Edgar Filing: PRUDENTIAL FINANCIAL INC

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, 2015

¨	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		(I.R.S. Employer
Incorporation or Organization)		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, 2015, 453 million shares of the registrant’s Common Stock (par value $0.01) 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, 2015 and December 31, 2014		1
		Unaudited Interim Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014		2
		Unaudited Interim Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014		3
		Unaudited Interim Consolidated Statements of Equity for the three months ended March 31, 2015 and 2014		4
		Unaudited Interim Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014		5
		Notes to Unaudited Interim Consolidated Financial Statements		6
		1. Business and Basis of Presentation		6
		2. Significant Accounting Policies and Pronouncements		7
		3. Acquisitions		9
		4. Investments		10
		5. Variable Interest Entities		27
		6. Closed Block		29
		7. Equity		32
		8. Earnings Per Share		36
		9. Short-Term and Long-Term Debt		40
		10. Employee Benefit Plans		43
		11. Segment Information		44
		12. Income Taxes		51
		13. Fair Value of Assets and Liabilities		52
		14. Derivative Instruments		76
		15. Commitments and Guarantees, Contingent Liabilities and Litigation and Regulatory Matters		86
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		91
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		170
	Item 4.	Controls and Procedures		170

PART II OTHER INFORMATION
	Item 1.	Legal Proceedings		171
	Item 1A.	Risk Factors		171
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		171
	Item 6.	Exhibits		172

SIGNATURES				173

EXHIBIT INDEX				174

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 additional debt or equity capital or external financing for our operations; (3) interest rate fluctuations or prolonged periods of low interest rates; (4) the degree to which we choose not to hedge risks, or the potential ineffectiveness or insufficiency of hedging or risk management strategies we do implement; (5) any inability to access our credit facilities; (6) reestimates of our reserves for future policy benefits and claims; (7) differences between actual experience regarding mortality, morbidity, persistency, utilization, interest rates or market returns and the assumptions we use in pricing our products, establishing liabilities and reserves or for other purposes; (8) changes in our assumptions related to deferred policy acquisition costs, value of business acquired or goodwill; (9) changes in assumptions for our pension and other post-retirement benefit plans; (10) changes in our financial strength or credit ratings; (11) statutory reserve requirements associated with term and universal life insurance policies under Regulation XXX and Guideline AXXX; (12) investment losses, defaults and counterparty non-performance; (13) competition in our product lines and for personnel; (14) difficulties in marketing and distributing products through current or future distribution channels; (15) changes in tax law; (16) economic, political, currency and other risks relating to our international operations; (17) fluctuations in foreign currency exchange rates and foreign securities markets; (18) regulatory or legislative changes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act; (19) inability to protect our intellectual property rights or claims of infringement of the intellectual property rights of others; (20) adverse determinations in litigation or regulatory matters and our exposure to contingent liabilities, including in connection with our divestiture or winding down of businesses; (21) 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; (22) ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks; (23) effects of acquisitions, divestitures and restructurings, including possible difficulties in integrating and realizing projected results of acquisitions; (24) interruption in telecommunication, information technology or other operational systems or failure to maintain the security, confidentiality or privacy of sensitive data on such systems; (25) changes in statutory or U.S. GAAP accounting principles, practices or policies; and (26) 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. 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, 2014 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. “Prudential,” the “Company,” “we” and “our” refer to our consolidated operations.

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Financial Position

March 31, 2015 and December 31, 2014 (in millions, except share amounts)


	March 31, 2015			December 31, 2014
ASSETS
Fixed maturities, available-for-sale, at fair value (amortized cost: 2015-$263,134; 2014-$265,116)(1)	$	299,422		$	299,090
Fixed maturities, held-to-maturity, at amortized cost (fair value: 2015-$2,817; 2014-$2,902)(1)		2,513			2,575
Trading account assets supporting insurance liabilities, at fair value(1)		20,626			20,263
Other trading account assets, at fair value(1)		11,989			10,874
Equity securities, available-for-sale, at fair value (cost: 2015 - $7,045; 2014 - $6,921)		10,206			9,861
Commercial mortgage and other loans (includes $316 and $380 measured at fair value under the fair value option at March 31, 2015 and December 31, 2014, respectively)(1)		47,478			46,432
Policy loans		11,693			11,712
Other long-term investments (includes $1,203 and $1,082 measured at fair value under the fair value option at March 31, 2015 and December 31, 2014, respectively)(1)		11,001			10,921
Short-term investments		5,947			8,258

Total investments		420,875			419,986
Cash and cash equivalents(1)		19,119			14,918
Accrued investment income(1)		3,135			3,130
Deferred policy acquisition costs		15,639			15,971
Value of business acquired		2,514			2,836
Other assets(1)		14,624			13,379
Separate account assets		302,706			296,435

TOTAL ASSETS	$	778,612		$	766,655

LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits	$	220,840		$	217,766
Policyholders’ account balances(1)		135,143			136,150
Policyholders’ dividends		8,337			7,661
Securities sold under agreements to repurchase		7,766			9,407
Cash collateral for loaned securities		4,437			4,241
Income taxes		11,390			9,881
Short-term debt		3,013			3,839
Long-term debt		19,703			19,831
Other liabilities(1)		12,873			13,037
Notes issued by consolidated variable interest entities (includes $6,810 and $6,033 measured at fair value under the fair value option at March 31, 2015 and December 31, 2014, respectively)(1)		6,830			6,058
Separate account liabilities		302,706			296,435

Total liabilities		733,038			724,306

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; 660,111,339 shares issued at both March 31, 2015 and December 31, 2014)		6			6
Class B Stock ($.01 par value; 0 shares authorized and issued at March 31, 2015; 10,000,000 shares authorized and 2,000,000 shares issued at December 31, 2014		0			0
Additional paid-in capital		24,346			24,565
Common Stock held in treasury, at cost (206,589,103 and 205,277,862 shares at March 31, 2015 and December 31, 2014, respectively)		(13,233	)		(13,088	)
Class B Stock held in treasury, at cost (0 and 2,000,000 shares at March 31, 2015 and December 31, 2014, respectively)		0			(651	)
Accumulated other comprehensive income (loss)		17,752			16,050
Retained earnings		16,173			14,888

Total Prudential Financial, Inc. equity		45,044			41,770

Noncontrolling interests		530			579

Total equity		45,574			42,349

TOTAL LIABILITIES AND EQUITY	$	778,612		$	766,655

(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, 2015 and 2014 (in millions, except per share amounts)


	Three Months Ended March 31,
	2015			2014
REVENUES
Premiums	$	6,647		$	5,868
Policy charges and fee income		1,608			1,501
Net investment income		3,769			3,838
Asset management and service fees		952			904
Other income		215			535
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities		(14	)		(79	)
Other-than-temporary impairments on fixed maturity securities transferred to Other comprehensive income		6			63
Other realized investment gains (losses), net		2,369			224

Total realized investment gains (losses), net		2,361			208

Total revenues		15,552			12,854

BENEFITS AND EXPENSES
Policyholders’ benefits		7,239			6,386
Interest credited to policyholders’ account balances		1,233			1,015
Dividends to policyholders		781			600
Amortization of deferred policy acquisition costs		789			437
General and administrative expenses		2,762			2,698

