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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the quarterly period ended June 30, 2016

OR
¨
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 July 31, 2016, 437 million shares of the registrant’s Common Stock (par value $0.01) were outstanding.


Table of Contents

TABLE OF CONTENTS
 
 
 
Page
PART I FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 6.


Table of Contents

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 facility; (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 and the U.S. Department of Labor’s fiduciary rules; (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 related to the remediation of certain securities lending activities administered by the Company; (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) possible difficulties in executing, integrating and realizing projected results of acquisitions, divestitures and restructurings; (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, 2015 for discussion of certain risks relating to our businesses and investment in our securities.



i

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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
June 30, 2016 and December 31, 2015 (in millions, except share amounts)
 
 
June 30,
2016
 
December 31,
2015
ASSETS
 
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost: 2016-$286,066; 2015-$265,416)(1)
 
$
332,270

 
$
290,323

Fixed maturities, held-to-maturity, at amortized cost (fair value: 2016-$3,026; 2015-$2,624)(1)
 
2,485

 
2,308

Trading account assets supporting insurance liabilities, at fair value(1)
 
21,702

 
20,522

Other trading account assets, at fair value(1)
 
7,268

 
14,458

Equity securities, available-for-sale, at fair value (cost: 2016-$7,088; 2015-$6,847)
 
9,496

 
9,274

Commercial mortgage and other loans (includes $591 and $274 measured at fair value under the fair value option at June 30, 2016 and December 31, 2015, respectively)(1)
 
51,447

 
50,559

Policy loans
 
11,930

 
11,657

Other long-term investments (includes $1,384 and $1,322 measured at fair value under the fair value option at June 30, 2016 and December 31, 2015, respectively)(1)
 
10,247

 
9,986

Short-term investments
 
5,035

 
8,105

Total investments
 
451,880

 
417,192

Cash and cash equivalents(1)
 
24,142

 
17,612

Accrued investment income(1)
 
3,211

 
3,110

Deferred policy acquisition costs
 
16,152

 
16,718

Value of business acquired
 
1,951

 
2,828

Other assets(1)(2)
 
14,322

 
14,225

Separate account assets
 
284,832

 
285,570

TOTAL ASSETS
 
$
796,490

 
$
757,255

LIABILITIES AND EQUITY
 
 
 
 
LIABILITIES
 
 
 
 
Future policy benefits
 
$
242,950

 
$
224,384

Policyholders’ account balances(1)
 
142,716

 
136,784

Policyholders’ dividends
 
7,295

 
5,578

Securities sold under agreements to repurchase
 
7,335

 
7,882

Cash collateral for loaned securities
 
4,643

 
3,496

Income taxes
 
15,140

 
8,714

Short-term debt
 
676

 
1,216

Long-term debt(2)
 
18,986

 
19,594

Other liabilities(1)
 
14,645

 
13,517

Notes issued by consolidated variable interest entities (includes $2,094 and $8,597 measured at fair value under the fair value option at June 30, 2016 and December 31, 2015, respectively)(1)
 
2,094

 
8,597

Separate account liabilities
 
284,832

 
285,570

Total liabilities
 
741,312

 
715,332

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 June 30, 2016 and December 31, 2015)
 
6

 
6

Additional paid-in capital
 
24,457

 
24,482

Common Stock held in treasury, at cost (221,372,301 and 213,009,970 shares at June 30, 2016 and December 31, 2015, respectively)
 
(14,432
)
 
(13,814
)
Accumulated other comprehensive income (loss)
 
24,667

 
12,285

Retained earnings
 
20,451

 
18,931

Total Prudential Financial, Inc. equity
 
55,149

 
41,890

Noncontrolling interests
 
29

 
33

Total equity
 
55,178

 
41,923

TOTAL LIABILITIES AND EQUITY
 
$
796,490

 
$
757,255

__________
(1)
See Note 5 for details of balances associated with variable interest entities.
(2)
Prior period amounts are presented on a basis consistent with the current period presentation, reflecting the adoption of ASU 2015-03. See Note 2 for additional information.

See Notes to Unaudited Interim Consolidated Financial Statements

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PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Operations
Three and Six Months Ended June 30, 2016 and 2015 (in millions, except per share amounts)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
REVENUES
 
 
 
 
 
 
 
Premiums
$
6,935

 
$
7,582

 
$
13,232

 
$
14,229

Policy charges and fee income
1,276

 
1,250

 
2,875

 
2,858

Net investment income
3,789

 
3,671

 
7,459

 
7,440

Asset management and service fees
920

 
956

 
1,825

 
1,908

Other income
86

 
124

 
63

 
339

Realized investment gains (losses), net:
 
 
 
 
 
 
 
Other-than-temporary impairments on fixed maturity securities
(17
)
 
(54
)
 
(175
)
 
(68
)
Other-than-temporary impairments on fixed maturity securities transferred to Other comprehensive income
6

 
25

 
38

 
31

Other realized investment gains (losses), net
1,444

 
158

 
3,451

 
2,527

Total realized investment gains (losses), net
1,433

 
129

 
3,314

 
2,490

Total revenues
14,439

 
13,712

 
28,768

 
29,264

BENEFITS AND EXPENSES
 
 
 
