Edgar Filing: PRUDENTIAL FINANCIAL INC

Three Months Ended
March 31,

(in millions)

Asset Management segment intersegment revenues

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

Commission File Number 001-16707

Prudential Financial, Inc.

(Exact Name of Registrant as Specified in its Charter)

New Jersey

22-3703799

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification Number)

751 Broad Street

Newark, New Jersey 07102

(973) 802-6000

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨

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 April 30, 2010, 464 million shares of the registrant’s Common Stock (par value $0.01) were outstanding. In addition, 2 million shares of the registrant’s Class B Stock, for which there is no established public trading market, were outstanding.

TABLE OF CONTENTS


			Page

PART I FINANCIAL INFORMATION

	Item 1.	Financial Statements:
		Unaudited Interim Consolidated Statements of Financial Position as of March 31, 2010 and December 31, 2009	1
		Unaudited Interim Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009	2
		Unaudited Interim Consolidated Statement of Equity for the three months ended March 31, 2010 and 2009	3
		Unaudited Interim Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009	4
		Notes to Unaudited Interim Consolidated Statements	5
		Unaudited Interim Supplemental Combining Financial Information:
		Unaudited Interim Supplemental Financial Statements of Financial Position as of March 31, 2010 and December 31, 2009	82
		Unaudited Interim Supplemental Financial Statements of Operations for the three months ended March 31, 2010 and 2009	83
		Notes to Unaudited Interim Supplemental Combining Financial Information	84
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	86
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	210
	Item 4.	Controls and Procedures	211

PART II OTHER INFORMATION

	Item 1.	Legal Proceedings	212
	Item 1A.	Risk Factors	212
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	213
	Item 6.	Exhibits	213

SIGNATURES			214

FORWARD-LOOKING STATEMENTS

Certain of the statements included in this Quarterly Report on Form 10-Q, including but not limited to those in Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Prudential 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) general economic, market and political conditions, including the performance and fluctuations of fixed income, equity, real estate and other financial markets; (2) the availability and cost of external financing for our operations, which has been affected by the stress experienced by the global financial markets; (3) interest rate fluctuations; (4) reestimates of our reserves for future policy benefits and claims; (5) differences between actual experience regarding mortality, morbidity, persistency, surrender experience, interest rates or market returns and the assumptions we use in pricing our products, establishing liabilities and reserves or for other purposes; (6) changes in our assumptions related to deferred policy acquisition costs, valuation of business acquired or goodwill; (7) changes in our claims-paying or credit ratings; (8) investment losses, defaults and counterparty non-performance; (9) competition in our product lines and for personnel; (10) changes in tax law; (11) economic, political, currency and other risks relating to our international operations; (12) fluctuations in foreign currency exchange rates and foreign securities markets; (13) regulatory or legislative changes, including government actions in response to the stress experienced by the global financial markets; (14) adverse determinations in litigation or regulatory matters and our exposure to contingent liabilities, including in connection with our divestiture or winding down of businesses; (15) domestic or international military actions, natural or man-made disasters including terrorist activities or pandemic disease, or other events resulting in catastrophic loss of life; (16) ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks; (17) effects of acquisitions, divestitures and restructurings, including possible difficulties in integrating and realizing the projected results of acquisitions; (18) changes in statutory or U.S. GAAP accounting principles, practices or policies; (19) changes in assumptions for retirement expense; (20) Prudential Financial, Inc.’s primary reliance, as a holding company, on dividends or distributions from its subsidiaries to meet debt payment obligations and the ability of the subsidiaries to pay such dividends or distributions in light of our ratings objectives and/or applicable regulatory restrictions; and (21) risks due to the lack of legal separation between our Financial Services Businesses and our Closed Block Business. The foregoing risks are even more pronounced in severe adverse market and economic conditions such as those that began in the second half of 2007 and continued into 2009. Prudential Financial, Inc. does not intend, and is under no obligation, to update any particular forward-looking statement included in this document. See “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2009 for discussion of certain risks relating to our businesses and investment in our securities.

Throughout this Quarterly Report on Form 10-Q, “Prudential Financial” and the “Registrant” refer to Prudential Financial, Inc., the ultimate holding company for all of our companies. “Prudential Insurance” refers to The Prudential Insurance Company of America, before and after its demutualization on December 18, 2001. “Prudential,” the “Company,” “we” and “our” refer to our consolidated operations before and after demutualization.

PART I—FINANCIAL INFORMATION

ITEM 1. Financial Statements

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Financial Position

March 31, 2010 and December 31, 2009 (in millions, except share amounts)


	March 31, 2010			December 31, 2009
ASSETS
Fixed maturities, available for sale, at fair value (amortized cost: 2010—$177,397; 2009—$174,251)(1)	$	180,450		$	175,225
Fixed maturities, held to maturity, at amortized cost (fair value: 2010—$5,081; 2009—$5,197)(1)		5,016			5,120
Trading account assets supporting insurance liabilities, at fair value(1)		16,683			16,020
Other trading account assets, at fair value		3,371			3,033
Equity securities, available for sale, at fair value (cost: 2010—$6,082; 2009—$6,106)		7,088			6,895
Commercial mortgage and other loans (includes $359 and $479 measured at fair value under the fair value option at March 31, 2010 and December 31, 2009, respectively)(1)		30,760			31,384
Policy loans		10,223			10,146
Other long-term investments(1)		5,960			5,904
Short-term investments		6,924			6,825

Total investments		266,475			260,552
Cash and cash equivalents(1)		9,626			13,164
Accrued investment income(1)		2,368			2,322
Deferred policy acquisition costs		14,718			14,578
Other assets(1)		16,053			15,513
Separate account assets(1)		182,621			174,074

Total Assets	$	491,861		$	480,203

LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits	$	125,743		$	125,707
Policyholders’ account balances		101,651			101,666
Policyholders’ dividends		1,787			1,254
Securities sold under agreements to repurchase		6,111			6,033
Cash collateral for loaned securities		3,180			3,163
Income taxes		4,059			4,014
Short-term debt		3,066			3,122
Long-term debt (includes $0 and $429 measured at fair value under the fair option at March 31, 2010 and December 31, 2009, respectively)(1)		21,641			21,037
Other liabilities		14,496			14,404
Separate account liabilities(1)		182,621			174,074

Total liabilities		464,355			454,474

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 15)
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; 641,762,125 and 641,762,089 shares issued at March 31, 2010 and December 31, 2009, respectively)		6			6
Class B Stock ($.01 par value; 10,000,000 shares authorized; 2,000,000 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively)		0			0
Additional paid-in capital		23,186			23,235
Common Stock held in treasury, at cost (178,150,917 and 179,650,931 shares at March 31, 2010 and December 31, 2009, respectively)		(11,290	)		(11,390	)
Accumulated other comprehensive income (loss)		620			(443	)
Retained earnings		14,478			13,787

Total Prudential Financial, Inc. equity		27,000			25,195

Noncontrolling interests		506			534

Total equity		27,506			25,729

TOTAL LIABILITIES AND EQUITY	$	491,861		$	480,203

(1)	See Note 5 for details of balances associated with variable interest entities.

See Notes to Unaudited Interim Consolidated Financial Statements

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Operations

Three Months Ended March 31, 2010 and 2009 (in millions, except per share amounts)


	Three Months Ended March 31,
	2010			2009
REVENUES
Premiums	$	4,242		$	4,034
Policy charges and fee income		816			726
Net investment income		2,874			2,849
Asset management fees and other income		971			778
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities		(1,249	)		(1,855	)
Other-than-temporary impairments on fixed maturity securities transferred to Other Comprehensive Income		995			1,250
Other realized investment gains (losses), net		643			743

Total realized investment gains (losses), net		389			138

Total revenues		9,292			8,525

BENEFITS AND EXPENSES
Policyholders’ benefits		4,243			4,341
Interest credited to policyholders’ account balances		1,235			1,169
Dividends to policyholders’		517			(1	)
General and administrative expenses		2,281			3,013

Total benefits and expenses		8,276			8,522

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURES		1,016			3

Income tax expense (benefit)		353			(2	)

INCOME FROM CONTINUING OPERATIONS BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURES		663			5
Equity in earnings of operating joint ventures, net of taxes		10			(6	)

INCOME (LOSS) FROM CONTINUING OPERATIONS		673			(1	)
Income (loss) from discontinued operations, net of taxes		(2	)		4

NET INCOME		671			3
Less: Loss attributable to noncontrolling interests		(26	)		(11	)

NET INCOME ATTRIBUTABLE TO PRUDENTIAL FINANCIAL, INC.	$	697		$	14

EARNINGS PER SHARE (See Note 8)
Financial Services Businesses
Basic:
Income from continuing operations attributable to Prudential Financial, Inc. per share of Common Stock	$	1.17		$	0.00
Income (loss) from discontinued operations, net of taxes		(0.01	)		0.01

Net income attributable to Prudential Financial, Inc. per share of Common Stock	$	1.16		$	0.01

Diluted:
Income from continuing operations attributable to Prudential Financial, Inc. per share of Common Stock	$	1.16		$	0.00
Income (loss) from discontinued operations, net of taxes		(0.01	)		0.01

Net income attributable to Prudential Financial, Inc. per share of Common Stock	$	1.15		$	0.01

Closed Block Business
Basic and Diluted:
Income from continuing operations attributable to Prudential Financial, Inc. per share of Class B Stock	$	75.50		$	4.00
Income from discontinued operations, net of taxes		0.00			0.00

Net income attributable to Prudential Financial, Inc. per share of Class B Stock	$	75.50		$	4.00

See Notes to Unaudited Interim Consolidated Financial Statements

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Equity(1)

Three Months Ended March 31, 2010 and 2009 (in millions)


	Prudential Financial, Inc. Equity																	Noncontrolling Interests			Total 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, 2009	$	6	$	23,235		$	13,787		$	(11,390	)	$	(443	)	$	25,195		$	534		$	25,729
Contributions from noncontrolling interests																			3			3
Distributions to noncontrolling interests																			(4	)		(4	)
Consolidations/deconsolidations of noncontrolling interests				(2	)											(2	)		(1	)		(3	)
Stock-based compensation programs				(47	)		(6	)		100						47						47
Comprehensive income:
Net income							697									697			(26	)		671
Other comprehensive income (loss), net of tax													1,063			1,063			0			1,063

Total comprehensive income (loss)																1,760			(26	)		1,734

Balance, March 31, 2010	$	6	$	23,186		$	14,478		$	(11,290	)	$	620		$	27,000		$	506		$	27,506


	Prudential Financial, Inc. Equity																	Noncontrolling Interests			Total 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, 2008	$	6	$	22,001		$	10,426		$	(11,655	)	$	(7,343	)	$	13,435		$	351		$	13,786
Contributions from noncontrolling interests																			276			276
Stock-based compensation programs				(74	)		(9	)		110						27						27
Impact of adoption of guidance for other-than-temporary impairments of debt securities, net of taxes							686						(686	)		0						0
Comprehensive income:
Net income							14									14			(11	)		3
Other comprehensive income (loss), net of tax													(546	)		(546	)		(40	)		(586	)

Total comprehensive loss																(532	)		(51	)		(583	)

Balance, March 31, 2009	$	6	$	21,927		$	11,117		$	(11,545	)	$	(8,575	)	$	12,930		$	576		$	13,506

(1)	Class B Stock is not presented as the amounts are immaterial.

See Notes to Unaudited Interim Consolidated Financial Statements

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Cash Flows

Three Months Ended March 31, 2010 and 2009 (in millions)


	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	671		$	3
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment (gains) losses, net		(389	)		(138	)
Policy charges and fee income		(277	)		(450	)
Interest credited to policyholders’ account balances		1,235			1,169
Depreciation and amortization		(31	)		142
Gains on trading account assets supporting insurance liabilities, net		(253	)		(148	)
Change in:
Deferred policy acquisition costs		(294	)		624
Future policy benefits and other insurance liabilities		930			1,373
Other trading account assets		(298	)		539
Income taxes		(1,238	)		322
Other, net		(107	)		(900	)

Cash flows from (used in) operating activities		(51	)		2,536

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available for sale		5,598			13,174
Fixed maturities, held to maturity		114			62
Trading account assets supporting insurance liabilities and other trading account assets		14,974			8,234
Equity securities, available for sale		833			243
Commercial mortgage and other loans		997			834
Policy loans		418			427
Other long-term investments		106			290
Short-term investments		4,332			6,868
Payments for the purchase/origination of:
Fixed maturities, available for sale		(9,600	)		(13,472	)
Fixed maturities, held to maturity		(57	)		(573	)
Trading account assets supporting insurance liabilities and other trading account assets		(15,098	)		(9,114	)
Equity securities, available for sale		(750	)		(194	)
Commercial mortgage and other loans		(487	)		(775	)
Policy loans		(379	)		(446	)
Other long-term investments		(117	)		(419	)
Short-term investments		(4,691	)		(6,104	)
Other, net		137			(66	)

Cash flows used in investing activities		(3,670	)		(1,031	)

CASH FLOWS FROM FINANCING ACTIVITIES
Policyholders’ account deposits		5,302			7,914
Policyholders’ account withdrawals		(5,859	)		(6,517	)
Net change in securities sold under agreements to repurchase and cash collateral for loaned securities		145			(410	)
Cash dividends paid on Common Stock		(34	)		(31	)
Net change in financing arrangements (maturities 90 days or less)		108			(1,906	)
Common Stock reissued for exercise of stock options		30			9
Proceeds from the issuance of debt (maturities longer than 90 days)		1,407			964
Repayments of debt (maturities longer than 90 days)		(1,020	)		(2,257	)
Excess tax benefits from share-based payment arrangements		5			0
Other, net		201			59

Cash flows from (used in) financing activities		285			(2,175	)

Effect of foreign exchange rate changes on cash balances		(102	)		(22	)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(3,538	)		(692	)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		13,164			15,028

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	9,626		$	14,336

NON-CASH TRANSACTIONS DURING THE PERIOD
Treasury Stock shares issued for stock-based compensation programs	$	67		$	96

See Notes to Unaudited Interim Consolidated Financial Statements

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, investment management, and real estate services. The Company has organized its principal operations into the Financial Services Businesses and the Closed Block Business. The Financial Services Businesses operate through three operating divisions: U.S. Retirement Solutions and Investment Management, U.S. Individual Life and Group Insurance, and International Insurance and Investments. The Company’s real estate and relocation services business as well as businesses that are not sufficiently material to warrant separate disclosure and divested businesses, are included in Corporate and Other operations within the Financial Services Businesses. The Closed Block Business, which includes the Closed Block (see Note 6), is managed separately from the Financial Services Businesses. The Closed Block Business was established on the date of demutualization and includes the Company’s in force participating insurance and annuity products and assets that are used for the payment of benefits and policyholders’ dividends on these products, as well as other assets and equity that support these products and related liabilities. In connection with the demutualization, the Company ceased offering these participating products.

