currency/Interest rate	122			(35		)	367			(36		)	(3)
Net unrealized investment gains (losses) on available-for-sale securities	76			544			319			1,367
Total net unrealized investment gains (losses)	200			509			690			1,329			(4)
Amortization of defined benefit pension items:
Prior service cost	1			1			3			3			(5)
Actuarial gain (loss)	(57		)	(57		)	(173		)	(171		)	(5)
Total amortization of defined benefit pension items	(56		)	(56		)	(170		)	(168		)
Total reclassifications for the period	$	143		$	452		$	519		$	1,158

__________


(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.

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:

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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	(12		)									5			(7		)
Reclassification adjustment for (gains) losses included in net income	(68		)									28			(40		)
Reclassification adjustment for OTTI losses excluded from net income(1)	(2		)									1			(1		)
Impact of net unrealized investment (gains) losses on DAC, DSI, VOBA and reinsurance recoverables				3								(1		)	2
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									27			(10		)	17
Balance, September 30, 2018	$	204		$	1		$	3	$	(19	)	$	(71	)	$	118

__________


(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



	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	(13,709		)										3,782			(9,927		)
Reclassification adjustment for (gains) losses included in net income	(622		)										255			(367		)
Reclassification adjustment for OTTI losses excluded from net income(2)	2												(1		)	1
Impact of net unrealized investment (gains) losses on DAC, DSI, VOBA and reinsurance recoverables				937									(270		)	667
Impact of net unrealized investment (gains) losses on future policy benefits and policyholders’ account balances and reinsurance payables							313						(177		)	136
Impact of net unrealized investment (gains) losses on policyholders’ dividends										1,989			(887		)	1,102
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, September 30, 2018	$	19,741		$	(643	)	$	(930	)	$	(829	)	$	(4,641	)	$	12,698

__________


(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.

Table of Contents

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 September 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)	$	1,675				$	2,241
Less: Income (loss) attributable to noncontrolling interests	3					3
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards	19					27
Net income (loss) attributable to Prudential Financial available to holders of Common Stock	$	1,653	416.2	$	3.97	$	2,211	426.2	$	5.19
Effect of dilutive securities and compensation programs
Add: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Basic	$	19				$	27
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Diluted	19					27
Stock options			1.4					1.9
Deferred and long-term compensation programs			1.2					1.1
Exchangeable Surplus Notes	5		5.9			4		5.8
Diluted earnings per share
Net income (loss) attributable to Prudential Financial available to holders of Common Stock	$	1,658	424.7	$	3.90	$	2,215	435.0	$	5.09

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Nine Months Ended September 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)	$	3,239				$	4,109
Less: Income (loss) attributable to noncontrolling interests	7					11
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards	37					50
Net income (loss) attributable to Prudential Financial available to holders of Common Stock	$	3,195	419.2	$	7.62	$	4,048	428.1	$	9.46
Effect of dilutive securities and compensation programs
Add: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Basic	$	37				$	50
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Diluted	37					50
Stock options			1.6					2.2
Deferred and long-term compensation programs			1.1					1.0
Exchangeable Surplus Notes	16		5.9			13		5.8
Diluted earnings per share
Net income (loss) attributable to Prudential Financial available to holders of Common Stock	$	3,211	427.8	$	7.51	$	4,061	437.1	$	9.29

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 months ended September 30, 2018 and 2017, as applicable, were based on 4.8 million and 5.2 million of such awards, respectively, and for the nine months ended September 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:

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended September 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	$	108.60	0.4	$	110.20
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



	Nine Months Ended September 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	0.6	$	108.46	0.3	$	110.27
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			0.2
Antidilutive shares due to net loss available to holders of Common Stock	0.0			0.0
Total antidilutive stock options and shares	0.6			0.5

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 September 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 PGIM division consists of the PGIM segment. The U.S. Workplace Solutions division consists of the Retirement and Group Insurance segments. The U.S. Individual Solutions division consists of the Individual Annuities and Individual Life segments. 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.

Table of Contents

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”:

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(in millions)
Adjusted operating income before income taxes by segment:
PGIM	$	230		$	259		$	716		$	673
Total PGIM division(1)	230			259			716			673
Retirement	239			248			833			953
Group Insurance	59			61			196			231
Total U.S. Workplace Solutions division(1)	298			309			1,029			1,184
Individual Annuities	454			577			1,480			1,657
Individual Life	170			150			249			(289		)
Total U.S. Individual Solutions division(1)	624			727			1,729			1,368
International Insurance	890			799			2,530			2,421
Total International Insurance division	890			799			2,530			2,421
Corporate and Other operations	(374		)	(310		)	(954		)	(974		)
Total Corporate and Other	(374		)	(310		)	(954		)	(974		)
Total segment adjusted operating income before income taxes	1,668			1,784			5,050			4,672
Reconciling items:
Realized investment gains (losses), net, and related adjustments	271			1,395			751			(48		)
Charges related to realized investment gains (losses), net	(94		)	(231		)	(233		)	571
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net	10			85			(586		)	330
Change in experience-rated contractholder liabilities due to asset value changes	(21		)	(31		)	482			(188		)
Divested businesses:
Closed Block division	18			33			(22		)	49
Other divested businesses	12			10			(1,586		)	51
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests	(26		)	(24		)	(75		)	(66		)
Consolidated income (loss) before income taxes and equity in earnings of operating joint ventures	$	1,838		$	3,021		$	3,781		$	5,371

__________


(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:

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Revenues												Total Assets
	Three Months Ended September 30,						Nine Months Ended September 30,						September 30, 2018		December 31, 2017
	2018			2017			2018			2017
	(in millions)
PGIM	$	817		$	827		$	2,459		$	2,370		$	48,175	$	49,944
Total PGIM division(1)	817			827			2,459			2,370			48,175		49,944
Retirement	4,203			3,259			9,280			8,803			178,778		183,629
Group Insurance	1,430			1,363			4,270			4,108			41,634		41,575
Total U.S. Workplace Solutions division(1)	5,633			4,622			13,550			12,911			220,412		225,204
Individual Annuities	1,224			1,304			3,742			3,825			177,497		183,666
Individual Life	1,454			1,411			4,330			3,510			86,313		83,985
Total U.S. Individual Solutions division(1)	2,678			2,715			8,072			7,335			263,810		267,651
International Insurance	5,490			5,376			16,818			16,268			214,197		211,647
Total International Insurance division	5,490			5,376			16,818			16,268			214,197		211,647
Corporate and Other operations	(186		)	(179		)	(549		)	(488		)	16,199		14,556
Total Corporate and Other	(186		)	(179		)	(549		)	(488		)	16,199		14,556
Total	14,432			13,361			40,350			38,396			762,793		769,002
Reconciling items:
Realized investment gains (losses), net, and related adjustments	271			1,395			751			(48		)
Charges related to realized investment gains (losses), net	(60		)	(63		)	(223		)	(154		)
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net	10			85			(586		)	330
Divested businesses:
Closed Block division	1,249			1,376			3,800			4,382			59,955		63,134
Other divested businesses	276			185			551			594
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests	(30		)	(26		)	(83		)	(76		)
Total per Unaudited Interim Consolidated Financial Statements	$	16,148		$	16,313		$	44,560		$	43,424		$	822,748	$	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 September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	(in millions)
PGIM segment intersegment revenues	$	183	$	181	$	552	$	534

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.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

14. COMMITMENTS AND CONTINGENT LIABILITIES

Commitments and Guarantees

Commercial Mortgage Loan Commitments



	September 30, 2018		December 31, 2017
	(in millions)
Total outstanding mortgage loan commitments	$	2,141	$	2,772
Portion of commitment where prearrangement to sell to investor exists	$	1,003	$	435

In connection with the Company’s commercial mortgage operations, it originates commercial mortgage loans. Commitments for loans that will be held for sale are recognized as derivatives and recorded at fair value. In certain of these transactions, the Company pre-arranges that it will sell the loan to an investor, including to government sponsored entities as discussed below, after the Company funds the loan.

