Edgar Filing: PRUDENTIAL FINANCIAL INC

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.

Document

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