Edgar Filing: PRUDENTIAL FINANCIAL INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2014

¨	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 October 31, 2014, 456 million shares of the registrant’s Common Stock (par value $0.01) were outstanding. In addition, 2 million shares of the registrant’s Class B Stock, for which there is no established public trading market, were outstanding.

TABLE OF CONTENTS


			Page
PART I FINANCIAL INFORMATION

	Item 1.	Financial Statements:
		Unaudited Interim Consolidated Statements of Financial Position as of September 30, 2014 and December 31, 2013		1
		Unaudited Interim Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013		2
		Unaudited Interim Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013		3
		Unaudited Interim Consolidated Statements of Equity for the nine months ended September 30, 2014 and 2013		4
		Unaudited Interim Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013		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 and Dispositions		10
		4. Investments		12
		5. Variable Interest Entities		30
		6. Closed Block		32
		7. Equity		35
		8. Earnings Per Share		39
		9. Short-Term and Long-Term Debt		44
		10. Employee Benefit Plans		48
		11. Segment Information		49
		12. Income Taxes		56
		13. Fair Value of Assets and Liabilities		58
		14. Derivative Instruments		87
		15. Commitments and Guarantees, Contingent Liabilities and Litigation and Regulatory Matters		97
		Unaudited Interim Supplemental Combining Financial Information:
		Unaudited Interim Supplemental Combining Statements of Financial Position as of September 30, 2014 and December 31, 2013		108
		Unaudited Interim Supplemental Combining Statements of Operations for the three and nine months ended September 30, 2014 and 2013		109
		Notes to Unaudited Interim Supplemental Combining Financial Information		111
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		113
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		224
	Item 4.	Controls and Procedures		225

PART II OTHER INFORMATION
	Item 1.	Legal Proceedings		226
	Item 1A.	Risk Factors		226
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		226
	Item 6.	Exhibits		227

SIGNATURES				228

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, with regard to variable annuity or other product guarantees; (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, longevity, morbidity, persistency, surrender experience, interest rates or market returns and the assumptions we use in pricing our products, establishing liabilities and reserves or for other purposes; (8) changes in our assumptions related to deferred policy acquisition costs, value of business acquired or goodwill; (9) changes in assumptions for retirement expense; (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; (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; and (27) risks due to the lack of legal separation between our Financial Services Businesses and our Closed Block Business. 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, 2013 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

September 30, 2014 and December 31, 2013 (in millions, except share amounts)


	September 30, 2014			December 31, 2013
ASSETS
Fixed maturities, available-for-sale, at fair value (amortized cost: 2014-$273,760; 2013- $268,727)(1)	$	301,067		$	286,866
Fixed maturities, held-to-maturity, at amortized cost (fair value: 2014-$3,183; 2013- $3,553)(1)		2,880			3,312
Trading account assets supporting insurance liabilities, at fair value(1)		20,507			20,827
Other trading account assets, at fair value(1)		9,321			6,453
Equity securities, available-for-sale, at fair value (cost: 2014-$7,099; 2013-$7,003)		9,878			9,910
Commercial mortgage and other loans (includes $304 and $158 measured at fair value under the fair value option at September 30, 2014 and December 31, 2013, respectively)(1)		44,836			41,008
Policy loans		11,857			11,766
Other long-term investments (includes $1,024 and $873 measured at fair value under the fair value option at September 30, 2014 and December 31, 2013, respectively)(1)		10,860			10,328
Short-term investments		5,535			7,703

Total investments		416,741			398,173
Cash and cash equivalents(1)		17,222			11,439
Accrued investment income(1)		3,209			3,089
Deferred policy acquisition costs		16,585			16,512
Value of business acquired		3,394			3,675
Other assets(1)		14,380			13,833
Separate account assets		292,616			285,060

TOTAL ASSETS	$	764,147		$	731,781

LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits	$	215,847		$	206,859
Policyholders’ account balances(1)		139,133			136,657
Policyholders’ dividends		6,904			5,515
Securities sold under agreements to repurchase		9,039			7,898
Cash collateral for loaned securities		4,569			5,040
Income taxes		8,634			5,422
Short-term debt		4,429			2,669
Long-term debt		22,597			23,553
Other liabilities(1)		12,630			13,925
Notes issued by consolidated variable interest entities (includes $5,367 and $3,254 measured at fair value under the fair value option at September 30, 2014 and December 31, 2013, respectively)(1)		5,397			3,302
Separate account liabilities		292,616			285,060

Total liabilities		721,795			695,900

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; 660,111,337 and 660,111,319 shares issued at September 30, 2014 and December 31, 2013, respectively)		6			6
Class B Stock ($.01 par value; 10,000,000 shares authorized; 2,000,000 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively)		0			0
Additional paid-in capital		24,525			24,475
Common Stock held in treasury, at cost (203,017,507 and 199,056,067 shares at September 30, 2014 and December 31, 2013, respectively)		(12,879	)		(12,415	)
Accumulated other comprehensive income (loss)		13,501			8,681
Retained earnings		16,616			14,531

Total Prudential Financial, Inc. equity		41,769			35,278

Noncontrolling interests		583			603

Total equity		42,352			35,881

TOTAL LIABILITIES AND EQUITY	$	764,147		$	731,781

(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 and Nine Months Ended September 30, 2014 and 2013 (in millions, except per share amounts)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
REVENUES
Premiums	$	6,644		$	6,141		$	18,580		$	20,147
Policy charges and fee income		1,496			1,257			4,517			3,988
Net investment income		3,841			3,650			11,433			10,999
Asset management and service fees		949			858			2,781			2,558
Other income		(625	)		1,514			177			(2,313	)
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities		(2	)		(359	)		(113	)		(847	)
Other-than-temporary impairments on fixed maturity securities transferred to Other comprehensive income		(3	)		316			66			701
Other realized investment gains (losses), net		80			(2,067	)		939			(3,711	)

Total realized investment gains (losses), net		75			(2,110	)		892			(3,857	)

Total revenues		12,380			11,310			38,380			31,522

BENEFITS AND EXPENSES
Policyholders’ benefits		7,334			6,237			20,186			20,480
Interest credited to policyholders’ account balances		882			759			3,075			2,203
Dividends to policyholders		745			582			2,056			1,587
Amortization of deferred policy acquisition costs		346			(452	)		1,265			(14	)
General and administrative expenses		2,789			2,658			8,289			8,068

Total benefits and expenses		12,096			9,784			34,871			32,324

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURES		284			1,526			3,509			(802	)

Income tax expense (benefit)		(234	)		497			643			(605	)

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURES		518			1,029			2,866			(197	)
Equity in earnings of operating joint ventures, net of taxes		5			3			11			54

INCOME (LOSS) FROM CONTINUING OPERATIONS		523			1,032			2,877			(143	)
Income (loss) from discontinued operations, net of taxes		0			8			8			11

NET INCOME (LOSS)		523			1,040			2,885			(132	)
Less: Income (loss) attributable to noncontrolling interests		11			13			45			75

NET INCOME (LOSS) ATTRIBUTABLE TO PRUDENTIAL FINANCIAL, INC.	$	512		$	1,027		$	2,840		$	(207	)

EARNINGS PER SHARE (See Note 8)
Financial Services Businesses
Basic earnings per share-Common Stock:
Income (loss) from continuing operations attributable to Prudential Financial, Inc.	$	1.00		$	2.06		$	5.87		$	(0.64	)
Income (loss) from discontinued operations, net of taxes		0.00			0.01			0.02			0.03

Net income (loss) attributable to Prudential Financial, Inc.	$	1.00		$	2.07		$	5.89		$	(0.61	)

Diluted earnings per share-Common Stock:
Income (loss) from continuing operations attributable to Prudential Financial, Inc.	$	0.99		$	2.02		$	5.79		$	(0.64	)
Income (loss) from discontinued operations, net of taxes		0.00			0.02			0.01			0.03

Net income (loss) attributable to Prudential Financial, Inc.	$	0.99		$	2.04		$	5.80		$	(0.61	)

Dividends declared per share of Common Stock	$	0.53		$	0.40		$	1.59		$	1.20

Closed Block Business
Basic and Diluted earnings per share-Class B Stock:
Income (loss) from continuing operations attributable to Prudential Financial, Inc.	$	25.00		$	29.50		$	54.50		$	36.00
Income (loss) from discontinued operations, net of taxes		0.00			0.00			0.00			0.00

Net income (loss) attributable to Prudential Financial, Inc.	$	25.00		$	29.50		$	54.50		$	36.00

Dividends declared per share of Class B Stock	$	2.41		$	2.41		$	7.22		$	7.22

See Notes to Unaudited Interim Consolidated Financial Statements

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Comprehensive Income

Three and Nine Months Ended September 30, 2014 and 2013 (in millions)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
NET INCOME (LOSS)	$	523		$	1,040		$	2,885		$	(132	)
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments for the period		(498	)		224			(251	)		(1,182	)
Net unrealized investment gains (losses)		1,331			(2,667	)		7,650			(3,819	)
Defined benefit pension and postretirement unrecognized periodic benefit		37			27			80			120

Total		870			(2,416	)		7,479			(4,881	)

Less: Income tax expense (benefit) related to other comprehensive income (loss)		446			(834	)		2,651			(1,544	)

Other comprehensive income (loss), net of taxes		424			(1,582	)		4,828			(3,337	)

Comprehensive income (loss)		947			(542	)		7,713			(3,469	)
Less: Comprehensive income (loss) attributable to noncontrolling interests		11			(19	)		53			53

Comprehensive income (loss) attributable to Prudential Financial, Inc.	$	936		$	(523	)	$	7,660		$	(3,522	)

See Notes to Unaudited Interim Consolidated Financial Statements

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Equity(1)

Nine Months Ended September 30, 2014 and 2013 (in millions)