Commitments to Purchase Investments (excluding Commercial Mortgage Loans)



	September 30, 2018		December 31, 2017
	(in millions)
Expected to be funded from the general account and other operations outside the separate accounts	$	6,656	$	6,319
Expected to be funded from separate accounts	$	91	$	141

The Company has other commitments to purchase or fund investments, some of which are contingent upon events or circumstances not under the Company’s control, including those at the discretion of the Company’s counterparties. The Company anticipates a portion of these commitments will ultimately be funded from its separate accounts.

Indemnification of Securities Lending Transactions



	September 30, 2018		December 31, 2017
	(in millions)
Indemnification provided to certain securities lending clients	$	5,085	$	4,619
Fair value of related collateral associated with above indemnifications	$	5,203	$	4,722
Accrued liability associated with guarantee	$	0	$	0

In the normal course of business, the Company may facilitate securities lending transactions on behalf of certain client accounts (collectively, “the accounts”). In certain of these arrangements, the Company has provided an indemnification to the accounts to hold them harmless against losses caused by counterparty (i.e., borrower) defaults associated with the securities lending activity facilitated by the Company. Collateral is provided by the counterparty to the accounts at the inception of the loan equal to or greater than 102% of the fair value of the loaned securities and the collateral is maintained daily at 102% or greater of the fair value of the loaned securities. The Company is only at risk if the counterparty to the securities lending transaction defaults and the value of the collateral held is less than the value of the securities loaned to such counterparty. The Company believes the possibility of any payments under these indemnities is remote.

Credit Derivatives Written

As discussed further in Note 5, the Company writes credit derivatives under which the Company is obligated to pay the counterparty the referenced amount of the contract and receive in return the defaulted security or similar security.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Guarantees of Asset Values



	September 30, 2018		December 31, 2017
	(in millions)
Guaranteed value of third-parties’ assets	$	78,512	$	77,290
Fair value of collateral supporting these assets	$	77,308	$	77,651
Asset (liability) associated with guarantee, carried at fair value	$	2	$	(1	)

Certain contracts underwritten by the Retirement segment include guarantees related to financial assets owned by the guaranteed party. These contracts are accounted for as derivatives and carried at fair value. The collateral supporting these guarantees is not reflected on the Unaudited Interim Consolidated Statements of Financial Position.

Indemnification of Serviced Mortgage Loans



	September 30, 2018		December 31, 2017
	(in millions)
Maximum exposure under indemnification agreements for mortgage loans serviced by the Company	$	1,760	$	1,609
First-loss exposure portion of above	$	525	$	483
Accrued liability associated with guarantees	$	16	$	14

As part of the commercial mortgage activities of the Company’s PGIM segment, the Company provides commercial mortgage origination, underwriting and servicing for certain government sponsored entities, such as Fannie Mae and Freddie Mac. The Company has agreed to indemnify the government sponsored entities for a portion of the credit risk associated with certain of the mortgages it services through a delegated authority arrangement. Under these arrangements, the Company originates multi-family mortgages for sale to the government sponsored entities based on underwriting standards they specify, and makes payments to them for a specified percentage share of losses they incur on certain loans serviced by the Company. The Company’s percentage share of losses incurred generally varies from 2% to 20% of the loan balance, and is typically based on a first-loss exposure for a stated percentage of the loan balance, plus a shared exposure with the government sponsored entity for any losses in excess of the stated first-loss percentage, subject to a contractually specified maximum percentage. The Company determines the liability related to this exposure using historical loss experience, and the size and remaining life of the asset. The Company serviced $14,070 million and $12,892 million of mortgages subject to these loss-sharing arrangements as of September 30, 2018 and December 31, 2017, respectively, all of which are collateralized by first priority liens on the underlying multi-family residential properties. As of September 30, 2018, these mortgages had a weighted-average debt service coverage ratio of 1.86 times and a weighted-average loan-to-value ratio of 60%. As of December 31, 2017, these mortgages had a weighted average debt service coverage ratio of 1.82 times and a weighted-average loan-to-value ratio of 59%. The Company had no losses related to indemnifications that were settled for the nine months ended September 30, 2018 and 2017, respectively.

Other Guarantees



	September 30, 2018		December 31, 2017
	(in millions)
Other guarantees where amount can be determined	$	78	$	31
Accrued liability for other guarantees and indemnifications	$	0	$	0

The Company is also subject to other financial guarantees and indemnity arrangements. The Company has provided indemnities and guarantees related to acquisitions, dispositions, investments and other transactions that are triggered by, among other things, breaches of representations, warranties or covenants provided by the Company. These obligations are typically subject to various time limitations, defined by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum potential obligation is subject to contractual limitations, while in other cases such limitations are not specified or applicable. Included above is $13 million and $31 million as of September 30, 2018 and December 31, 2017, respectively, of yield maintenance guarantees related to certain investments the Company sold. The Company does not expect to make any payments on these guarantees and is not carrying any liabilities associated with these guarantees.

Since certain of these obligations are not subject to limitations, it is not possible to determine the maximum potential amount due under these guarantees. The accrued liabilities identified above do not include retained liabilities associated with sold businesses.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Contingent Liabilities

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

The Company is subject to the laws and regulations of states and other jurisdictions concerning the identification, reporting and escheatment of unclaimed or abandoned funds, and is subject to audit and examination for compliance with these requirements. For additional discussion of these matters, see “—Litigation and Regulatory Matters” below.

It is possible that the results of operations or the cash flow of the Company in a particular quarterly or annual period could be materially affected as a result of payments in connection with the matters discussed above or other matters depending, in part, upon the results of operations or cash flow for such period. Management believes, however, that ultimate payments in connection with these matters, after consideration of applicable reserves and rights to indemnification, should not have a material adverse effect on the Company’s financial position.

Litigation and Regulatory Matters

The Company is subject to legal and regulatory actions in the ordinary course of its businesses. Pending legal and regulatory actions include proceedings relating to aspects of the Company’s businesses and operations that are specific to it and proceedings that are typical of the businesses in which it operates, including in both cases businesses that have been either divested or placed in wind down status. Some of these proceedings have been brought on behalf of various alleged classes of complainants. In certain of these matters, the plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary damages. The outcome of litigation or a regulatory matter, and the amount or range of potential loss at any particular time, is often inherently uncertain.