Total benefits and expenses		12,804			11,136

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURES		2,748			1,718

Total income tax expense (benefit)		699			473

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURES		2,049			1,245
Equity in earnings of operating joint ventures, net of taxes		(3	)		0

INCOME (LOSS) FROM CONTINUING OPERATIONS		2,046			1,245
Income (loss) from discontinued operations, net of taxes		0			4

NET INCOME (LOSS)		2,046			1,249
Less: Income (loss) attributable to noncontrolling interests		10			11

NET INCOME (LOSS) ATTRIBUTABLE TO PRUDENTIAL FINANCIAL, INC.	$	2,036		$	1,238

EARNINGS PER SHARE(1)
Basic earnings per share-Common Stock:
Income (loss) from continuing operations attributable to Prudential Financial, Inc.	$	4.44		$	2.62
Income (loss) from discontinued operations, net of taxes		0.00			0.01

Net income (loss) attributable to Prudential Financial, Inc.	$	4.44		$	2.63

Diluted earnings per share-Common Stock:
Income (loss) from continuing operations attributable to Prudential Financial, Inc.	$	4.37		$	2.58
Income (loss) from discontinued operations, net of taxes		0.00			0.01

Net income (loss) attributable to Prudential Financial, Inc.	$	4.37		$	2.59

Dividends declared per share of Common Stock	$	0.58		$	0.53

(1)	For the three months ended March 31, 2015, represents consolidated earnings per share of Common Stock. For the three months ended March 31, 2014, represents earnings of the Company’s former Financial Services Businesses per share of Common Stock. See Note 8 for additional information.

See Notes to Unaudited Interim Consolidated Financial Statements

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Comprehensive Income

Three Months Ended March 31, 2015 and 2014 (in millions)


	Three Months Ended March 31,
	2015			2014
NET INCOME (LOSS)	$	2,046		$	1,249
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments for the period		(67	)		80
Net unrealized investment gains (losses)		2,490			3,068
Defined benefit pension and postretirement unrecognized periodic benefit		52			23

Total		2,475			3,171

Less: Income tax expense (benefit) related to other comprehensive income (loss)		811			1,047

Other comprehensive income (loss), net of taxes		1,664			2,124

Comprehensive income (loss)		3,710			3,373
Less: Comprehensive income (loss) attributable to noncontrolling interests		(28	)		18

Comprehensive income (loss) attributable to Prudential Financial, Inc.	$	3,738		$	3,355

See Notes to Unaudited Interim Consolidated Financial Statements

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Equity

Three Months Ended March 31, 2015 and 2014 (in millions)


	Prudential Financial, Inc. Equity
	Common Stock		Additional Paid-in Capital			Retained Earnings			Common Stock Held In Treasury			Class B Stock Held In Treasury			Accumulated Other Comprehensive Income (Loss)		Total Prudential Financial, Inc. Equity			Noncontrolling Interests			Total Equity
Balance December 31, 2014	$	6	$	24,565		$	14,888		$	(13,088	)	$	(651	)	$	16,050	$	41,770		$	579		$	42,349
Common Stock acquired										(250	)							(250	)					(250	)
Class B Stock cancelled				(167	)		(484	)					651					0						0
Contributions from noncontrolling interests																					11			11
Distributions to noncontrolling interests																					(32	)		(32	)
Stock-based compensation programs				(52	)					105								53						53
Dividends declared on Common Stock							(267	)										(267	)					(267	)
Comprehensive income:
Net income (loss)							2,036											2,036			10			2,046
Other comprehensive income (loss), net of tax																1,702		1,702			(38	)		1,664

Total comprehensive income (loss)																		3,738			(28	)		3,710

Balance, March 31, 2015	$	6	$	24,346		$	16,173		$	(13,233	)	$	0		$	17,752	$	45,044		$	530		$	45,574


	Prudential Financial, Inc. Equity
	Common Stock		Additional Paid-in Capital			Retained Earnings			Common Stock Held In Treasury			Class B Stock Held In Treasury			Accumulated Other Comprehensive Income (Loss)		Total Prudential Financial, Inc. Equity			Noncontrolling Interests			Total Equity
Balance, December 31, 2013	$	6	$	24,475		$	14,531		$	(12,415	)	$	0		$	8,681	$	35,278		$	603		$	35,881
Common Stock acquired										(250	)							(250	)					(250	)
Distributions to noncontrolling interests																					(36	)		(36	)
Consolidations (deconsolidations) of noncontrolling interests																					56			56
Stock-based compensation programs				(40	)					132								92						92
Dividends declared on Common Stock							(247	)										(247	)					(247	)
Dividends declared on Class B Stock							(5	)										(5	)					(5	)
Comprehensive income:
Net income (loss)							1,238											1,238			11			1,249
Other comprehensive income (loss), net of tax																2,117		2,117			7			2,124

Total comprehensive income (loss)																		3,355			18			3,373

Balance, March 31, 2014	$	6	$	24,435		$	15,517		$	(12,533	)	$	0		$	10,798	$	38,223		$	641		$	38,864

See Notes to Unaudited Interim Consolidated Financial Statements

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Cash Flows

Three Months Ended March 31, 2015 and 2014 (in millions)


	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	2,046		$	1,249
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment (gains) losses, net		(2,361	)		(208	)
Policy charges and fee income		(576	)		(509	)
Interest credited to policyholders’ account balances		1,233			1,015
Depreciation and amortization		170			41
Gains on trading account assets supporting insurance liabilities, net		(85	)		(101	)
Change in:
Deferred policy acquisition costs		142			(231	)
Future policy benefits and other insurance liabilities		1,549			1,568
Other trading account assets		(11	)		(14	)
Income taxes		644			388
Derivatives, net		3,261			20
Other, net		(484	)		(1,239	)

Cash flows from operating activities		5,528			1,979

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale		12,313			13,437
Fixed maturities, held-to-maturity		59			93
Trading account assets supporting insurance liabilities and other trading account assets		2,925			3,066
Equity securities, available-for-sale		988			994
Commercial mortgage and other loans		968			573
Policy loans		549			537
Other long-term investments		198			137
Short-term investments		20,093			16,822
Payments for the purchase/origination of:
Fixed maturities, available-for-sale		(10,357	)		(15,701	)
Fixed maturities, held-to-maturity		0			(22	)
Trading account assets supporting insurance liabilities and other trading account assets		(4,024	)		(3,892	)
Equity securities, available-for-sale		(974	)		(1,094	)
Commercial mortgage and other loans		(2,096	)		(1,926	)
Policy loans		(439	)		(465	)
Other long-term investments		(331	)		(312	)
Short-term investments		(17,763	)		(15,270	)
Acquisition of business, net of cash acquired		0			(23	)
Derivatives, net		(366	)		(135	)
Other, net		(95	)		212

Cash flows from (used in) investing activities		1,648			(2,969	)