	Prudential Financial, Inc. Equity
	Common Stock		Additional Paid-in Capital			Retained Earnings			Common Stock Held In Treasury			Accumulated Other Comprehensive Income (Loss)			Total Prudential Financial, Inc. Equity			Noncontrolling Interests			Total Equity
Balance December 31, 2013	$	6	$	24,475		$	14,531		$	(12,415	)	$	8,681		$	35,278		$	603		$	35,881
Common Stock acquired										(750	)					(750	)					(750	)
Contributions from noncontrolling interests				(4	)											(4	)		73			69
Distributions to noncontrolling interests																			(145	)		(145	)
Consolidations/(deconsolidations) of noncontrolling interests																			(1	)		(1	)
Stock-based compensation programs				54						286						340						340
Dividends declared on Common Stock							(741	)								(741	)					(741	)
Dividends declared on Class B Stock							(14	)								(14	)					(14	)
Comprehensive income:
Net income (loss)							2,840									2,840			45			2,885
Other comprehensive income (loss), net of tax													4,820			4,820			8			4,828

Total comprehensive income (loss)																7,660			53			7,713

Balance, September 30, 2014	$	6	$	24,525		$	16,616		$	(12,879	)	$	13,501		$	41,769		$	583		$	42,352


	Prudential Financial, Inc. Equity
	Common Stock		Additional Paid-in Capital			Retained Earnings			Common Stock Held In Treasury			Accumulated Other Comprehensive Income (Loss)			Total Prudential Financial, Inc. Equity			Noncontrolling Interests			Total Equity
Balance, December 31, 2012	$	6	$	24,380		$	16,066		$	(12,163	)	$	10,214		$	38,503		$	609		$	39,112
Common Stock acquired										(500	)					(500	)					(500	)
Contributions from noncontrolling interests																			1			1
Distributions to noncontrolling interests																			(78	)		(78	)
Consolidations/(deconsolidations) of noncontrolling interests																			45			45
Stock-based compensation programs				33			(41	)		368						360						360
Dividends declared on Common Stock							(563	)								(563	)					(563	)
Dividends declared on Class B Stock							(14	)								(14	)					(14	)
Comprehensive income:
Net income (loss)							(207	)								(207	)		75			(132	)
Other comprehensive income (loss), net of tax													(3,315	)		(3,315	)		(22	)		(3,337	)

Total comprehensive income (loss)																(3,522	)		53			(3,469	)

Balance, September 30, 2013	$	6	$	24,413		$	15,241		$	(12,295	)	$	6,899		$	34,264		$	630		$	34,894

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

See Notes to Unaudited Interim Consolidated Financial Statements

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2014 and 2013 (in millions)


	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	2,885		$	(132	)
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment (gains) losses, net		(892	)		3,857
Policy charges and fee income		(1,519	)		(1,192	)
Interest credited to policyholders’ account balances		3,075			2,203
Depreciation and amortization		454			338
Gains on trading account assets supporting insurance liabilities, net		(195	)		275
Change in:
Deferred policy acquisition costs		(758	)		(2,230	)
Future policy benefits and other insurance liabilities		5,590			6,211
Other trading account assets		110			(34	)
Income taxes		661			(1,962	)
Other, net		2,011			(1,851	)

Cash flows from operating activities		11,422			5,483

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale		38,541			40,389
Fixed maturities, held-to-maturity		377			397
Trading account assets supporting insurance liabilities and other trading account assets		9,695			16,339
Equity securities, available-for-sale		3,705			3,472
Commercial mortgage and other loans		2,509			4,700
Policy loans		1,623			1,702
Other long-term investments		514			1,312
Short-term investments		52,817			39,449
Payments for the purchase/origination of:
Fixed maturities, available-for-sale		(44,613	)		(45,215	)
Fixed maturities, held-to-maturity		(22	)		(170	)
Trading account assets supporting insurance liabilities and other trading account assets		(11,630	)		(18,830	)
Equity securities, available-for-sale		(3,334	)		(3,233	)
Commercial mortgage and other loans		(6,192	)		(7,068	)
Policy loans		(1,441	)		(1,366	)
Other long-term investments		(1,661	)		(1,938	)
Short-term investments		(50,770	)		(41,437	)
Acquisition of business, net of cash acquired.		(23	)		(488	)
Other, net		228			(291	)

Cash flows used in investing activities		(9,677	)		(12,276	)

CASH FLOWS FROM FINANCING ACTIVITIES
Policyholders’ account deposits		18,138			18,588
Policyholders’ account withdrawals		(16,391	)		(19,091	)
Net change in securities sold under agreements to repurchase and cash collateral for loaned securities		669			3,371
Cash dividends paid on Common Stock		(741	)		(585	)
Cash dividends paid on Class B Stock		(14	)		(14	)
Net change in financing arrangements (maturities 90 days or less)		352			269
Common Stock acquired		(750	)		(487	)
Common Stock reissued for exercise of stock options		230			226
Proceeds from the issuance of debt (maturities longer than 90 days)		5,273			3,619
Repayments of debt (maturities longer than 90 days)		(2,590	)		(3,428	)
Excess tax benefits from share-based payment arrangements		24			21
Other, net		(82	)		(337	)

Cash flows from financing activities		4,118			2,152

Effect of foreign exchange rate changes on cash balances		(80	)		(809	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		5,783			(5,450	)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		11,439			18,100

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	17,222		$	12,650

NON-CASH TRANSACTIONS DURING THE PERIOD
Treasury Stock shares issued for stock-based compensation programs	$	95		$	104
Acquisition of Gibraltar BSN Life Berhad (See Note 3):
Assets acquired, excluding cash and cash equivalents acquired	$	656		$	0
Liabilities assumed		586			0
Noncontrolling interest assumed		47			0

Net cash paid on acquisition	$	23		$	0

Acquisition of The Hartford’s individual life business (See Note 3):
Assets acquired, excluding cash and cash equivalents acquired	$	0		$	11,056
Liabilities assumed		0			10,568

Net cash paid on acquisition	$	0		$	488

See Notes to Unaudited Interim Consolidated Financial Statements

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements

1. BUSINESS AND BASIS OF PRESENTATION

Prudential Financial, Inc. (“Prudential Financial”) and its subsidiaries (collectively, “Prudential” or the “Company”) provide a wide range of insurance, investment management, and other financial products and services to both individual and institutional customers throughout the United States and in many other countries. Principal products and services provided include life insurance, annuities, retirement-related services, mutual funds, and investment management. The Company has organized its principal operations into the Financial Services Businesses and the Closed Block Business. The Financial Services Businesses operate through three operating divisions: U.S. Retirement Solutions and Investment Management, U.S. Individual Life and Group Insurance, and International Insurance. The Company’s businesses that are not sufficiently material to warrant separate disclosure and divested businesses are included in Corporate and Other operations within the Financial Services Businesses. The Closed Block Business, which includes the Closed Block (see Note 6), is managed separately from the Financial Services Businesses. The Closed Block Business was established on the date of demutualization and includes the Company’s in force participating insurance and annuity products and assets that are used for the payment of benefits and policyholders’ dividends on these products, as well as other assets and equity that support these products and related liabilities. In connection with the demutualization, the Company ceased offering these participating products.

Basis of Presentation

The Unaudited Interim Consolidated Financial Statements include the accounts of Prudential Financial, entities over which the Company exercises control, including majority-owned subsidiaries and minority-owned entities such as limited partnerships in which the Company is the general partner, and variable interest entities in which the Company is considered the primary beneficiary. See Note 5 for more information on the Company’s consolidated variable interest entities. The Unaudited Interim Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) on a basis consistent with reporting interim financial information in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Intercompany balances and transactions have been eliminated.

In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations have been made. All such adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Company’s Audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

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 September 30, 2014, include the assets and liabilities of Gibraltar Life and its results of operations as of, and for the three and nine months ended, August 31, 2014, 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.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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

Out of Period Adjustments

During the third quarter of 2014, the Company recorded out of period adjustments resulting in an aggregate net decrease of $156 million to “Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures” for the three and nine months ended September 30, 2014. Such adjustments were primarily comprised of: 1) a charge of $48 million from an increase in reserves for group long-term disability products and 2) a charge of $45 million from an increase in reserves, net of a related increase in deferred policy amortization costs, for certain variable annuities products with optional living benefit guarantees. These items were identified during the Company’s annual review and update of assumptions used in calculating these reserves. Management has evaluated the adjustments and concluded that they are not material to the current quarter or to any previously reported quarterly or annual financial statements.

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, 2013.

Adoption of New Accounting Pronouncements

In December 2013, the Financial Accounting Standards Board (“FASB”) issued updated guidance establishing a single definition of a public entity for use in financial accounting and reporting guidance. This new guidance is effective for all current and future reporting periods and did not have a significant effect on the Company’s consolidated financial position, results of operations or financial statement disclosures.

In July 2013, the FASB issued new guidance regarding derivatives. The guidance permits the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) to be used as a U.S. benchmark interest rate for hedge accounting in addition to the United States Treasury rate and London Inter-Bank Offered Rate (“LIBOR”). The guidance also removes the restriction on using different benchmark rates for similar hedges. The guidance is effective for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013, 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 July 2013, the FASB issued updated guidance regarding the presentation of unrecognized tax benefits when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. This new guidance became effective for interim or annual reporting periods that began after December 15, 2013, 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.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

In June 2013, the FASB issued updated guidance clarifying the characteristics of an investment company and requiring new disclosures. Under the guidance, all entities regulated under the Investment Company Act of 1940 automatically qualify as investment companies, while all other entities need to consider both the fundamental and typical characteristics of an investment company in determining whether they qualify as investment companies. This new guidance became effective for interim or annual reporting periods that began after December 15, 2013, 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 March 2013, the FASB issued updated guidance regarding the recognition in net income of the cumulative translation adjustment upon the sale or loss of control of a business or group of assets residing in a foreign subsidiary, or a loss of control of a foreign investment. This guidance became effective for interim or annual reporting periods that began after December 15, 2013, and was applied prospectively. The amendments require an entity that ceases to have a controlling financial interest in a subsidiary or group of assets within a foreign entity to release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. For an equity method investment that is a foreign entity, the partial sale guidance still applies. As such, a pro rata portion of the cumulative translation adjustment should be released into net income upon a partial sale of such an equity method investment. 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 February 2013, the FASB issued updated guidance regarding the presentation of comprehensive income. Under the guidance, an entity is required to separately present information about significant items reclassified out of accumulated other comprehensive income by component as well as changes in accumulated other comprehensive income balances by component in either the financial statements or the notes to the financial statements. The guidance does not change the items that are reported in other comprehensive income, does not change when an item of other comprehensive income must be reclassified to net income, and does not amend any existing requirements for reporting net income or other comprehensive income. The guidance became effective for interim or annual reporting periods that began after December 15, 2012, and was applied prospectively. The disclosures required by this guidance are included in Note 7.