Basis of Presentation

The Unaudited Interim Consolidated Financial Statements include the accounts of Prudential Financial, entities over which the Company exercises control, including majority-owned subsidiaries and minority-owned entities such as limited partnerships in which the Company is the general partner, and variable interest entities in which the Company is considered the primary beneficiary. See Note 5 for more information on the Company’s consolidated variable interest entities. 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.

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 Audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Use of Estimates

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

The most significant estimates include those used in determining deferred policy acquisition costs and related amortization; valuation of business acquired and its amortization; amortization of sales inducements; measurement of goodwill and any related impairment; valuation of investments including derivatives and the recognition of other-than-temporary impairments; future policy benefits including guarantees; pension and other postretirement benefits; provision for income taxes and valuation of deferred tax assets; and reserves for contingent liabilities, including reserves for losses in connection with unresolved legal matters.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Reclassifications

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

2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS

Investments in Debt and Equity Securities

The Company’s investments in debt and equity securities include fixed maturities; trading account assets; equity securities; and short-term investments. The accounting policies related to these are as follows:

Fixed maturities are comprised of bonds, notes and redeemable preferred stock. Fixed maturities classified as “available for sale” are carried at fair value. See Note 13 for additional information regarding the determination of fair value. Fixed maturities that the Company has both the positive intent and ability to hold to maturity are carried at amortized cost and classified as “held to maturity.” The amortized cost of fixed maturities is adjusted for amortization of premiums and accretion of discounts to maturity. Interest income, as well as the related amortization of premium and accretion of discount, is included in “Net investment income” under the effective yield method. For mortgage-backed and asset-backed securities, the effective yield is based on estimated cash flows, including prepayment assumptions based on data from widely accepted third-party data sources or internal estimates. In addition to prepayment assumptions, cash flow estimates vary based on assumptions regarding the underlying collateral, including default rates and changes in value. These assumptions can significantly impact income recognition and the amount of other-than-temporary impairments recognized in earnings and other comprehensive income. For high credit quality mortgage-backed and asset-backed securities (those rated AA or above), cash flows are provided quarterly, and the amortized cost and effective yield of the security are adjusted as necessary to reflect historical prepayment experience and changes in estimated future prepayments. The adjustments to amortized cost are recorded as a charge or credit to net investment income in accordance with the retrospective method. For asset-backed and mortgage-backed securities rated below AA, the effective yield is adjusted prospectively for any changes in estimated cash flows. See the discussion below on realized investment gains and losses for a description of the accounting for impairments, as well as the impact of the Company’s adoption on January 1, 2009 of new authoritative guidance for the recognition and presentation of other-than-temporary impairments for debt securities. Unrealized gains and losses on fixed maturities classified as “available for sale,” net of tax, and the effect on deferred policy acquisition costs, valuation of business acquired, deferred sales inducements, future policy benefits and policyholders’ dividends that would result from the realization of unrealized gains and losses, are included in “Accumulated other comprehensive income (loss).”

“Trading account assets supporting insurance liabilities, at fair value” includes invested assets that support certain products included in the Retirement segment, as well as certain products included in the International Insurance segment, 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 for these investments are reported in “Asset management fees and other income.” Interest and dividend income from these investments is reported in “Net investment income.”

“Other trading account assets, at fair value” consist primarily of investments and certain derivatives, including those used by the Company in its capacity as a broker-dealer. These instruments are carried at fair value. Realized and unrealized gains and losses on these investments and on derivatives used by the Company in its capacity as a broker-dealer are reported in “Asset management fees and other income.” Interest and dividend income from these investments is reported in “Net investment income.”

Equity securities available for sale are comprised of common stock, mutual fund shares, non-redeemable preferred stock, and perpetual preferred stock, and are carried at fair value. The associated unrealized gains and losses, net of tax, and the effect on deferred policy acquisition costs, valuation of business acquired, deferred

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

sales inducements, future policy benefits and policyholders’ dividends that would result from the realization of unrealized gains and losses, are included in “Accumulated other comprehensive income (loss).” The cost of equity securities is written down to fair value when a decline in value is considered to be other-than-temporary. See the discussion below on realized investment gains and losses for a description of the accounting for impairments. Dividends from these investments are recognized in “Net investment income” when declared.

Short-term investments primarily consist of highly liquid debt instruments with a maturity of greater than three months and less than twelve months when purchased, other than those debt instruments meeting this definition that are included in “Trading account assets supporting insurance liabilities, at fair value.” These investments are generally carried at fair value and include certain money market investments, short-term debt securities issued by government sponsored entities and other highly liquid debt instruments. Short-term investments held in our broker-dealer operations are marked-to-market through “Asset management fees and other income.”

Realized investment gains (losses) are computed using the specific identification method with the exception of some of the Company’s International Insurance businesses’ portfolios, where the average cost method is used. Realized investment gains and losses are generated from numerous sources, including the sale of fixed maturity securities, equity securities, investments in joint ventures and limited partnerships and other types of investments, as well as adjustments to the cost basis of investments for net other-than-temporary impairments recognized in earnings. Realized investment gains and losses are also generated from prepayment premiums received on private fixed maturity securities, recoveries of principal on previously impaired securities, provisions for losses on commercial mortgage and other loans, fair value changes on commercial mortgage loans carried at fair value, and fair value changes on embedded derivatives and free-standing derivatives that do not qualify for hedge accounting treatment, except those derivatives used in the Company’s capacity as a broker or dealer.

The Company’s available for sale and held to maturity securities with unrealized losses are reviewed quarterly to identify other-than-temporary impairments in value. In evaluating whether a decline in value is other-than-temporary, the Company considers several factors including, but not limited to the following: (1) the extent and the duration of the decline; (2) the reasons for the decline in value (credit event, currency or interest-rate related, including general credit spread widening); and (3) the financial condition of and near-term prospects of the issuer. With regard to available-for-sale equity securities, the Company also considers the ability and intent to hold the investment for a period of time to allow for a recovery of value. When it is determined that a decline in value of an equity security is other-than-temporary, the carrying value of the equity security is reduced to its fair value, with a corresponding charge to earnings.

In addition, in April 2009, the Financial Accounting Standards Board (“FASB”) revised the authoritative guidance for the recognition and presentation of other-than-temporary impairments for debt securities. The Company early adopted this guidance on January 1, 2009. Prior to the adoption of this guidance the Company was required to record an other-than-temporary impairment for a debt security unless it could assert that it had both the intent and ability to hold the security for a period of time sufficient to allow for a recovery in its fair value to its amortized cost basis. The revised guidance indicates that an other-than-temporary impairment must be recognized in earnings for a debt security in an unrealized loss position when an entity either (a) has the intent to sell the debt security or (b) more likely than not will be required to sell the debt security before its anticipated recovery. For all debt securities in unrealized loss positions that do not meet either of these two criteria, the guidance requires that the Company analyze its ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security prior to impairment. The Company may use the estimated fair value of collateral as a proxy for the net present value if it believes that the security is dependent on the liquidation of collateral for recovery of its investment. If the net present value is less than the amortized cost of the investment, an other-than-temporary impairment is recognized.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Under the authoritative guidance for the recognition and presentation of other-than-temporary impairments, when an other-than-temporary impairment of a debt security has occurred, the amount of the other-than-temporary impairment recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the debt security meets either of these two criteria, the other-than-temporary impairment recognized in earnings is equal to the entire difference between the security’s amortized cost basis and its fair value at the impairment measurement date. For other-than-temporary impairments of debt securities that do not meet these two criteria, the net amount recognized in earnings is equal to the difference between the amortized cost of the debt security and its net present value calculated as described above. Any difference between the fair value and the net present value of the debt security at the impairment measurement date is recorded in “Other comprehensive income (loss).” Unrealized gains or losses on securities for which an other-than-temporary impairment has been recognized in earnings is tracked as a separate component of “Accumulated other comprehensive income (loss).” Prior to the adoption of this guidance in 2009, an other-than-temporary impairment recognized in earnings for debt securities was equal to the total difference between amortized cost and fair value at the time of impairment.

For debt securities, the split between the amount of an other-than-temporary impairment recognized in other comprehensive income and the net amount recognized in earnings is driven principally by assumptions regarding the amount and timing of projected cash flows. For mortgage-backed and asset-backed securities, cash flow estimates consider the payment terms of the underlying assets backing a particular security, including prepayment assumptions, and are based on data from widely accepted third-party data sources or internal estimates. In addition to prepayment assumptions, cash flow estimates include assumptions regarding the underlying collateral including default rates and recoveries, which vary based on the asset type and geographic location, as well as the vintage year of the security. For structured securities, the payment priority within the tranche structure is also considered. For all other debt securities, cash flow estimates are driven by assumptions regarding probability of default and estimates regarding timing and amount of recoveries associated with a default. The Company has developed these estimates using information based on its historical experience as well as using market observable data, such as industry analyst reports and forecasts, sector credit ratings and other data relevant to the collectability of a security, such as the general payment terms of the security and the security’s position within the capital structure of the issuer.

The new cost basis of an impaired security is not adjusted for subsequent increases in estimated fair value. In periods subsequent to the recognition of an other-than-temporary impairment, the impaired security is accounted for as if it had been purchased on the measurement date of the impairment. For debt securities, the discount (or reduced premium) based on the new cost basis may be accreted into net investment income in future periods based on prospective changes in cash flow estimates, to reflect adjustments to the effective yield.

Derivative Financial Instruments

Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices or the values of securities or commodities. Derivative financial instruments generally used by the Company include swaps, futures, forwards and options and may be exchange-traded or contracted in the over-the-counter market. Derivative positions are carried at fair value, generally by obtaining quoted market prices or through the use of valuation models. Values can be affected by changes in interest rates, foreign exchange rates, financial indices, values of securities or commodities, credit spreads, market volatility, expected returns and liquidity. Values can also be affected by changes in estimates and assumptions, including those related to counterparty behavior and non-performance risk used in valuation models.

Derivatives are used in a non-dealer or broker capacity in insurance, investment and international businesses as well as treasury operations to manage the characteristics of the Company’s asset/liability mix, to manage the

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

interest rate and currency characteristics of assets or liabilities and to mitigate the risk of a diminution, upon translation to U.S. dollars, of expected non-U.S. earnings and net investments in foreign operations resulting from unfavorable changes in currency exchange rates. Additionally, derivatives may be used to seek to reduce exposure to interest rate, credit, foreign currency and equity risks associated with assets held or expected to be purchased or sold, and liabilities incurred or expected to be incurred. As discussed in detail below and in Note 14, all realized and unrealized changes in fair value of non-dealer or broker related derivatives, with the exception of the effective portion of cash flow hedges and effective hedges of net investments in foreign operations, are recorded in current earnings. Cash flows from these derivatives are reported in the operating, investing, or financing activities sections in the Unaudited Interim Consolidated Statements of Cash Flows.

Derivatives are also used in a derivative dealer or broker capacity in the Company’s global commodities group to meet the needs of clients by structuring transactions that allow clients to manage their exposure to interest rates, foreign exchange rates, indices or prices of securities and commodities. Realized and unrealized changes in fair value of derivatives used in these dealer related operations are included in “Asset management fees and other income” in the periods in which the changes occur. Cash flows from such derivatives are reported in the operating activities section of the Unaudited Interim Consolidated Statements of Cash Flows.

Derivatives are recorded either as assets, within “Other trading account assets, at fair value” or “Other long-term investments,” or as liabilities, within “Other liabilities,” except for embedded derivatives which are recorded with the associated host contract. The Company nets the fair value of all derivative financial instruments with counterparties for which a master netting arrangement has been executed.

The Company designates derivatives as either (1) a hedge of the fair value of a recognized asset or liability or unrecognized firm commitment (“fair value” hedge); (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge); (3) a foreign-currency fair value or cash flow hedge (“foreign currency” hedge); (4) a hedge of a net investment in a foreign operation; or (5) a derivative that does not qualify for hedge accounting.

To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated risk of the hedged item. Effectiveness of the hedge is formally assessed at inception and throughout the life of the hedging relationship. Even if a derivative qualifies for hedge accounting treatment, there may be an element of ineffectiveness of the hedge. Under such circumstances, the ineffective portion is recorded in “Realized investment gains (losses), net.”

The Company formally documents at inception all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives designated as fair value, cash flow, or foreign currency hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. Hedges of a net investment in a foreign operation are linked to the specific foreign operation.

When a derivative is designated as a fair value hedge and is determined to be highly effective, changes in its fair value, along with changes in the fair value of the hedged asset or liability (including losses or gains on firm commitments), are reported on a net basis in the income statement, generally in “Realized investment gains (losses), net.” When swaps are used in hedge accounting relationships, periodic settlements are recorded in the same income statement line as the related settlements of the hedged items.

When a derivative is designated as a cash flow hedge and is determined to be highly effective, changes in its fair value are recorded in “Accumulated other comprehensive income (loss)” until earnings are affected by the variability of cash flows being hedged (e.g., when periodic settlements on a variable-rate asset or liability are

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

recorded in earnings). At that time, the related portion of deferred gains or losses on the derivative instrument is reclassified and reported in the income statement line item associated with the hedged item.

When a derivative is designated as a foreign currency hedge and is determined to be highly effective, changes in its fair value are recorded either in current period earnings if the hedge transaction is a fair value hedge (e.g., a hedge of a recognized foreign currency asset or liability) or in “Accumulated other comprehensive income (loss)” if the hedge transaction is a cash flow hedge (e.g., a foreign currency denominated forecasted transaction). When a derivative is used as a hedge of a net investment in a foreign operation, its change in fair value, to the extent effective as a hedge, is recorded in the cumulative translation adjustment account within “Accumulated other comprehensive income (loss).”