 
 
 
 
Policyholders’ benefits
7,989

 
7,852

 
15,020

 
15,091

Interest credited to policyholders’ account balances
1,058

 
676

 
2,344

 
1,909

Dividends to policyholders
598

 
437

 
864

 
1,218

Amortization of deferred policy acquisition costs
427

 
135

 
1,629

 
924

General and administrative expenses
3,026

 
2,483

 
5,838

 
5,245

Total benefits and expenses
13,098

 
11,583

 
25,695

 
24,387

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURES
1,341

 
2,129

 
3,073

 
4,877

Total income tax expense (benefit)
431

 
679

 
799

 
1,378

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURES
910

 
1,450

 
2,274

 
3,499

Equity in earnings of operating joint ventures, net of taxes
15

 
9

 
20

 
6

INCOME (LOSS) FROM CONTINUING OPERATIONS
925

 
1,459

 
2,294

 
3,505

Income (loss) from discontinued operations, net of taxes
0

 
0

 
0

 
0

NET INCOME (LOSS)
925

 
1,459

 
2,294

 
3,505

Less: Income (loss) attributable to noncontrolling interests
4

 
53

 
37

 
63

NET INCOME (LOSS) ATTRIBUTABLE TO PRUDENTIAL FINANCIAL, INC.
$
921

 
$
1,406

 
$
2,257

 
$
3,442

EARNINGS PER SHARE
 
 
 
 
 
 
 
Basic earnings per share-Common Stock:
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to Prudential Financial, Inc.
$
2.06

 
$
3.07

 
$
5.03

 
$
7.52

Income (loss) from discontinued operations, net of taxes
0.00

 
0.00

 
0.00

 
0.00

Net income (loss) attributable to Prudential Financial, Inc.
$
2.06

 
$
3.07

 
$
5.03

 
$
7.52

Diluted earnings per share-Common Stock:
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to Prudential Financial, Inc.
$
2.04

 
$
3.03

 
$
4.97

 
$
7.40

Income (loss) from discontinued operations, net of taxes
0.00

 
0.00

 
0.00

 
0.00

Net income (loss) attributable to Prudential Financial, Inc.
$
2.04

 
$
3.03

 
$
4.97

 
$
7.40

Dividends declared per share of Common Stock
$
0.70

 
$
0.58

 
$
1.40

 
$
1.16











See Notes to Unaudited Interim Consolidated Financial Statements

2

Table of Contents

PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Comprehensive Income
Three and Six Months Ended June 30, 2016 and 2015 (in millions)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
NET INCOME (LOSS)
$
925

 
$
1,459

 
$
2,294

 
$
3,505

Other comprehensive income (loss), before tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments for the period
546

 
(96
)
 
1,283

 
(163
)
Net unrealized investment gains (losses)
7,907

 
(6,702
)
 
17,320

 
(4,212
)
Defined benefit pension and postretirement unrecognized periodic benefit (cost)
39

 
54

 
73

 
106

Total
8,492

 
(6,744
)
 
18,676

 
(4,269
)
Less: Income tax expense (benefit) related to other comprehensive income (loss)
2,892

 
(2,380
)
 
6,291

 
(1,569
)
Other comprehensive income (loss), net of taxes
5,600

 
(4,364
)
 
12,385

 
(2,700
)
Comprehensive income (loss)
6,525

 
(2,905
)
 
14,679

 
805

Less: Comprehensive income (loss) attributable to noncontrolling interests
3

 
37

 
40

 
9

Comprehensive income (loss) attributable to Prudential Financial, Inc.
$
6,522

 
$
(2,942
)
 
$
14,639

 
$
796

 

See Notes to Unaudited Interim Consolidated Financial Statements
 

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Table of Contents

PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Equity
Six Months Ended June 30, 2016 and 2015 (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, 2015
$
6

 
$
24,482

 
$
18,931

 
$
(13,814
)
 
$
0

 
$
12,285

 
$
41,890

 
$
33

 
$
41,923

Cumulative effect of adoption of accounting changes
 
 
 
 
11

 
 
 
 
 
 
 
11

 
(30
)
 
(19
)
Common Stock acquired
 
 
 
 
 
 
(750
)
 
 
 
 
 
(750
)
 
 
 
(750
)
Class B Stock repurchase adjustment
 
 
 
 
(119
)
 
 
 
 
 
 
 
(119
)
 
 
 
(119
)
Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5

 
5

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(19
)
 
(19
)
Stock-based compensation programs
 
 
(25
)
 
 
 
132

 
 
 
 
 
107

 
 
 
107

Dividends declared on Common Stock
 
 
 
 
(629
)
 
 
 
 
 
 
 
(629
)
 
 
 
(629
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
2,257

 
 
 
 
 
 
 
2,257

 
37

 
2,294

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
 
 
12,382

 
12,382

 
3

 
12,385

Total comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
14,639

 
40

 
14,679

Balance, June 30, 2016
$
6


$
24,457


$
20,451


$
(14,432
)

$
0

 
$
24,667


$
55,149


$
29


$
55,178

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
 
 
 
(500
)
 
 
 
 
 
(500
)
 
 
 