The Company establishes accruals for litigation and regulatory matters when it is probable that a loss has been incurred and the amount of that loss can be reasonably estimated. For litigation and regulatory matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established but the matter, if potentially material, is disclosed, including matters discussed below. The Company estimates that as of September 30, 2018, the aggregate range of reasonably possible losses in excess of accruals established for those litigation and regulatory matters for which such an estimate currently can be made is less than $250 million. Any estimate is not an indication of expected loss, if any, or the Company’s maximum possible loss exposure on such matters. The Company reviews relevant information with respect to its litigation and regulatory matters on a quarterly and annual basis and updates its accruals, disclosures and estimates of reasonably possible loss based on such reviews.

The following discussion of litigation and regulatory matters provides an update of those matters discussed in Note 23 to the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, and should be read in conjunction with the complete descriptions provided in the Form 10-K.

Individual Annuities, Individual Life and Group Insurance

Wells Fargo MyTerm Sales

In November 2018, the Company and Wells Fargo resolved the Company’s claims emanating from the MyTerm distribution agreement.

Huffman v. The Prudential Insurance Company of America

In April 2018, the Third Circuit Court of Appeals denied Prudential Insurance’s request for leave to appeal the class certification decision.

Behfarin v. Pruco Life

In September 2018, plaintiff filed a motion for class certification.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Escheatment Litigation

State of West Virginia ex. Rel. John D. Perdue v. The Prudential Insurance Company of America

In September 2018, the case was dismissed with prejudice. This matter is now closed.

State of West Virginia ex. Rel. John D. Perdue v. Pruco Life

In September 2018, the case was dismissed with prejudice. This matter is now closed.

Total Asset Recovery Services, LLC v. MetLife, Inc., et al., Prudential Financial, Inc., The Prudential Insurance Company of America, and Prudential Insurance Agency, LLC

In May 2018, defendants filed a motion to dismiss the Second Amended Complaint.

Other Matters

Rosen v. PRIAC, et al.

In March 2018, plaintiff’s time to appeal the decision of the Court of Appeals expired. This case is now closed.

Residential Mortgage-Backed Securities Trustee Litigation

PICA et al. v. Citibank N.A.

In March 2018, the federal court granted Citibank’s motion for summary judgment. In April 2018, plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Second Circuit from the March 2018 decision granting summary judgment.

PICA et al. v. Deutsche Bank, et al.

In May 2018, plaintiffs’ motion for class certification was denied in the state court action. In June 2018, plaintiffs filed a Notice of Appeal to the California Court of Appeal of the denial of their class certification motion.

PICA et al. v. HSBC, et al.

In February 2018, the court denied plaintiffs’ motion for class certification and plaintiffs filed a petition with the Second Circuit Court of Appeals seeking permission to appeal the class certification decision. In May 2018, the Second Circuit denied plaintiffs’ request for permission to appeal the denial of their class certification motion.

PICA et al. v. U.S. Bank N.A.

In February 2018, the federal court entered a stipulated order: (i) dismissing all claims involving three trusts with prejudice; (ii) with respect to twenty trusts, dismissing with prejudice the Trust Indenture Act (“TIA”) claims for lack of standing, and the breach of contract claims without prejudice; and (iii) dismissing without prejudice the TIA and breach of contract claims concerning the four remaining trusts. In February 2018, U.S. Bank filed an appeal from the state court’s order concerning U.S. Bank’s motion to dismiss the amended complaint. In March 2018, plaintiffs filed a cross-appeal of the state court’s order concerning the motion to dismiss. In August 2018, plaintiffs filed a second class action complaint in New York state court against U.S. Bank, as trustee, asserting claims for breach of contract, breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, and breach of duty of care. In October 2018, the New York State Supreme Court, First Department, modified the lower court’s January 2018 order, by dismissing plaintiffs’ breach of contract claims for servicer violations involving 56 of 77 trusts, and otherwise affirmed the remainder of the lower court’s January 2018 order.

Regulatory Matters

Securities Lending and Foreign Tax Reclaim Matter

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

In 2016, the Company self-reported to the SEC and the U.S. Department of Labor (“DOL”) , and notified other regulators, that in some cases it failed to maximize securities lending income for the benefit of certain separate account investments due to a long-standing restriction benefiting the Company that limited the availability of loanable securities. The Company has removed the restriction and implemented a remediation plan for the benefit of customers. As part of the Company’s review of this matter, in 2018 it further self-reported to the SEC, and notified other regulators, that in some cases it failed to timely process foreign tax reclaims for the separate account investments. The Company has corrected the foreign tax reclaim process and is implementing a remediation plan for the benefit of customers.

The DOL’s review of the securities lending matter is closed. The Company is cooperating with the SEC in its review of the securities lending and foreign tax reclaim matters (which includes a review of the remediation plans) and has entered into discussions with the SEC staff regarding a possible settlement of the securities lending matter that would potentially involve charges under the Investment Advisers Act and financial remedies. We cannot predict the outcome of the discussions with the SEC regarding the foreign tax reclaim matter or the possible settlement of the securities lending matter.

Summary

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

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE OF CONTENTS



	Page
Overview	76
Regulatory Developments	76
Impact of a Low Interest Rate Environment	77
Results of Operations	80
Consolidated Results of Operations	80
Segment Results of Operations	81
Segment Measures	84
Impact of Foreign Currency Exchange Rates	84
Accounting Policies & Pronouncements	87
Results of Operations by Segment	89
PGIM	89
Retirement	93
Group Insurance	95
Individual Annuities	97
Individual Life	102
International Insurance	104
Corporate and Other	109
Divested Businesses	110
Closed Block Division	111
Income Taxes	112
Experience-Rated Contractholder Liabilities, Assets Supporting Experience-Rated Contractholder Liabilities and Other Related Investments	112
Valuation of Assets and Liabilities	114
General Account Investments	116
Liquidity and Capital Resources	135
Ratings	144
Off-Balance Sheet Arrangements	145

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) addresses the consolidated financial condition of Prudential Financial, Inc. (“Prudential,” “Prudential Financial,” “PFI,” or “the Company”) as of September 30, 2018, compared with December 31, 2017, and its consolidated results of operations for the three and nine months ended September 30, 2018 and 2017. You should read the following analysis of our consolidated financial condition and results of operations in conjunction with the MD&A, the “Risk Factors” section, and the audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as well as the statements under “Forward-Looking Statements” and the Unaudited Interim Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Table of Contents

Overview

Prudential Financial, a financial services leader with approximately $1.410 trillion of assets under management as of September 30, 2018, has operations primarily in the United States, Asia, Europe and Latin America. Through our subsidiaries and affiliates, we offer a wide array of financial products and services, including life insurance, annuities, retirement-related services, mutual funds and investment management. We offer these products and services to individual and institutional customers through one of the largest distribution networks in the financial services industry.