If it is determined that a derivative no longer qualifies as an effective fair value or cash flow hedge or management removes the hedge designation, the derivative will continue to be carried on the balance sheet at its fair value, with changes in fair value recognized currently in “Realized investment gains (losses), net.” The asset or liability under a fair value hedge will no longer be adjusted for changes in fair value and the existing basis adjustment is amortized to the income statement line associated with the asset or liability. The component of “Accumulated other comprehensive income (loss)” related to discontinued cash flow hedges is amortized to the income statement line associated with the hedged cash flows consistent with the earnings impact of the original hedged cash flows.

When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, or because it is probable that the forecasted transaction will not occur by the end of the specified time period, the derivative will continue to be carried on the balance sheet at its fair value, with changes in fair value recognized currently in “Realized investment gains (losses), net.” Any asset or liability that was recorded pursuant to recognition of the firm commitment is removed from the balance sheet and recognized currently in “Realized investment gains (losses), net.” Gains and losses that were in “Accumulated other comprehensive income (loss)” pursuant to the hedge of a forecasted transaction are recognized immediately in “Realized investment gains (losses), net.”

If a derivative does not qualify for hedge accounting, all changes in its fair value, including net receipts and payments, are included in “Realized investment gains (losses), net” without considering changes in the fair value of the economically associated assets or liabilities.

The Company is a party to financial instruments that contain derivative instruments that are “embedded” in the financial instruments, the identification of which involves judgment. At inception, the Company assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the host contract) and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and (2) a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and changes in its fair value are included in “Realized investment gains (losses), net.” For certain financial instruments that contain an embedded derivative that otherwise would need to be bifurcated and reported at fair value, the Company may elect to classify the entire instrument as a trading account asset and report it within “Other trading account assets, at fair value.”

Adoption of New Accounting Pronouncements

In January 2010, the FASB issued updated guidance that requires new fair value disclosures about significant transfers between Level 1 and 2 measurement categories and separate presentation of purchases, sales, issuances, and settlements within the roll forward of Level 3 activity. Also, this updated fair value guidance

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

clarifies the disclosure requirements about level of disaggregation and valuation techniques and inputs. This new guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of Level 3 activity, which are effective for interim and annual reporting periods beginning after December 15, 2010. The Company adopted this guidance effective January 1, 2010. The required disclosures are provided in Note 13.

In June 2009, the FASB issued authoritative guidance which changes the analysis required to determine whether or not an entity is a variable interest entity (“VIE”). In addition, the guidance changes the determination of the primary beneficiary of a VIE from a quantitative to a qualitative model. Under the new qualitative model, the primary beneficiary must have both the ability to direct the activities of the VIE and the obligation to absorb either losses or gains that could be significant to the VIE. This guidance also changes when reassessment is needed, as well as requires enhanced disclosures, including the effects of a company’s involvement with a VIE on its financial statements. This guidance is effective for interim and annual reporting periods beginning after November 15, 2009. In February 2010, the FASB issued updated guidance which defers, except for disclosure requirements, the impact of this guidance for entities that (1) possess the attributes of an investment company, (2) do not require the reporting entity to fund losses, and (3) are not financing vehicles or entities that were formerly classified as qualified special purpose entities (“QSPE’s”). The Company’s adoption of this guidance effective January 1, 2010 did not have a material effect on the Company’s consolidated financial position and results of operations. The disclosures required by this revised guidance are provided in Note 5.

In June 2009, the FASB issued authoritative guidance which changes the accounting for transfers of financial assets, and is effective for transfers of financial assets occurring in interim and annual reporting periods beginning after November 15, 2009. It removes the concept of a QSPE from the guidance for transfers of financial assets and removes the exception from applying the guidance for consolidation of variable interest entities to qualifying special-purpose entities. It changes the criteria for achieving sale accounting when transferring a financial asset and changes the initial recognition of retained beneficial interests. The guidance also defines “participating interest” to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale. The Company’s adoption of this guidance effective January 1, 2010 did not have a material effect on the Company’s consolidated financial position, results of operations, and financial statement disclosures.

Future Adoption of New Accounting Pronouncements

In April 2010, the FASB issued guidance that amends the accounting for modification of loans that are part of a pool accounted for as a single asset. Under this guidance, modification of loans accounted for within a pool under provisions for loans acquired with deteriorated credit quality, does not result in removal of such loans from the pool even if the modification would otherwise be considered a troubled debt restructuring. An entity must continue to consider whether the pool of assets in which the modified loan is included is impaired if expected cash flows for the pool change. This guidance does not affect the accounting for loans acquired with deteriorated credit quality that are not accounted for within a pool. Loans accounted for individually that were acquired with deteriorated credit quality continue to be subject to the accounting provisions for troubled debt restructuring by creditors. This amended guidance is effective for modifications of loans accounted for within a pool that occur in the first interim or annual reporting period ending on or after July 15, 2010. The amended guidance is to be applied prospectively, with early application permitted. The Company will adopt this guidance effective July 1, 2010, and is currently assessing the impact of the guidance on the Company’s consolidated financial position, results of operations, and financial statement disclosures.

In April 2010, the FASB issued guidance clarifying that an insurance entity should not consider any separate account interests in an investment held for the benefit of policyholders to be the insurer’s interests, and should not combine those interests with its general account interest in the same investment when assessing the

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

investment for consolidation, unless the separate account interests are held for a related party policyholder, whereby consolidation of such interests must be considered under applicable variable interest guidance. This guidance is effective for interim and annual periods beginning after December 15, 2010 and retrospectively to all prior periods upon the date of adoption, with early adoption permitted. The Company will adopt this guidance effective January 1, 2011. The Company is currently assessing the impact of this guidance on the Company’s consolidated financial position, results of operations, and financial statement disclosures.

In April 2010, the FASB issued guidance clarifying that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity should not classify such an award as a liability if it otherwise qualifies as equity. Disclosure requirements are unchanged. This guidance is effective for interim and annual reporting periods beginning after December 15, 2010, with earlier application permitted. The Company’s adoption of this guidance effective January 1, 2011 is not expected to have a material effect on the Company’s consolidated financial position, results of operations, and financial statement disclosures.

In March 2010, the FASB issued updated guidance that amends and clarifies the accounting for credit derivatives embedded in interests in securitized financial assets. This new guidance eliminates the scope exception for embedded credit derivatives (except for those that are created solely by subordination) and provides new guidance on how the evaluation of embedded credit derivatives is to be performed. This new guidance is effective for the first interim reporting period beginning after June 15, 2010, with early adoption permitted. The Company will adopt this guidance effective with the interim reporting period ending September 30, 2010. The Company is currently assessing the impact of this guidance on the Company’s consolidated financial position, results of operations, and financial statement disclosures.

3. ACQUISITIONS AND DISPOSITIONS

Sale of investment in Wachovia Securities

On December 31, 2009, the Company completed the sale of its minority joint venture interest in Wachovia Securities Financial Holdings, LLC (“Wachovia Securities”), which includes Wells Fargo Advisors, to Wells Fargo & Company (“Wells Fargo”). The Company’s minority joint venture interest in Wachovia Securities originated as a result of the Company combining its retail securities brokerage and clearing operations with those of Wachovia Corporation (“Wachovia”) in 2003. On December 31, 2008, Wachovia merged with and into Wells Fargo, which succeeded to Wachovia’s rights and obligations under the joint venture arrangements. At the closing, the Company received $4.5 billion in cash as the purchase price of its joint venture interest and de-recognized the carrying value of its investment in the joint venture and the carrying value of the associated “lookback” option. The pre-tax gain on sale recognized by the Company was $2.247 billion and was reflected in “Equity in earnings of operating joint ventures, net of taxes.”

Acquisition of Yamato Life

On May 1, 2009, the Company’s Gibraltar Life operations acquired Yamato Life, a Japanese life insurance company that declared bankruptcy in October 2008. Gibraltar Life served as the reorganization sponsor for Yamato and under the reorganization agreement acquired Yamato by contributing $72 million of capital to Yamato. At the date of acquisition the Company recognized $2.3 billion of assets and $2.3 billion of liabilities related to Yamato. Subsequent to the acquisition, the Company renamed the acquired company The Prudential Gibraltar Financial Life Insurance Company, Ltd.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Discontinued Operations

Income (loss) from discontinued businesses, including charges upon disposition, are as follows:


	Three Months Ended March 31,
	2010			2009
	(in millions)
Korean asset management operations	$	1		$	9
Real estate investments sold or held for sale		2			2
International securities operations		(1	)		—

Income from discontinued operations before income taxes		2			11
Income tax expense		4			7

Income (loss) from discontinued operations, net of taxes	$	(2	)	$	4

In the first quarter of 2010, the Company signed a definitive agreement, which is subject to local regulatory approval, to sell Prudential Investment & Securities Co. Ltd. and Prudential Asset Management Co. Ltd., which together comprise the Company’s Korean asset management operations. The net proceeds from this agreement are expected to be approximately equal to the book value. The transaction is expected to close in the second quarter of 2010. Also included in the table above are amounts related to currency hedging activities related to these operations.

Real estate investments sold or held for sale reflects the income or loss from discontinued real estate investments.

Charges recorded in connection with the disposals of businesses include estimates that are subject to subsequent adjustment.

The Company’s Unaudited Interim Consolidated Statements of Financial Position include total assets and total liabilities related to discontinued businesses as follows:


	March 31, 2010		December 31, 2009
	(in millions)
Total assets	$	882	$	937
Total liabilities	$	494	$	556

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

4. INVESTMENTS

Fixed Maturities and Equity Securities

The following tables provide information relating to fixed maturities and equity securities (excluding investments classified as trading) as of the dates indicated:


	March 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Other-than- temporary impairments in AOCI(3)
	(in millions)
Fixed maturities, available for sale
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	8,943	$	404	$	384	$	8,963	$	—
Obligations of U.S. states and their political subdivisions		1,493		37		24		1,506		—
Foreign government bonds		40,076		1,422		132		41,366		—
Corporate securities		92,545		5,286		2,168		95,663		(28	)
Asset-backed securities(1)		12,300		174		2,370		10,104		(1,742	)
Commercial mortgage-backed securities		11,249		529		93		11,685		5
Residential mortgage-backed securities(2)		10,791		465		93		11,163		(10	)

Total fixed maturities, available for sale	$	177,397	$	8,317	$	5,264	$	180,450	$	(1,775	)

Equity securities, available for sale	$	6,082	$	1,111	$	105	$	7,088

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

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

(3)

Represents the amount of other-than-temporary impairment losses in “Accumulated other comprehensive income (loss),” or “AOCI,” which were not included in earnings. Amount excludes $475 million of net unrealized gains on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.


	March 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Other-than- temporary impairments in AOCI(3)
	(in millions)
Fixed maturities, held to maturity
Foreign government bonds	$	1,043	$	17	$	4	$	1,056	$	—
Corporate securities		912		1		126		787		—
Asset-backed securities(1)		1,076		15		4		1,087		—
Commercial mortgage-backed securities		466		114		—		580		—
Residential mortgage-backed securities(2)		1,519		54		2		1,571		—

Total fixed maturities, held to maturity	$	5,016	$	201	$	136	$	5,081	$	—

(1)	Includes credit tranched securities collateralized by auto loans, credit cards, education loans, and other asset types.

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

(3)	Represents the amount of other-than-temporary impairment losses in “Accumulated other comprehensive income (loss),” or “AOCI,” which were not included in earnings.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


	December 31, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Other-than- temporary impairments in AOCI(3)
	(in millions)
Fixed maturities, available for sale
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	8,254	$	384	$	370	$	8,268	$	—
Obligations of U.S. states and their political subdivisions		1,389		28		42		1,375		—
Foreign government bonds		39,795		1,549		135		41,209		—
Corporate securities		89,915		4,377		2,746		91,546		(43	)
Asset-backed securities(1)		12,587		155		2,504		10,238		(1,716	)
Commercial mortgage-backed securities		11,036		202		220		11,018		1
Residential mortgage-backed securities(2)		11,275		428		132		11,571		(11	)

Total fixed maturities, available for sale	$	174,251	$	7,123	$	6,149	$	175,225	$	(1,769	)

Equity securities, available for sale	$	6,106	$	1,014	$	225	$	6,895

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

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

(3)

Represents the amount of other-than-temporary impairment losses in “Accumulated other comprehensive income (loss),” or “AOCI,” which were not included in earnings. Amount excludes $540 million of net unrealized gains on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.


	December 31, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Other-than- temporary impairments in AOCI(3)
	(in millions)
Fixed maturities, held to maturity
Foreign government bonds	$	1,058	$	25	$	1	$	1,082	$	—
Corporate securities		876		1		126		751		—
Asset-backed securities(1)		1,112		16		3		1,125		—
Commercial mortgage-backed securities		460		104		—		564		—
Residential mortgage-backed securities(2)		1,614		64		3		1,675		—

Total fixed maturities, held to maturity	$	5,120	$	210	$	133	$	5,197	$	—

(1)	Includes credit tranched securities collateralized by auto loans, credit cards, education loans, and other asset types.

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

(3)	Represents the amount of other-than-temporary impairment losses in “Accumulated other comprehensive income (loss),” or “AOCI,” which were not included in earnings.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The amortized cost and fair value of fixed maturities by contractual maturities at March 31, 2010, are as follows:


	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)				(in millions)
Due in one year or less	$	11,675	$	11,912	$	—	$	—
Due after one year through five years		36,235		37,493		48		48
Due after five years through ten years		31,271		32,471		75		75
Due after ten years		63,876		65,622		1,832		1,720
Asset-backed securities		12,300		10,104		1,076		1,087
Commercial mortgage-backed securities		11,249		11,685		466		580
Residential mortgage-backed securities		10,791		11,163		1,519		1,571

Total	$	177,397	$	180,450	$	5,016	$	5,081

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 are not due at a single maturity date.

The following table depicts the sources of fixed maturity proceeds and related investment gains (losses), as well as losses on impairments of both fixed maturities and equity securities:


	Three Months Ended March 31,
	2010			2009
	(in millions)
Fixed maturities, available for sale
Proceeds from sales	$	2,248		$	8,643
Proceeds from maturities/repayments		3,457			4,025
Gross investment gains from sales, prepayments, and maturities		89			363
Gross investment losses from sales and maturities		(58	)		(117	)

Fixed maturities, held to maturity
Gross investment gains from prepayments	$	—		$	—
Proceeds from maturities/repayments		114			62

Fixed maturity and equity security impairments
Net writedowns for other-than-temporary impairment losses on fixed maturities recognized in earnings(1)	$	(254	)	$	(605	)
Writedowns for impairments on equity securities		(69	)		(493	)

(1)	Excludes the portion of other-than-temporary impairments recorded in “Other comprehensive income (loss),” 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.