(500
)
Class B Stock canceled
 
 
(167
)
 
(484
)
 
 
 
651

 
 
 
0

 
 
 
0

Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 


 
23

 
23

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(42
)
 
(42
)
Stock-based compensation programs
 
 
(1
)
 
 
 
190

 
 
 
 
 
189

 
 
 
189

Dividends declared on Common Stock
 
 
 
 
(532
)
 
 
 
 
 
 
 
(532
)
 
 
 
(532
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
3,442

 
 
 
 
 
 
 
3,442

 
63

 
3,505

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
 
 
(2,646
)
 
(2,646
)
 
(54
)
 
(2,700
)
Total comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
796

 
9

 
805

Balance, June 30, 2015
$
6


$
24,397


$
17,314


$
(13,398
)

$
0

 
$
13,404


$
41,723


$
569


$
42,292





See Notes to Unaudited Interim Consolidated Financial Statements

4

Table of Contents

PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Cash Flows
Six Months Ended June 30, 2016 and 2015 (in millions)
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
2,294

 
$
3,505

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Realized investment (gains) losses, net
(3,314
)
 
(2,490
)
Policy charges and fee income
(894
)
 
(760
)
Interest credited to policyholders’ account balances
2,344

 
1,909

Depreciation and amortization
424

 
(48
)
(Gains) losses on trading account assets supporting insurance liabilities, net
(324
)
 
137

Change in:
 
 
 
Deferred policy acquisition costs
227

 
(387
)
Future policy benefits and other insurance liabilities
4,267

 
3,157

Other trading account assets
(27
)
 
(62
)
Income taxes
299

 
1,038

Derivatives, net
9,357

 
(1,919
)
Other, net
(1,164
)
 
(605
)
Cash flows from (used in) operating activities
13,489

 
3,475

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Proceeds from the sale/maturity/prepayment of:
 
 
 
Fixed maturities, available-for-sale
24,028

 
24,630

Fixed maturities, held-to-maturity
121

 
121

Trading account assets supporting insurance liabilities and other trading account assets
14,270

 
6,595

Equity securities, available-for-sale
1,755

 
2,488

Commercial mortgage and other loans
3,034

 
2,392

Policy loans
1,167

 
1,119

Other long-term investments
269

 
490

Short-term investments
27,859

 
41,720

Payments for the purchase/origination of:
 
 
 
Fixed maturities, available-for-sale
(33,380
)
 
(23,175
)
Trading account assets supporting insurance liabilities and other trading account assets
(14,729
)
 
(8,433
)
Equity securities, available-for-sale
(1,527
)
 
(2,101
)
Commercial mortgage and other loans
(3,743
)
 
(4,372
)
Policy loans
(941
)
 
(907
)
Other long-term investments
(865
)
 
(870
)
Short-term investments
(25,021
)
 
(39,095
)
Acquisition of business, net of cash acquired
(532
)
 
0

Derivatives, net
268

 
148

Other, net
178

 
(36
)
Cash flows from (used in) investing activities
(7,789
)
 
714

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Policyholders’ account deposits
12,631

 
10,730

Policyholders’ account withdrawals
(9,807
)
 
(10,678
)
Net change in securities sold under agreements to repurchase and cash collateral for loaned securities
600

 
(1,978
)
Cash dividends paid on Common Stock
(631
)
 
(537
)
Net change in financing arrangements (maturities 90 days or less)
40

 
493

Common Stock acquired
(733
)
 
(502
)
Class B stock acquired
(119
)
 
(651
)
Common Stock reissued for exercise of stock options
54

 
125

Proceeds from the issuance of debt (maturities longer than 90 days)
197

 
3,348

Repayments of debt (maturities longer than 90 days)
(1,382
)
 
(2,166
)
Excess tax benefits from share-based payment arrangements
3

 
14

Other, net
(234
)
 
(307
)
Cash flows from (used in) financing activities
619

 
(2,109
)
Effect of foreign exchange rate changes on cash balances
211

 
40

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
6,530

 
2,120

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
17,612

 
14,918

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
24,142

 
$
17,038

NON-CASH TRANSACTIONS DURING THE PERIOD(1)
 
 
 
Treasury Stock shares issued for stock-based compensation programs
$
111

 
$
109

Significant Pension Risk Transfer transactions:
 
 
 
Assets acquired, excluding cash and cash equivalents acquired
$
0

 
$
1,553

Liabilities assumed
0

 
1,919

Net cash paid
$
0

 
$
366

_______
1) See Note 2 for the impact of the adoption of “ASU 2015-02, Consolidation” on the Consolidated Financial Statements.

See Notes to Unaudited Interim Consolidated Financial Statements

5

Table of Contents

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements
 
1. BUSINESS AND BASIS OF PRESENTATION
 
Prudential Financial, Inc. (“Prudential Financial”) and its subsidiaries (collectively, “Prudential” or the “Company” 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 canceled 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 and businesses that have been or will be divested, excluding the Closed Block division.