Our principal operations are comprised of five divisions, which together encompass seven segments, and our Corporate and Other operations. The PGIM division is comprised of the PGIM segment, our global investment management businesses (retitled from the “Investment Management division” and the “Investment Management segment” effective in the second quarter of 2018). The U.S. Workplace Solutions division consists of our Retirement and Group Insurance segments. The U.S. Individual Solutions division consists of our Individual Annuities and Individual Life segments. The International Insurance division consists of our International Insurance segment. The Closed Block division consists of our 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. Our 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.

We attribute financing costs to each segment based on the amount of financing used by each segment, excluding financing costs associated with corporate debt which are reflected in Corporate and Other operations. The net investment income of each segment includes earnings on the amount of capital that management believes is necessary to support the risks of that segment.

Regulatory Developments

Regulation as a Designated Financial Company

In October 2018, the Financial Stability Oversight Council rescinded the designation of the Company as a non-bank financial company (a “Designated Financial Company”) subject to supervision by the Board of Governors of the Federal Reserve System (“FRB”) under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). As a result, the Company is no longer subject to supervision and examination by the FRB or to the prudential standards applicable to Designated Financial Companies under Dodd-Frank. The Company remains subject to comprehensive regulation and supervision as described under “Business—Regulation” in our Annual Report on Form 10-K for the year ended December 31, 2017, and the New Jersey Department of Banking and Insurance will continue to act as our group-wide supervisor.

Fiduciary Rules and other Standards of Care

In March 2018, the Fifth Circuit Court of Appeals vacated the fiduciary rules adopted by the U.S. Department of Labor (“DOL”) in April 2016. The decision became effective in June 2018.

In April 2018, the Securities and Exchange Commission (the “SEC”) proposed a package of rulemakings and interpretative guidance that would, among other things, require broker-dealers to act in the best interest of retail customers when recommending securities transactions or investment strategies to them. The proposals would also clarify the SEC’s views of the fiduciary duty that investment advisers owe to their clients. If enacted in their current form, we believe the primary impact of the proposals would be in our Individual Annuities, Retirement, PGIM and Individual Life segments and our Prudential Advisors distribution system, which we include in the results of our Individual Life segment.

In July 2018, the New York Department of Financial Services issued an amendment to its suitability regulations which will impose a best-interest standard on the sale of annuity and life insurance products in New York. In addition, in October 2018 the New Jersey Bureau of Securities issued proposed regulations that would impose a fiduciary standard on all New Jersey investment professionals, and other state regulators and legislatures have adopted or are considering adopting best interest standards.

Given the uncertainty as to the standards that will ultimately apply to our businesses, we cannot predict the impact of these new laws and proposals.

State Insurance Exam

In June 2018, the New Jersey Department of Banking and Insurance, along with the insurance regulators of Arizona, Connecticut and Indiana, completed their first global consolidated group-wide examination of Prudential and its subsidiaries for the five-year period ended December 31, 2016 and had no reportable findings.

Table of Contents

Risk-Based Capital

In June 2018, the Capital Adequacy Task Force of the National Association of Insurance Commissioners (the “NAIC”) approved revisions to the NAIC’s risk-based capital (“RBC”) framework in respect of the Tax Cuts and Jobs Act of 2017 (the “Tax Act of 2017”). The revisions will apply to our domestic life insurance companies’ RBC ratios as of December 31, 2018. For a discussion of the impact of the Tax Act of 2017 and these changes on our RBC ratios, see “Liquidity and Capital Resources-Capital-Insurance Regulatory Capital.”

For additional information on the potential impacts of regulation on the Company, see “Business—Regulation” and “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017.

Impact of a Low Interest Rate Environment

As a global financial services company, market interest rates are a key driver of our results of operations and financial condition. Changes in interest rates can affect our results of operations and/or our financial condition in several ways, including favorable or adverse impacts to:


•	investment-related activity, including: investment income returns, net interest margins, net investment spread results, new money rates, mortgage loan prepayments and bond redemptions;


•	insurance reserve levels, market experience true-ups and amortization of both deferred policy acquisition costs (“DAC”) and value of business acquired (“VOBA”);


•	customer account values, including their impact on fee income;


•	fair value of, and possible impairments on, intangible assets such as goodwill;


•	product offerings, design features, crediting rates and sales mix; and


•	policyholder behavior, including surrender or withdrawal activity.

For more information on interest rate risks, see “Risk Factors—Market Risk” included in our Annual Report on Form 10-K for the year ended December 31, 2017.

See below for discussions related to the current interest rate environments in our two largest markets, the United States and Japan; the composition of our insurance liabilities and policyholder account balances; and the hypothetical impacts to our results if these interest rate environments are sustained.

U.S. Operations excluding the Closed Block Division

Interest rates in the U.S. have experienced a period of historically low levels in large part due to Federal Reserve efforts to assist with the economic recovery subsequent to the financial crisis of 2008. However, more recently market interest rates have begun to climb in conjunction with a series of Federal Reserve decisions to raise interest rates in response to a strengthening economy. While market conditions and events make uncertain the timing, amount and impact of any further monetary policy decisions by the Federal Reserve, a trend of rising interest rates may enhance our reinvestment yields, primarily for our investments in fixed maturity securities and commercial mortgage loans. As interest rates rise, our reinvestment yield may approach or exceed the overall portfolio yield.

For the general account supporting our U.S. Individual Solutions division, U.S. Workplace Solutions division, PGIM division and our Corporate and Other operations, we expect annual scheduled payments and prepayments to be approximately 6.1% of the fixed maturity security and commercial mortgage loan portfolios through 2019. The portion of the general account attributable to these operations has approximately $193 billion of such assets (based on net carrying value) as of September 30, 2018. The average portfolio yield for fixed maturity securities and commercial mortgage loans is approximately 4.2% as of September 30, 2018.

Included in the $193 billion of fixed maturity securities and commercial mortgage loans are approximately $112 billion that are subject to call or redemption features at the issuer’s option and have a weighted average interest rate of approximately 4%. Of this $112 billion, approximately 63% contain provisions for prepayment premiums. If we reinvest scheduled payments or prepayments (not subject to a prepayment fee) at rates below the current portfolio yield, including in some cases at rates below those guaranteed under our insurance contracts, future operating results will be impacted to the extent we do not, or are unable to, reduce crediting rates on in force blocks of business, or effectively utilize other asset/liability management strategies described below, in order to maintain current net interest margins.

The following table sets forth the insurance liabilities and policyholder account balances of our U.S. Operations excluding the Closed Block Division, by type, for the date indicated:

Table of Contents



	As of September 30, 2018
	(in billions)
Long-duration insurance products with fixed and guaranteed terms	$	114
Contracts with adjustable crediting rates subject to guaranteed minimums	57
Participating contracts where investment income risk ultimately accrues to contractholders	15
Total	$	186

The $114 billion above relates to long-duration products such as group annuities, structured settlements and other insurance products that have fixed and guaranteed terms, for which underlying assets may have to be reinvested at interest rates that are lower than portfolio rates. We seek to mitigate the impact of a prolonged low interest rate environment on these contracts through asset/liability management, as discussed further below.