In December 2011 and January 2013, the FASB issued updated guidance regarding the disclosure of recognized derivative instruments (including bifurcated embedded derivatives), repurchase agreements and securities borrowing/lending transactions that are offset in the statement of financial position or are subject to an enforceable master netting arrangement or similar agreement (irrespective of whether they are offset in the statement of financial position). This new guidance requires an entity to disclose information on both a gross and net basis about instruments and transactions within the scope of this guidance. This new guidance became effective for interim or annual reporting periods that began on or after January 1, 2013, and was applied retrospectively for all comparative periods presented. The disclosures required by this guidance are included in Note 14.

Future Adoption of New Accounting Pronouncements

In January 2014, the 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 is effective for annual periods and interim reporting periods within those annual

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

periods, beginning after December 15, 2014, and should be applied retrospectively to all periods presented. 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 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 is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2014. This guidance can be elected for prospective adoption or by using a modified retrospective transition method. This guidance is not expected to have a significant impact 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 is effective prospectively to new disposals and new classifications of disposal groups as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. Early adoption is permitted for new disposals or new classifications as held for sale that have not been reported in financial statements previously issued or available for issuance. This guidance is not expected to have a significant impact on the Company’s consolidated financial position, results of operations or financial statement disclosures.

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 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 will be permitted. This guidance 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 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 is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2014, with early adoption permitted. This

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

guidance can be adopted using either a prospective transition method or a modified retrospective transition method. This guidance is not expected to have a significant impact on the Company’s consolidated financial position, results of operations, or financial statement disclosures.

3. ACQUISITIONS AND DISPOSITIONS

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

On October 28, 2014, the Company announced that it has entered into a memorandum of understanding with Inversiones La Construcción S.A. (“ILC”), the investment subsidiary of the Chilean Construction Chamber, to acquire an indirect ownership interest in Administradora de Fondos de Pensiones Habitat S.A. (“AFP Habitat”), a leading provider of retirement services in Chile. The Company expects to acquire indirectly between approximately 34% and 40% of AFP Habitat from ILC, depending on the results of a pre-closing partial tender offer by ILC to acquire additional shares of AFP Habitat from public shareholders. The Company would acquire its indirect interest in the AFP Habitat shares from subsidiaries of ILC for 925 Chilean pesos per share, for a total purchase price of approximately $530 million to $620 million at current exchange rates. It is expected that the transaction would result in equal ownership positions for the Company and ILC, with a controlling stake in AFP Habitat held through a joint holding company. The transaction, which is subject to certain conditions, including receipt of regulatory approvals, is expected to close in the first half of 2015. This acquisition will enable the Company to participate in the growing Chilean pension market.

Acquisition of UniAsia Life Assurance

On January 2, 2014, the Company completed the acquisition of UniAsia Life Assurance Berhad, an established life insurance company in Malaysia, through the formation of a joint venture with Bank Simpanan Nasional (“BSN”), a bank owned by the Malaysian government. The joint venture paid cash consideration of $158 million, 70% of which was provided by Prudential Insurance and 30% of which was provided by BSN. This acquisition is part of the Company’s strategic initiative to further expand its business into Southeast Asian markets. Subsequent to the acquisition, the Company renamed the acquired company Gibraltar BSN Life Berhad.

The assets acquired and the liabilities assumed have been included in the Company’s Unaudited Interim Consolidated Financial Statements as of the acquisition date. After adjustments, total assets acquired were $744 million, including $88 million of cash and cash equivalents and $19 million of goodwill, none of which is deductible for local tax purposes, and total liabilities assumed were $586 million.

Prudential Financial intends to make a Section 338(g) election under the Internal Revenue Code with respect to this acquisition, resulting in the acquired entity being treated for U.S. tax purposes as a newly-incorporated company. Under such election, the U.S. tax basis of the assets acquired and liabilities assumed of UniAsia Life Assurance Berhad was adjusted as of January 2, 2014, to reflect the consequences of the Section 338(g) election.

Acquisition of The Hartford’s Individual Life Insurance Business

On January 2, 2013, the Company acquired The Hartford Financial Services Group’s (“The Hartford”) individual life insurance business through a reinsurance transaction. Under the agreement, the Company paid The Hartford cash consideration of $615 million, primarily in the form of a ceding commission, to provide reinsurance for approximately 700,000 life insurance policies with net retained face amount in force of approximately $141 billion. The acquisition increased the Company’s scale in the U.S. individual life insurance market, particularly universal life products, and provides complementary distribution opportunities through expanded wirehouse and bank distribution channels.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The assets acquired and liabilities assumed have been included in the Company’s Unaudited Interim Consolidated Financial Statements as of the acquisition date. Total assets acquired were $11.2 billion, including $1.4 billion of value of business acquired and $0.1 billion of cash, and total liabilities assumed were $10.6 billion. There is no goodwill, including tax deductible goodwill, associated with the acquisition.

Sale of Wealth Management Solutions Business

In April 2013, the Company signed a definitive agreement to sell its wealth management solutions business to Envestnet Inc. The transaction, which does not have a material impact to the Company’s financial results, closed on July 1, 2013. Due to the existence of an ongoing contractual relationship between the Company and these operations, this disposition did not qualify for discontinued operations treatment under U.S. GAAP.

Discontinued Operations

Income from discontinued operations, including charges upon disposition, are as follows:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2014		2013			2014		2013
	(in millions)
Real estate investments sold or held for sale(1)	$	0	$	13		$	12	$	15
Global commodities business		0		(1	)		0		1

Income from discontinued operations before income taxes		0		12			12		16
Income tax expense		0		4			4		5

Income from discontinued operations, net of taxes	$	0	$	8		$	8	$	11

(1)	Reflects the income from discontinued real estate investments.

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

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


	September 30, 2014		December 31, 2013
	(in millions)
Total assets	$	5	$	15
Total liabilities	$	6	$	7

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:


	September 30, 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	$	13,305	$	3,162	$	11	$	16,456	$	0
Obligations of U.S. states and their political subdivisions		5,318		615		21		5,912		0
Foreign government bonds		77,292		9,719		171		86,840		1
Corporate securities		146,653		14,519		1,307		159,865		(6	)
Asset-backed securities(1)		11,188		299		127		11,360		(603	)
Commercial mortgage-backed securities		14,180		330		79		14,431		(2	)
Residential mortgage-backed securities(2)		5,824		389		10		6,203		(6	)

Total fixed maturities, available-for-sale	$	273,760	$	29,033	$	1,726	$	301,067	$	(616	)

Equity securities, available-for-sale	$	7,099	$	2,840	$	61	$	9,878


	September 30, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in millions)
Fixed maturities, held-to-maturity
Foreign government bonds	$	897	$	152	$	0	$	1,049
Corporate securities(4)		776		69		4		841
Asset-backed securities(1)		593		45		0		638
Commercial mortgage-backed securities		94		9		0		103
Residential mortgage-backed securities(2)		520		32		0		552

Total fixed maturities, held-to-maturity(4)	$	2,880	$	307	$	4	$	3,183

(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 $928 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.

(4)	Excludes notes with amortized cost of $3,588 million (fair value, $3,859 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, 2013
	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	$	13,754	$	1,742	$	96	$	15,400	$	0
Obligations of U.S. states and their political subdivisions		3,598		274		137		3,735		0
Foreign government bonds		75,595		7,459		266		82,788		1
Corporate securities		145,091		12,095		3,408		153,778		(4	)
Asset-backed securities(1)		10,691		214		316		10,589		(755	)
Commercial mortgage-backed securities		13,633		403		163		13,873		0
Residential mortgage-backed securities(2)		6,365		379		41		6,703		(7	)

Total fixed maturities, available-for-sale	$	268,727	$	22,566	$	4,427	$	286,866	$	(765	)

Equity securities, available-for-sale	$	7,003	$	2,931	$	24	$	9,910


	December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in millions)
Fixed maturities, held-to-maturity
Foreign government bonds	$	938	$	117	$	0	$	1,055
Corporate securities(4)		904		50		24		930
Asset-backed securities(1)		693		46		0		739
Commercial mortgage-backed securities		166		18		0		184
Residential mortgage-backed securities(2)		611		34		0		645

Total fixed maturities, held-to-maturity(4)	$	3,312	$	265	$	24	$	3,553

(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 $875 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 $2,400 million (fair value, $2,461 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 September 30, 2014, 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	$	10,140	$	10,588	$	0	$	0
Due after one year through five years		49,570		54,298		51		53
Due after five years through ten years		58,410		64,263		219		232
Due after ten years(1)		124,448		139,924		1,403		1,605
Asset-backed securities		11,188		11,360		593		638
Commercial mortgage-backed securities		14,180		14,431		94		103
Residential mortgage-backed securities		5,824		6,203		520		552