The Closed Block division includes certain 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. See Note 6 for further information on the Closed Block. In connection with demutualization, the Company ceased offering these participating products. 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 variable interest entities (“VIEs”) 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. 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 Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

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. The unaudited interim consolidated balance sheet data as of June 30, 2016, include the assets and liabilities of Gibraltar Life as of May 31, 2016. The unaudited interim consolidated income statement data include Gibraltar Life’s results of operations for the three and six months ended May 31, 2016 and 2015, respectively.
 

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
The most significant estimates include those used in determining deferred policy acquisition costs (“DAC”) and related amortization; value of business acquired (“VOBA”) and its amortization; amortization of deferred sales inducements (“DSI”); measurement of goodwill and any related impairment; valuation of investments including derivatives and the recognition of other-than-temporary impairments (“OTTI”); future policy benefits including guarantees; pension and other postretirement benefits; provision for income taxes and valuation of deferred tax assets; and accruals for contingent liabilities, including estimates for losses in connection with unresolved legal matters.

Out of Period Adjustments

During the second quarter of 2016, the Company recorded an out of period adjustment resulting in a decrease of $148 million to “Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures” for the three month period ended June 30, 2016. The adjustment reflects a charge to increase reserves, net of a related increase in DAC, for certain universal life products within the Individual Life business. Management evaluated the adjustment and concluded it was not material to the current quarter or to any previously reported quarterly or annual financial statements. For additional information on the impact of this adjustment to the Company’s operating segments, see Note 11.

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, 2015.

Adoption of New Accounting Pronouncements

In May 2015, the Financial Accounting Standards Board (“FASB”) issued guidance (Accounting Standards Update (“ASU”) 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)) to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The new guidance became effective for annual periods and interim periods within those annual periods that began after December 15, 2015, and was applied retrospectively. Adoption of the guidance did not have a significant effect on the Company’s financial statement disclosures, see Note 13.

In April 2015, the FASB issued updated guidance (ASU 2015-03, InterestImputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs) that simplifies the 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. The Company adopted the guidance effective January 1, 2016. Prior period financial information presented in these financial statements has been adjusted to reflect the retrospective adoption of the amended guidance. “Other assets” and “Long-term debt” as previously reported on the Company’s consolidated statements of financial position as of December 31, 2015 were both reduced by $133 million as a result of this retrospective adoption.


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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

In February 2015, the FASB issued updated guidance (ASU 2015-02, Consolidation (Topic 810): Amendments to Consolidation Analysis) that modifies 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 adopted the updated guidance effective January 1, 2016 and applied the modified retrospective method of adoption, primarily resulting in the deconsolidation of certain of its previously consolidated collateralized loan obligations (“CLOs”), as its fee arrangements are no longer deemed variable interests in these entities. The Company continues to consolidate CLOs where it retains other economic interests which absorb more than an insignificant amount of the CLOs expected variability. The Company also deconsolidated certain investment structures where it is no longer deemed to be the primary beneficiary as the Company, through its equity ownership, no longer has the obligation to absorb losses of the VIE that could be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The impact to the Company’s consolidated statements of financial position upon adoption of the updated guidance is a reduction of $5.5 billion of “Total assets” (including $5.1 billion of “Total investments”) and $5.5 billion of “Total liabilities” (including $5.1 billion of “Notes issued by consolidated variable interest entities”), with a $30 million decrease in “Noncontrolling interests” and a $7 million increase to “Total Prudential Financial, Inc. equity.”

In August 2014, the FASB issued updated guidance (ASU 2014-14, ReceivablesTroubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure) 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.

In August 2014, the FASB issued updated guidance (ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity) 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 entity based on either the fair value of the financial assets or the financial liabilities, whichever is more observable. If adopted, the guidance eliminates the measurement difference that exists when both are measured at fair value. The Company adopted the updated guidance effective January 1, 2016, and applied the modified retrospective method of adoption. The impact to the Company’s consolidated statements of financial position upon adoption of the updated guidance was a $4 million reduction in “Total liabilities” and a $4 million increase to “Total Prudential Financial, Inc. equity.”

In June 2014, the FASB issued updated guidance (ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures) that requires repurchase-to-maturity transactions to be accounted for as secured borrowings and eliminates existing guidance for repurchase financings. The guidance also requires new disclosures for certain transactions accounted for as secured borrowings and for transfers accounted for as sales when the transferor also retains substantially all of the exposure to the economic return on the transferred financial assets. Accounting changes and new disclosures for transfers accounted for as sales under the new guidance were effective for the first interim or annual period beginning after December 15, 2014, and did not have a significant effect on the Company's consolidated financial position, results of operations or financial statement disclosures. Disclosures for certain transactions accounted for as secured borrowings were effective for interim periods beginning after March 15, 2015, and are included in Note 4. The Company applied the modified retrospective method of adoption.

In April 2014, the FASB issued updated guidance (ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity) 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, 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.


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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

In January 2014, the FASB issued updated guidance (ASU 2014-04, ReceivablesTroubled Debt Restructuring by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure) 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 January 2014, the FASB issued updated guidance (ASU 2014-01, InvestmentsEquity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects) 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.