As discussed in Note 2, a portion of certain other-than-temporary impairment (“OTTI”) losses on fixed maturity securities are recognized in “Other comprehensive income (loss)” (“OCI”). The net amount recognized in earnings (“credit loss impairments”) represents the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. Any remaining difference between the fair value and amortized cost is recognized in OCI. The following table sets forth the amount of pre-tax credit loss impairments on fixed maturity securities held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized in OCI, and the corresponding changes in such amounts.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


Credit losses recognized in earnings on fixed maturity securities held by the Company for which a portion of the OTTI loss was recognized in OCI
	(in millions)
Balance, December 31, 2009	$	1,747
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period		(192	)
Credit loss impairments previously recognized on securities impaired to fair value during the period(1)		(7	)
Credit loss impairment recognized in the current period on securities not previously impaired		114
Additional credit loss impairments recognized in the current period on securities previously impaired		81
Increases due to the passage of time on previously recorded credit losses		29
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected		(19	)

Balance, March 31, 2010	$	1,753

(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.

Trading Account Assets Supporting Insurance Liabilities

The following table sets forth the composition of “Trading account assets supporting insurance liabilities” as of the dates indicated:


	March 31, 2010				December 31, 2009
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)				(in millions)
Short-term investments and cash equivalents	$	752	$	752	$	725	$	725

Fixed maturities:
Corporate securities		9,342		9,776		9,202		9,502
Commercial mortgage-backed securities		1,930		1,937		1,899		1,893
Residential mortgage-backed securities		1,379		1,384		1,434		1,432
Asset-backed securities		1,134		987		1,022		857
Foreign government bonds		497		504		508		517
U.S. government authorities and agencies and obligations of U.S. states		334		326		169		159

Total fixed maturities		14,616		14,914		14,234		14,360
Equity securities		1,047		1,017		1,033		935

Total trading account assets supporting insurance liabilities	$	16,415	$	16,683	$	15,992	$	16,020

The net change in unrealized gains (losses) from trading account assets supporting insurance liabilities still held at period end, recorded within “Asset management fees and other income” was $240 million and $245 million during the three months ended March 31, 2010 and 2009 respectively.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Other Trading Account Assets

The following table sets forth the composition of the “Other trading account” assets as of the dates indicated:


	March 31, 2010				December 31, 2009
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)				(in millions)
Short-term investments and cash equivalents	$	5	$	5	$	5	$	5

Fixed Maturities:
Asset-backed securities		726		687		1,043		991
Residential mortgage-backed securities		314		183		287		158
Corporate securities		324		334		345		359
Commercial mortgage-backed securities		192		120		239		136
U.S. government authorities and agencies and obligations of U.S. states		318		323		90		95
Foreign government bonds		22		23		23		24

Total fixed maturities		1,896		1,670		2,027		1,763
Derivative instruments and other		1,033		1,210		662		794
Equity securities		464		486		456		471

Total other trading account assets	$	3,398	$	3,371	$	3,150	$	3,033

The net change in unrealized gains (losses) from other trading account assets still held at period end, recorded within “Asset management fees and other income” were $90 million, and $(29) million during the three months ended March 31, 2010, and 2009, respectively.

Net Investment Income

Net investment income for the three months ended March 31, 2010 and 2009 was from the following sources:


	Three Months Ended March 31,
	2010			2009
	(in millions)
Fixed maturities, available for sale	$	2,054		$	2,084
Fixed maturities, held to maturity		34			31
Equity securities, available for sale		70			77
Trading account assets		203			207
Commercial mortgage and other loans		455			483
Policy loans		142			137
Broker-dealer related receivables		3			6
Short-term investments and cash equivalents		11			60
Other long-term investments		4			(106	)

Gross investment income		2,976			2,979
Less investment expenses		(102	)		(130	)

Net investment income	$	2,874		$	2,849

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Realized Investment Gains (Losses), Net

Realized investment gains (losses), net, for the three months ended March 31, 2010 and 2009 were from the following sources:


	Three Months Ended March 31,
	2010			2009
	(in millions)
Fixed maturities	$	(223	)	$	(359	)
Equity securities		41			(501	)
Commercial mortgage and other loans		(7	)		(122	)
Investment real-estate		—			(14	)
Joint ventures and limited partnerships		(2	)		(14	)
Derivatives(1)		576			1,145
Other		4			3

Realized investment gains (losses), net	$	389		$	138

(1)	Includes the offset of hedged items in qualifying effective hedge relationships prior to maturity or termination.

Net Unrealized Investment Gains (Losses)

Net unrealized investment gains and losses on securities classified as “available for sale” and certain other long-term investments and other assets are included in the Consolidated Statements of Financial Position as a component of “Accumulated other comprehensive income (loss),” or “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 and losses, are as follows:

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


	Net Unrealized Gains (Losses) on Investments			Deferred Policy Acquisition Costs, Deferred Sales Inducements, and Valuation of Business Acquired			Future Policy Benefits			Policyholders’ Dividends		Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses)
	(in millions)
Balance, December 31, 2009	$	(1,229	)	$	193		$	2		$	—	$	355		$	(679	)
Net investment gains (losses) on investments arising during the period		(148	)		—			—			—		52			(96	)
Reclassification adjustment for (gains) losses included in net income		95			—			—			—		(33	)		62
Reclassification adjustment for OTTI losses excluded from net income(1)		(18	)		—			—			—		6			(12	)
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs, deferred sales inducements and valuation of business acquired		—			(89	)		—			—		31			(58	)
Impact of net unrealized investment (gains) losses on future policy benefits		—			—			(10	)		—		4			(6	)
Impact of net unrealized investment (gains) losses on policyholders’ dividends		—			—			—			268		(94	)		174

Balance, March 31, 2010	$	(1,300	)	$	104		$	(8	)	$	268	$	321		$	(615	)

(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.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

All Other Net Unrealized Investment Gains and Losses in AOCI


	Net Unrealized Gains/ (Losses) on Investments(1)		Deferred Policy Acquisition Costs, Deferred Sales Inducements, and Valuation of Business Acquired			Future Policy Benefits			Policyholders’ Dividends			Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses)
	(in millions)
Balance, December 31, 2009	$	2,885	$	(803	)	$	(509	)	$	—		$	(383	)	$	1,190
Net investment gains (losses) on investments arising during the period		2,401		—			—			—			(815	)		1,586
Reclassification adjustment for (gains) losses included in net income		87		—			—			—			(30	)		57
Reclassification adjustment for OTTI losses excluded from net income(2)		18		—			—			—			(6	)		12
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs, deferred sales inducements and valuation of business acquired		—		(46	)		—			—			16			(30	)
Impact of net unrealized investment (gains) losses on future policy benefits		—		—			(104	)		—			36			(68	)
Impact of net unrealized investment (gains) losses on policyholders’ dividends		—		—			—			(835	)		292			(543	)

Balance, March 31, 2010	$	5,391	$	(849	)	$	(613	)	$	(835	)	$	(890	)	$	2,204

(1)	Includes cash flow hedges. See Note 14 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.

The table below presents net unrealized gains (losses) on investments by asset class as of the dates indicated:


	March 31, 2010			December 31, 2009
	(in millions)
Fixed maturity securities on which an OTTI loss has been recognized	$	(1,300	)	$	(1,229	)
Fixed maturity securities, available for sale—all other		4,353			2,203
Equity securities, available for sale		1,006			789
Derivatives designated as cash flow hedges(1)		(256	)		(317	)
Other investments(2)		288			210

Net unrealized gains (losses) on investments	$	4,091		$	1,656

(1)	See Note 14 for more information on cash flow hedges.

(2)	Includes $248 million of net unrealized losses on held to maturity securities that were transferred from available for sale.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Duration of Gross Unrealized Loss Positions for Fixed Maturities

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


	March 31, 2010
	Less than twelve months				Twelve months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in millions)
Fixed maturities(1)
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	3,100	$	185	$	866	$	199	$	3,966	$	384
Obligations of U.S. states and their political subdivisions		703		24		8		—		711		24
Foreign government bonds		3,048		27		3,645		109		6,693		136
Corporate securities		9,122		312		14,486		1,982		23,608		2,294
Commercial mortgage-backed securities		217		2		819		91		1,036		93
Asset-backed securities		368		8		6,631		2,366		6,999		2,374
Residential mortgage-backed securities		549		2		1,200		93		1,749		95

Total	$	17,107	$	560	$	27,655	$	4,840	$	44,762	$	5,400

(1)	Includes $1,491 million of fair value and $136 million of gross unrealized losses at March 31, 2010 on securities classified as held to maturity, a portion of which are not reflected in accumulated other comprehensive income.


	December 31, 2009
	Less than twelve months				Twelve months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in millions)
Fixed maturities(1)
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	4,058	$	259	$	475	$	111	$	4,533	$	370
Obligations of U.S. states and their political subdivisions		936		42		7		—		943		42
Foreign government bonds		5,027		95		498		41		5,525		136
Corporate securities		10,388		352		17,414		2,520		27,802		2,872
Commercial mortgage-backed securities		1,471		40		3,216		180		4,687		220
Asset-backed securities		1,619		565		6,128		1,942		7,747		2,507
Residential mortgage-backed securities		1,567		21		1,150		114		2,717		135

Total	$	25,066	$	1,374	$	28,888	$	4,908	$	53,954	$	6,282

(1)	Includes $1,216 million of fair value and $133 million of gross unrealized losses at December 31, 2009 on securities classified as held to maturity, a portion of which are not reflected in accumulated other comprehensive income.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The gross unrealized losses at March 31, 2010 and December 31, 2009 are composed of $3,592 million and $4,240 million related to high or highest quality securities based on NAIC or equivalent rating and $1,808 million and $2,042 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. At March 31, 2010, $3,074 million of the gross unrealized losses represented declines in value of greater than 20%, $482 million of which had been in that position for less than six months, as compared to $3,594 million at December 31, 2009 that represented declines in value of greater than 20%, $588 million of which had been in that position for less than six months. At March 31, 2010, the $4,840 million of gross unrealized losses of twelve months or more were concentrated in asset backed securities, and in the manufacturing, finance, and services sectors of the Company’s corporate securities. At December 31, 2009, the $4,908 million of gross unrealized losses of twelve months or more were concentrated in asset backed securities, and in the manufacturing and finance sectors of the Company’s corporate securities. In accordance with its policy described in Note 2, the Company concluded that an adjustment to earnings for other-than-temporary impairments for these securities was not warranted at March 31, 2010 or December 31, 2009. These conclusions are based on a detailed analysis of the underlying credit and cash flows on each security. The gross unrealized losses are primarily attributable to credit spread widening and increased liquidity discounts. At March 31, 2010, the Company does not intend to sell the securities and it is not more likely than not that the Company will be required to sell the securities before the anticipated recovery of its remaining amortized cost basis.

Duration of Gross Unrealized Loss Positions for Equity Securities

The following table shows the fair value and gross unrealized losses aggregated by length of time that individual equity securities have been in a continuous unrealized loss position, as of the following dates:


	March 31, 2010
	Less than twelve months				Twelve months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in millions)
Equity securities, available for sale	$	874	$	57	$	428	$	48	$	1,302	$	105


	December 31, 2009
	Less than twelve months				Twelve months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in millions)
Equity securities, available for sale	$	1,159	$	142	$	754	$	83	$	1,913	$	225

At March 31, 2010, $24 million of the gross unrealized losses represented declines of greater than 20%, $8 million of which had been in that position for less than six months. At December 31, 2009, $62 million of the gross unrealized losses represented declines of greater than 20%, $37 million of which had been in that position for less than six months. Perpetual preferred securities have characteristics of both debt and equity securities. Since an impairment model similar to fixed maturity securities is applied to these securities, an other-than-temporary impairment has not been recognized on certain perpetual preferred securities that have been in a continuous unrealized loss position for twelve months or more as of March 31, 2010 and December 31, 2009. In accordance with its policy described in Note 2, the Company concluded that an adjustment for other-than-temporary impairments for these equity securities was not warranted at March 31, 2010 or December 31, 2009.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

5. 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”). A VIE is an entity that either (1) has equity investors that lack certain essential characteristics of a controlling financial interest (including the ability to control activities of the entity, the obligation to absorb the entity’s expected losses and the right to receive the entity’s expected residual returns) or (2) lacks sufficient equity to finance its own activities without financial support provided by other entities, which in turn would be expected to absorb at least some of the expected losses of the VIE.

If the Company determines that it is the VIE’s “primary beneficiary” it consolidates the VIE. There are currently two models for determining whether or not the Company is the “primary beneficiary” of a VIE. The first relates to those VIE’s that have the characteristics of an investment company and for which certain other conditions are true. These conditions are that (1) the Company does not have the implicit or explicit obligation to fund losses of the VIE and (2) the VIE is not a securitization entity, asset-backed financing entity or an entity that was formerly considered a qualified special-purpose entity. In this model the Company is the primary beneficiary if it stands to absorb a majority of the VIE’s expected losses or to receive a majority of the VIE’s expected residual returns and would be required to consolidate the VIE.

For all other VIE’s, the Company is the primary beneficiary if the Company has (1) the power to direct the activities of the VIE that most significantly impact the economic performance of the entity and (2) the obligation to absorb losses of the entity that could be potentially significant to the VIE or the right to receive benefits from the entity that could be potentially significant. If both conditions are present the Company would be required to consolidate the VIE.