Total	$	273,760	$	301,067	$	2,880	$	3,183

(1)	Excludes notes with amortized cost of $3,588 million (fair value, $3,859 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 September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Fixed maturities, available-for-sale
Proceeds from sales	$	5,859		$	7,603		$	21,897		$	22,237
Proceeds from maturities/repayments		5,874			5,976			16,580			18,420
Gross investment gains from sales, prepayments, and maturities		294			607			1,195			1,249
Gross investment losses from sales and maturities		(125	)		(197	)		(360	)		(391	)
Fixed maturities, held-to-maturity
Gross investment gains from prepayments	$	0		$	0		$	0		$	0
Proceeds from maturities/repayments		145			122			377			395
Equity securities, available-for-sale
Proceeds from sales	$	1,456		$	1,290		$	3,937		$	3,475
Gross investment gains from sales		224			222			555			453
Gross investment losses from sales		(33	)		(22	)		(92	)		(72	)
Fixed maturity and equity security impairments
Net writedowns for other-than-temporary impairment losses on fixed maturities recognized in earnings(1)	$	(5	)	$	(43	)	$	(47	)	$	(146	)
Writedowns for impairments on equity securities		(9	)		(3	)		(26	)		(11	)

(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.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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, 2013, a portion of certain other-than-temporary impairment (“OTTI”) losses on fixed maturity securities is 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 tables set 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 September 30, 2014			Nine Months Ended September 30, 2014
	(in millions)
Balance, beginning of period	$	794		$	968
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period		(15	)		(214	)
Credit loss impairments previously recognized on securities impaired to fair value during the period(1)		0			0
Credit loss impairment recognized in the current period on securities not previously impaired		0			12
Additional credit loss impairments recognized in the current period on securities previously impaired		1			5
Increases due to the passage of time on previously recorded credit losses		10			28
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected		(3	)		(12	)

Balance, end of period	$	787		$	787


	Three Months Ended September 30, 2013			Nine Months Ended September 30, 2013
	(in millions)
Balance, beginning of period	$	1,080		$	1,166
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period		(113	)		(263	)
Credit loss impairments previously recognized on securities impaired to fair value during the period(1)		(1	)		(1	)
Credit loss impairment recognized in the current period on securities not previously impaired		1			9
Additional credit loss impairments recognized in the current period on securities previously impaired		27			66
Increases due to the passage of time on previously recorded credit losses		14			40
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected		(3	)		(12	)

Balance, end of period	$	1,005		$	1,005

(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.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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:


	September 30, 2014				December 31, 2013
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Short-term investments and cash equivalents	$	328	$	328	$	697	$	697

Fixed maturities:
Corporate securities		11,914		12,466		12,109		12,616
Commercial mortgage-backed securities		2,555		2,582		2,417		2,441
Residential mortgage-backed securities(1)		1,704		1,718		1,857		1,830
Asset-backed securities(2)		1,168		1,189		1,096		1,107
Foreign government bonds		635		652		579		596
U.S. government authorities and agencies and obligations of U.S. states		308		358		303		341

Total fixed maturities		18,284		18,965		18,361		18,931
Equity securities		966		1,214		913		1,199

Total trading account assets supporting insurance liabilities	$	19,578	$	20,507	$	19,971	$	20,827

(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 $(194) million and $63 million during the three months ended September 30, 2014 and 2013, respectively, and $73 million and $(430) million during the nine months ended September 30, 2014 and 2013, respectively.

Other Trading Account Assets

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


	September 30, 2014				December 31, 2013
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Short-term investments and cash equivalents	$	57	$	57	$	105	$	106
Fixed maturities		7,192		7,238		4,653		4,723
Equity securities		1,011		1,130		1,051		1,177
Other		8		13		3		7

Subtotal	$	8,268		8,438	$	5,812		6,013

Derivative instruments				883				440

Total other trading account assets			$	9,321			$	6,453

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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 $(66) million and $25 million during the three months ended September 30, 2014 and 2013, respectively, and $(31) million and $112 million during the nine months ended September 30, 2014 and 2013, respectively.

Concentrations of Financial Instruments

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

As of both September 30, 2014 and December 31, 2013, 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.


	September 30, 2014				December 31, 2013
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Investments in Japanese government and government agency securities:
Fixed maturities, available-for-sale	$	59,267	$	65,922	$	59,775	$	65,389
Fixed maturities, held-to-maturity		875		1,025		916		1,032
Trading account assets supporting insurance liabilities		477		483		451		458
Other trading account assets		39		40		38		39
Short-term investments		0		0		0		0
Cash equivalents		232		232		107		107

Total	$	60,890	$	67,702	$	61,287	$	67,025


	September 30, 2014				December 31, 2013
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Investments in South Korean government and government agency securities:
Fixed maturities, available-for-sale	$	7,117	$	8,469	$	6,672	$	7,277
Fixed maturities, held-to-maturity		0		0		0		0
Trading account assets supporting insurance liabilities		49		50		61		61
Other trading account assets		0		0		0		0
Short-term investments		0		0		0		0
Cash equivalents		0		0		0		0

Total	$	7,166	$	8,519	$	6,733	$	7,338

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:


	September 30, 2014						December 31, 2013
	Amount (in millions)			% of Total			Amount (in millions)			% of Total
Commercial and agricultural mortgage loans by property type:
Office	$	9,037			21.0	%	$	7,762			19.9	%
Retail		8,702			20.2			8,698			22.3
Apartments/Multi-Family		9,766			22.7			7,492			19.2
Industrial		7,477			17.5			7,390			18.9
Hospitality		2,124			4.9			2,050			5.2
Other		3,510			8.2			3,464			8.9

Total commercial mortgage loans		40,616			94.5			36,856			94.4
Agricultural property loans		2,370			5.5			2,183			5.6

Total commercial and agricultural mortgage loans by property type		42,986			100.0	%		39,039			100.0	%

Valuation allowance		(112	)					(195	)

Total net commercial and agricultural mortgage loans by property type		42,874						38,844

Other loans
Uncollateralized loans		1,193						1,306
Residential property loans		459						544
Other collateralized loans		325						335

Total other loans		1,977						2,185
Valuation allowance		(15	)					(21	)

Total net other loans		1,962						2,164

Total commercial mortgage and other loans(1)	$	44,836					$	41,008

(1)	Includes loans held at fair value.

The commercial mortgage and agricultural property loans are geographically dispersed throughout the United States, Canada, Europe, Mexico and Asia with the largest concentrations in California (26%), New York (10%), and Texas (9%) at September 30, 2014.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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


	September 30, 2014
	Commercial Mortgage Loans			Agricultural Property Loans			Residential Property Loans			Other Collateralized Loans			Uncollateralized Loans			Total
	(in millions)
Allowance for credit losses, beginning of year	$	188		$	7		$	6		$	3		$	12		$	216
Addition to / (release of) allowance for losses		(71	)		(5	)		(1	)		(1	)		(2	)		(80	)
Charge-offs, net of recoveries		(7	)		0			0			(2	)		0			(9	)
Change in foreign exchange		0			0			0			0			0			0

Total ending balance	$	110		$	2		$	5		$	0		$	10		$	127


	December 31, 2013
	Commercial Mortgage Loans			Agricultural Property Loans			Residential Property Loans			Other Collateralized Loans			Uncollateralized Loans			Total
	(in millions)
Allowance for credit losses, beginning of year	$	209		$	20		$	11		$	12		$	17		$	269
Addition to / (release of) allowance for losses		12			(7	)		(3	)		(9	)		(2	)		(9	)
Charge-offs, net of recoveries		(33	)		(6	)		0			0			0			(39	)
Change in foreign exchange		0			0			(2	)		0			(3	)		(5	)

Total ending balance	$	188		$	7		$	6		$	3		$	12		$	216

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:


	September 30, 2014
	Commercial Mortgage Loans		Agricultural Property Loans		Residential Property Loans		Other Collateralized Loans		Uncollateralized Loans		Total
	(in millions)
Allowance for Credit Losses:
Ending balance: individually evaluated for impairment	$	11	$	0	$	0	$	0	$	0	$	11
Ending balance: collectively evaluated for impairment		99		2		5		0		10		116
Ending balance: loans acquired with deteriorated credit quality		0		0		0		0		0		0

Total ending balance	$	110	$	2	$	5	$	0	$	10	$	127


Recorded Investment:(1)
Ending balance gross of reserves: individually evaluated for impairment	$	286	$	4	$	0	$	3	$	2	$	295
Ending balance gross of reserves: collectively evaluated for impairment		40,330		2,366		459		322		1,191		44,668
Ending balance gross of reserves: loans acquired with deteriorated credit quality		0		0		0		0		0		0

Total ending balance, gross of reserves	$	40,616	$	2,370	$	459	$	325	$	1,193	$	44,963

(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, 2013
	Commercial Mortgage Loans		Agricultural Property Loans		Residential Property Loans		Other Collateralized Loans		Uncollateralized Loans		Total
	(in millions)
Allowance for Credit Losses:
Ending balance: individually evaluated for impairment	$	16	$	0	$	0	$	3	$	0	$	19
Ending balance: collectively evaluated for impairment		172		7		6		0		12		197
Ending balance: loans acquired with deteriorated credit quality		0		0		0		0		0		0

Total ending balance	$	188	$	7	$	6	$	3	$	12	$	216

Recorded Investment:(1)
Ending balance gross of reserves: individually evaluated for impairment	$	429	$	5	$	0	$	7	$	2	$	443
Ending balance gross of reserves: collectively evaluated for impairment		36,427		2,178		544		328		1,304		40,781
Ending balance gross of reserves: loans acquired with deteriorated credit quality		0		0		0		0		0		0

Total ending balance, gross of reserves	$	36,856	$	2,183	$	544	$	335	$	1,306	$	41,224

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

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:


	September 30, 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	$	9	$	9	$	0	$	13	$	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		2		0		0		0

Total with no related allowance	$	13	$	15	$	0	$	17	$	1


With an allowance recorded:
Commercial mortgage loans	$	114	$	114	$	11	$	85	$	5
Agricultural property loans		0		0		0		0		0
Residential property loans		0		0		0		0		0
Other collateralized loans		2		2		0		3		0
Uncollateralized loans		0		0		0		0		0

Total with related allowance	$	116	$	116	$	11	$	88	$	5


Total:
Commercial mortgage loans	$	123	$	123	$	11	$	98	$	6
Agricultural property loans		4		4		0		4		0
Residential property loans		0		0		0		0		0
Other collateralized loans		2		2		0		3		0
Uncollateralized loans		0		2		0		0		0

Total	$	129	$	131	$	11	$	105	$	6

(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 income regardless of when the impairments occurred.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


	December 31, 2013
	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	$	33	$	33	$	0	$	30	$	1
Agricultural property loans		5		5		0		2		0
Residential property loans		0		0		0		0		0
Other collateralized loans		0		0		0		0		0
Uncollateralized loans		0		2		0		0		0

Total with no related allowance	$	38	$	40	$	0	$	32	$	1


With an allowance recorded:
Commercial mortgage loans	$	54	$	55	$	16	$	121	$	1
Agricultural property loans		0		0		0		10		0
Residential property loans		0		0		0		0		0
Other collateralized loans		5		5		3		8		3
Uncollateralized loans		0		0		0		0		0

Total with related allowance	$	59	$	60	$	19	$	139	$	4


Total:
Commercial mortgage loans	$	87	$	88	$	16	$	151	$	2
Agricultural property loans		5		5		0		12		0
Residential property loans		0		0		0		0		0
Other collateralized loans		5		5		3		8		3
Uncollateralized loans		0		2		0		0		0

Total	$	97	$	100	$	19	$	171	$	5

(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 income regardless of when the impairments occurred.