The $57 billion above relates to contracts with crediting rates that may be adjusted over the life of the contract, subject to guaranteed minimums. Although we may have the ability to lower crediting rates for those contracts above guaranteed minimums, our willingness to do so may be limited by competitive pressures. The following table sets forth the related account values by range of guaranteed minimum crediting rates and the related range of the difference, in basis points (“bps”), between rates being credited to contractholders as of September 30, 2018, and the respective guaranteed minimums.



	Account Values with Adjustable Crediting Rates Subject to Guaranteed Minimums:
	At guaranteed minimum			1-49 bps above guaranteed minimum			50-99 bps above guaranteed minimum			100-150 bps above guaranteed minimum			Greater than 150 bps above guaranteed minimum			Total
	($ in billions)
Range of Guaranteed Minimum Crediting Rates:
Less than 1.00%	$	0.5		$	1.2		$	0.5		$	0.0		$	0.0		$	2.2
1.00% - 1.99%	1.0			2.2			13.1			2.1			0.4			18.8
2.00% - 2.99%	1.3			0.7			1.9			1.0			0.6			5.5
3.00% - 4.00%	26.7			2.0			0.2			0.2			0.0			29.1
Greater than 4.00%	0.9			0.0			0.0			0.0			0.0			0.9
Total(1)	$	30.4		$	6.1		$	15.7		$	3.3		$	1.0		$	56.5
Percentage of total	54		%	11		%	27		%	6		%	2		%	100		%

__________


(1)	Includes approximately $0.81 billion related to contracts that impose a market value adjustment if the invested amount is not held to maturity.

The remaining $15 billion of insurance liabilities and policyholder account balances in these operations relates to participating contracts for which the investment income risk is expected to ultimately accrue to contractholders. The crediting rates for these contracts are periodically adjusted based on the return earned on the related assets.

Assuming a hypothetical scenario where the average 10-year U.S. Treasury rate is 3.10% for the period from October 1, 2018 through December 31, 2019, and credit spreads remain unchanged from levels as of September 30, 2018, we estimate that the unfavorable impact to pre-tax adjusted operating income of reinvesting in such an environment, compared to reinvesting at current average portfolio yields, would be approximately $1 million in 2018 and $3 million in 2019. This hypothetical scenario only reflects the impact related to the approximately $57 billion of contracts shown in the table above, and does not reflect: any benefit from potential changes to the crediting rates on the corresponding contractholder liabilities where the Company has the contractual ability to do so, or other potential mitigants such as changes in investment mix that we may implement as funds are reinvested; any impact related to assets that do not directly support our liabilities; any impact from other factors, including but not limited to, new business, contractholder behavior, product modifications, changes in product offerings, changes in competitive conditions or changes in capital markets; or any impact from other factors described below. See “—Segment Measures” for a discussion of adjusted operating income and its use as a measure of segment operating performance.

Table of Contents

In order to mitigate the unfavorable impact that a low interest rate environment has on our net interest margins, we employ a proactive asset/liability management program, which includes strategic asset allocation and hedging strategies within a disciplined risk management framework. These strategies seek to match the characteristics of our products, and to closely approximate the interest rate sensitivity of the assets with the estimated interest rate sensitivity of the product liabilities. Our asset/liability management program also helps manage duration gaps, currency and other risks between assets and liabilities through the use of derivatives. We adjust this dynamic process as products change, as customer behavior changes and as changes in the market environment occur. As a result, our asset/liability management process has permitted us to manage the interest rate risk associated with our products through several market cycles. Our interest rate exposure is also mitigated by our business mix, which includes lines of business for which fee-based and insurance underwriting earnings play a more prominent role in product profitability.

Closed Block Division

Substantially all of the $58 billion of general account assets in the Closed Block division support obligations and liabilities relating to the Closed Block policies only. See Note 7 to the Unaudited Interim Consolidated Financial Statements for further information on the Closed Block.

International Insurance Operations

While our international insurance operations have experienced a low interest rate environment for many years, the current reinvestment yields for certain blocks of business in our international insurance operations are generally lower than the current portfolio yield supporting these blocks of business. In recent years, the Bank of Japan’s monetary policy has resulted in even lower and, at times, negative yields for certain tenors of government bonds. Our international insurance operations employ a proactive asset/liability management program in order to mitigate, to the extent possible, the unfavorable impact that the current interest rate environment has on our net interest margins. In conjunction with this program, we have not purchased negative yielding assets to support the portfolio and we continue to purchase long-term bonds with tenors of 30 years or greater. Additionally, our diverse product portfolio in terms of currency mix and premium payment structure allows us to further mitigate the negative impact from this low interest rate environment. We regularly examine our product offerings and their profitability. As a result, we have repriced certain products, adjusted commissions for certain products and have discontinued sales of other products that do not meet our profit expectations. The impact of these actions, coupled with the strengthening of the yen against the U.S. dollar and introduction of certain new products, has resulted in an increase in sales of U.S. dollar-denominated products relative to products denominated in other currencies. For additional information on sales within our international insurance operations, see “—International Insurance Division—International Insurance—Sales Results,” below.

The following table sets forth the insurance liabilities and policyholder account balances of our Japanese operations, by type, for the date indicated:



	As of September 30, 2018
	(in billions)
Long-duration insurance products with fixed and guaranteed terms	$	129
Contracts with a market value adjustment if invested amount is not held to maturity	26
Contracts with adjustable crediting rates subject to guaranteed minimums	10
Total	$	165

The $129 billion above is predominantly comprised of long-duration insurance products that have fixed and guaranteed terms, for which underlying assets may have to be reinvested at interest rates that are lower than current portfolio yields. The remaining insurance liabilities and policyholder account balances include $26 billion related to contracts that impose a market value adjustment if the invested amount is not held to maturity and $10 billion related to contracts with crediting rates that may be adjusted over the life of the contract, subject to guaranteed minimums. Most of the current crediting rates on these contracts, however, are at or near contractual minimums. Although we have the ability in some cases to lower crediting rates for those contracts that are above guaranteed minimum crediting rates, the majority of this business has interest crediting rates that are determined by formula.

Table of Contents

Assuming a hypothetical scenario within our Japanese and Korean operations where new money yields would be 25 bps lower than projected, and applying these lower new money yields to annualized investment of renewal premiums, proceeds from investment disposition and reinvestment of investment income, we estimate that the unfavorable impact would reduce adjusted operating income in 2019 by approximately $10 to $15 million. This hypothetical scenario excludes first-year premium, single pay premium, multi-currency fixed annuity cash flows, any potential benefit from repricing products and any impact from other factors, including but not limited to new business, contractholder behavior, changes in competitive conditions, changes in capital markets and the effect of derivative instruments.