Future Adoption of New Accounting Pronouncements

In May 2014, the FASB issued updated guidance (ASU 2014-09, Revenue from Contracts with Customers (Topic 606)) 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. In August 2015, the FASB issued an update to defer the original effective date of this guidance. As a result of the deferral, the new guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017, and must be applied using one of two retrospective application methods. Early adoption is permitted only for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. 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 May 2015, the FASB issued final guidance (ASU 2015-09, Financial ServicesInsurance (Topic 944): Disclosures about Short-Duration Contracts) that aims to enhance disclosures about insurance contracts classified as short-duration. The new disclosure requirements focus on providing users of financial statements with more transparent information about an insurance entity’s initial claim estimates and subsequent adjustments to those estimates, methodologies and judgments in estimating claims, and timing, frequency and severity of claims as they relate to short-duration insurance contracts. The new guidance is effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016, and is to be applied retrospectively. The Company is currently assessing the impact of the guidance on the Company’s financial statement disclosures but has concluded that this guidance will not impact the Company’s consolidated financial position or results of operations.

In January 2016, the FASB issued updated guidance (ASU 2016-01, Financial InstrumentsOverall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities) on the recognition and measurement of financial assets and financial liabilities. The guidance revises an entity’s accounting related to the classification and measurement of certain equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. The guidance also amends certain disclosure requirements associated with the fair value of financial instruments. The new guidance is effective for annual periods and interim reporting periods within those annual periods beginning after December 15, 2017. Early adoption is not permitted except for the provisions related to the presentation of certain fair value changes for financial liabilities measured at fair value. The Company is currently assessing the impact of the guidance on the Company’s consolidated financial position, results of operations and financial statement disclosures.


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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

In February 2016, the FASB issued guidance (ASU 2016-02, Leases (Topic 842)) that ensures assets and liabilities from all outstanding lease contracts are recognized on balance sheet (with limited exception). The guidance substantially changes a Lessee’s accounting for leases and requires the recording on balance sheet of a “right-of-use” asset and liability to make lease payments for most leases. A Lessee will continue to recognize expense in its income statement in a manner similar to the requirements under the current lease accounting guidance. For Lessors, the guidance modifies classification criteria and accounting for sales-type and direct financing leases and requires a Lessor to derecognize the carrying value of the leased asset that is considered to have been transferred to a Lessee and record a lease receivable and residual asset (“receivable and residual” approach). The guidance also eliminates the real estate specific provisions of the current guidance (i.e., sale-leaseback). The new guidance is effective for financial statements issued for annual reporting periods beginning after December 15, 2018, and for interim periods within those annual periods, 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 March 2016, the FASB issued guidance (ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting) to simplify the transition to equity method when an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The new guidance is effective for financial statements issued for annual reporting periods beginning after December 15, 2016, and for interim periods within those annual periods. 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 March 2016, the FASB issued guidance (ASU 2016-09, CompensationStock Compensation (Topic 718): Improvements to Employee Share-Based Payments Accounting) to simplify and improve employee share-based payment accounting. The areas updated include income tax consequences, a policy election related to forfeitures, classification of awards as either equity or liability, and classification of operating and financing activity on the statement of cash flows. The new guidance is effective for financial statements issued for annual reporting periods beginning after December 15, 2016, and for interim periods within those annual periods, 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 June 2016, the FASB issued guidance (ASU 2016-13, Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments) that provides a new current expected credit loss model to account for credit losses on certain financial assets and off-balance sheet exposures (e.g., loans held for investment, debt securities held to maturity, reinsurance receivables, net investments in leases and loan commitments). The model requires an entity to estimate lifetime credit losses related to such financial assets and exposures based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The guidance also modifies the current other-than-temporary impairment guidance for available-for-sale debt securities to require the use of an allowance rather than a direct write down of the investment, and replaces existing guidance for purchased credit deteriorated loans and debt securities. The new guidance is effective for financial statements issued by public entities for annual reporting periods beginning after December 15, 2019, and for interim periods within those annual periods. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently assessing the impact of the guidance on the Company’s consolidated financial position, results of operations and financial statement disclosures.


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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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, 2015.

Acquisition of Deutsche Bank’s India Asset Management Business
    
In March 2016, the Company and its asset management joint venture partner in India completed the previously announced acquisition of Deutsche Bank’s India asset management business through the joint venture. This acquisition, which will expand the Company’s investment management expertise, distribution platform and product portfolio in India, did not have a material impact on the Company’s financial results.

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

In March 2016, the Company completed the purchase of an indirect 40% ownership interest in Administradora de Fondos de Pensiones Habitat S.A. (“AFP Habitat”), a leading provider of retirement services in Chile, from Inversiones La Construcción S.A. (“ILC”), the investment subsidiary of the Chilean Construction Chamber. The Company paid 899.90 Chilean pesos per share, for a total purchase price of approximately $532 million based on exchange rates at the share acquisition date. The Company and ILC now equally own an indirect controlling stake in AFP Habitat through a joint holding company. The Company’s investment will be accounted for under the equity method and is recorded within “Other assets.” This acquisition will enable the Company to participate in the growing Chilean pension market.
    