The net carrying value of commercial and other loans held for sale by the Company as of September 30, 2014 and December 31, 2013 was $304 million and $158 million, respectively. In all of these transactions, the Company pre-arranges that it will sell the loan to an investor. As of both September 30, 2014 and December 31, 2013, 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 September 30, 2014, based upon the recorded investment gross of allowance for credit losses.

Commercial mortgage loans


	Debt Service Coverage Ratio—September 30, 2014
	Greater than 1.2X		1.0X to <1.2X		Less than 1.0X		Total
	(in millions)
Loan-to-Value Ratio
0%-59.99%	$	20,689	$	581	$	324	$	21,594
60%-69.99%		12,834		456		271		13,561
70%-79.99%		4,442		374		50		4,866
Greater than 80%		168		170		257		595

Total commercial mortgage loans	$	38,133	$	1,581	$	902	$	40,616

Agricultural property loans


	Debt Service Coverage Ratio—September 30, 2014
	Greater than 1.2X		1.0X to <1.2X		Less than 1.0X		Total
	(in millions)
Loan-to-Value Ratio
0%-59.99%	$	2,111	$	133	$	2	$	2,246
60%-69.99%		124		0		0		124
70%-79.99%		0		0		0		0
Greater than 80%		0		0		0		0

Total agricultural property loans	$	2,235	$	133	$	2	$	2,370

Total commercial and agricultural mortgage loans


	Debt Service Coverage Ratio—September 30, 2014
	Greater than 1.2X		1.0X to <1.2X		Less than 1.0X		Total
	(in millions)
Loan-to-Value Ratio
0%-59.99%	$	22,800	$	714	$	326	$	23,840
60%-69.99%		12,958		456		271		13,685
70%-79.99%		4,442		374		50		4,866
Greater than 80%		168		170		257		595

Total commercial and agricultural mortgage loans	$	40,368	$	1,714	$	904	$	42,986

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, 2013, based upon the recorded investment gross of allowance for credit losses.

Commercial mortgage loans


	Debt Service Coverage Ratio—December 31, 2013
	Greater than 1.2X		1.0X to <1.2X		Less than 1.0X		Total
	(in millions)
Loan-to-Value Ratio
0%-59.99%	$	19,089	$	597	$	179	$	19,865
60%-69.99%		11,101		379		95		11,575
70%-79.99%		4,005		422		216		4,643
Greater than 80%		325		173		275		773

Total commercial mortgage loans	$	34,520	$	1,571	$	765	$	36,856

Agricultural property loans


	Debt Service Coverage Ratio—December 31, 2013
	Greater than 1.2X		1.0X to <1.2X		Less than 1.0X		Total
	(in millions)
Loan-to-Value Ratio
0%-59.99%	$	2,023	$	137	$	0	$	2,160
60%-69.99%		23		0		0		23
70%-79.99%		0		0		0		0
Greater than 80%		0		0		0		0

Total agricultural property loans	$	2,046	$	137	$	0	$	2,183

Total commercial and agricultural mortgage loans


	Debt Service Coverage Ratio—December 31, 2013
	Greater than 1.2X		1.0X to <1.2X		Less than 1.0X		Total
	(in millions)
Loan-to-Value Ratio
0%-59.99%	$	21,112	$	734	$	179	$	22,025
60%-69.99%		11,124		379		95		11,598
70%-79.99%		4,005		422		216		4,643
Greater than 80%		325		173		275		773

Total commercial and agricultural mortgage loans	$	36,566	$	1,708	$	765	$	39,039

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.


	September 30, 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	$	40,605	$	5	$	5	$	0	$	1	$	11	$	40,616	$	107
Agricultural property loans		2,369		0		0		0		1		1		2,370		1
Residential property loans		442		6		3		0		8		17		459		8
Other collateralized loans		325		0		0		0		0		0		325		2
Uncollateralized loans		1,193		0		0		0		0		0		1,193		2

Total	$	44,934	$	11	$	8	$	0	$	10	$	29	$	44,963	$	120


	December 31, 2013
	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	$	36,821	$	16	$	0	$	0	$	19	$	35	$	36,856	$	154
Agricultural property loans		2,182		0		0		0		1		1		2,183		2
Residential property loans		520		11		3		0		10		24		544		10
Other collateralized loans		334		0		0		0		1		1		335		5
Uncollateralized loans		1,306		0		0		0		0		0		1,306		2

Total	$	41,163	$	27	$	3	$	0	$	31	$	61	$	41,224	$	173

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, 2013, for further discussion regarding nonaccrual status loans.

For both the three and nine months ended September 30, 2014, there were no new commercial mortgage and other loans acquired, other than those through direct origination, nor were there any new commercial mortgage and other loans sold, other than those classified as held-for-sale. For the three months ended September 30, 2013, there were no new commercial mortgage and other loans acquired, other than those through direct origination, nor were there any new commercial mortgage and other loans sold, other than those classified as held-for-sale. For the nine months ended September 30, 2013, there were $718 million of commercial mortgage and other loans acquired, other than those through direct origination, and $7 million of 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 both September 30, 2014 and December 31, 2013, the Company had no significant commitments to fund to borrowers that have been involved in a troubled debt restructuring.

During the three months and nine months ended September 30, 2014 there were no new troubled debt restructurings related to commercial mortgage and other 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.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

During the three months and nine months ended September 30, 2013, there were adjusted pre-modification outstanding recorded investments of $7 million and $107 million, respectively, and post-modification outstanding recorded investments of $8 million and $107 million, respectively, related to commercial mortgage loans. There were 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, 2013.

Net Investment Income

Net investment income for the three and nine months ended September 30, 2014 and 2013, was from the following sources:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Fixed maturities, available-for-sale	$	2,659		$	2,618		$	7,945		$	7,910
Fixed maturities, held-to-maturity		53			31			135			92
Equity securities, available-for-sale		92			93			281			265
Trading account assets		277			243			794			715
Commercial mortgage and other loans		519			498			1,539			1,480
Policy loans		162			159			474			457
Short-term investments and cash equivalents		9			9			26			30
Other long-term investments		254			145			771			477

Gross investment income		4,025			3,796			11,965			11,426
Less: investment expenses		(184	)		(146	)		(532	)		(427	)

Net investment income	$	3,841		$	3,650		$	11,433		$	10,999

Realized Investment Gains (Losses), Net

Realized investment gains (losses), net, for the three and nine months ended September 30, 2014 and 2013, were from the following sources:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Fixed maturities	$	163		$	368		$	788		$	712
Equity securities		185			198			438			369
Commercial mortgage and other loans		91			31			107			68
Investment real-estate		0			2			0			2
Joint ventures and limited partnerships		(14	)		16			(13	)		10
Derivatives(1)		(356	)		(2,730	)		(441	)		(5,030	)
Other		6			5			13			12

Realized investment gains (losses), net	$	75		$	(2,110	)	$	892		$	(3,857	)

(1)	Includes the offset of hedged items in qualifying effective hedge relationship 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:


	September 30, 2014			December 31, 2013
	(in millions)
Fixed maturity securities on which an OTTI loss has been recognized	$	312		$	110
Fixed maturity securities, available-for-sale—all other		26,995			18,029
Equity securities, available-for-sale		2,779			2,907
Derivatives designated as cash flow hedges(1)		(145	)		(446	)
Other investments(2)		0			4

Net unrealized gains (losses) on investments	$	29,941		$	20,604

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

(2)	As of September 30, 2014, includes $9 million of net unrealized losses on held-to-maturity securities that were previously transferred from available-for-sale.