Results of Operations

Consolidated Results of Operations

The following table summarizes net income (loss) for the periods presented.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	(in millions)
Revenues	$	16,148	$	16,313	$	44,560	$	43,424
Benefits and expenses	14,310		13,292		40,779		38,053
Income (loss) before income taxes and equity in earnings of operating joint ventures	1,838		3,021		3,781		5,371
Income tax expense (benefit)	184		800		604		1,320
Income (loss) before equity in earnings of operating joint ventures	1,654		2,221		3,177		4,051
Equity in earnings of operating joint ventures, net of taxes	21		20		62		58
Net income (loss)	1,675		2,241		3,239		4,109
Less: Income attributable to noncontrolling interests	3		3		7		11
Net income (loss) attributable to Prudential Financial, Inc.	$	1,672	$	2,238	$	3,232	$	4,098

Three Month Comparison. The $566 million decrease in “Net income (loss) attributable to Prudential Financial, Inc.” for the third quarter of 2018 compared to the third quarter of 2017 reflected the following notable items:


•	$718 million unfavorable variance, on a pre-tax basis, reflecting the net impact from changes in the value of our embedded derivatives and related hedge positions associated with certain variable annuities (see “—Results of Operations by Segment—U.S. Individual Solutions Division—Individual Annuities—Variable Annuity Risks and Risk Mitigants” for additional information);


•	$588 million unfavorable variance from net pre-tax realized investment gains and losses for PFI excluding the Closed Block division, and excluding the impact of the hedging program associated with certain variable annuities discussed above (see “—General Account Investments” for additional information); and

•

$84 million unfavorable variance, on a pre-tax basis, from adjustments to reserves as well as DAC and other costs, reflecting updates to the estimated profitability of our businesses. This excludes the impact associated with the variable annuity hedging program discussed above (see “—Results of Operations by Segment—U.S. Individual Solutions Division—Individual Annuities” for additional information).

Partially offsetting these decreases in “Net income (loss) attributable to Prudential Financial, Inc.” was the following item:


•	$824 million net favorable variance, on a pre-tax basis, primarily from lower income tax expense due to lower net income compared to the prior year period as well as the impact of tax reform and certain other tax matters (see Note 8 to the Unaudited Interim Consolidated Financial Statements for additional information).

Table of Contents

Nine Month Comparison. The $866 million decrease in “Net income (loss) attributable to Prudential Financial, Inc.” for the first nine months of 2018 compared to the first nine months of 2017 reflected the following notable items:

•

$1,389 million unfavorable variance, on a pre-tax basis, from adjustments to reserves as well as DAC and other costs, reflecting updates to the estimated profitability of our businesses, including the impact of our annual reviews and update of assumptions and other refinements. This excludes the impact associated with the variable annuity hedging program discussed below (see “—Results of Operations by Segment—U.S. Individual Solutions Division—Individual Annuities” for additional information);


•	$771 million unfavorable variance from net pre-tax realized investment gains and losses for PFI excluding the Closed Block division, and excluding the impact of the hedging program associated with certain variable annuities discussed below (see “—General Account Investments” for additional information); and


•	$249 million net unfavorable variance, on a pre-tax basis, from a loss in the current period from our Divested Businesses compared to income in the prior period, excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above.

Partially offsetting these decreases in “Net income (loss) attributable to Prudential Financial, Inc.” were the following items:


•	$730 million favorable variance, on a pre-tax basis, reflecting the net impact from changes in the value of our embedded derivatives and related hedge positions associated with certain variable annuities (see “—Results of Operations by Segment—U.S. Individual Solutions Division—Individual Annuities—Variable Annuity Risks and Risk Mitigants” for additional information); and


•	$813 million net favorable variance, on a pre-tax basis, primarily from lower income tax expense due to lower net income compared to the prior year period as well as the impact of tax reform and certain other tax matters (see Note 8 to the Unaudited Interim Consolidated Financial Statements for additional information).

Segment Results of Operations

We analyze the performance of our segments and Corporate and Other operations using a measure of segment profitability called adjusted operating income. See “—Segment Measures” for a discussion of adjusted operating income and its use as a measure of segment operating performance.

Summary of Results of Operations by Segment

Shown below are the adjusted operating income contributions of each segment and Corporate and Other operations for the periods indicated and a reconciliation of this segment measure of performance to “Income (loss) before income taxes and equity in earnings of operating joint ventures” as presented in our Unaudited Interim Consolidated Statements of Operations.

Table of Contents



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(in millions)
Adjusted operating income before income taxes by segment:
PGIM	$	230		$	259		$	716		$	673
Total PGIM division(1)	230			259			716			673
Retirement	239			248			833			953
Group Insurance	59			61			196			231
Total U.S. Workplace Solutions division(1)	298			309			1,029			1,184
Individual Annuities	454			577			1,480			1,657
Individual Life	170			150			249			(289		)
Total U.S. Individual Solutions division(1)	624			727			1,729			1,368
International Insurance	890			799			2,530			2,421
Total International Insurance division	890			799			2,530			2,421
Corporate and Other operations	(374		)	(310		)	(954		)	(974		)
Total Corporate and Other	(374		)	(310		)	(954		)	(974		)
Total segment adjusted operating income before income taxes	1,668			1,784			5,050			4,672
Reconciling items:
Realized investment gains (losses), net, and related adjustments(2)	271			1,395			751			(48		)
Charges related to realized investment gains (losses), net(3)	(94		)	(231		)	(233		)	571
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net(4)	10			85			(586		)	330
Change in experience-rated contractholder liabilities due to asset value changes(5)	(21		)	(31		)	482			(188		)
Divested businesses(6):
Closed Block division	18			33			(22		)	49
Other divested businesses	12			10			(1,586		)	51
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(7)	(26		)	(24		)	(75		)	(66		)
Consolidated income (loss) before income taxes and equity in earnings of operating joint ventures	$	1,838		$	3,021		$	3,781		$	5,371

__________


(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. For additional information, see Note 22 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2017.


(2)	Represents “Realized investment gains (losses), net,” and related adjustments. See “—General Account Investments” and Note 13 to our Unaudited Interim Consolidated Financial Statements for additional information.


(3)	Includes charges that represent the impact of realized investment gains (losses), net, on the amortization of DAC and other costs, and on changes in reserves. Also includes charges resulting from payments related to market value adjustment features of certain of our annuity products and the impact of realized investment gains (losses), net, on the amortization of unearned revenue reserves.


(4)	Represents net investment gains (losses) on assets supporting experience-rated contractholder liabilities. See “—Experience-Rated Contractholder Liabilities, Assets Supporting Experience-Rated Contractholder Liabilities and Other Related Investments.”


(5)	Represents changes in contractholder liabilities due to asset value changes in the pool of investments supporting these experience-rated contracts. See “—Experience-Rated Contractholder Liabilities, Assets Supporting Experience-Rated Contractholder Liabilities and Other Related Investments.”


(6)	Represents the contribution to income (loss) of divested businesses that have been or will be sold or exited, including businesses that have been placed in wind down, but that did not qualify for “discontinued operations” accounting treatment under accounting principles generally accepted in the United States of America (“U.S. GAAP”). See “—Divested Businesses.”

(7)

Equity in earnings of operating joint ventures are included in adjusted operating income but excluded from income before income taxes and equity in earnings of operating joint ventures as they are reflected on an after-tax U.S. GAAP basis as a separate line item in our Unaudited Interim Consolidated Statements of Operations. Earnings attributable to noncontrolling interests are excluded from adjusted operating income but included in income before taxes and equity earnings of operating joint ventures as they are reflected on a U.S. GAAP basis as a separate line in our Unaudited Interim Consolidated Statements of Operations. Earnings attributable to noncontrolling interests represent the portion of earnings from consolidated entities that relates to the equity interests of minority investors.