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:
 
 
June 30, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
OTTI
in AOCI(4)
 
(in millions)
Fixed maturities, available-for-sale
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
17,128

 
$
5,302

 
$
1

 
$
22,429

 
$
0

Obligations of U.S. states and their political subdivisions
8,326

 
1,456

 
3

 
9,779

 
0

Foreign government bonds
82,283

 
23,744

 
40

 
105,987

 
0

U.S. corporate public securities
76,570

 
9,391

 
531

 
85,430

 
(9
)
U.S. corporate private securities(1)
29,177

 
2,643

 
255

 
31,565

 
(20
)
Foreign corporate public securities
26,861

 
3,474

 
199

 
30,136

 
(5
)
Foreign corporate private securities
20,132

 
905

 
700

 
20,337

 
0

Asset-backed securities(2)
10,162

 
180

 
155

 
10,187

 
(374
)
Commercial mortgage-backed securities
10,995

 
653

 
5

 
11,643

 
(1
)
Residential mortgage-backed securities(3)
4,432

 
347

 
2

 
4,777

 
(3
)
Total fixed maturities, available-for-sale(1)
$
286,066

 
$
48,095

 
$
1,891

 
$
332,270

 
$
(412
)
Equity securities, available-for-sale
$
7,088

 
$
2,500

 
$
92

 
$
9,496

 
 
 

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
June 30, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(in millions)
Fixed maturities, held-to-maturity
 
 
 
 
 
 
 
Foreign government bonds
$
954

 
$
393

 
$
0

 
$
1,347

Foreign corporate public securities
694

 
82

 
0

 
776

Foreign corporate private securities(5)
92

 
5

 
0

 
97

Commercial mortgage-backed securities
11

 
0

 
0

 
11

Residential mortgage-backed securities(3)
734

 
61

 
0

 
795

Total fixed maturities, held-to-maturity(5)
$
2,485

 
$
541

 
$
0

 
$
3,026

__________
(1)
Excludes notes with amortized cost of $1,127 million (fair value, $1,127 million) which have been offset with the associated payables under a netting agreement.
(2)
Includes credit-tranched securities collateralized by sub-prime mortgages, auto loans, credit cards, education loans and other asset types.
(3)
Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
(4)
Represents the amount of OTTI losses in Accumulated Other Comprehensive Income (“AOCI”), which were not included in earnings. Amount excludes $698 million of net unrealized gains on impaired available-for-sale securities and $1 million of net unrealized gains on impaired held-to-maturity securities relating to changes in the value of such securities subsequent to the impairment measurement date.
(5)
Excludes notes with amortized cost of $3,990 million (fair value, $3,990 million) which have been offset with the associated payables under a netting agreement.
 
 
December 31, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
OTTI
in AOCI(4)
 
(in millions)
Fixed maturities, available-for-sale
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
14,992

 
$
3,544

 
$
19

 
$
18,517

 
$
0

Obligations of U.S. states and their political subdivisions
8,089

 
747

 
41

 
8,795

 
0

Foreign government bonds
71,849

 
12,011

 
147

 
83,713

 
1

U.S. corporate public securities
70,979

 
6,344

 
1,955

 
75,368

 
(3
)
U.S. corporate private securities(1)
28,525

 
2,278

 
359

 
30,444

 
0

Foreign corporate public securities
26,354

 
2,821

 
621

 
28,554

 
0

Foreign corporate private securities
19,393

 
739

 
994

 
19,138

 
0

Asset-backed securities(2)
10,121

 
226

 
121

 
10,226

 
(452
)
Commercial mortgage-backed securities
10,337

 
195

 
70

 
10,462

 
(1
)
Residential mortgage-backed securities(3)
4,777

 
335

 
6

 
5,106

 
(4
)
Total fixed maturities, available-for-sale(1)
$
265,416

 
$
29,240

 
$
4,333

 
$
290,323

 
$
(459
)
Equity securities, available-for-sale
$
6,847

 
$
2,570

 
$
143

 
$
9,274

 
 
 

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
December 31, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(in millions)
Fixed maturities, held-to-maturity
 
 
 
 
 
 
 
Foreign government bonds
$
816

 
$
196

 
$
0

 
$
1,012

Foreign corporate public securities
625

 
62

 
0

 
687

Foreign corporate private securities(5)
78

 
4

 
0

 
82

Commercial mortgage-backed securities
33

 
1

 
0

 
34

Residential mortgage-backed securities(3)
756

 
53

 
0

 
809

Total fixed maturities, held-to-maturity(5)
$
2,308

 
$
316

 
$
0

 
$
2,624

__________
(1)
Excludes notes with amortized cost of $1,050 million (fair value, $1,039 million) which have been offset with the associated payables under a netting agreement.
(2)
Includes credit-tranched securities collateralized by sub-prime mortgages, auto loans, credit cards, education loans and other asset types.
(3)
Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
(4)
Represents the amount of OTTI losses in AOCI, which were not included in earnings. Amount excludes $693 million of net unrealized gains on impaired available-for-sale securities and less than $1 million of net unrealized gains on impaired held-to-maturity securities relating to changes in the value of such securities subsequent to the impairment measurement date.
(5)
Excludes notes with amortized cost of $3,850 million (fair value, $4,081 million) which have been offset with the associated payables under a netting agreement.
 