CASH FLOWS FROM FINANCING ACTIVITIES
Policyholders’ account deposits		5,063			5,751
Policyholders’ account withdrawals		(5,359	)		(5,368	)
Net change in securities sold under agreements to repurchase and cash collateral for loaned securities		(1,445	)		691
Cash dividends paid on Common Stock		(268	)		(247	)
Cash dividends paid on Class B Stock		0			(5	)
Net change in financing arrangements (maturities 90 days or less)		135			472
Common Stock acquired		(252	)		(250	)
Class B Stock acquired		(651	)		0
Common Stock reissued for exercise of stock options		41			77
Proceeds from the issuance of debt (maturities longer than 90 days)		1,152			1,146
Repayments of debt (maturities longer than 90 days)		(1,293	)		(225	)
Excess tax benefits from share-based payment arrangements		12			14
Other, net		(221	)		(59	)

Cash flows from (used in) financing activities		(3,086	)		1,997

Effect of foreign exchange rate changes on cash balances		111			26

NET INCREASE IN CASH AND CASH EQUIVALENTS		4,201			1,033
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		14,918			11,439

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	19,119		$	12,472

NON-CASH TRANSACTIONS DURING THE PERIOD
Treasury Stock shares issued for stock-based compensation programs	$	106		$	92
Significant Pension Risk Transfer transactions:
Assets acquired, excluding cash and cash equivalents acquired	$	640		$	0
Liabilities assumed		635			0

Net cash received (paid)	$	(5	)	$	0

Acquisition of Gibraltar BSN Life Berhad:
Assets acquired, excluding cash and cash equivalents acquired	$	0		$	659
Liabilities assumed		0			589
Noncontrolling interest assumed		0			47

Net cash paid on acquisition	$	0		$	23

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

From December 18, 2001, the date of demutualization, through December 31, 2014, the Company organized its principal operations into the Financial Services Businesses and the Closed Block Business, and had two classes of common stock outstanding. The Common Stock, which is publicly traded (NYSE:PRU), reflected the performance of the Financial Services Businesses, while the Class B Stock, which was issued through a private placement and did not trade on any exchange, reflected the performance of the Closed Block Business.

On January 2, 2015, Prudential Financial repurchased and cancelled all of the shares of the Class B Stock (the “Class B Repurchase”). As a result, the Company no longer organizes its principal operations into the Financial Services Businesses and the Closed Block Business. The Company’s principal operations are comprised of four divisions: the U.S. Retirement Solutions and Investment Management division, the U.S. Individual Life and Group Insurance division, the International Insurance division and the Closed Block division. The Company’s Corporate and Other operations include corporate items and initiatives that are not allocated to business segments, businesses that are not sufficiently material to warrant separate disclosure and businesses that have been or will be divested, excluding the Closed Block division.

The Closed Block division includes the Company’s in force participating insurance and annuity products and corresponding assets that are used for the payment of benefits and policyholders’ dividends on these products (the “Closed Block”), as well as certain related assets and liabilities. In connection with demutualization, the Company ceased offering these participating products (see Note 6). The Closed Block division is accounted for as a divested business that is reported separately from the divested businesses that are included in the Company’s Corporate and Other operations.

Basis of Presentation

As a result of the Class B Repurchase and resulting elimination of the separation of the Financial Services Businesses and the Closed Block Business, these Unaudited Interim Consolidated Financial Statements refer to the divisions and segments of the Company that formerly comprised the Financial Services Businesses as “PFI excluding Closed Block division” and refer to the operations that were formerly included in the Closed Block Business as the “Closed Block division,” except as otherwise noted. Closed Block Business results were associated with the Company’s Class B Stock for periods prior to January 1, 2015.

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.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations have been made. All such adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

The Company’s Gibraltar Life Insurance Company, Ltd. (“Gibraltar Life”) consolidated operations use a November 30 fiscal year end for purposes of inclusion in the Company’s Consolidated Financial Statements; therefore, the Unaudited Interim Consolidated Financial Statements as of March 31, 2015, include the assets and liabilities of Gibraltar Life and its results of operations as of, and for the three months ended, February 28, 2015, respectively.

Use of Estimates

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

The most significant estimates include those used in determining deferred policy acquisition costs (“DAC”) and related amortization; value of business acquired (“VOBA”) and its amortization; amortization of 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.

Reclassifications

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

2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS

This section supplements, and should be read in conjunction with, Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

Earnings Per Share

As discussed in Note 1, from demutualization through December 31, 2014, the Company had two separate classes of common stock. Basic earnings per share for those periods was computed by dividing available income attributable to each of the two groups of common shareholders by the respective weighted average number of common shares outstanding for the period. Diluted earnings per share included the effect of all dilutive potential common shares that were outstanding during the period.

As a result of the Class B Repurchase, earnings per share of Common Stock for the three months ended March 31, 2015 reflects the consolidated earnings of Prudential Financial. Basic earnings per share is computed by dividing available income attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share includes the effect of all dilutive potential common shares that were outstanding during the period. See Note 8 for additional information.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Adoption of New Accounting Pronouncements

In January 2014, the Financial Accounting Standards Board (“FASB”) issued updated guidance regarding investments in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. Under the guidance, an entity is permitted to make an accounting policy election to amortize the initial cost of its investment in proportion to the tax credits and other tax benefits received and recognize the net investment performance in the statement of operations as a component of income tax expense (benefit) if certain conditions are met. The new guidance became effective for annual periods and interim reporting periods within those annual periods that began after December 15, 2014. The Company did not elect the proportional amortization method under this guidance.

In January 2014, the FASB issued updated guidance for troubled debt restructurings clarifying when an in substance repossession or foreclosure occurs, and when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The new guidance became effective for annual periods and interim periods within those annual periods that began after December 15, 2014, and was applied prospectively. Adoption of the guidance did not have a significant effect on the Company’s consolidated financial position, results of operations or financial statement disclosures.

In April 2014, the FASB issued updated guidance that changes the criteria for reporting discontinued operations and introduces new disclosures. The new guidance became effective for new disposals and new classifications of disposal groups as held for sale that occur within annual periods that began on or after December 15, 2014, and interim periods within those annual periods. Adoption of the guidance did not have a significant effect on the Company’s consolidated financial position, results of operations or financial statement disclosures.

In August 2014, the FASB issued guidance requiring that mortgage loans be derecognized and that a separate other receivable be recognized upon foreclosure if certain conditions are met. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The new guidance became effective for annual periods and interim periods within those annual periods that began after December 15, 2014, and was applied prospectively. Adoption of the guidance did not have a significant effect on the Company’s consolidated financial position, results of operations or financial statement disclosures.

Future Adoption of New Accounting Pronouncements

In May 2014, the FASB issued updated guidance on accounting for revenue recognition. The guidance is based on the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from cost incurred to obtain or fulfill a contract. Revenue recognition for insurance contracts is explicitly scoped out of the guidance. The new guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2016, and must be applied using one of two retrospective application methods. Early adoption is not permitted. The Company is currently assessing the impact of the guidance on the Company’s consolidated financial position, results of operations and financial statement disclosures.