Results for the periods presented above reflect the following:

Table of Contents

PGIM. Segment results for the third quarter of 2018 decreased in comparison to the prior year period, primarily reflecting lower other related revenues, net of associated expenses, partially offset by higher asset management fees, net of related expenses. Results for the first nine months of 2018 increased in comparison to the prior year period, primarily reflecting higher asset management fees, net of related expenses, partially offset by higher expenses supporting business growth and lower other related revenues, net of associated expenses.

Retirement. Segment results for the third quarter of 2018 decreased in comparison to the prior year period, primarily reflecting a lower contribution from reserve experience, partially offset by higher net investment spread results. Segment results for the first nine months of 2018 decreased in comparison to the prior year period, primarily reflecting a net unfavorable comparative impact from our annual reviews and update of assumptions and other refinements, lower net investment spread results and higher general and administrative expenses, partially offset by a higher contribution from reserve experience.

Group Insurance. Segment results for the third quarter of 2018 decreased modestly in comparison to the prior year period, reflecting higher expenses partially offset by more favorable underwriting results in our group life and group disability businesses. Segment results for the first nine months of 2018 decreased in comparison to the prior year period, reflecting higher expenses, less favorable comparative net impacts from our annual reviews and update of assumptions and other refinements, and a lower contribution from net investment spread results, partially offset by more favorable underwriting results in our group life and group disability businesses.

Individual Annuities. Segment results for both the third quarter and the first nine months of 2018 decreased in comparison to the prior year periods both reflecting less favorable comparative net impacts from changes in the estimated profitability of the business. Excluding these impacts, segment results for the third quarter of 2018 decreased in comparison to the prior year period primarily driven by higher capital hedge costs, higher distribution expenses and lower net asset-based fee income. Segment results for the first nine months of 2018 increased slightly in comparison to the prior year periods primarily driven by higher net asset-based fee income, as well as lower amortization costs and reserve provisions. These increases were mostly offset by lower net investment spread results, higher capital hedge costs and higher distribution expenses.

Individual Life. Segment results for the third quarter of 2018 increased in comparison to the prior year period, primarily reflecting a more favorable impact of mortality experience, net of reinsurance. Segment results for the first nine months of 2018 increased in comparison to the prior year period, primarily reflecting favorable comparative net impacts from our annual reviews and update of assumptions and other refinements.

International Insurance. Segment results for the third quarter and the first nine months of 2018 increased in comparison to the prior year periods, inclusive of favorable net impacts from foreign currency exchange rates. The nine-month comparison also included comparatively unfavorable net impacts from our annual reviews and update of assumptions and other refinements. Excluding these items, segment results increased from the prior periods as both current periods benefited from business growth and lower expenses, partially offset by a lower contribution from net investment results.

Corporate and Other operations. The results for the third quarter of 2018 reflected increased losses in comparison to the prior year period, driven by higher levels of corporate expenses and lower net investment income, partially offset by higher income from our qualified pension plan. Results for the first nine months of 2018 reflected decreased losses in comparison to the prior year period, driven by higher income from our qualified pension plan, lower levels of corporate expenses and lower interest expense, partially offset by lower net investment income.

Closed Block Division. The Closed Block division results for the third quarter of 2018 decreased in comparison to the prior year period, primarily driven by a decrease in net investment income and a less favorable policyholder dividend obligation adjustment, partially offset by higher net insurance activity and net realized investment gains and related activity results. The Closed Block division results for the first nine months of 2018 decreased in comparison to the prior year period, primarily driven by decreases in net investment income and net realized investment gains and related activity, partially offset by higher net insurance activity results and a more favorable policyholder dividend obligation adjustment.

Table of Contents

Segment Measures

Adjusted Operating Income. In managing our business, we analyze our segments’ operating performance 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 we use to evaluate segment performance and allocate resources, and consistent with authoritative guidance, is our measure of segment performance. The adjustments to derive adjusted operating income are important to an understanding of our overall results of operations. Adjusted operating income is not a substitute for income determined in accordance with U.S. GAAP, and our definition of adjusted operating income may differ from that used by other companies. However, we believe that the presentation of adjusted operating income as we measure it for management purposes enhances the understanding of our results of operations by highlighting the results from ongoing operations and the underlying profitability of our businesses.

See Note 13 to the Unaudited Interim Consolidated Financial Statements for further information on the presentation of segment results and our definition of adjusted operating income.

Annualized New Business Premiums. In managing our Individual Life, Group Insurance and International Insurance businesses, we analyze annualized new business premiums, which do not correspond to revenues under U.S. GAAP. Annualized new business premiums measure the current sales performance of the business, while revenues primarily reflect the renewal persistency of policies written in prior years and net investment income, in addition to current sales. Annualized new business premiums include 10% of first year premiums or deposits from single pay products. No other adjustments are made for limited pay contracts.

The amount of annualized new business premiums for any given period can be significantly impacted by several factors, including but not limited to: addition of new products, discontinuation of existing products, changes in credited interest rates for certain products and other product modifications, changes in premium rates, changes in tax laws, changes in regulations or changes in the competitive environment. Sales volume may increase or decrease prior to certain of these changes becoming effective, and then fluctuate in the other direction following such changes.

Assets Under Management. In managing our PGIM business, we analyze assets under management (which do not correspond directly to U.S. GAAP assets) because the principal source of revenues is fees based on assets under management. Assets under management represents the fair market value or account value of assets which we manage directly for institutional clients, retail clients, and for our general account, as well as assets invested in our products that are managed by third-party managers.

Account Values. In managing our Individual Annuities and Retirement businesses, we analyze account values, which do not correspond to U.S. GAAP assets. Net sales (redemptions) in our Individual Annuities business and net additions (withdrawals) in our Retirement business do not correspond to revenues under U.S. GAAP, but are used as a relevant measure of business activity.

Impact of Foreign Currency Exchange Rates

Foreign currency exchange rate movements and related hedging strategies

As a U.S.-based company with significant business operations outside the U.S., particularly in Japan, we are subject to foreign currency exchange rate movements that could impact our U.S. dollar-equivalent earnings and shareholder return on equity. We seek to mitigate this impact through various hedging strategies, including the use of derivative contracts and by holding U.S. dollar-denominated assets in certain of our foreign subsidiaries.

The operations of certain of our businesses are subject to currency fluctuations that could materially affect our U.S. dollar-equivalent earnings from period to period, even if earnings on a local currency basis are relatively constant. We enter into forward currency derivative contracts as part of our strategy to effectively fix the currency exchange rates for a portion of our prospective non-U.S. dollar-denominated earnings streams, thereby reducing earnings volatility from foreign currency exchange rate movements. The forward currency hedging program is primarily associated with our insurance operations in Japan and Korea.

For further information on the hedging strategies used to mitigate the risks of foreign currency exchange rate movements on earnings as well as the U.S. GAAP earnings impact from products denominated in non-local currencies, see “—Impact of foreign currency exchange rate movements on earnings,” below.