The amortized cost and fair value of fixed maturities by contractual maturities at June 30, 2016, 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
$
12,437

 
$
13,082

 
$
8

 
$
8

Due after one year through five years
47,952

 
52,497

 
80

 
85

Due after five years through ten years
58,735

 
64,754

 
702

 
784

Due after ten years(1)
141,353

 
175,330

 
950

 
1,343

Asset-backed securities
10,162

 
10,187

 
0

 
0

Commercial mortgage-backed securities
10,995

 
11,643

 
11

 
11

Residential mortgage-backed securities
4,432

 
4,777

 
734

 
795

Total
$
286,066

 
$
332,270

 
$
2,485

 
$
3,026

__________ 
(1)
Excludes available-for-sale notes with amortized cost of $1,127 million (fair value, $1,127 million) and held-to-maturity notes with amortized cost of $3,990 million (fair value, $3,990 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 and equity security proceeds and related investment gains (losses), as well as losses on impairments of both fixed maturities and equity securities:
 

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in millions)
Fixed maturities, available-for-sale
 
 
 
 
 
 
 
Proceeds from sales
$
9,232

 
$
7,626

 
$
14,354

 
$
15,044

Proceeds from maturities/repayments
5,586

 
4,618

 
9,623

 
9,713

Gross investment gains from sales, prepayments and maturities
499

 
442

 
794

 
974

Gross investment losses from sales and maturities
(55
)
 
(42
)
 
(297
)
 
(97
)
Fixed maturities, held-to-maturity
 
 
 
 
 
 
 
Gross investment gains from prepayments
$
0

 
$
0

 
$
0

 
$
0

Proceeds from maturities/repayments
75

 
63

 
125

 
123

Equity securities, available-for-sale
 
 
 
 
 
 
 
Proceeds from sales
$
896

 
$
1,564

 
$
1,837

 
$
2,553

Gross investment gains from sales
138

 
273

 
248

 
427

Gross investment losses from sales
(36
)
 
(35
)
 
(107
)
 
(61
)
Fixed maturity and equity security impairments
 
 
 
 
 
 
 
Net writedowns for other-than-temporary impairment losses on fixed maturities recognized in earnings(1)
$
(11
)
 
$
(29
)
 
$
(137
)
 
$
(37
)
Writedowns for impairments on equity securities
(31
)
 
(11
)
 
(42
)
 
(17
)
__________ 
(1)
Excludes the portion of OTTI recorded in “Other comprehensive income (loss),” (“OCI”) representing any difference between the fair value of the impaired debt security and the net present value of its projected future cash flows at the time of impairment.

As discussed in Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, a portion of certain OTTI losses on fixed maturity securities is recognized in 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 June 30, 2016
 
Six Months Ended June 30, 2016
 
(in millions)
Balance, beginning of period
$
543

 
$
532

Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period
(131
)
 
(141
)
Credit loss impairments previously recognized on securities impaired to fair value during the period(1)
0

 
(2
)
Credit loss impairments recognized in the current period on securities not previously impaired
7

 
27

Additional credit loss impairments recognized in the current period on securities previously impaired
0

 
0

Increases due to the passage of time on previously recorded credit losses
7

 
12

Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected
(2
)
 
(4
)
Balance, end of period
$
424

 
$
424



14

Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
Three Months Ended June 30, 2015
 
Six Months Ended June 30, 2015
 
(in millions)
Balance, beginning of period
$
773

 
$
781

Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period
(15
)
 
(28
)
Credit loss impairments previously recognized on securities impaired to fair value during the period(1)
(12
)
 
(13
)
Credit loss impairments recognized in the current period on securities not previously impaired
0

 
3

Additional credit loss impairments recognized in the current period on securities previously impaired
2

 
2

Increases due to the passage of time on previously recorded credit losses
7

 
13

Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected
(4
)
 
(7
)
Balance, end of period
$
751

 
$
751

__________ 
(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:
 
 
 
June 30, 2016
 
December 31, 2015
 
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
 
(in millions)
Short-term investments and cash equivalents
 
$
614

 
$
614

 
$
765

 
$
765

Fixed maturities:
 
 
 
 
 
 
 
 
Corporate securities
 
13,422

 
13,872

 
12,797

 
12,851

Commercial mortgage-backed securities
 
1,899

 
1,985

 
1,860

 
1,862

Residential mortgage-backed securities(1)
 
1,289

 
1,334

 
1,411

 
1,428

Asset-backed securities(2)
 
1,343

 
1,353

 
1,295

 
1,299

Foreign government bonds
 
803

 
847

 
680

 
694

U.S. government authorities and agencies and obligations of U.S. states
 
405

 
452

 
326

 
369

Total fixed maturities
 
19,161

 
19,843

 
18,369

 
18,503

Equity securities
 
1,194

 
1,245

 
1,030

 
1,254

Total trading account assets supporting insurance liabilities
 
$
20,969

 
$
21,702

 
$
20,164

 
$
20,522

__________ 
(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 $136 million and $(276) million during the three months ended June 30, 2016 and 2015, respectively, and $375 million and $(266) million during the six months ended June 30, 2016 and 2015, respectively.
 