Consolidated Variable Interest Entities for which the Company is the Sponsor

The Company is the sponsor of certain asset-backed investment vehicles (commonly referred to as collateralized debt obligations, or “CDOs”) and certain other vehicles for which the Company earns fee income for investment management services, including certain investment structures which the Company’s asset management business invests with other co-investors in investment funds referred to as feeder funds. The Company sells or syndicates investments through these vehicles, principally as part of the proprietary investing activity of the Company’s asset management businesses. Additionally, the Company may invest in debt or equity securities issued by these vehicles. CDOs raise capital by issuing debt securities, and use the proceeds to purchase investments, typically interest-bearing financial instruments. The Company analyzes these relationships to determine whether it has (1) the power to direct the activities of the VIE that most significantly impact the economic performance of the entity and (2) the obligation to absorb losses of the entity that could be potentially significant to the VIE or the right to receive benefits from the entity that could be potentially significant and thus is the primary beneficiary. This analysis includes a review of (1) the Company’s rights and responsibilities as sponsor, (2) fees received by the Company and (3) other interests (if any) held by the Company. The Company is not required to provide, and has not provided, material financial or other support to any VIE for which it is the sponsor.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The Company has determined that it is the primary beneficiary of certain VIEs that it sponsors, including one CDO and certain other investment structures, as it meets both conditions listed above. The table below reflects the carrying amount and balance sheet caption in which the assets and liabilities of consolidated VIEs for which the Company is the sponsor are reported. The assets of these VIE’s are restricted and must be used first to settle liabilities of the VIE. The creditors of these VIEs do not have recourse to the Company in excess of the assets contained within the VIE.


	March 31, 2010		December 31, 2009
	(in millions)
Fixed maturities, available for sale	$	61	$	68
Trading account assets supporting insurance liabilities		6		7
Commercial mortgage and other loans		402		412
Other long-term investments		7		10
Cash and cash equivalents		43		44
Accrued investment income		2		2
Other assets		4		4
Separate account assets		36		38

Total assets of consolidated VIEs	$	561	$	585

Long-term debt	$	413	$	413
Separate account liabilities		36		38

Total liabilities of consolidated VIEs	$	449	$	451

The Company also consolidates a VIE whose beneficial interests are wholly owned by consolidated subsidiaries. This VIE is not included in the table above and the Company does not currently intend to sell these beneficial interests to third parties.

Other Consolidated Variable Interest Entities

The Company is the primary beneficiary of certain VIEs in which the Company has invested, as part of its investment activities. Included among these structured investments are structured investments issued by a VIE that manages yen-denominated investments coupled with cross-currency coupon swap agreements thereby creating synthetic dual currency investments. The Company’s involvement in the structuring of these investments combined with its economic interest indicates that the Company is the primary beneficiary. The Company has not provided material financial or other support that was not contractually required to these VIEs. The table below reflects the carrying amount and balance sheet caption in which the assets and liabilities of consolidated VIEs for which the Company is not the sponsor are reported. These liabilities primarily comprise obligations under debt instruments issued by the VIEs that are non-recourse to the Company. The creditors of each consolidated VIE have recourse only to the assets of that VIE.


	March 31, 2010			December 31, 2009
	(in millions)
Fixed maturities, available for sale	$	106		$	107
Fixed maturities, held to maturity		981			985
Other long-term investments		(22	)		(48	)
Accrued investment income		4			4

Total assets of consolidated VIEs	$	1,069		$	1,048

Total liabilities of consolidated VIEs	$	—		$	—

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

In addition, not reflected in the table above, the Company has created a trust that is a VIE, to facilitate Prudential Insurance’s Funding Agreement Notes Issuance Program (“FANIP”). The trust issues medium-term notes secured by funding agreements issued to the trust by Prudential Insurance with the proceeds of such notes. The trust is the beneficiary of an indemnity agreement with the Company that provides that the Company is responsible for costs related to the notes issued with limited exception. As a result, the Company has determined that it is the primary beneficiary of the trust, which is therefore consolidated.

The funding agreements represent an intercompany transaction that is eliminated upon consolidation. However, in recognition of the security interest in such funding agreements, the trust’s medium-term note liability of $4,301 million and $4,927 million at March 31, 2010 and December 31, 2009, respectively, is classified within “Policyholders’ account balances.” Creditors of the trust have recourse to Prudential Insurance if the trust fails to make contractual payments on the medium-term notes. The Company has not provided material financial or other support that was not contractually required to the trust.

Unconsolidated Variable Interest Entities

The Company has determined that it is not the primary beneficiary of certain VIEs that it sponsors, including certain CDOs and other investment structures, as it does not have both (1) the power to direct the activities of the VIE that most significantly impact the economic performance of the entity and (2) the obligation to absorb losses of the entity that could be potentially significant to the VIE or the right to receive benefits from the entity that could be potentially significant. The Company’s maximum exposure to loss resulting from its relationship with unconsolidated VIEs it sponsors is limited to its investment in the VIEs, which was $380 million at March 31, 2010 and December 31, 2009. These investments are reflected in “Fixed maturities, available for sale.” The fair value of assets held within these unconsolidated VIEs was $6,978 million and $6,988 million as of March 31, 2010 and December 31, 2009, respectively. There are no liabilities associated with these unconsolidated VIEs on the Company’s balance sheet.

In the normal course of its activities, the Company will invest in joint ventures and limited partnerships. These ventures 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 has determined that it is not required to consolidate these entities because either (1) it does not control them or (2) it does not have the obligation to absorb losses of the entities that could be potentially significant to the entities or the right to receive benefits from the entities that could be potentially significant. The Company classifies these investments as “Other long-term investments” and its maximum exposure to loss associated with these entities was $3,304 million and $3,251 million as of March 31, 2010 and December 31, 2009, 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 sponsor. 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 4 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.

Included among these structured investments are asset-backed securities issued by VIEs that manage investments in the European market. In addition to a stated coupon, each investment provides a return based on the VIE’s portfolio of assets and related investment activity. The market value of these VIEs was approximately

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

$6.0 billion and $7.5 billion as of March 31, 2010 and December 31, 2009, respectively, and these VIEs were financed primarily through the issuance of notes similar to those purchased by the Company. The Company generally accounts for these investments as available for sale fixed maturities containing embedded derivatives that are bifurcated and marked-to-market through “Realized investment gains (losses), net,” based upon the change in value of the underlying portfolio. The Company’s variable interest in each of these VIEs represents less than 50% of the only class of variable interests issued by the VIE. The Company’s maximum exposure to loss from these interests was $747 million and $723 million at March 31, 2010 and December 31, 2009, respectively, which includes the fair value of the embedded derivatives.

6. CLOSED BLOCK

On the date of demutualization, Prudential Insurance established a Closed Block for certain individual life insurance policies and annuities issued by Prudential Insurance in the U.S. 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 Business.

The policies included in the Closed Block are specified individual life insurance policies and individual annuity contracts that were in force on the effective date of the Plan of Reorganization and for which Prudential Insurance is currently paying or expects to pay experience-based policy dividends. Assets have been allocated to the Closed Block in an amount that has been determined to produce cash flows which, together with revenues from policies included in the Closed Block, are expected to be sufficient to support obligations and liabilities relating to these policies, including provision for payment of benefits, certain expenses, and taxes and to provide for continuation of the policyholder dividend scales in effect in 2000, assuming experience underlying such scales continues. To the extent that, over time, cash flows from the assets allocated to the Closed Block and claims and other experience related to the Closed Block are, in the aggregate, more or less favorable than what was assumed when the Closed Block was established, total dividends paid to Closed Block policyholders may be greater than or less than the total dividends that would have been paid to these policyholders if the policyholder dividend scales in effect in 2000 had been continued. Any cash flows in excess of amounts assumed will be available for distribution over time to Closed Block policyholders and will not be available to stockholders. If the Closed Block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside of the Closed Block. The Closed Block will continue in effect as long as any policy in the Closed Block remains in force unless, with the consent of the New Jersey insurance regulator, it is terminated earlier.

The excess of Closed Block Liabilities over Closed Block Assets at the date of the demutualization (adjusted to eliminate the impact of related amounts in “Accumulated other comprehensive income (loss)”) represented the estimated maximum future earnings at that date from the Closed Block expected to result from operations attributed to the Closed Block after income taxes. In establishing the Closed Block, the Company developed an actuarial calculation of the timing of such maximum future earnings. If actual cumulative earnings of the Closed Block from inception through the end of any given period are greater than the expected cumulative earnings, only the expected earnings will be recognized in income. Any excess of actual cumulative earnings over expected cumulative earnings will represent undistributed accumulated earnings attributable to policyholders, which are recorded as a policyholder dividend obligation. The policyholder dividend obligation represents amounts to be paid to Closed Block policyholders as an additional policyholder dividend unless otherwise offset by future Closed Block performance that is less favorable than originally expected. If the actual cumulative earnings of the Closed Block from its inception through the end of any given period are less than the expected cumulative earnings of the Closed Block, the Company will recognize only the actual earnings in income. However, the Company may reduce policyholder dividend scales, which would be intended to increase future actual earnings until the actual cumulative earnings equaled the expected cumulative earnings.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

As of March 31, 2010, the Company has not recognized a policyholder dividend obligation for the excess of actual cumulative earnings over the expected cumulative earnings. Actual cumulative earnings are below the expected cumulative earnings by $357 million. However, 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 $565 million at March 31, 2010, to be paid to Closed Block policyholders unless offset by future experience, with an offsetting amount reported in “Accumulated other comprehensive income.” As of December 31, 2009, actual cumulative earnings were below the expected cumulative earnings, thereby eliminating the policyholder dividend obligation. Furthermore, the accumulation of net unrealized investment gains as of December 31, 2009 that had arisen subsequent to the establishment of the Closed Block, were not sufficient to overcome the cumulative earnings shortfall. See the table below for changes in the components of the policyholder dividend obligation for the three months ended March 31, 2010.

Closed Block Liabilities and Assets designated to the Closed Block, as well as maximum future earnings to be recognized from Closed Block Liabilities and Closed Block Assets, are as follows:


	March 31, 2010			December 31, 2009
	(in millions)
Closed Block Liabilities
Future policy benefits	$	51,636		$	51,774
Policyholders’ dividends payable		966			926
Policyholders’ dividend obligation		565			—
Policyholders’ account balances		5,569			5,588
Other Closed Block liabilities		4,488			4,300

Total Closed Block Liabilities		63,224			62,588

Closed Block Assets
Fixed maturities, available for sale, at fair value		39,480			38,448
Other trading account assets, at fair value		148			166
Equity securities, available for sale, at fair value		3,211			3,037
Commercial mortgage and other loans		7,589			7,751
Policy loans		5,398			5,418
Other long-term investments		1,697			1,597
Short-term investments		1,047			1,218

Total investments		58,570			57,635
Cash and cash equivalents		550			662
Accrued investment income		655			608
Other Closed Block assets		446			307

Total Closed Block Assets		60,221			59,212

Excess of reported Closed Block Liabilities over Closed Block Assets		3,003			3,376
Portion of above representing accumulated other comprehensive income:
Net unrealized investment gains (losses)		917			231
Allocated to policyholder dividend obligation		(565	)		—

Future earnings to be recognized from Closed Block Assets and Closed Block Liabilities	$	3,355		$	3,607

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Information regarding the policyholder dividend obligation is as follows:


	Three Months Ended March 31, 2010
	(in millions)
Balance, January 1	$	—
Impact from earnings allocable to policyholder dividend obligation		—
Change in net unrealized investment gains (losses) allocated to policyholder dividend obligation		565

Balance, March 31	$	565

Closed Block revenues and benefits and expenses for the three months ended March 31, 2010 and 2009 were as follows:


	Three Months Ended March 31,
	2010			2009
	(in millions)
Revenues
Premiums	$	711		$	773
Net investment income		735			718
Realized investment gains (losses), net		278			(408	)
Other income		7			15

Total Closed Block revenues		1,731			1,098

Benefits and Expenses
Policyholders’ benefits		840			912
Interest credited to policyholders’ account balances		35			35
Dividends to policyholders		491			3
General and administrative expenses		139			145

Total Closed Block benefits and expenses		1,505			1,095

Closed Block revenues, net of Closed Block benefits and expenses, before income taxes and discontinued operations		226			3
Income tax expense (benefit)		(26	)		5

Closed Block revenues, net of Closed Block benefits and expenses and income taxes, before discontinued operations		252			(2	)
Income from discontinued operations, net of taxes		—			—

Closed Block revenues, net of Closed Block benefits and expenses, income taxes and discontinued operations	$	252		$	(2	)

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

7. EQUITY

The Company has outstanding two classes of common stock: the Common Stock and the Class B Stock. The changes in the number of shares issued, held in treasury and outstanding are as follows for the periods indicated:


	Common Stock				Class B Stock
	Issued	Held In Treasury		Outstanding	Issued and Outstanding
	(in millions)
Balance, December 31, 2009	641.8	179.7		462.1	2.0
Common Stock issued	—	—		—	—
Common Stock acquired	—	—		—	—
Stock-based compensation programs(1)	—	(1.5	)	1.5	—

Balance, March 31, 2010	641.8	178.2		463.6	2.0

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

Comprehensive Income

The components of comprehensive income (loss) are as follows:


	Three Months Ended March 31,
	2010			2009
	(in millions)
Net income	$	671		$	3
Other comprehensive income (loss), net of taxes:
Change in foreign currency translation adjustments		(35	)		(328	)
Change in net unrealized investments gains (losses)(1)		1,078			(267	)
Change in pension and postretirement unrecognized net periodic benefit		20			9

Other comprehensive income (loss)(2)		1,063			(586	)

Comprehensive income (loss)		1,734			(583	)

Comprehensive loss attributable to noncontrolling interests		26			51

Comprehensive income (loss) attributable to Prudential Financial, Inc.	$	1,760		$	(532	)

(1)

Includes cash flow hedges of $40 million and $25 million for the three months ended March 31, 2010 and 2009, respectively. See Note 4 for additional information regarding unrealized investment gains (losses), including the split between amounts related to fixed maturity securities on which an other-than-temporary impairment loss has been recognized, and all other unrealized investment gains (losses).

(2)	Amounts are net of tax expense (benefit) of $524 million and $(227) million for the three months ended March 31, 2010 and 2009, respectively.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The balance of and changes in each component of “Accumulated other comprehensive income (loss) attributable to Prudential Financial, Inc.” for the three months ended March 31, 2010 and 2009 are as follows (net of taxes):


	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, 2009	$	674		$	511		$	(1,628	)	$	(443	)
Change in component during period		(35	)		1,078			20			1,063

Balance, March 31, 2010	$	639		$	1,589		$	(1,608	)	$	620


	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, 2008	$	375		$	(6,735	)	$	(983	)	$	(7,343	)
Change in component during period		(276	)		(279	)		9			(546	)
Impact of adoption of guidance for other-than- temporary impairments of debt securities(2)		—			(686	)		—			(686	)

Balance, March 31, 2009	$	99		$	(7,700	)	$	(974	)	$	(8,575	)

(1)

Includes cash flow hedges $(165) million and $(205) million as of March 31, 2010 and December 31, 2009 respectively and $(122) million and $(147) million as of March 31, 2009 and December 31, 2008 respectively. See Note 4 for additional information regarding unrealized investment gains (losses), including the split between amounts related to fixed maturity securities on which an other-than-temporary impairment loss has been recognized, and all other unrealized investment gains (losses).