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:


	September 30, 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	$	1,381	$	10	$	37	$	1	$	1,418	$	11
Obligations of U.S. states and their political subdivisions		401		7		310		14		711		21
Foreign government bonds		1,147		48		1,352		123		2,499		171
Corporate securities		13,399		269		17,039		1,042		30,438		1,311
Commercial mortgage-backed securities		2,317		12		1,947		67		4,264		79
Asset-backed securities		1,281		5		3,086		122		4,367		127
Residential mortgage-backed securities		288		1		383		9		671		10

Total	$	20,214	$	352	$	24,154	$	1,378	$	44,368	$	1,730

Equity securities, available-for-sale	$	1,263	$	61	$	2	$	0	$	1,265	$	61

(1)	Includes $93 million of fair value and $4 million of gross unrealized losses at September 30, 2014, 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, 2013
	Less than twelve months				Twelve months or more				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(in millions)
Fixed maturities(1)
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	3,913	$	95	$	6	$	1	$	3,919	$	96
Obligations of U.S. states and their political subdivisions		1,187		129		43		8		1,230		137
Foreign government bonds		3,260		211		438		55		3,698		266
Corporate securities		29,574		1,618		14,094		1,814		43,668		3,432
Commercial mortgage-backed securities		4,267		128		605		35		4,872		163
Asset-backed securities		3,007		42		2,556		274		5,563		316
Residential mortgage-backed securities		1,590		34		239		7		1,829		41

Total	$	46,798	$	2,257	$	17,981	$	2,194	$	64,779	$	4,451

Equity securities, available-for-sale	$	586	$	24	$	1	$	0	$	587	$	24

(1)	Includes $210 million of fair value and $24 million of gross unrealized losses at December 31, 2013, 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 September 30, 2014 and December 31, 2013, are composed of $1,539 million and $4,178 million, respectively, related to high or highest quality securities based on the National Association of Insurance Commissioners (“NAIC”) or equivalent rating and $191 million and $274 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. At September 30, 2014, the $1,378 million of gross unrealized losses of twelve months or more were concentrated in the consumer non-cyclical, utility, energy, and capital goods sectors of the Company’s corporate securities. At December 31, 2013, the $2,194 million of gross unrealized losses of twelve months or more were concentrated in the consumer non-cyclical, utility, and capital goods 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 its 2013 Annual Report on Form 10-K, the Company concluded that an adjustment to earnings for other-than-temporary impairments for these securities was not warranted at September 30, 2014 or December 31, 2013. 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 movements, credit spread widening and increased liquidity discounts. At September 30, 2014, the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before the anticipated recovery of their remaining amortized cost bases.

At September 30, 2014, $6 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. At December 31, 2013, $4 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 its 2013 Annual Report on Form 10-K, the Company concluded that an adjustment for other-than-temporary impairments for these equity securities was not warranted at September 30, 2014 or December 31, 2013.

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, or “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 VIE do not have recourse to the Company in excess of the assets contained within the VIE.


	Consolidated VIEs for Which the Company is the Investment Manager				Other Consolidated VIEs
	September 30, 2014		December 31, 2013		September 30, 2014			December 31, 2013
	(in millions)
Fixed maturities, available-for-sale	$	48	$	68	$	108		$	108
Fixed maturities, held-to-maturity		0		0		834			871
Trading account assets supporting insurance liabilities		0		0		11			11
Other trading account assets		6,203		3,832		0			0
Commercial mortgage and other loans		13		23		300			300
Other long-term investments		0		0		123			87
Cash and cash equivalents		886		566		(1	)		(3	)
Accrued investment income		31		19		3			4
Other assets		275		132		0			0

Total assets of consolidated VIEs	$	7,456	$	4,640	$	1,378		$	1,378

Notes issued by consolidated VIEs	$	5,397	$	3,302	$	0		$	0
Other liabilities		1,044		631		1			1

Total liabilities of consolidated VIEs	$	6,441	$	3,933	$	1		$	1

As included in the table above, notes issued by consolidated VIEs are classified in the line item on the 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 September 30, 2014, 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. The trust issues medium-term notes secured by funding agreements issued to the trust by Prudential Insurance with the proceeds of such notes. The trust is the beneficiary of an indemnity agreement with the Company that provides that the Company is responsible for costs related to the notes issued with limited exception. As a result, the Company has determined that it is the primary beneficiary of the trust, which is therefore consolidated.

The funding agreements represent an intercompany transaction that is eliminated upon consolidation. However, in recognition of the security interest in such funding agreements, the trust’s medium-term note liability of $2,710 million and $2,381 million at September 30, 2014 and December 31, 2013, 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 $141 million and $489 million at September 30, 2014 and December 31, 2013, 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 $7,548 million and $9,426 million as of September 30, 2014 and December 31, 2013, 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 $7,462 million and $7,244 million as of September 30, 2014 and December 31, 2013, 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 Business.

The policies included in the Closed Block are specified individual life insurance policies and individual annuity contracts that were in force on the effective date of the Plan of Reorganization and for which Prudential Insurance is currently paying or expects to pay experience-based policy dividends. Assets have been allocated to the Closed Block in an amount that has been determined to produce cash flows which, together with revenues from policies included in the Closed Block, are expected to be sufficient to support obligations and liabilities relating to these policies, including provision for payment of benefits, certain expenses, and taxes and to provide for continuation of the policyholder dividend scales in effect in 2000, assuming experience underlying such scales continues. To the extent that, over time, cash flows from the assets allocated to the Closed Block and claims and other experience related to the Closed Block are, in the aggregate, more or less favorable than what was assumed when the Closed Block was established, total dividends paid to Closed Block policyholders may be

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 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 September 30, 2014 and December 31, 2013, the Company recognized a policyholder dividend obligation of $1,427 million and $887 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 $4,402 million and $3,624 million at September 30, 2014 and December 31, 2013, respectively, to be paid to Closed Block policyholders unless offset by future experience, with an offsetting 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:


	September 30, 2014			December 31, 2013
	(in millions)
Closed Block Liabilities
Future policy benefits	$	49,862		$	50,258
Policyholders’ dividends payable		954			907
Policyholders’ dividend obligation		5,829			4,511
Policyholders’ account balances		5,319			5,359
Other Closed Block liabilities		5,422			4,281

Total Closed Block Liabilities		67,386			65,316

Closed Block Assets
Fixed maturities, available-for-sale, at fair value		40,494			39,169
Other trading account assets, at fair value		266			291
Equity securities, available-for-sale, at fair value		3,502			3,884
Commercial mortgage and other loans		9,407			8,762
Policy loans		4,929			5,013
Other long-term investments		2,540			2,085
Short-term investments		602			1,790

Total investments		61,740			60,994
Cash and cash equivalents		1,610			544
Accrued investment income		556			542
Other Closed Block assets		561			296

Total Closed Block Assets		64,467			62,376

Excess of reported Closed Block Liabilities over Closed Block Assets		2,919			2,940
Portion of above representing accumulated other comprehensive income:
Net unrealized investment gains (losses)		4,392			3,615
Allocated to policyholder dividend obligation		(4,402	)		(3,624	)

Future earnings to be recognized from Closed Block Assets and Closed Block Liabilities	$	2,909		$	2,931

Information regarding the policyholder dividend obligation is as follows:


	Nine Months Ended September 30, 2014
	(in millions)
Balance, January 1	$	4,511
Impact from earnings allocable to policyholder dividend obligation		540
Change in net unrealized investment gains (losses) allocated to policyholder dividend obligation		778

Balance, September 30	$	5,829

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Closed Block revenues and benefits and expenses for the three and nine months ended September 30, 2014 and 2013 were as follows:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2014			2013		2014		2013
	(in millions)
Revenues
Premiums	$	620		$	629	$	1,970	$	1,987
Net investment income		697			678		2,101		2,099
Realized investment gains (losses), net		397			208		901		284
Other income		(3	)		25		31		40

Total Closed Block revenues		1,711			1,540		5,003		4,410

Benefits and Expenses
Policyholders’ benefits		756			774		2,459		2,459
Interest credited to policyholders’ account balances		35			34		102		102
Dividends to policyholders		725			557		1,990		1,468
General and administrative expenses		110			116		335		353

Total Closed Block benefits and expenses		1,626			1,481		4,886		4,382

Closed Block revenues, net of Closed Block benefits and expenses, before income taxes and discontinued operations		85			59		117		28
Income tax expense (benefit)		74			53		95		12

Closed Block revenues, net of Closed Block benefits and expenses and income taxes, before discontinued operations		11			6		22		16
Income (loss) from discontinued operations, net of taxes		0			0		0		0

Closed Block revenues, net of Closed Block benefits and expenses, income taxes and discontinued operations	$	11		$	6	$	22	$	16

7. EQUITY

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


	Common Stock								Class B Stock
	Issued		Held In Treasury			Outstanding			Issued and Outstanding
	(in millions)
Balance, December 31, 2013		660.1		199.0			461.1			2.0
Common Stock issued		0.0		0.0			0.0			0.0
Common Stock acquired		0.0		8.7			(8.7	)		0.0
Stock-based compensation programs(1)		0.0		(4.7	)		4.7			0.0

Balance, September 30, 2014		660.1		203.0			457.1			2.0

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

In June 2013, Prudential Financial’s Board of Directors authorized the Company to repurchase at management’s discretion up to $1.0 billion of its outstanding Common Stock from July 1, 2013 through June 30,

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

2014. Under this authorization, 12.0 million shares of the Company’s common stock were repurchased at a total cost of $1.0 billion, of which 5.9 million shares were repurchased in the first six months of 2014 at a total cost of $500 million.

In June 2014, Prudential Financial’s Board of Directors authorized the Company to repurchase at management’s discretion up to $1.0 billion of its outstanding Common Stock from July 1, 2014 through June 30, 2015. As of September 30, 2014, 2.8 million shares of the Company’s Common Stock were repurchased under this authorization at a total cost of $250 million. The timing and amount of share repurchases are determined by management based upon market conditions and other considerations, and repurchases may be effected in the open market, through derivative, accelerated repurchase and other negotiated transactions and through prearranged trading plans complying with Rule 10b5-1(c) under the Securities Exchange Act of 1934 (the “Exchange Act”). Numerous factors could affect the timing and amount of any future repurchases under the share repurchase authorization, including increased capital needs of the Company due to changes in regulatory capital requirements, opportunities for growth and acquisitions, and the effect of adverse market conditions on the segments.