In August 2014, the FASB issued updated guidance for measuring the financial assets and the financial liabilities of a consolidated collateralized financing entity. Under the guidance, an entity within scope is permitted to measure both the financial assets and financial liabilities of a consolidated collateralized financing

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

entity based on either the fair value of the financial assets or the financial liabilities, whichever is more observable. If elected, the guidance will eliminate the measurement difference that exists when both are measured at fair value. The new guidance is effective for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted, and can be elected for modified retrospective or full retrospective adoption. The Company is currently assessing the impact of the guidance on the Company’s consolidated financial position, results of operations and financial statement disclosures.

In February 2015, the FASB issued updated guidance that changes the rules regarding consolidation. The pronouncement eliminates specialized guidance for limited partnerships and similar legal entities, and removes the indefinite deferral for certain investment funds. The new guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, with early adoption permitted. The Company is currently assessing the impact of the guidance on the Company’s consolidated financial position, results of operations and financial statement disclosures.

In April 2015, the FASB issued guidance that simplifies presentation of debt issuance costs. The pronouncement requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The new guidance is effective for periods beginning after December 15, 2015, with early adoption permitted, and it must be applied retrospectively. The Company is currently assessing the impact of the guidance on the Company’s financial statement disclosures.

3. ACQUISITIONS

This section supplements, and should be read in conjunction with, the complete descriptions provided in Note 3 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2014.

Acquisition of Administradora de Fondos de Pensiones Habitat S.A.

In March 2015, the Company and Inversiones La Construcción S.A. signed definitive documentation related to the Company’s previously disclosed acquisition of an indirect ownership interest in Administradora de Fondos de Pensiones Habitat S.A. (“AFP Habitat”) and filed for regulatory approval. The transaction, which is subject to certain conditions, including receipt of regulatory approvals, is expected to close in the second half of 2015.

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, 2015
	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	$	15,780	$	4,837	$	3	$	20,614	$	0
Obligations of U.S. states and their political subdivisions		6,518		931		7		7,442		0
Foreign government bonds		68,884		11,764		108		80,540		(2	)
Corporate securities		142,902		18,838		1,184		160,556		(6	)
Asset-backed securities(1)		10,912		365		115		11,162		(580	)
Commercial mortgage-backed securities		12,676		535		14		13,197		(1	)
Residential mortgage-backed securities(2)		5,462		451		2		5,911		(5	)

Total fixed maturities, available-for-sale	$	263,134	$	37,721	$	1,433	$	299,422	$	(594	)

Equity securities, available-for-sale	$	7,045	$	3,227	$	66	$	10,206


	March 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in millions)
Fixed maturities, held-to-maturity
Foreign government bonds	$	820	$	174	$	0	$	994
Corporate securities(4)		711		64		2		773
Commercial mortgage-backed securities		69		2		0		71
Residential mortgage-backed securities(2)		913		66		0		979

Total fixed maturities, held-to-maturity(4)	$	2,513	$	306	$	2	$	2,817

(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 (“AOCI”), which were not included in earnings. Amount excludes $963 million of net unrealized gains on impaired available-for-sale securities and $1 million of net unrealized gains on impaired held-to-maturity securities relating to changes in the value of such securities subsequent to the impairment measurement date.

(4)	Excludes notes with amortized cost of $3,850 million (fair value, $4,280 million) which have been offset with the associated payables under a netting agreement.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


	December 31, 2014
	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	$	15,807	$	4,321	$	5	$	20,123	$	0
Obligations of U.S. states and their political subdivisions		5,720		814		3		6,531		0
Foreign government bonds		69,894		11,164		117		80,941		(1	)
Corporate securities		143,631		17,799		1,054		160,376		(6	)
Asset-backed securities(1)		10,966		353		134		11,185		(592	)
Commercial mortgage-backed securities		13,486		430		39		13,877		(1	)
Residential mortgage-backed securities(2)		5,612		448		3		6,057		(5	)

Total fixed maturities, available-for-sale	$	265,116	$	35,329	$	1,355	$	299,090	$	(605	)

Equity securities, available-for-sale	$	6,921	$	3,023	$	83	$	9,861


	December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in millions)
Fixed maturities, held-to-maturity
Foreign government bonds	$	821	$	184	$	0	$	1,005
Corporate securities(4)		713		68		1		780
Commercial mortgage-backed securities		78		7		0		85
Residential mortgage-backed securities(2)		963		69		0		1,032

Total fixed maturities, held-to-maturity(4)	$	2,575	$	328	$	1	$	2,902

(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 AOCI, which were not included in earnings. Amount excludes $954 million of net unrealized gains on impaired available-for-sale securities and $1 million of net unrealized gains on impaired held-to-maturity securities relating to changes in the value of such securities subsequent to the impairment measurement date.

(4)	Excludes notes with amortized cost of $3,588 million (fair value, $3,953 million) which have been offset with the associated payables under a netting agreement.

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, 2015, are as follows:


	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Due in one year or less	$	12,423	$	13,111	$	0	$	0
Due after one year through five years		46,730		52,295		74		79
Due after five years through ten years		54,891		61,913		171		181
Due after ten years(1)		120,040		141,833		1,286		1,507
Asset-backed securities		10,912		11,162		0		0
Commercial mortgage-backed securities		12,676		13,197		69		71
Residential mortgage-backed securities		5,462		5,911		913		979

Total	$	263,134	$	299,422	$	2,513	$	2,817

(1)	Excludes notes with amortized cost of $3,850 million (fair value, $4,280 million) which have been offset with the associated payables under a netting agreement.

Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Asset-backed, commercial mortgage-backed and residential mortgage-backed securities are shown separately in the table above, as they 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,
	2015			2014
	(in millions)
Fixed maturities, available-for-sale
Proceeds from sales	$	7,418		$	8,578
Proceeds from maturities/repayments		5,095			4,859
Gross investment gains from sales, prepayments, and maturities		532			425
Gross investment losses from sales and maturities		(56	)		(152	)
Fixed maturities, held-to-maturity
Gross investment gains from prepayments	$	0		$	0
Proceeds from maturities/repayments		60			94
Equity securities, available-for-sale
Proceeds from sales	$	989		$	1,165
Gross investment gains from sales		153			133
Gross investment losses from sales		(26	)		(39	)
Fixed maturity and equity security impairments
Net writedowns for other-than-temporary impairment losses on fixed maturities recognized in earnings(1)	$	(8	)	$	(16	)
Writedowns for impairments on equity securities		(6	)		(10	)

(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 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2014, a portion of certain other-than-temporary impairment

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

(“OTTI”) losses on fixed maturity securities are recognized in “Other comprehensive income (loss)” (“OCI”). For these securities, 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.