Table of Contents

We utilize a yen hedging strategy that calibrates the hedge level to preserve the relative contribution of our yen-based business to the Company’s overall return on equity on a leverage neutral basis. We implement this hedging strategy utilizing a variety of instruments, including foreign currency derivative contracts, as discussed above, as well as U.S. dollar-denominated assets and, to a lesser extent, “dual currency” and “synthetic dual currency” assets held locally in our Japanese insurance subsidiaries. We may also hedge using instruments held in our U.S. domiciled entities, such as U.S. dollar-denominated debt that has been swapped to yen. The total hedge level may vary based on our periodic assessment of the relative contribution of our yen-based business to the Company’s overall return on equity.

The table below presents the aggregate amount of instruments that serve to hedge the impact of foreign currency exchange movements on our U.S. dollar-equivalent shareholder return on equity from our Japanese insurance subsidiaries as of the dates indicated.



	September 30, 2018		December 31, 2017
	(in billions)
Instruments hedging foreign currency exchange rate exposure on U.S. dollar-equivalent earnings:
Forward currency hedging program(1)	$	1.5	$	1.6
Instruments hedging foreign currency exchange rate exposure on U.S. dollar-equivalent equity:
U.S. dollar-denominated assets held in yen-based entities(2):
U.S. dollar-denominated investments(3)	13.3		13.7
Other	0.1		0.1
Subtotal	13.4		13.8
Dual currency and synthetic dual currency investments(4)	0.6		0.6
Total instruments hedging foreign currency exchange rate exposure on U.S. dollar-equivalent equity	14.0		14.4
Total hedges	$	15.5	$	16.0

__________


(1)	Represents the notional amount of forward currency contracts outstanding.


(2)	Excludes $47.3 billion and $41.2 billion as of September 30, 2018 and December 31, 2017, respectively, of U.S. dollar-denominated assets supporting U.S. dollar-denominated liabilities related to U.S. dollar-denominated products issued by our Japanese insurance operations.


(3)	Includes U.S. dollar-denominated fixed maturities at amortized cost and U.S. dollar notional amount of foreign currency derivative contracts outstanding.


(4)	Dual currency and synthetic dual currency investments are held by our yen-based entities in the form of fixed maturities and loans with a yen-denominated principal component and U.S. dollar-denominated interest income. The amounts shown represent the present value of future U.S. dollar-denominated cash flows.

The U.S. dollar-denominated investments that hedge the impact of foreign currency exchange rate movements on U.S. dollar-equivalent earnings and shareholder return on equity from our Japanese insurance operations are reported within yen-based entities and, as a result, foreign currency exchange rate movements will impact their value reported within our yen-based Japanese insurance entities. We seek to mitigate the risk that future unfavorable foreign currency exchange rate movements will decrease the value of these U.S. dollar-denominated investments reported within our yen-based Japanese insurance entities, and therefore negatively impact their equity and regulatory solvency margins, by having our Japanese insurance operations enter into currency hedging transactions. Those hedges are with a subsidiary of Prudential Financial. These hedging strategies have the economic effect of moving the change in value of these U.S. dollar-denominated investments due to foreign currency exchange rate movements from our Japanese yen-based entities to our U.S. dollar-based entities.

These U.S. dollar-denominated investments also pay a coupon which is generally higher than what a similar yen-denominated investment would pay. The incremental impact of this higher yield on our U.S. dollar-denominated investments, as well as our dual currency and synthetic dual currency investments, will vary over time, and is dependent on the duration of the underlying investments as well as interest rate environments in both the U.S. and Japan at the time of the investments. See “—General Account Investments—Investment Results” for a discussion of the investment yields generated by our Japanese insurance operations.

Table of Contents

Impact of foreign currency exchange rate movements on earnings

The financial results of our International Insurance and PGIM segments reflect the impact of intercompany arrangements with our Corporate and Other operations pursuant to which certain of these segments’ non-U.S. dollar-denominated earnings are translated at fixed currency exchange rates. The financial results of our Retirement segment reflected the impact of an intercompany foreign currency exchange arrangement with our Corporate and Other operations in 2016 and 2017 prior to its termination effective January 1, 2018. This foreign currency exchange risk is now managed within our Retirement segment using a strategy that may include external hedges. Results of our Corporate and Other operations include any differences between the translation adjustments recorded by the segments at the fixed currency exchange rate versus the actual average rate during the period. In addition, specific to our International Insurance segment where we hedge certain currencies, as further discussed below, the results of our Corporate and Other operations also include the impact of any gains or losses recorded from the forward currency contracts that settled during the period, which include the impact of any over or under hedging of actual earnings that differ from projected earnings.

For International Insurance, the fixed currency exchange rates are generally determined in connection with a foreign currency income hedging program designed to mitigate the impact of exchange rate changes on the segment’s U.S. dollar-equivalent earnings. Pursuant to this program, our Corporate and Other operations execute forward currency contracts with third-parties to sell the net exposure of projected earnings for certain currencies in exchange for U.S. dollars at specified exchange rates. The maturities of these contracts correspond with the future periods (typically on a three-year rolling basis) in which the identified non-U.S. dollar-denominated earnings are expected to be generated. In establishing the level of non-U.S. dollar-denominated earnings that will be hedged through this program, we exclude the anticipated level of U.S. dollar-denominated earnings that will be generated by U.S. dollar-denominated products and investments. For the nine months ended September 30, 2018, approximately 20% of the segment’s earnings were yen-based and, as of September 30, 2018, we have hedged 100% of expected yen-based earnings for 2018, and 95%, 56% and 13% of expected yen-based earnings for 2019, 2020 and 2021, respectively. To the extent currently unhedged, our International Insurance segment’s future expected U.S. dollar-equivalent of yen-based earnings will be impacted by yen exchange rate movements.

As a result of these arrangements, our International Insurance segment’s results for 2018 and 2017 reflect the impact of translating yen-denominated earnings at fixed currency exchange rates of 111 and 112 yen per U.S. dollar, respectively, and Korean won-denominated earnings at fixed currency exchange rates of 1150 and 1130 Korean won per U.S. dollar, respectively. We expect our 2019 results to reflect the impact of translating yen-denominated earnings at a fixed currency exchange rate of 105 yen per U.S. dollar and Korean won-denominated earnings at a fixed currency exchange rate of 1110 won per U.S. dollar. Since determination of the fixed currency exchange rates for a given year is impacted by changes in foreign currency exchange rates over time, the segment’s future earnings will ultimately be impacted by these changes in exchange rates.

As a result of these arrangements, for PGIM and certain currencies within International Insurance, the fixed currency exchange rates for the current year are predetermined during the third quarter of the prior year using forward currency exchange rates.

The table below presents, for the periods indicated, the increase (decrease) to revenues and adjusted operating income for the International Insurance, Retirement and PGIM segments and for Corporate and Other operations, reflecting the impact of these intercompany arrangements.



	Three Months Ended September 30,					Nine Months Ended September 30,
	2018		2017			2018			2017
	(in millions)
Segment impacts of intercompany arrangements:
International Insurance	$	7	$	(1	)	$	(14	)	$	2
Retirement(1)	0

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.