Accumulated Other Comprehensive Income (Loss)

The balance of and changes in each component of “Accumulated other comprehensive income (loss) attributable to Prudential Financial, Inc.” for the nine months ended September 30, 2014 and 2013 are as follows:


	Accumulated Other Comprehensive Income (Loss) Attributable to Prudential Financial, Inc.
	Foreign Currency Translation Adjustment			Net Unrealized Investment Gains (Losses)(1)			Pension and Postretirement Unrecognized Net Periodic Benefit (Cost)			Total Accumulated Other Comprehensive Income (Loss)
	(in millions)
Balance, December 31, 2013	$	(113	)	$	10,344		$	(1,550	)	$	8,681
Change in other comprehensive income before reclassifications		(257	)		8,916			11			8,670
Amounts reclassified from AOCI		(2	)		(1,266	)		69			(1,199	)
Income tax benefit (expense)		59			(2,681	)		(29	)		(2,651	)

Balance, September 30, 2014	$	(313	)	$	15,313		$	(1,499	)	$	13,501


	Accumulated Other Comprehensive Income (Loss) Attributable to Prudential Financial, Inc.
	Foreign Currency Translation Adjustment			Net Unrealized Investment Gains (Losses)(1)			Pension and Postretirement Unrecognized Net Periodic Benefit (Cost)			Total Accumulated Other Comprehensive Income (Loss)
	(in millions)
Balance, December 31, 2012	$	928		$	11,402		$	(2,116	)	$	10,214
Change in other comprehensive income before reclassifications		(1,160	)		(2,754	)		26			(3,888	)
Amounts reclassified from AOCI		0			(1,065	)		94			(971	)
Income tax benefit (expense)		328			1,259			(43	)		1,544

Balance, September 30, 2013	$	96		$	8,842		$	(2,039	)	$	6,899

(1)	Includes cash flow hedges of $(145) million and $(446) million as of September 30, 2014 and December 31, 2013, respectively, and $(355) million and $(257) million as of September 30, 2013 and December 31, 2012, respectively.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Reclassifications out of Accumulated Other Comprehensive Income (Loss)


	Three Months Ended September 30,						Nine Months Ended September 30,						Affected line item in Consolidated Statement of Operations
	2014			2013			2014			2013
	(in millions)
Amounts reclassified from AOCI(1)(2):
Foreign currency translation adjustment:
Foreign currency translation adjustments	$	0		$	0		$	2		$	0		Realized investment gains (losses), net

Total foreign currency translation adjustment		0			0			2			0
Net unrealized investment gains (losses):
Cash flow hedges—Interest Rate		(6	)		(6	)		(18	)		(18	)	(3)
Cash flow hedges—Currency/Interest rate		68			(21	)		58			(65	)	(3)
Net unrealized investment gains (losses) on available-for-sale securities		348			568			1,226			1,082
Net unrealized investment gains (losses)—all other		0			0			0			66

Total net unrealized investment gains (losses)		410			541			1,266			1,065		(4)
Amortization of defined benefit pension items:
Prior service cost		4			6			15			17		(5)
Actuarial gain (loss)		(27	)		(37	)		(84	)		(111	)	(5)

Total amortization of defined benefit pension items		(23	)		(31	)		(69	)		(94	)

Total reclassifications for the period	$	387		$	510		$	1,199		$	971

(1)	All amounts are shown before tax.

(2)	Positive amounts indicate gains/benefits reclassified out of AOCI. Negative amounts indicate losses/costs reclassified out of AOCI.

(3)	See Note 14 for additional information on cash flow hedges.

(4)	See table below for additional information on unrealized investment gains (losses), including the impact on deferred policy acquisition and other costs, future policy benefits and policyholders’ dividends.

(5)	See Note 10 for information on employee benefit plans.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Net Unrealized Investment Gains (Losses)

Net unrealized investment gains and losses on securities classified as available-for-sale and certain other long-term investments and other assets are included in the Company’s Unaudited Interim Consolidated Statements of Financial Position as a component of AOCI. Changes in these amounts include reclassification adjustments to exclude from “Other comprehensive income (loss)” those items that are included as part of “Net income” for a period that had been part of “Other comprehensive income (loss)” in earlier periods. The amounts for the periods indicated below, split between amounts related to fixed maturity securities on which an OTTI loss has been recognized, and all other net unrealized investment gains and losses, are as follows:

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


	Net Unrealized Gains (Losses) On Investments			Deferred Policy Acquisition Costs, Deferred Sales Inducements, and Value of Business Acquired			Future Policy Benefits and Policyholders’ Account Balances		Policyholders’ Dividends			Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses)
	(in millions)
Balance, December 31, 2013	$	110		$	(5	)	$	4	$	64		$	(60	)	$	113
Net investment gains (losses) on investments arising during the period		163											(57	)		106
Reclassification adjustment for (gains) losses included in net income		40											(14	)		26
Reclassification adjustment for OTTI losses excluded from net income(1)		(1	)										0			(1	)
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs, deferred sales inducements and value of business acquired					(2	)							1			(1	)
Impact of net unrealized investment (gains) losses on future policy benefits and policyholders’ account balances								0					0			0
Impact of net unrealized investment (gains) losses on policyholders’ dividends										(96	)		34			(62	)

Balance, September 30, 2014	$	312		$	(7	)	$	4	$	(32	)	$	(96	)	$	181

(1)	Represents “transfers in” related to the portion of OTTI losses recognized during the period that were not recognized in earnings for securities with no prior OTTI loss.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

All Other Net Unrealized Investment Gains and Losses in AOCI


	Net Unrealized Gains (Losses) on Investments(1)			Deferred Policy Acquisition Cost, Deferred Sales Inducements, and Value of Business Acquired			Future Policy Benefits and Policyholders’ Account Balances			Policyholders’ Dividends			Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses)
	(in millions)
Balance, December 31, 2013	$	20,494		$	(719	)	$	(679	)	$	(3,694	)	$	(5,171	)	$	10,231
Net investment gains (losses) on investments arising during the period		10,440												(3,656	)		6,784
Reclassification adjustment for (gains) losses included in net income		(1,306	)											457			(849	)
Reclassification adjustment for OTTI losses excluded from net income(2)		1												0			1
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs, deferred sales inducements and value of business acquired					(498	)								174			(324	)
Impact of net unrealized investment (gains) losses on future policy benefits and policyholders’ account balances								(400	)					140			(260	)
Impact of net unrealized investment (gains) losses on policyholders’ dividends											(691	)		240			(451	)

Balance, September 30, 2014	$	29,629		$	(1,217	)	$	(1,079	)	$	(4,385	)	$	(7,816	)	$	15,132

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

(2)	Represents “transfers out” related to the portion of OTTI losses recognized during the period that were not recognized in earnings for securities with no prior OTTI loss.

8. EARNINGS PER SHARE

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

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

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Common Stock

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


	Three Months Ended September 30,
	2014							2013
	Income			Weighted Average Shares		Per Share Amount		Income		Weighted Average Shares		Per Share Amount
	(in millions, except per share amounts)
Basic earnings per share
Income (loss) from continuing operations attributable to the Financial Services Businesses	$	476						$	971
Direct equity adjustment		(3	)						2
Less: Income (loss) attributable to noncontrolling interests		11							13
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards		4							9

Income (loss) from continuing operations attributable to the Financial Services Businesses available to holders of Common Stock after direct equity adjustment	$	458			458.0	$	1.00	$	951		462.6	$	2.06

Effect of dilutive securities and compensation programs
Add: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Basic	$	4						$	9
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Diluted		4							9
Stock options					3.0						3.4
Deferred and long-term compensation programs					0.8						0.7
Exchangeable Surplus Notes		4			5.4				4		5.3

Diluted earnings per share
Income (loss) from continuing operations attributable to the Financial Services Businesses available to holders of Common Stock after direct equity adjustment	$	462			467.2	$	0.99	$	955		472.0	$	2.02

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


	Nine Months Ended September 30,
	2014							2013
	Income			Weighted Average Shares		Per Share Amount		Income			Weighted Average Shares		Per Share Amount
	(in millions, except per share amounts)
Basic earnings per share
Income (loss) from continuing operations attributable to the Financial Services Businesses	$	2,776						$	(222	)
Direct equity adjustment		(8	)						7
Less: Income (loss) attributable to noncontrolling interests		45							75
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards		25							6

Income (loss) from continuing operations attributable to the Financial Services Businesses available to holders of Common Stock after direct equity adjustment	$	2,698			459.4	$	5.87	$	(296	)		463.7	$	(0.64	)

Effect of dilutive securities and compensation programs(1)
Add: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Basic	$	25						$	6
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Diluted		25							6
Stock options					3.1							0.0
Deferred and long-term compensation programs					0.7							0.0
Exchangeable Surplus Notes		13			5.4				0			0.0

Diluted earnings per share(1)
Income (loss) from continuing operations attributable to the Financial Services Businesses available to holders of Common Stock after direct equity adjustment	$	2,711			468.6	$	5.79	$	(296	)		463.7	$	(0.64	)

(1)

For the nine months ended September 30, 2013, weighted average shares for basic earnings per share is also used for calculating diluted earnings per share because dilutive shares and dilutive earnings per share are not applicable when a loss from continuing operations is reported. As a result of the loss from continuing operations available to holders of Common Stock after direct equity adjustment for the nine months ended September 30, 2013, all potential stock options and compensation programs were considered antidilutive.

Unvested share-based payment awards that contain nonforfeitable rights to dividends are participating securities and included in the computation of earnings per share pursuant to the two-class method. Under this method, earnings of the Financial Services Businesses attributable to Prudential Financial are allocated between Common Stock and the participating awards, as if the awards were a second class of stock. During periods of income from continuing operations available to holders of Common Stock after direct equity adjustment, the calculation of earnings per share excludes the income attributable to participating securities in the numerator and the dilutive impact of these securities from the denominator. In the event of loss from continuing operations available to holders of Common Stock after direct equity adjustment, undistributed earnings are not allocated to

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

participating securities and the denominator excludes the dilutive impact of these securities as they do not share in the losses of the Company. For the nine months ended September 30, 2013, undistributed earnings were not allocated to participating unvested share-based payment awards as these awards do not participate in losses. Undistributed earnings allocated to participating unvested share-based payment awards for the three months ended September 30, 2014 and September 30, 2013 were based on 4.3 million and 4.4 million of such awards, respectively, and for the nine months ended September 30, 2014 were based on 4.3 million of such awards, weighted for the period they were outstanding.