	Three Months Ended March 31,
	2015			2014
	(in millions)
Balance, beginning of period	$	781		$	968
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period		(13	)		(140	)
Credit loss impairments previously recognized on securities impaired to fair value during the period(1)		(1	)		0
Credit loss impairment recognized in the current period on securities not previously impaired		2			2
Additional credit loss impairments recognized in the current period on securities previously impaired		0			4
Increases due to the passage of time on previously recorded credit losses		7			9
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected		(3	)		(5	)

Balance, end of period	$	773		$	838

(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, 2015				December 31, 2014
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Short-term investments and cash equivalents	$	732	$	732	$	196	$	196
Fixed maturities:
Corporate securities		11,972		12,473		11,922		12,439
Commercial mortgage-backed securities		2,322		2,383		2,505		2,546
Residential mortgage-backed securities(1)		1,577		1,621		1,640		1,676
Asset-backed securities(2)		1,138		1,160		1,180		1,198
Foreign government bonds		627		647		621		650
U.S. government authorities and agencies and obligations of U.S. states		303		372		303		372

Total fixed maturities		17,939		18,656		18,171		18,881
Equity securities		945		1,238		896		1,186

Total trading account assets supporting insurance liabilities	$	19,616	$	20,626	$	19,263	$	20,263

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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

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

The net change in unrealized gains (losses) from trading account assets supporting insurance liabilities still held at period end, recorded within “Other income,” was $10 million and $66 million during the three months ended March 31, 2015 and 2014, respectively.

Other Trading Account Assets

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


	March 31, 2015				December 31, 2014
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Short-term investments and cash equivalents	$	41	$	41	$	27	$	27
Fixed maturities		8,937		8,853		8,306		8,282
Equity securities		1,004		1,123		992		1,105
Other		7		13		7		11

Subtotal	$	9,989		10,030	$	9,332		9,425

Derivative instruments				1,959				1,449

Total other trading account assets			$	11,989			$	10,874

The net change in unrealized gains (losses) from other trading account assets, excluding derivatives instruments, still held at period end, recorded within “Other income,” was $(52) million and $26 million during the three months ended March 31, 2015 and 2014, respectively.

Concentrations of Financial Instruments

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

As of both March 31, 2015 and December 31, 2014, the Company’s exposure to concentrations of credit risk of single issuers greater than 10% of the Company’s stockholders’ equity included securities of the U.S. government, certain U.S. government agencies and certain securities guaranteed by the U.S. government, as well as the securities disclosed below.


	March 31, 2015				December 31, 2014
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Investments in Japanese government and government agency securities:
Fixed maturities, available-for-sale	$	51,917	$	59,445	$	52,703	$	60,379
Fixed maturities, held-to-maturity		799		968		801		981
Trading account assets supporting insurance liabilities		470		481		457		470
Other trading account assets		37		37		36		36
Short-term investments		0		0		0		0
Cash equivalents		0		0		0		0

Total	$	53,223	$	60,931	$	53,997	$	61,866

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


	March 31, 2015				December 31, 2014
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Investments in South Korean government and government agency securities:
Fixed maturities, available-for-sale	$	7,027	$	9,027	$	6,927	$	8,438
Fixed maturities, held-to-maturity		0		0		0		0
Trading account assets supporting insurance liabilities		44		44		49		50
Other trading account assets		0		0		0		0
Short-term investments		0		0		0		0
Cash equivalents		0		0		0		0

Total	$	7,071	$	9,071	$	6,976	$	8,488

Commercial Mortgage and Other Loans

The Company’s commercial mortgage and other loans are comprised as follows, as of the dates indicated:


	March 31, 2015						December 31, 2014
	Amount (in millions)			% of Total			Amount (in millions)			% of Total
Commercial and agricultural mortgage loans by property type:
Office	$	10,005			21.8	%	$	9,612			21.5	%
Retail		8,953			19.5			8,765			19.6
Apartments/Multi-Family		10,779			23.5			10,369			23.2
Industrial		7,653			16.7			7,628			16.9
Hospitality		2,425			5.3			2,270			5.1
Other		3,544			7.8			3,659			8.2

Total commercial mortgage loans		43,359			94.6			42,303			94.5
Agricultural property loans		2,461			5.4			2,445			5.5

Total commercial and agricultural mortgage loans by property type		45,820			100.0	%		44,748			100.0	%

Valuation allowance		(100	)					(105	)

Total net commercial and agricultural mortgage loans by property type		45,720						44,643

Other loans:
Uncollateralized loans		1,085						1,092
Residential property loans		370						392
Other collateralized loans		317						319

Total other loans		1,772						1,803
Valuation allowance		(14	)					(14	)

Total net other loans		1,758						1,789

Total commercial mortgage and other loans(1)	$	47,478					$	46,432

(1)	Includes loans held at fair value.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The commercial mortgage and agricultural property loans are geographically dispersed throughout the United States, Canada and Asia with the largest concentrations in California (26%), New York (9%), and Texas (9%) at March 31, 2015.

Activity in the allowance for credit losses for all commercial mortgage and other loans, as of the dates indicated, is as follows:


	March 31, 2015
	Commercial Mortgage Loans			Agricultural Property Loans		Residential Property Loans		Other Collateralized Loans		Uncollateralized Loans		Total
	(in millions)
Allowance for losses, beginning of year	$	104		$	1	$	5	$	0	$	9	$	119
Addition to (release of) allowance of losses		(5	)		0		0		0		0		(5	)
Charge-offs, net of recoveries		0			0		0		0		0		0
Change in foreign exchange		0			0		0		0		0		0

Total ending balance	$	99		$	1	$	5	$	0	$	9	$	114


	December 31, 2014
	Commercial Mortgage Loans			Agricultural Property Loans			Residential Property Loans			Other Collateralized Loans			Uncollateralized Loans			Total
	(in millions)
Allowance for losses, beginning of year	$	188		$	7		$	6		$	3		$	12		$	216
Addition to (release of) allowance of losses		(77	)		(6	)		(1	)		(1	)		(2	)		(87	)
Charge-offs, net of recoveries		(7	)		0			0			(2	)		0			(9	)
Change in foreign exchange		0			0			0			0			(1	)		(1	)

Total ending balance	$	104		$	1		$	5		$	0		$	9		$	119

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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


	March 31, 2015
	Commercial Mortgage Loans		Agricultural Property Loans		Residential Property Loans		Other Collateralized Loans		Uncollateralized Loans		Total
	(in millions)
Allowance for Credit Losses:
Individually evaluated for impairment	$	7	$	0	$	0	$	0	$	0	$	7
Collectively evaluated for impairment		92		1		5		0		9		107
Loans acquired with deteriorated credit quality		0		0		0		0		0		0

Total ending balance	$	99	$	1	$	5	$	0	$	9	$	114

Recorded Investment:(1)
Gross of reserves: individually evaluated for impairment	$	220	$	4	$	0	$	1	$	2	$	227
Gross of reserves: collectively evaluated for impairment		43,139		2,457		370		316		1,083		47,365
Gross of reserves: loans acquired with deteriorated credit quality		0		0		0		0		0		0

Total ending balance, gross of reserves	$	43,359	$	2,461	$	370	$	317	$	1,085	$	47,592

(1)	Recorded investment reflects the balance sheet carrying value gross of related allowance.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


	December 31, 2014(2)
	Commercial Mortgage Loans		Agricultural Property Loans		Residential Property Loans		Other Collateralized Loans		Uncollateralized Loans		Total
	(in millions)
Allowance for Credit Losses:
Individually evaluated for impairment	$	8	$	0	$	0	$	0	$	0	$	8
Collectively evaluated for impairment		96		1		5		0		9		111
Loans acquired with deteriorated credit quality		0		0		0		0		0		0

Total ending balance	$	104	$	1	$	5	$	0	$	9	$	119

Recorded Investment:(1)
Gross of reserves: individually evaluated for impairment	$	247	$	4	$	0	$	1	$	2	$	254
Gross of reserves: collectively evaluated for impairment		42,056		2,441		392		318		1,090		46,297
Gross of reserves: loans acquired with deteriorated credit quality		0		0		0		0		0		0

Total ending balance, gross of reserves	$	42,303	$	2,445	$	392	$	319	$	1,092	$	46,551

(1)	Recorded investment reflects the balance sheet carrying value gross of related allowance.