(2)	See Note 2 for additional information on the adoption of guidance for other-than-temporary impairments of debt securities.

8. EARNINGS PER SHARE

The Company has outstanding two separate classes of common stock. The Common Stock reflects the performance of the Financial Services Businesses and the Class B Stock reflects the performance of the Closed Block Business. Accordingly, earnings per share is calculated separately for each of these two classes of common stock.

Net income for the Financial Services Businesses and the Closed Block Business is determined in accordance with U.S. GAAP and includes general and administrative expenses charged to each of the respective businesses based on the Company’s methodology for the allocation of such expenses. Cash flows between the Financial Services Businesses and the Closed Block Business related to administrative expenses are determined by a policy servicing fee arrangement that is based upon insurance and policies in force and statutory cash premiums. To the extent reported administrative expenses vary from these cash flow amounts, the differences are recorded, on an after tax basis, as direct equity adjustments to the equity balances of the businesses.

The direct equity adjustments modify the earnings available to each of the classes of common stock for earnings per share purposes.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Common Stock

A reconciliation of the numerators and denominators of the basic and diluted per share computations is as follows:


	Three Months Ended March 31,
	2010						2009
	Income			Weighted Average Shares	Per Share Amount		Income			Weighted Average Shares	Per Share Amount
	(in millions except per share amounts)
Basic earnings per share
Income (loss) from continuing operations attributable to the Financial Services Businesses	$	512					$	(20	)
Direct equity adjustment		10						11
Less: Income (loss) attributable to noncontrolling interests		(26	)					(11	)
Less: Earnings allocated to participating unvested share-based payment awards		7						—

Income from continuing operations attributable to the Financial Services Businesses available to holders of Common Stock after direct equity adjustment	$	541		463.0	$	1.17	$	2		422.1	$	0.00

Effect of dilutive securities and compensation programs
Add: Earnings allocated to participating unvested share-based payment awards—Basic	$	7					$	—
Less: Earnings allocated to participating unvested share-based payment awards—Diluted		7						—
Stock options				2.9						0.1
Deferred and long-term compensation programs				0.5						1.0

Exchangeable Surplus Notes		4		5.1				—		—


Diluted earnings per share
Income from continuing operations attributable to the Financial Services Businesses available to holders of Common Stock after direct equity adjustment	$	545		471.5	$	1.16	$	2		423.2	$	0.00

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 of the Financial Services Businesses attributable to Prudential Financial, Inc. are allocated between Common Stock and the participating awards, as if the awards were a second class of stock. Undistributed earnings allocated to participating unvested share-based payment awards for the three months ended March 31, 2010 and 2009 were based on 5.8 million and 4.1 million of such awards, respectively, weighted for the period they were outstanding. The computation of earnings per share of Common Stock excludes the dilutive impact of participating unvested share-based awards based on the application of the two-class method.

For the three months ended March 31, 2010 and 2009, 10.9 million and 19.1 million options, respectively, weighted for the portion of the period they were outstanding, with a weighted average exercise price of $71.29 and $54.66 per share, respectively, were excluded from the computation of diluted earnings per share because the options, based on application of the treasury stock method, were antidilutive.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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 exchange rate used in the diluted earnings per share calculation for the surplus notes is 10.1235 shares of Common Stock per each $1,000 principal amount of surplus notes. 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, is added to the denominator, and interest expense, net of tax, is added to the numerator, if the overall effect is dilutive.

As of March 31, 2010, $2 million of senior notes related to the $2.0 billion December 2006 issuance remain outstanding. These will be dilutive to earnings per share if the average market price of the Common Stock for a particular period is above the initial conversion price of $104.21. As of March 31, 2010, $0.2 million of senior notes related to the $3.0 billion December 2007 issuance remain outstanding. These senior notes will be dilutive to earnings per share if the average market price of the Common Stock for a particular period is above the initial conversion price of $132.39.

Class B Stock

Income from continuing operations per share of Class B Stock for the three months ended March 31, are presented below. There are no potentially dilutive shares associated with the Class B Stock.


	Three Months Ended March 31,
	2010					2009
	Income		Weighted Average Shares	Per Share Amount		Income		Weighted Average Shares	Per Share Amount
	(in millions except per share amounts)
Basic earnings per share
Income from continuing operations attributable to the Closed Block Business	$	161				$	19
Less: Direct equity adjustment		10					11

Income from continuing operations attributable to the Closed Block Business available to holders of Class B Stock after direct equity adjustment	$	151	2.0	$	75.50	$	8	2.0	$	4.00

9. SHORT-TERM AND LONG-TERM DEBT

Commercial Paper

The Company issues commercial paper under the two programs described below primarily to manage operating cash flows and existing commitments, to meet working capital needs and to take advantage of current investment opportunities. At March 31, 2010 and December 31, 2009, the weighted average maturity of total commercial paper outstanding was 29 and 27 days, respectively.

Prudential Financial has a commercial paper program rated A-1 by Standard & Poor’s Rating Services (“S&P”), P-2 by Moody’s Investors Service, Inc. (“Moody’s”) and F2 by Fitch Ratings Ltd. (“Fitch”) as of March 31, 2010.

Prudential Funding, LLC, a wholly owned subsidiary of Prudential Insurance, has a commercial paper program, rated A-1+ by S&P, P-2 by Moody’s and F1 by Fitch as of March 31, 2010. Prudential Financial has issued a subordinated guarantee covering Prudential Funding’s domestic commercial paper program.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The table below presents the Company’s total outstanding commercial paper borrowings as of the dates indicated:


	March 31, 2010		December 31, 2009
	(in millions)
Prudential Financial	$	143	$	146
Prudential Funding, LLC		733		730

Total outstanding commercial paper borrowings	$	876	$	876

Medium-term Notes

On January 14, 2010, Prudential Financial issued under its Medium-term Notes, Series D program $500 million of 2.75% notes due January 2013 and $750 million of 3.875% notes due January 2015.

Federal Home Loan Bank of New York

Prudential Insurance is a member of the Federal Home Loan Bank of New York or FHLBNY. Membership allows Prudential Insurance access to the FHLBNY’s financial services, including the ability to obtain collateralized loans and to issue collateralized funding agreements that can be used as an alternative source of liquidity. FHLBNY borrowings and funding agreements are collateralized by qualifying mortgage-related assets or U.S. Treasury securities, the fair value of which must be maintained at certain specified levels relative to outstanding borrowings, depending on the type of asset pledged. FHLBNY membership requires Prudential Insurance to own member stock and borrowings require the purchase of activity-based stock in an amount equal to 4.5% of outstanding borrowings. Under FHLBNY guidelines, if Prudential Insurance’s financial strength ratings decline below A/A2/A Stable by S&P/Moody’s/Fitch, respectively, and the FHLBNY does not receive written assurances from the New Jersey Department of Banking and Insurance, or NJDOBI, regarding Prudential Insurance’s solvency, new borrowings from the FHLBNY would be limited to a term of 90 days or less. Currently there are no restrictions on the term of borrowings from the FHLBNY.

NJDOBI permits Prudential Insurance to pledge collateral to the FHLBNY in an amount up to 7% of its prior year-end statutory net admitted assets, excluding separate account assets. This limitation resets to 5% on December 31, 2010 unless extended by NJDOBI. NJDOBI has also limited the aggregate amount of assets that Prudential Insurance may pledge for any loans, including FHLBNY borrowings, up to 10% of its prior year-end statutory net admitted assets, excluding separate account assets; however, this limitation excludes certain activities, such as the asset-based financing transactions described above. Based on Prudential Insurance’s statutory net admitted assets as of December 31, 2009, the 7% limitation equates to a maximum amount of pledged assets of $10.4 billion and an estimated maximum borrowing capacity (after taking into account required collateralization levels and purchases of activity-based stock) of approximately $8.7 billion. Nevertheless, FHLBNY borrowings are subject to the FHLBNY’s discretion and to the availability of qualifying assets at Prudential Insurance.

As of March 31, 2010, Prudential Insurance had pledged qualifying assets with a fair value of $3.9 billion, which supported outstanding collateralized advances of $2.0 billion and collateralized funding agreements of $1.5 billion. The fair value of qualifying assets that were available to Prudential Insurance but not pledged amounted to $5.7 billion as of March 31, 2010.

As of March 31, 2010, $2.0 billion of the FHLBNY outstanding advances are reflected in “Short-term debt” with $1.0 billion maturing on June 4, 2010 and $1.0 billion maturing on December 6, 2010. The funding agreements issued to the FHLBNY, which are reflected in “Policyholders’ account balances,” have priority claim status above debt holders of Prudential Insurance.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Federal Home Loan Bank of Boston

Prudential Retirement Insurance and Annuity Company, or PRIAC, became a member of the Federal Home Loan Bank of Boston or FHLBB, in December 2009. Membership allows PRIAC access to collateralized advances which will be classified in “short-term debt” or “long-term debt,” depending on the maturity date of the obligation. PRIAC’s membership in FHLBB requires the ownership of member stock and borrowings from FHLBB require the purchase of activity-based stock in an amount between 3.0% and 4.5% of outstanding borrowings depending on the maturity date of the obligation. As of March 31, 2010, PRIAC had no advances outstanding under the FHLBB facility.

The Connecticut Department of Insurance, or CTDOI, permits PRIAC to pledge up to $2.6 billion in qualifying assets to secure FHLBB borrowings through December 31, 2011. PRIAC must seek re-approval from CTDOI prior to borrowing additional funds after that date. Based on available eligible assets as of March 31, 2010, PRIAC had an estimated maximum borrowing capacity, after taking into consideration required collateralization levels and required purchases of activity based FHLBB stock, of approximately $1.1 billion.

Term Asset-Backed Securities Loan Facility

During 2009, the Company purchased securities under the Federal Reserve’s Term Asset-Backed Securities Loan Facility (“TALF”). The TALF is designed to provide secured financing for the acquisition of certain types of asset-backed securities, including certain high-quality commercial mortgage-backed securities issued before January 1, 2009. TALF financing is non-recourse to the borrower, is collateralized by the purchased securities and provides financing for the purchase price of the securities, less a ‘haircut’ that varies based on the type of collateral. Borrowers under the program can deliver the collateralized securities to a special purpose vehicle created by the Federal Reserve in full defeasance of the loan.

During 2009, the Company obtained $1,167 million of secured financing from the Federal Reserve under this program. In 2009, the Company sold a portion of the securities purchased under the program and used the proceeds to repay $738 million of the borrowings. In 2010, the Company sold a portion of the remaining securities purchased under the program and used the proceeds, as well as internal sources of cash, to repay the remaining $429 million of the borrowings.

10. EMPLOYEE BENEFIT PLANS

Pension and Other Postretirement Plans

The Company has funded and non-funded contributory and non-contributory defined benefit pension plans, 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. The Company has elected to amortize its transition obligation for other postretirement benefits over 20 years.

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 March 31,
	Pension Benefits						Other Postretirement Benefits
	2010			2009			2010			2009
	(in millions)
Components of net periodic (benefit) cost
Service cost	$	45		$	41		$	3		$	3
Interest cost		117			115			28			29
Expected return on plan assets		(186	)		(182	)		(27	)		(27	)
Amortization of prior service cost		6			7			(3	)		(3	)
Amortization of actuarial (gain) loss, net		10			8			10			11
Special termination benefits		1			—			—			—

Net periodic (benefit) cost	$	(7	)	$	(11	)	$	11		$	13

The Company has evaluated the impact of the Patient Protection and Affordable Care Act (“PPACA”) and Health Care and Education Reconciliation Act (“HCERA”) signed into law in March 2010 on its Retiree Medical obligations and has concluded the impact is not material. The effects of the Acts will be included in the next measurement of the obligation at December 31, 2010.

11. SEGMENT INFORMATION

Segments

The Company has organized its principal operations into the Financial Services Businesses and the Closed Block Business. Within the Financial Services Businesses, the Company operates through three divisions, which together encompass seven reportable segments. The Company’s real estate and relocation services business, as well as businesses that are not sufficiently material to warrant separate disclosure and divested businesses are included in Corporate and Other operations within the Financial Services Businesses. Collectively, the businesses that comprise the three operating divisions and Corporate and Other are referred to as the Financial Services Businesses.

Adjusted Operating Income

In managing the Financial Services Businesses, the Company analyzes the operating performance of each segment using “adjusted operating income.” Adjusted operating income does not equate to “income from continuing operations before income taxes and equity in earnings of operating joint ventures” or “net income” as determined in accordance with U.S. GAAP but is the measure of segment profit or loss used by the Company 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 from continuing operations before income taxes and equity in earnings of operating joint ventures” for the following items, which are described in greater detail below:

•

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

•

net investment gains and losses on trading account assets supporting insurance liabilities and changes in experience-rated contractholder liabilities due to asset value changes;

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

•

the contribution to income/loss of divested businesses that have been or will be sold or exited but that did not qualify for “discontinued operations” accounting treatment under U.S. GAAP; 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. However, the Company 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 the Financial Services Businesses.

Realized investment gains (losses), net, and related charges and adjustments. Adjusted operating income excludes realized investment gains (losses), net, except as indicated below. A significant element of realized investment gains and losses are impairments and credit-related and interest rate-related gains and losses from sales of securities. Impairments and losses from sales of credit-impaired securities, the timing of which depends largely on market credit cycles, can vary considerably across periods. The timing of other sales that would result in gains or losses, such as interest rate-related gains or losses, is largely subject to the Company’s discretion and influenced by market opportunities, as well as the Company’s tax and capital profile. Trends in the underlying profitability of the Company’s businesses can be more clearly identified without the fluctuating effects of these transactions.