15

Table of Contents
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:
 
 
 
June 30, 2016
 
December 31, 2015
 
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
 
(in millions)
Short-term investments and cash equivalents
 
$
26

 
$
26

 
$
26

 
$
26

Fixed maturities
 
4,268

 
4,072

 
11,132

 
10,764

Equity securities
 
939

 
1,022

 
1,006

 
1,098

Other
 
5

 
6

 
12

 
15

Subtotal
 
$
5,238

 
5,126

 
$
12,176

 
11,903

Derivative instruments
 
 
 
2,142

 
 
 
2,555

Total other trading account assets
 

 
$
7,268

 

 
$
14,458

 
The net change in unrealized gains (losses) from other trading account assets, excluding derivative instruments, still held at period end, recorded within “Other income,” was $137 million and $61 million during the three months ended June 30, 2016 and 2015, respectively, and $161 million and $9 million during the six months ended June 30, 2016 and 2015, respectively.
 
Concentrations of Financial Instruments
 
The Company monitors its concentrations of financial instruments and mitigates credit risk by maintaining a diversified investment portfolio which limits exposure to any one issuer.
 
As of both June 30, 2016 and December 31, 2015, the Company’s exposure to concentrations of credit risk of single issuers greater than 10% of the Company’s stockholders’ equity included securities of the U.S. government and certain U.S. government agencies and certain securities guaranteed by the U.S. government, as well as the securities disclosed below.
 
 
 
June 30, 2016
 
December 31, 2015
 
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
 
(in millions)
Investments in Japanese government and government agency securities:
 
 
 
 
 
 
 
 
Fixed maturities, available-for-sale
 
$
63,034

 
$
81,467

 
$
53,851

 
$
61,911

Fixed maturities, held-to-maturity
 
931

 
1,315

 
796

 
988

Trading account assets supporting insurance liabilities
 
599

 
646

 
492

 
502

Other trading account assets
 
36

 
37

 
33

 
33

Total
 
$
64,600

 
$
83,465

 
$
55,172

 
$
63,434

 
 
 
June 30, 2016
 
December 31, 2015
 
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
 
(in millions)
Investments in South Korean government and government agency securities:
 
 
 
 
 
 
 
 
Fixed maturities, available-for-sale
 
$
7,569

 
$
10,485

 
$
7,191

 
$
9,233

Fixed maturities, held-to-maturity
 
0

 
0

 
0

 
0

Trading account assets supporting insurance liabilities
 
44

 
45

 
44

 
44

Other trading account assets
 
7

 
7

 
0

 
0

Total
 
$
7,620

 
$
10,537

 
$
7,235

 
$
9,277

 

16

Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Commercial Mortgage and Other Loans
 
The Company’s commercial mortgage and other loans are comprised as follows, as of the dates indicated:
 
 
 
June 30, 2016
 
December 31, 2015
 
 
Amount
(in millions)
 
% of
Total
 
Amount
(in millions)
 
% of
Total
Commercial mortgage and agricultural property loans by property type:
 
 
 
 
 
 
 
 
Office
 
$
11,790

 
23.3
%
 
$
11,226

 
22.9
%
Retail
 
8,567

 
17.0

 
8,917

 
18.2

Apartments/Multi-Family
 
13,139

 
26.0

 
12,034

 
24.5

Industrial
 
7,718

 
15.3

 
7,775

 
15.9

Hospitality
 
2,372

 
4.7

 
2,513

 
5.1

Other
 
4,037

 
8.0

 
3,722

 
7.6

Total commercial mortgage loans
 
47,623

 
94.3

 
46,187

 
94.2

Agricultural property loans
 
2,873

 
5.7

 
2,859

 
5.8

Total commercial mortgage and agricultural property loans by property type
 
50,496

 
100.0
%
 
49,046

 
100.0
%
Valuation allowance
 
(92
)
 
 
 
(99
)
 
 
Total net commercial mortgage and agricultural property loans by property type
 
50,404

 
 
 
48,947

 
 
Other loans:
 
 
 

 
 
 

Uncollateralized loans
 
730

 

 
1,012

 

Residential property loans
 
310

 

 
301

 

Other collateralized loans
 
11

 

 
312

 

Total other loans
 
1,051

 

 
1,625

 

Valuation allowance
 
(8
)
 

 
(13
)
 

Total net other loans
 
1,043

 

 
1,612

 

Total commercial mortgage and other loans(1)
 
$
51,447

 

 
$
50,559

 

__________ 
(1)
Includes loans held at fair value.

The commercial mortgage and agricultural property loans are geographically dispersed throughout the United States (with the largest concentrations in California (26%), New York (9%) and Texas (9%)) and include loans secured by properties in Europe (4%) and Asia (1%) at June 30, 2016.

Activity in the allowance for credit losses for all commercial mortgage and other loans, as of the dates indicated, is as follows:
 
 
 
June 30, 2016
 
 
Commercial
Mortgage
Loans
 
Agricultural
Property
Loans
 
Residential
Property
Loans
 
Other
Collateralized
Loans
 
Uncollateralized
Loans
 
Total
 
 
(in millions)
Allowance for credit losses, beginning of year
 
$
97

 
$
2

 
$
3

 
$
0

 
$
10

 
$
112

Addition to (release of) allowance for losses
 
(7
)
 
0
<