(2)	Prior period’s amounts are presented on a basis consistent with current period presentation.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Impaired loans include those loans for which it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. Impaired commercial mortgage and other loans identified in management’s specific review of probable loan losses and the related allowance for losses, as of the dates indicated, are as follows:


	March 31, 2015
	Recorded Investment(1)		Unpaid Principal Balance		Related Allowance		Average Recorded Investment Before Allowance(2)		Interest Income Recognized(3)
	(in millions)
With no related allowance recorded:
Commercial mortgage loans	$	0	$	0	$	0	$	6	$	0
Agricultural property loans		4		4		0		4		0
Residential property loans		0		0		0		0		0
Other collateralized loans		0		0		0		0		0
Uncollateralized loans		0		1		0		0		0

Total with no related allowance	$	4	$	5	$	0	$	10	$	0


With an allowance recorded:
Commercial mortgage loans	$	75	$	76	$	7	$	93	$	2
Agricultural property loans		0		0		0		0		0
Residential property loans		0		0		0		0		0
Other collateralized loans		0		0		0		0		0
Uncollateralized loans		0		0		0		0		0

Total with related allowance	$	75	$	76	$	7	$	93	$	2


Total:
Commercial mortgage loans	$	75	$	76	$	7	$	99	$	2
Agricultural property loans		4		4		0		4		0
Residential property loans		0		0		0		0		0
Other collateralized loans		0		0		0		0		0
Uncollateralized loans		0		1		0		0		0

Total	$	79	$	81	$	7	$	103	$	2

(1)	Recorded investment reflects the balance sheet carrying value gross of related allowance.

(2)	Average recorded investment represents the average of the beginning-of-period and end-of-period balances.

(3)	The interest income recognized is for the year-to-date of income regardless of when the impairments occurred.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


	December 31, 2014
	Recorded Investment(1)		Unpaid Principal Balance		Related Allowance		Average Recorded Investment Before Allowance(2)		Interest Income Recognized(3)
	(in millions)
With no related allowance recorded:
Commercial mortgage loans	$	8	$	8	$	0	$	16	$	1
Agricultural property loans		4		4		0		4		0
Residential property loans		0		0		0		0		0
Other collateralized loans		0		0		0		0		0
Uncollateralized loans		0		1		0		0		0

Total with no related allowance	$	12	$	13	$	0	$	20	$	1


With an allowance recorded:
Commercial mortgage loans	$	76	$	76	$	8	$	82	$	6
Agricultural property loans		0		0		0		0		0
Residential property loans		0		0		0		0		0
Other collateralized loans		0		0		0		3		1
Uncollateralized loans		0		0		0		0		0

Total with related allowance	$	76	$	76	$	8	$	85	$	7


Total:
Commercial mortgage loans	$	84	$	84	$	8	$	98	$	7
Agricultural property loans		4		4		0		4		0
Residential property loans		0		0		0		0		0
Other collateralized loans		0		0		0		3		1
Uncollateralized loans		0		1		0		0		0

Total	$	88	$	89	$	8	$	105	$	8

(1)	Recorded investment reflects the balance sheet carrying value gross of related allowance.

(2)	Average recorded investment represents the average of the beginning-of-period and all subsequent quarterly end-of-period balances.

(3)	The interest income recognized is for the year-to-date of income regardless of when the impairments occurred.

The net carrying value of commercial and other loans held for sale by the Company as of March 31, 2015 and December 31, 2014, was $316 million and $380 million, respectively. In all these transactions, the Company pre-arranges that it will sell the loan to an investor. As of both March 31, 2015 and December 31, 2014, all of the Company’s commercial and other loans held for sale were collateralized, with collateral primarily consisting of apartment complexes.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The following tables set forth certain key credit quality indicators as of March 31, 2015, based upon the recorded investment gross of allowance for credit losses.

Commercial mortgage loans


	Debt Service Coverage Ratio—March 31, 2015
	Greater than 1.2X		1.0X to <1.2X		Less than 1.0X		Total
	(in millions)
Loan-to-Value Ratio
0%-59.99%	$	23,065	$	426	$	252	$	23,743
60%-69.99%		12,815		376		210		13,401
70%-79.99%		5,006		655		15		5,676
Greater than 80%		238		141		160		539

Total commercial mortgage loans	$	41,124	$	1,598	$	637	$	43,359

Agricultural property loans


	Debt Service Coverage Ratio—March 31, 2015
	Greater than 1.2X		1.0X to <1.2X		Less than 1.0X		Total
	(in millions)
Loan-to-Value Ratio
0%-59.99%	$	2,155	$	141	$	2	$	2,298
60%-69.99%		163		0		0		163
70%-79.99%		0		0		0		0
Greater than 80%		0		0		0		0

Total agricultural property loans	$	2,318	$	141	$	2	$	2,461

Total commercial and agricultural mortgage loans


	Debt Service Coverage Ratio—March 31, 2015
	Greater than 1.2X		1.0X to <1.2X		Less than 1.0X		Total
	(in millions)
Loan-to-Value Ratio
0%-59.99%	$	25,220	$	567	$	254	$	26,041
60%-69.99%		12,978		376		210		13,564
70%-79.99%		5,006		655		15		5,676
Greater than 80%		238		141		160		539

Total commercial and agricultural mortgage loans	$	43,442	$	1,739	$	639	$	45,820

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The following tables set forth certain key credit quality indicators as of December 31, 2014, based upon the recorded investment gross of allowance for credit losses.

Commercial mortgage loans


	Debt Service Coverage Ratio—December 31, 2014
	Greater than 1.2X		1.0X to <1.2X		Less than 1.0X		Total
	(in millions)
Loan-to-Value Ratio
0%-59.99%	$	22,557	$	637	$	207	$	23,401
60%-69.99%		12,563		500		237		13,300
70%-79.99%		4,354		664		21		5,039
Greater than 80%		234		127		202		563

Total commercial mortgage loans	$	39,708	$	1,928	$	667	$	42,303

Agricultural property loans


	Debt Service Coverage Ratio—December 31, 2014
	Greater than 1.2X		1.0X to <1.2X		Less than 1.0X		Total
	(in millions)
Loan-to-Value Ratio
0%-59.99%	$	2,152	$	140	$	2	$	2,294
60%-69.99%		151		0		0		151
70%-79.99%		0		0		0		0
Greater than 80%		0		0		0		0

Total agricultural property loans	$	2,303	$	140	$	2	$	2,445

Total commercial and agricultural mortgage loans


	Debt Service Coverage Ratio—December 31, 2014
	Greater than 1.2X		1.0X to <1.2X		Less than 1.0X		Total
	(in millions)
Loan-to-Value Ratio
0%-59.99%	$	24,709	$	777	$	209	$	25,695
60%-69.99%		12,714		500		237		13,451
70%-79.99%		4,354		664		21		5,039
Greater than 80%		234		127		202		563

Total commercial and agricultural mortgage loans	$	42,011	$	2,068	$	669	$	44,748

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The following tables provide an aging of past due commercial mortgage and other loans as of the dates indicated, based upon the recorded investment gross of allowance for credit losses, as well as the amount of commercial mortgage loans on nonaccrual status as of the dates indicated.