Charges that relate to realized investment gains (losses), net, are also excluded from adjusted operating income. The related charges are associated with: policyholder dividends; amortization of deferred policy acquisition costs, valuation of business acquired (“VOBA”), unearned revenue reserves and deferred sales inducements; interest credited to policyholders’ account balances; reserves for future policy benefits; and payments associated with the market value adjustment features related to certain of the annuity products the Company sells. The related charges associated with policyholder dividends include a percentage of the net increase in the fair value of specified assets included in Gibraltar Life’s reorganization plan that is required to be paid as a special dividend to Gibraltar Life policyholders. Deferred policy acquisition costs, VOBA, unearned revenue reserves and deferred sales inducements for certain products are amortized based on estimated gross profits, which include net realized investment gains and losses on the underlying invested assets. The related charge for these items represents the portion of this amortization associated with net realized investment gains and losses. The related charges for interest credited to policyholders’ account balances relate to certain group life policies that pass back certain realized investment gains and losses to the policyholder. The reserves for certain policies are adjusted when cash flows related to these policies are affected by net realized investment gains and losses, and the related charge for reserves for future policy benefits represents that adjustment. Certain of the Company’s annuity products contain a market value adjustment feature that requires us to pay to the contractholder or entitles us to receive from the contractholder, upon surrender, a market value adjustment based on the crediting rates on the contract surrendered compared to crediting rates on newly issued contracts or based on an index rate at the time of purchase compared to an index rate at time of surrender, as applicable. These payments mitigate the net realized investment gains or losses incurred upon the disposition of the underlying invested assets. The related charge represents the payments or receipts associated with these market value adjustment features.

Adjustments to “Realized investment gains (losses), net,” for purposes of calculating adjusted operating income, include the following:

Gains and losses pertaining to derivative contracts that do not qualify for hedge accounting treatment, other than derivatives used in the Company’s capacity as a broker or dealer, are included in “Realized investment gains

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

(losses), net.” This includes mark-to-market adjustments of open contracts as well as periodic settlements. As discussed further below, adjusted operating income includes a portion of realized gains and losses pertaining to certain derivative contracts.

Adjusted operating income of the International Insurance segment and International Investments segment, excluding the global commodities group, reflect the impact of an intercompany arrangement with Corporate and Other operations pursuant to which the segments’ non-U.S. dollar denominated earnings in all countries for a particular year, including its interim reporting periods, are translated at fixed currency exchange rates. The fixed rates are determined in connection with a currency hedging program designed to mitigate the risk that unfavorable rate changes will reduce the segments’ U.S. dollar equivalent earnings. Pursuant to this program, the Company’s Corporate and Other operations execute forward currency contracts with third parties to sell the net exposure of projected earnings from the hedged currency in exchange for U.S. dollars at a specified exchange rate. The maturities of these contracts correspond with the future periods in which the identified non-U.S. dollar denominated earnings are expected to be generated. These contracts do not qualify for hedge accounting under U.S. GAAP and, as noted above, all resulting profits or losses from such contracts are included in “Realized investment gains (losses), net.” When the contracts are terminated in the same period that the expected earnings emerge, the resulting positive or negative cash flow effect is included in adjusted operating income (net losses of $19 million and $3 million for the three months ended March 31, 2010 and 2009, respectively). As of March 31, 2010 and December 31, 2009, the fair value of open contracts used for this purpose was a net asset of $1 million and a net liability of $16 million, respectively.

The Company uses interest rate and currency swaps and other derivatives to manage interest and currency exchange rate exposures arising from mismatches between assets and liabilities, including duration mismatches. For the derivative contracts that do not qualify for hedge accounting treatment, mark-to-market adjustments of open contracts as well as periodic settlements are included in “Realized investment gains (losses), net.” However, the periodic swap settlements, as well as other derivative related yield adjustments, are included in adjusted operating income to reflect the after-hedge yield of the underlying instruments. In certain instances, when these derivative contracts are terminated or offset before their final maturity, the resulting realized gains or losses recorded within “Realized investment gains (losses), net” are recognized in adjusted operating income over periods that generally approximate the expected terms of the derivatives or underlying instruments in order for adjusted operating income to reflect the after-hedge yield of the underlying instruments. Adjusted operating income includes net gains of $70 million and $26 million for the three months ended March 31, 2010 and 2009, respectively, due to periodic settlements and yield adjustments of such contracts, and includes net gains of $7 million and $6 million for the three months ended March 31, 2010 and 2009, respectively, related to derivative contracts that were terminated or offset in prior periods. The table below reflects the total deferred gain (loss) as of March 31, 2010, related to derivative contracts that were terminated or offset in prior periods that will be recognized in adjusted operating income in future periods for each segment, as well as the weighted average period over which these deferred amounts will be recognized.


	Deferred Amount			Weighted Average Period
	(in millions)
Segment:
International Insurance	$	742		30 years
Asset Management		30		10 years
Corporate and Other		(55	)	7 years

Total deferred gain (loss)	$	717

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Certain products the Company sells are accounted for as freestanding derivatives or contain embedded derivatives. Changes in the fair value of these derivatives, along with any fees received or payments made relating to the derivative, are recorded in “Realized investment gains (losses), net.” These “Realized investment gains (losses), net” are included in adjusted operating income in the period in which the gain or loss is recorded. In addition, the changes in fair value of any associated derivative portfolio that is part of an economic hedging program related to the risk of these products (but which do not qualify for hedge accounting treatment under U.S. GAAP) are also included in adjusted operating income in the period in which the gains or losses on the derivative portfolio are recorded. Adjusted operating income includes net gains of $117 million and $1,345 million for the three months ended March 31, 2010 and 2009, respectively, related to these products and any associated derivative portfolio.

Adjustments are also made for the purposes of calculating adjusted operating income for the following items:

The Company conducts certain activities for which “Realized investment gains (losses), net” are a principal source of earnings for its businesses and therefore included in adjusted operating income, particularly within the Company’s Asset Management segment. For example, Asset Management’s proprietary investing business makes investments for sale or syndication to other investors or for placement or co-investment in the Company’s managed funds and structured products. The “Realized investment gains (losses), net” associated with the sale of these proprietary investments, as well as related derivative results, are a principal activity for this business and included in adjusted operating income. In addition, the “Realized investment gains (losses), net” associated with loans originated by the Company’s commercial mortgage operations, as well as related derivative results and retained mortgage servicing rights, are a principal activity for this business and included in adjusted operating income. Net realized investment losses of $21 million and $50 million for the three months ended March 31, 2010 and 2009, respectively, related to these and other businesses were included in adjusted operating income as an adjustment to “Realized investment gains (losses), net.”

The Company has certain investments in its general account portfolios that are classified as trading. These trading investments are carried at fair value and included in “Other trading account assets, at fair value” on the Company’s statements of financial position. Realized and unrealized gains and losses for these investments are recorded in “Asset management fees and other income,” and interest and dividend income for these investments is recorded in “Net investment income.” Consistent with the exclusion of realized investment gains and losses with respect to other investments managed on a consistent basis, the net gains or losses on these investments, which is recorded within “Asset management fees and other income,” is excluded from adjusted operating income and is reflected as an adjustment to “Realized investment gains (losses), net.” In addition, prior to the Company’s repayment of the obligation in 2010, the secured financing received from the Federal Reserve under TALF was reflected within “Long-term debt,” and carried at fair value under the fair value option under authoritative guidance around fair value. The changes in the fair value of this debt, which were recorded within “Asset management fees and other income,” was also excluded from adjusted operating income and reflected as an adjustment to “Realized investment gains (losses), net.” This is consistent with the securities purchased with the proceeds from this financing, which were carried at fair value and included in “Other trading account assets, at fair value” as discussed above. The net impact of these adjustments was to exclude from adjusted operating income net gains of $39 million and net losses of $40 million, for the three months ended March 31, 2010 and 2009, respectively.

The Company has certain assets and liabilities for which, under GAAP, the change in value due to changes in foreign currency exchange rates during the period is recorded in “Asset management fees and other income.” To the extent the foreign currency exposure on these assets and liabilities is economically hedged, the change in value included in “Asset management fees and other income” is excluded from adjusted operating income and is

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

reflected as an adjustment to “Realized investment gains (losses), net.” The net impact of these adjustments was to exclude from adjusted operating income net losses of $62 million, and net gains of $78 million for the three months ended March 31, 2010 and 2009, respectively.

Investment gains and losses on trading account assets supporting insurance liabilities and changes in experience-rated contractholder liabilities due to asset value changes. Certain products included in the Retirement and International Insurance segments, are experience-rated in that investment results associated with these products are expected to ultimately accrue to contractholders. The investments supporting these experience-rated products, excluding commercial mortgage and other loans, are classified as trading and are carried at fair value. These trading investments are reflected on the statements of financial position as “Trading account assets supporting insurance liabilities, at fair value.” Realized and unrealized gains and losses for these investments are reported in “Asset management fees and other income.” Interest and dividend income for these investments is reported in “Net investment income.” Commercial mortgage and other loans that support these experience-rated products are carried at unpaid principal, net of unamortized discounts and an allowance for losses, and are reflected on the statements of financial position as “Commercial mortgage and other loans.”

Adjusted operating income excludes net investment gains and losses on trading account assets supporting insurance liabilities. This is consistent with the exclusion of realized investment gains and losses with respect to other investments supporting insurance liabilities managed on a consistent basis. In addition, to be consistent with the historical treatment of charges related to realized investment gains and losses on investments, adjusted operating income also excludes the change in contractholder liabilities due to asset value changes in the pool of investments (including changes in the fair value of commercial mortgage and other loans) supporting these experience-rated contracts, which are reflected in “Interest credited to policyholders’ account balances.” The result of this approach is that adjusted operating income for these products includes net fee revenue and interest spread the Company earns on these experience-rated contracts, and excludes changes in fair value of the pool of investments, both realized and unrealized, that are expected to ultimately accrue to the contractholders.

Divested businesses. The contribution to income/loss of divested businesses that have been or will be sold or exited, but that did not qualify for “discontinued operations” accounting treatment under U.S. GAAP, are excluded from adjusted operating income as the results of divested businesses are not relevant to understanding the Company’s ongoing operating results.

Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests. Equity in earnings of operating joint ventures, on a pre-tax basis, are included in adjusted operating income as these results are a principal source of earnings. These earnings are reflected on a U.S. GAAP basis on an after-tax basis as a separate line on the Company’s Unaudited Interim Consolidated Statements of Operations.

Earnings attributable to noncontrolling interests are excluded from adjusted operating income. Earnings attributable to noncontrolling interests represents the portion of earnings from consolidated entities that relates to the equity interests of minority investors, and are reflected on a U.S. GAAP basis as a separate line on the Company’s Unaudited Interim Consolidated Statements of Operations.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The summary below reconciles adjusted operating income before income taxes for the Financial Services Businesses to income from continuing operations before income taxes and equity in earnings of operating joint ventures:


	Three Months Ended March 31,
	2010			2009
	(in millions)
Adjusted Operating Income before income taxes for Financial Services Businesses by Segment:
Individual Annuities	$	260		$	17
Retirement		171			159
Asset Management		83			(1	)

Total U.S. Retirement Solutions and Investment Management Division		514			175

Individual Life		91			40
Group Insurance		53			93

Total U.S. Individual Life and Group Insurance Division		144			133

International Insurance		484			425
International Investments		12			7

Total International Insurance and Investments Division		496			432

Corporate Operations		(195	)		(112	)
Real Estate and Relocation Services		(7	)		(63	)

Total Corporate and Other		(202	)		(175	)

Adjusted Operating Income before income taxes for Financial Services Businesses		952			565

Reconciling items:
Realized investment gains (losses), net, and related adjustments		(55	)		(707	)
Charges related to realized investment gains (losses), net		(29	)		44
Investment gains (losses) on trading account assets supporting insurance liabilities, net		252			145
Change in experience-rated contractholder liabilities due to asset value changes		(320	)		(45	)
Divested businesses		(7	)		(32	)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests		(36	)		3

Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures for Financial Services Businesses		757			(27	)

Income from continuing operations before income taxes and equity in earnings of operating joint ventures for Closed Block Business		259			30

Income from continuing operations before income taxes and equity in earnings of operating joint ventures	$	1,016		$	3

The U.S. Retirement Solutions and Investment Management Division and U.S. Individual Life and Group Insurance Division results reflect deferred policy acquisition costs as if the individual annuity business and group insurance business were stand-alone operations. The elimination of intersegment costs capitalized in accordance with this policy is included in consolidating adjustments within Corporate and Other operations.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The summary below presents revenues for the Company’s reportable segments:


	Three Months Ended March 31,
	2010			2009
	(in millions)
Financial Services Businesses:
Individual Annuities	$	873		$	1,892
Retirement		1,132			1,208
Asset Management		379			263

Total U.S. Retirement Solutions and Investment Management Division		2,384			3,363

Individual Life		687			680
Group Insurance		1,311			1,333

Total U.S. Individual Life and Group Insurance Division		1,998			2,013

International Insurance		2,913			2,537
International Investments		81			75

Total International Insurance and Investments Division		2,994			2,612

Corporate Operations		(62	)		(18	)
Real Estate and Relocation Services		41			(3	)

Total Corporate and Other		(21	)		(21	)

Total		7,355			7,967

Reconciling items:
Realized investment gains (losses), net, and related adjustments		(55	)		(707	)
Charges related to realized investment gains (losses), net		(44	)		(8	)
Investment gains (losses) on trading account assets supporting insurance liabilities, net		252			145
Divested businesses		2			(26	)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests		(10	)		14

Total Financial Services Businesses		7,500			7,385

Closed Block Business		1,792			1,140

Total per Unaudited Interim Consolidated Financial Statements	$	9,292		$	8,525

The Asset Management segment revenues include intersegment revenues primarily consisting of asset-based management and administration fees as follows:

Management has determined the intersegment revenues with reference to market rates. Intersegment revenues are eliminated in consolidation in Corporate and Other.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The summary below presents total assets for the Company’s reportable segments as of the dates indicated:


	March 31, 2010		December 31, 2009
	(in millions)
Individual Annuities	$	89,158	$	84,064
Retirement		125,866		123,625
Asset Management		30,161		30,185

Total U.S. Retirement Solutions and Investment Management Division		245,185		237,874

Individual Life		38,893		36,917
Group Insurance		33,964		32,935

Total U.S. Individual Life and Group Insurance Division		72,857		69,852

International Insurance		88,312		87,590
International Investments		5,175		4,997

Total International Insurance and Investments Division		93,487		92,587

Corporate Operations		13,823		14,368
Real Estate and Relocation Services		566		590

Total Corporate and Other		14,389		14,958

Total Financial Services Businesses		425,918		415,271

Closed Block Business		65,943		64,932

Total	$	491,861	$	480,203

12. INCOME TAXES

The Company’s liability for income taxes includes the liability for unrecognized tax benefits, interest and penalties which relate to tax years still subject to review by the Internal Revenue Service (“IRS”) or other taxing authorities. Audit periods remain open for review until the statute of limitations has passed. Generally, for tax years which produce net operating losses, capital losses or tax credit carryforwards (“tax attributes”), the statute of limitations does not close, to the extent of these tax attributes, until the expiration of the statute of limitations for the tax year in which they are fully utilized. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the liability for income taxes. The statute of limitations for the 2002 tax year expired on April 30, 2009. The statute of limitations for the 2003 tax year expired on July 31, 2009. The statute of limitations for the 2004, 2005, and 2006 tax years is set to expire in April 2011. Tax years 2007 through 2009 are still open for IRS examination. The Company does not anticipate any significant changes within the next 12 months to its total unrecognized tax benefits related to tax years for which the statute of limitations has not expired.