	March 31, 2015
	Current		30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days - Accruing		Greater Than 90 Days - Not Accruing		Total Past Due		Total Commercial Mortgage and other Loans		Non Accrual Status
	(in millions)
Commercial mortgage loans	$	43,305	$	52	$	0	$	0	$	2	$	54	$	43,359	$	101
Agricultural property loans		2,460		0		0		0		1		1		2,461		2
Residential property loans		353		7		2		0		8		17		370		8
Other collateralized loans		317		0		0		0		0		0		317		0
Uncollateralized loans		1,085		0		0		0		0		0		1,085		0

Total	$	47,520	$	59	$	2	$	0	$	11	$	72	$	47,592	$	111


	December 31, 2014
	Current		30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days - Accruing		Greater Than 90 Days - Not Accruing		Total Past Due		Total Commercial Mortgage and other Loans		Non Accrual Status
	(in millions)
Commercial mortgage loans	$	42,239	$	62	$	0	$	0	$	2	$	64	$	42,303	$	101
Agricultural property loans		2,443		0		1		0		1		2		2,445		1
Residential property loans		375		7		2		0		8		17		392		8
Other collateralized loans		319		0		0		0		0		0		319		0
Uncollateralized loans		1,092		0		0		0		0		0		1,092		0

Total	$	46,468	$	69	$	3	$	0	$	11	$	83	$	46,551	$	110

See Note 2 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2014, for further discussion regarding nonaccrual status loans.

For the three months ended March 31, 2015 and 2014, there were no new commercial mortgage and other loans acquired, other than those through direct origination. Additionally, there were no commercial mortgage and other loans sold, other than those classified as held for sale.

The Company’s commercial mortgage and other loans may occasionally be involved in a troubled debt restructuring. As of March 31, 2015 and December 31, 2014, the Company had no significant commitments to fund to borrowers that have been involved in a troubled debt restructuring. During the three months ended March 31, 2015 and 2014, there were no new troubled debt restructurings related to commercial mortgage loans, and no payment defaults on commercial mortgage and other loans that were modified as a troubled debt restructuring within the 12 months preceding each respective period. For additional information relating to the accounting for troubled debt restructurings, see Note 2 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2014.

As of March 31, 2015 and December 31, 2014, the Company did not have any foreclosed residential real estate property.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Net Investment Income

Net investment income for the three months ended March 31, 2015 and 2014, was from the following sources:


	Three Months Ended March 31,
	2015			2014
	(in millions)
Fixed maturities, available-for-sale	$	2,582		$	2,617
Fixed maturities, held-to-maturity(1)		48			40
Equity securities, available-for-sale		96			84
Trading account assets		287			258
Commercial mortgage and other loans		545			498
Policy loans		154			154
Short-term investments and cash equivalents		13			9
Other long-term investments		244			342

Gross investment income		3,969			4,002
Less: investment expenses		(200	)		(164	)

Net investment income	$	3,769		$	3,838

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

The Company had $230 million and $218 million of investments in low income housing tax credit limited partnerships and has committed to fund $93 million and $67 million as of March 31, 2015 and December 31, 2014, respectively.

Generally, the Company uses the equity method of accounting for these investments. The Company recognized $2 million and $16 million of equity method losses and utilized $9 million and $7 million of tax credits associated with these investments for the three months ended March 31, 2015 and 2014, respectively. There were no impairment losses from forfeiture or ineligibility of tax credits.

Realized Investment Gains (Losses), Net

Realized investment gains (losses), net, for the three months ended March 31, 2015 and 2014, were from the following sources:


	Three Months Ended March 31,
	2015			2014
	(in millions)
Fixed maturities	$	468		$	257
Equity securities		121			85
Commercial mortgage and other loans		11			8
Investment real estate		25			0
Joint ventures and limited partnerships		(5	)		1
Derivatives(1)		1,738			(145	)
Other		3			2

Realized investment gains (losses), net	$	2,361		$	208

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

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Net Unrealized Gains (Losses) on Investments by Asset Class

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


	March 31, 2015			December 31, 2014
	(in millions)
Fixed maturity securities on which an OTTI loss has been recognized	$	369		$	349
Fixed maturity securities, available-for-sale—all other		35,919			33,625
Equity securities, available-for-sale		3,161			2,940
Derivatives designated as cash flow hedges(1)		1,005			206
Other investments(2)		(12	)		(7	)

Net unrealized gains (losses) on investments	$	40,442		$	37,113

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

(2)	As of March 31, 2015, there were no net unrealized losses on held-to-maturity securities that were previously transferred from available-for-sale. Includes net unrealized gains on certain joint ventures that are strategic in nature and are included in “Other assets.”

Duration of Gross Unrealized Loss Positions for Fixed Maturities and Equity Securities

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


	March 31, 2015
	Less than twelve months				Twelve months or more				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(in millions)
Fixed maturities(1)
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	434	$	3	$	0	$	0	$	434	$	3
Obligations of U.S. states and their political subdivisions		467		7		9		0		476		7
Foreign government bonds		923		27		882		81		1,805		108
Corporate securities		16,155		836		5,677		348		21,832		1,184
Commercial mortgage-backed securities		1,401		5		485		9		1,886		14
Asset-backed securities		2,554		9		3,146		106		5,700		115
Residential mortgage-backed securities		87		0		138		2		225		2

Total	$	22,021	$	887	$	10,337	$	546	$	32,358	$	1,433

Equity securities, available-for-sale	$	1,431	$	65	$	7	$	1	$	1,438	$	66

(1)	Includes $86 million of fair value and $2 million of gross unrealized losses at March 31, 2015, on securities classified as held-to-maturity, a portion of which is not reflected in AOCI.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


	December 31, 2014
	Less than twelve months				Twelve months or more				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(in millions)
Fixed maturities(1)
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	2,145	$	5	$	10	$	0	$	2,155	$	5
Obligations of U.S. states and their political subdivisions		105		1		89		2		194		3
Foreign government bonds		839		26		1,052		91		1,891		117
Corporate securities		11,326		401		13,346		654		24,672		1,055
Commercial mortgage-backed securities		1,299		6		1,746		33		3,045		39
Asset-backed securities		3,417		16		3,229		118		6,646		134
Residential mortgage-backed securities		35		0		194		3		229		3

Total	$	19,166	$	455	$	19,666	$	901	$	38,832	$	1,356

Equity securities, available-for-sale	$	1,670	$	82	$	9	$	1	$	1,679	$	83

(1)	Includes $91 million of fair value and $1 million of gross unrealized losses at December 31, 2014, on securities classified as held-to-maturity, a portion of which is not reflected in AOCI.

The gross unrealized losses on fixed maturity securities at March 31, 2015 and December 31, 2014, are composed of $1,185 million and $1,156 million related to high or highest quality securities based on the National Association of Insurance Commissioners (“NAIC”) or equivalent rating and $248 million and $200 million, related to other than high or highest quality securities based on NAIC or equivalent rating, respectively. At March 31, 2015, the $546 million of gross unrealized losses of twelve months or more were concentrated in the energy, utility and basic industry sectors of the Company’s corporate securities. At December 31, 2014, the $901 million of gross unrealized losses of twelve months or more were concentrated in the energy, consumer non-cyclical and utility sectors of the Company’s corporate securities. In accordance with its policy described in Note 2 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2014, the Company concluded that an adjustment to earnings for other-than-temporary impairments for these securities was not warranted at March 31, 2015 or December 31, 2014. 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 foreign currency exchange rate movements and general credit spread widening. At March 31, 2015, 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.

At March 31, 2015, $17 million of the gross unrealized losses on equity securities represented declines in value of greater than 20%, $14 million of which had been in that position for less than six months. At December 31, 2014, $13 million of the gross unrealized losses on equity securities represented declines in value of greater than 20%, all of which had been in that position for less than six months. In accordance with its policy described in Note 2 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2014, the Company concluded that an adjustment for other-than-temporary impairments for these equity securities was not warranted at March 31, 2015 or December 31, 2014.

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 (the “Investment Company Model”) relates to those VIEs 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.

For all other VIEs, 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.

Consolidated Variable Interest Entities

The Company is the investment manager of certain asset-backed investment vehicles commonly referred to as collateralized loan obligations (“CLOs”) and certain other vehicles for which the Company earns fee income for investment management services, including certain investment structures in which the Company’s asset management business invests with other co-investors in investment funds referred to as feeder funds. The Company may sell or syndicate investments through these vehicles, principally as part of the strategic investing activity of the Company’s asset management businesses. Additionally, the Company may invest in securities issued by these vehicles. CLOs raise capital by issuing debt securities, and use the proceeds to purchase investments, typically interest-bearing financial instruments. The Company has analyzed these relationships and determined that for certain CLOs and other investment structures it is the primary beneficiary and consolidates these entities. This analysis includes a review of (1) the Company’s rights and responsibilities as investment manager, (2) fees received by the Company and (3) other interests (if any) held by the Company. The assets of these VIEs are restricted and must be used first to settle liabilities of the VIE. The Company is not required to provide, and has not provided, material financial or other support to any of these VIEs.

Additionally, the Company is the primary beneficiary of certain VIEs in which the Company has invested, as part of its investment activities, but for which it is not the investment manager. These include 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 support or other support that was not contractually required to these VIEs.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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


	Consolidated VIEs for Which the Company is the Investment Manager				Other Consolidated VIEs
	March 31, 2015		December 31, 2014		March 31, 2015		December 31, 2014
	(in millions)
Fixed maturities, available-for-sale	$	44	$	44	$	102	$	104
Fixed maturities, held-to-maturity		0		0		762		763
Trading account assets supporting insurance liabilities		0		0		10		11
Other trading account assets		7,771		6,943		0		0
Commercial mortgage and other loans		13		13		300		300
Other long-term investments		0		0		174		159
Cash and cash equivalents		680		623		0		0
Accrued investment income		41		39		3		3
Other assets		103		166		0		0

Total assets of consolidated VIEs	$	8,652	$	7,828	$	1,351	$	1,340

Notes issued by consolidated VIEs	$	6,830	$	6,058	$	0	$	0
Other liabilities		723		674		3		1

Total liabilities of consolidated VIEs	$	7,553	$	6,732	$	3	$	1

As included in the table above, notes issued by consolidated VIEs are classified in the line item on the Unaudited Interim Consolidated Statements of Financial Position titled, “Notes issued by consolidated VIEs.” Recourse is limited to the assets of the respective VIE and does not extend to the general credit of Prudential Financial. As of March 31, 2015, the maturities of these obligations were greater than five years.

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 exceptions. 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 $2,709 million and $2,705 million at March 31, 2015 and December 31, 2014, 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 to the trust that was not contractually required.

Unconsolidated Variable Interest Entities

The Company has determined that it is not the primary beneficiary of certain VIEs for which it is the investment manager. These VIEs consist primarily of investment funds for which the Company utilizes the Investment Company Model to assess consolidation. Accordingly, the Company has determined that it is not the

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

primary beneficiary of these entities because it does not stand to absorb a majority of the VIE’s expected losses or to receive a majority of the VIE’s expected residual returns. For all other investment structures, the Company has determined that it is not the primary beneficiary 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 for which it is the investment manager is limited to its investment in the VIEs, which was $179 million and $137 million at March 31, 2015 and December 31, 2014, respectively. These investments are reflected in “Fixed maturities, available-for-sale,” “Other trading account assets, at fair value” and “Other long-term investments.” The fair value of assets held within these unconsolidated VIEs was $6,526 million and $6,973 million as of March 31, 2015 and December 31, 2014, 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 $7,684 million and $7,545 million as of March 31, 2015 and December 31, 2014, respectively.

In addition, in the normal course of its activities, the Company will invest in structured investments including VIEs for which it is not the investment manager. These structured investments typically invest in fixed income investments and are managed by third parties and include asset-backed securities, commercial mortgage-backed securities and residential mortgage-backed securities. The Company’s maximum exposure to loss on these structured investments, both VIEs and non-VIEs, is limited to the amount of its investment. See Note 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.

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 division.

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

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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 Prudential Insurance’s 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 AOCI) 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.

As of March 31, 2015 and December 31, 2014, the Company recognized a policyholder dividend obligation of $1,833 million and $1,558 million, respectively, to Closed Block policyholders for the excess of actual cumulative earnings over the expected cumulative earnings. Additionally, accumulated net unrealized investment gains that have arisen subsequent to the establishment of the Closed Block have been reflected as a policyholder dividend obligation of $5,419 million and $5,053 million at March 31, 2015 and December 31, 2014, respectively, to be paid to Closed Block policyholders unless offset by future experience, with a corresponding amount reported in AOCI.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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, 2015		December 31, 2014
	(in millions)
Closed Block liabilities
Future policy benefits	$	49,783	$	49,863
Policyholders’ dividends payable		960		931
Policyholders’ dividend obligation		7,252		6,612
Policyholders’ account balances		5,289		5,310
Other Closed Block liabilities		5,226		5,084

Total Closed Block liabilities		68,510		67,800

Closed Block assets
Fixed maturities, available-for-sale, at fair value		40,834		40,629
Other trading account assets, at fair value		318		302
Equity securities, available-for-sale, at fair value		3,614		3,522
Commercial mortgage and other loans		9,589		9,472
Policy loans		4,880		4,914
Other long-term investments		2,895		2,765
Short-term investments		969		1,225

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