The dividends received deduction (“DRD”) reduces the amount of dividend income subject to U.S. tax and is a significant component of the difference between the Company’s effective tax rate and the federal statutory tax rate of 35%. The DRD for the current period was estimated using information from 2009, current year results, and was adjusted to take into account the current year’s equity market performance. The actual current year DRD can vary from the estimate based on factors such as, but not limited to, changes in the amount of dividends received that are eligible for the DRD, changes in the amount of distributions received from mutual fund investments, changes in the account balances of variable life and annuity contracts, and the Company’s taxable income before the DRD.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

In August 2007, the IRS released Revenue Ruling 2007-54, which included, among other items, guidance on the methodology to be followed in calculating the DRD related to variable life insurance and annuity contracts. In September 2007, the IRS released Revenue Ruling 2007-61. Revenue Ruling 2007-61 suspended Revenue Ruling 2007-54 and informed taxpayers that the U.S. Treasury Department and the IRS intend to address through new regulations the issues considered in Revenue Ruling 2007-54, including the methodology to be followed in determining the DRD related to variable life insurance and annuity contracts. On February 1, 2010, the Obama Administration released the “General Explanations of the Administration’s Revenue Proposals.” Although the Administration has not released proposed statutory language, one proposal would change the method used to determine the amount of the DRD. A change in the DRD, including the possible retroactive or prospective elimination of this deduction through regulation or legislation, could increase actual tax expense and reduce the Company’s consolidated net income. These activities had no impact on the Company’s 2009 or first quarter 2010 results.

In December 2006, the IRS completed all fieldwork with respect to its examination of the consolidated federal income tax returns for tax years 2002 and 2003. The final report was initially submitted to the Joint Committee on Taxation for their review in April 2007. The final report was resubmitted in March 2008 and again in April 2008. The Joint Committee returned the report to the IRS for additional review of an industry issue regarding the methodology for calculating the DRD related to variable life insurance and annuity contracts. The IRS completed its review of the issue and proposed an adjustment with respect to the calculation of the DRD. In order to expedite receipt of an income tax refund related to the 2002 and 2003 tax years, the Company agreed to such adjustment. The report, with the adjustment to the DRD, was submitted to the Joint Committee on Taxation in October 2008. The Company was advised on January 2, 2009 that the Joint Committee completed its consideration of the report and took no exception to the conclusions reached by the IRS. Accordingly, the final report was processed and a $157 million refund was received in February 2009. The Company believes that its return position with respect to the calculation of the DRD is technically correct. Therefore, the Company filed protective refund claims on October 1, 2009 to recover the taxes associated with the agreed upon adjustment and to pursue such other actions as appropriate. These activities had no impact on the Company’s 2009 or first quarter 2010 results.

In January 2007, the IRS began an examination of tax years 2004 through 2006. For tax years 2007, 2008 and 2009, the Company participated in the IRS’s Compliance Assurance Program (“CAP”). Under CAP, the IRS assigns an examination team to review completed transactions contemporaneously during these tax years in order to reach agreement with the Company on how they should be reported in the tax returns. If disagreements arise, accelerated resolutions programs are available to resolve the disagreements in a timely manner before the tax returns are filed. It is management’s expectation this program will shorten the time period between the filing of the Company’s federal income tax returns and the IRS’s completion of its examination of the returns.

The Company’s affiliates in Japan file separate tax returns and are subject to audits by the local taxing authority. The general statute of limitations is five years from when the return is filed. During 2009, the Tokyo Regional Taxation Bureau concluded a routine tax audit of the tax returns of Prudential Life Insurance Company Ltd. for its tax years ending March 31, 2004 to March 31, 2008. These activities had no material impact on the Company’s 2009 or first quarter 2010 results.

The Company’s affiliates in Korea file separate tax returns and are subject to audits by the local taxing authority. The general statute of limitations is five years from when the return is filed. During 2009, a local district office in the Korean tax authority concluded a routine tax audit of the local taxes for tax years ending March 31, 2004 through March 31, 2007 of Prudential Life Insurance Company of Korea, Ltd. These activities had no material impact on the Company’s 2009 or first quarter 2010 results.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act, which was modified by the Health Care and Education Reconciliation Act of 2010 signed into law on March 30, 2010, (together, the “Healthcare Act”). The federal government provides a subsidy to companies that provide certain retiree prescription drug benefits (the “Medicare Part D subsidy”), including the Company. The Medicare Part D subsidy was previously provided tax-free. However, as currently adopted, the Healthcare Act includes a provision that would reduce the tax deductibility of retiree health care costs to the extent of any Medicare Part D subsidy received. In effect, this provision of the Healthcare Act makes the Medicare Part D subsidy taxable beginning in 2013. Therefore, the Company has incurred a charge in the first quarter of 2010 for the reduction of deferred tax assets of $94 million, which reduces net income and is reflected in “Income tax expense (benefit).”

13. FAIR VALUE OF ASSETS AND LIABILITIES

Fair Value Measurement—Fair value is defined as 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 guidance around fair value established a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. 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. These generally provide the most reliable evidence and are used to measure fair value whenever available. Active markets are defined as having the following characteristics for the measured asset/liability: (i) many transactions, (ii) current prices, (iii) price quotes not varying substantially among market makers, (iv) narrow bid/ask spreads and (v) most information publicly available. The Company’s Level 1 assets and liabilities primarily include certain cash equivalents and short term investments, equity securities and derivative contracts that are traded in an active exchange market. Prices are obtained from readily available sources for market transactions involving identical assets or liabilities.

Level 2—Fair value is based on significant inputs, other than Level 1 inputs, 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. The Company’s Level 2 assets and liabilities include: fixed maturities (corporate public and private bonds, most government securities, certain asset-backed and mortgage-backed securities, etc.), certain equity securities and commercial mortgage loans, short-term investments and certain cash equivalents (primarily commercial paper), and certain over-the-counter derivatives. Valuations are generally obtained from third party pricing services for identical or comparable assets or liabilities or through the use of valuation methodologies using observable market inputs. Prices from services are validated through comparison to trade data and internal estimates of current fair value, generally developed using market observable inputs and economic indicators.

Level 3—Fair value is based on at least one or more significant unobservable inputs for the asset or liability. These inputs reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability. The Company’s Level 3 assets and liabilities primarily include: asset-backed securities collateralized by sub-prime mortgages as discussed below, certain private fixed maturities and equity securities, certain manually priced public equity securities and fixed maturities, certain highly structured over-the-counter derivative contracts, certain commercial mortgage loans, certain consolidated real estate funds for which the Company is the general partner, and embedded derivatives resulting from certain products with guaranteed

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

benefits. Prices are determined using valuation methodologies such as option pricing models, discounted cash flow models and other similar techniques. Non-binding broker quotes, which are utilized when pricing service information is not available, are reviewed for reasonableness based on the Company’s understanding of the market, and are generally considered Level 3. Under certain conditions, based on its observations of transactions in active markets, the Company may conclude the prices received from independent third party pricing services or brokers are not reasonable or reflective of market activity. In those instances, the Company may choose to over-ride the third-party pricing information or quotes received and apply internally developed values to the related assets or liabilities. To the extent the internally developed valuations use significant unobservable inputs, they are classified as Level 3. As of March 31, 2010 and December 31, 2009 these over-rides on a net basis were not material.

Inactive Markets—During 2009 and continuing through March 31, 2010, the Company observed that the volume and level of activity in the market for asset-backed securities collateralized by sub-prime mortgages remained at historically low levels. This stood in particular contrast to the markets for other structured products with similar cash flow and credit profiles, which experienced an increase in the level of activity beginning in the second quarter of 2009. The Company also observed significant implied relative liquidity risk premiums, yields, and weighting of “worst case” cash flows for asset-backed securities collateralized by sub-prime mortgages in comparison with our own estimates for such securities. In contrast, the liquidity of other spread-based asset classes, such as corporate bonds, high yield and consumer asset-backed securities, such as those collateralized by credit cards or autos, which were previously more correlated with sub-prime securities, improved beginning in the second quarter of 2009. Based on this information, the Company concluded as of June 30, 2009, and continuing through March 31, 2010, that the market for asset-backed securities collateralized by sub-prime mortgages was inactive and also determined the pricing quotes it received were based on limited market transactions, calling into question their representation of observable fair value.

Based on this conclusion, in determining the fair value of certain asset-backed securities collateralized by sub-prime mortgages, the Company considered both third-party pricing information, and an internally developed price, based on a discounted cash flow model. The discount rate used in the model was based on observed spreads for other similarly structured credit markets which were active and dominated by observable orderly transactions. The Company also applied additional risk premiums to the discount rate to reflect the relative illiquidity and asset specific cash flow uncertainty associated with asset-backed securities collateralized by sub-prime mortgages. This combined security specific additional spread reflects the Company’s judgment of what an investor would demand for taking on such risks in an orderly transaction under current market conditions, and is significantly higher than would be indicative of historical spread differences between structured credit asset classes when all asset classes had active markets dominated with orderly transactions. The Company believes these estimated spreads are reflective of current market conditions in the sub-prime mortgage market and these spread estimates are further supported by their relationship to recent observations of limited transactions in sub-prime securities. Using this discount rate, valuations were developed based on the expected future cash flows of the assets. In determining how much weight to place on the third-party pricing information versus our discounted cash flow valuation, the Company considered the level of inactivity and the amount of observable information. As of March 31, 2010, the Company weighted third-party pricing information 75% for low rated categories where it had less observable market information and 100% for all other ratings where more observable information was available. As a result, as of March 31, 2010, the Company reported fair values for these asset-backed securities collateralized by sub-prime securities which were net $222 million higher than the estimated fair values received from independent third party pricing services or brokers. The adjusted fair value of these securities was $5,262 million, which was reflected within Level 3 in the fair value hierarchy as of March 31, 2010, based on the unobservable inputs used in the discounted cash flow model and the limited observable market activity.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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


	As of March 31, 2010
	Level 1		Level 2		Level 3			Netting(2)			Total
	(in millions)
Fixed maturities, available for sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	—	$	8,963	$	—		$	—		$	8,963
Obligations of U.S. states and their political subdivisions		—		1,506		—			—			1,506
Foreign government bonds		—		41,320		46			—			41,366
Corporate securities		5		94,703		955			—			95,663
Asset-backed securities		—		4,081		6,023			—			10,104
Commercial mortgage-backed securities		—		11,440		245			—			11,685
Residential mortgage-backed securities		—		11,137		26			—			11,163

Sub-total		5		173,150		7,295			—			180,450
Trading account assets supporting insurance liabilities:
U.S. Treasury securities and obligations of U.S. government authorities and agencies		—		269		—			—			269
Obligations of U.S. states and their political subdivisions		—		57		—			—			57
Foreign government bonds		—		504		—			—			504
Corporate securities		—		9,681		95			—			9,776
Asset-backed securities		—		710		277			—			987
Commercial mortgage-backed securities		—		1,889		48			—			1,937
Residential mortgage-backed securities		—		1,364		20			—			1,384
Equity securities		769		244		4			—			1,017
Short-term investments and cash equivalents		441		311		—			—			752

Sub-total		1,210		15,029		444			—			16,683
Other trading account assets:
U.S. Treasury securities and obligations of U.S. government authorities and agencies		—		323		—			—			323
Obligations of U.S. states and their political subdivisions		—		—		—			—			—
Foreign government bonds		—		23		—			—			23
Corporate securities		14		284		36			—			334
Asset-backed securities		—		633		54			—			687
Commercial mortgage-backed securities		—		98		22			—			120
Residential mortgage-backed securities		—		163		20			—			183
Equity securities		323		138		25			—			486
All other activity		107		4,974		185			(4,051	)		1,215

Sub-total		444		6,636		342			(4,051	)		3,371
Equity securities, available for sale		4,242		2,491		355			—			7,088
Commercial mortgage and other loans		—		—		331			—			331
Other long-term investments		43		9		478			—			530
Short-term investments		3,327		3,248		—			—			6,575
Cash equivalents		2,021		5,143		—			—			7,164
Other assets		2,290		81		20			—			2,391

Sub-total excluding separate account assets		13,582		205,787		9,265			(4,051	)		224,583
Separate account assets(1)		93,075		76,906		12,640			—			182,621

Total assets	$	106,657	$	282,693	$	21,905		$	(4,051	)	$	407,204

Future policy benefits		—		—		(166	)		—			(166	)
Long-term debt		—		—		—			—			—
Other liabilities		25		4,506		2			(3,891	)		642

Total liabilities	$	25	$	4,506	$	(164	)	$	(3,891	)	$	476

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


	As of December 31, 2009
	Level 1		Level 2		Level 3		Netting(2)		Total
	(in millions)
Fixed maturities, available for sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	—	$	8,268	$	—	$	—	$	8,268
Obligations of U.S. states and their political subdivisions		—		1,375		—		—		1,375
Foreign government bonds		—		41,162		47		—		41,209
Corporate securities		5		90,639		902		—		91,546
Asset-backed securities		—		3,875		6,363		—		10,238
Commercial mortgage-backed securities		—		10,713		305		—		11,018
Residential mortgage-backed securities		—		11,467		104		—		11,571

Sub-total		5		167,499		7,721		—		175,225
Trading account assets supporting insurance liabilities:
U.S. Treasury securities and obligations of U.S. government authorities and agencies		—		128		—		—		128
Obligations of U.S. states and their political subdivisions		—		31		—		—		31
Foreign government bonds		—		517		—		—		517
Corporate securities		—		9,419		83		—		9,502
Asset-backed securities