Stock options and shares related to deferred and long-term compensation programs that are considered antidilutive are excluded from the computation of dilutive earnings per share. Stock options are considered antidilutive based on application of the treasury stock method or in the event of loss from continuing operations available to holders of Common Stock after direct equity adjustment. Shares related to deferred and long-term compensation programs are considered antidilutive in the event of loss from continuing operations available to holders of Common Stock after direct equity adjustment. The number of stock options and shares related to deferred and long-term compensation programs that were considered antidilutive and were excluded from the computation of diluted earnings per share, weighted for the portion of the period they were outstanding, as of the dates indicated, are as follows:


	Three Months Ended September 30,
	2014				2013
	Shares		Exercise Price Per Share		Shares		Exercise Price Per Share
	(in millions, except per share amounts, based on weighted average)
Antidilutive stock options based on application of the treasury stock method		1.8	$	90.85		2.2	$	88.63
Antidilutive stock options due to loss from continuing operations available to holders of Common Stock after direct equity adjustment		0.0				0.0
Antidilutive shares due to loss from continuing operations available to holders of Common Stock after direct equity adjustment		0.0				0.0

Total antidilutive stock options and shares		1.8				2.2


	Nine Months Ended September 30,
	2014				2013
	Shares		Exercise Price Per Share		Shares		Exercise Price Per Share
	(in millions, except per share amounts, based on weighted average)
Antidilutive stock options based on application of the treasury stock method		2.0	$	90.16		8.2	$	72.33
Antidilutive stock options due to loss from continuing operations available to holders of Common Stock after direct equity adjustment		0.0				11.4
Antidilutive shares due to loss from continuing operations available to holders of Common Stock after direct equity adjustment		0.0				5.2

Total antidilutive stock options and shares		2.0				24.8

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

In September 2009, the Company issued $500 million of surplus notes with an interest rate of 5.36% per annum which are exchangeable at the option of the note holders for shares of Common Stock. The initial exchange rate for the surplus notes was 10.1235 shares of Common Stock per each $1,000 principal amount of surplus notes, which represents an initial exchange price per share of Common Stock of $98.78; however, the exchange rate is subject to customary anti-dilution adjustments. In calculating diluted earnings per share under the if-converted method, the potential shares that would be issued assuming a hypothetical exchange, weighted for the period the notes are outstanding, are added to the denominator, and interest expense, net of tax, is added to the numerator, if the overall effect is dilutive.

Prudential Financial may, at its option, at any time, subject to a notification period, exchange all outstanding shares of Class B Stock into such number of shares of Common Stock as have an aggregate average market value equal to 120% of the appraised fair market value of the outstanding shares of Class B Stock. Holders of Class B Stock will be permitted to convert their shares of Class B Stock into such number of shares of Common Stock as have an aggregate average market value equal to 100% of the appraised fair market value of the outstanding shares of Class B Stock in the holder’s sole discretion, beginning on January 1, 2016, or earlier upon certain specified events. Any conversion may have a dilutive effect on holders of Common Stock.

Class B Stock

Income from continuing operations per share of Class B Stock for the three and nine months ended September 30 are presented below. There are no potentially dilutive shares associated with the Class B Stock.


	Three Months Ended September 30,
	2014							2013
	Income			Weighted Average Shares		Per Share Amount		Income		Weighted Average Shares		Per Share Amount
	(in millions, except per share amounts)
Basic earnings per share
Income (loss) from continuing operations attributable to the Closed Block Business	$	47						$	61
Less: Direct equity adjustment		(3	)						2

Income (loss) from continuing operations attributable to the Closed Block Business available to holders of Class B Stock after direct equity adjustment	$	50			2.0	$	25.00	$	59		2.0	$	29.50


	Nine Months Ended September 30,
	2014							2013
	Income			Weighted Average Shares		Per Share Amount		Income		Weighted Average Shares		Per Share Amount
	(in millions, except per share amounts)
Basic earnings per share
Income (loss) from continuing operations attributable to the Closed Block Business	$	101						$	79
Less: Direct equity adjustment		(8	)						7

Income (loss) from continuing operations attributable to the Closed Block Business available to holders of Class B Stock after direct equity adjustment	$	109			2.0	$	54.50	$	72		2.0	$	36.00

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

9. SHORT-TERM AND LONG-TERM DEBT

Short-term Debt

The table below presents the Company’s short-term debt as of the dates indicated:


	September 30, 2014			December 31, 2013
	(in millions)
Commercial paper:
Prudential Financial	$	228		$	190
Prudential Funding, LLC		752			460

Subtotal commercial paper		980			650
Other notes payable		297			0
Current portion of long-term debt(1)		3,152			2,019

Total short-term debt(2)	$	4,429		$	2,669


Supplemental short-term debt information:
Portion of commercial paper borrowings due overnight	$	538		$	466
Daily average commercial paper outstanding	$	1,499		$	1,309
Weighted average maturity of outstanding commercial paper, in days		27			18
Weighted average interest rate on outstanding short-term debt(3)		0.21	%		0.17	%

(1)	Includes limited and non-recourse borrowings of Prudential Holdings, LLC attributable to the Closed Block Business of $75 million at both September 30, 2014 and December 31, 2013.

(2)	Includes Prudential Financial debt of $2,451 million and $1,721 million at September 30, 2014 and December 31, 2013, respectively.

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

Commercial Paper

Prudential Financial has a commercial paper program with an authorized capacity of $3.0 billion. Prudential Financial’s commercial paper borrowings have generally been used to fund the working capital needs of Prudential Financial’s subsidiaries and provide short-term liquidity at Prudential Financial.

Prudential Funding, LLC (“Prudential Funding”), a wholly-owned subsidiary of Prudential Insurance, has a commercial paper program with an authorized capacity of $7.0 billion. Prudential Funding commercial paper borrowings generally have served as an additional source of financing to meet the working capital needs of Prudential Insurance and its subsidiaries. Prudential Funding also lends to other subsidiaries of Prudential Financial up to limits agreed with the New Jersey Department of Banking and Insurance (“NJDOBI”). Prudential Funding maintains a support agreement with Prudential Insurance whereby Prudential Insurance has agreed to maintain Prudential Funding’s tangible net worth at a positive level. Additionally, Prudential Financial has issued a subordinated guarantee covering Prudential Funding’s $7.0 billion commercial paper program.

Federal Home Loan Bank of New York

Prudential Insurance is a member of the Federal Home Loan Bank of New York (“FHLBNY’). Membership allows Prudential Insurance access to the FHLBNY’s financial services, including the ability to obtain collateralized loans and to issue collateralized funding agreements. Under applicable law, the funding agreements issued to the FHLBNY have priority claim status above debt holders of Prudential Insurance. FHLBNY borrowings and funding agreements are collateralized by qualifying mortgage-related assets or U.S. Treasury securities, the fair value of which must be maintained at certain specified levels relative to outstanding

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

borrowings. FHLBNY membership requires Prudential Insurance to own member stock and borrowings require the purchase of activity-based stock in an amount equal to 4.5% of outstanding borrowings. Under FHLBNY guidelines, if any of Prudential Insurance’s financial strength ratings decline below A/A2/A Stable by S&P/Moody’s/Fitch, respectively, and the FHLBNY does not receive written assurances from the NJDOBI regarding Prudential Insurance’s solvency, new borrowings from the FHLBNY would be limited to a term of 90 days or less. Currently, there are no restrictions on the term of borrowings from the FHLBNY.

NJDOBI permits Prudential Insurance to pledge collateral to the FHLBNY in an amount of up to 5% of its prior year-end statutory net admitted assets, excluding separate account assets. Based on Prudential Insurance’s statutory net admitted assets as of December 31, 2013, the 5% limitation equates to a maximum amount of pledged assets of $8.6 billion and an estimated maximum borrowing capacity (after taking into account required collateralization levels) of approximately $7.1 billion. Nevertheless, FHLBNY borrowings are subject to the FHLBNY’s discretion and to the availability of qualifying assets at Prudential Insurance.

As of September 30, 2014, Prudential Insurance had pledged assets with a fair value of $2.7 billion supporting aggregate outstanding collateralized advances and collateralized funding agreements of $2.2 billion. As of September 30, 2014, an outstanding advance of $0.3 billion is in “Long-term debt” and matures in December 2015 and outstanding funding agreements, totaling $1.9 billion are included in “Policyholders’ account balances.” The fair value of qualifying assets that were available to Prudential Insurance but not pledged amounted to $3.4 billion as of September 30, 2014.

Federal Home Loan Bank of Boston

Prudential Retirement Insurance and Annuity Company (“PRIAC”) is a member of the Federal Home Loan Bank of Boston (“FHLBB”). Membership allows PRIAC access to collateralized advances which will be classified in “Short-term debt” or “Long-term debt,” depending on the maturity date of the obligation. PRIAC’s membership in FHLBB requires the ownership of member stock and borrowings from FHLBB require the purchase of activity-based stock in an amount between 3.0% and 4.5% of outstanding borrowings depending on the maturity date of the obligation. As of September 30, 2014, PRIAC had no advances outstanding under the FHLBB facility.

Under Connecticut state insurance law, without the prior consent of the Connecticut Insurance Department, the amount of assets insurers may pledge to secure debt obligations is limited to the lesser of 5% of prior-year statutory admitted assets or 25% of prior-year statutory surplus, resulting in a maximum borrowing capacity for PRIAC under the FHLBB facility of approximately $0.2 billion.

Credit Facilities

The Company’s syndicated, unsecured committed credit facilities at September 30, 2014 are as follows:


Borrower	Original Term		Expiration Date		Capacity		Amount Outstanding
					(in millions)
Prudential Financial		5-year		Nov-2018	$	2,000	$	0
Prudential Financial and Prudential Funding		3-year		Nov-2016		1,750		0

					$	3,750	$	0

The above credit facilities may be used for general corporate purposes, including as backup liquidity for the Company’s commercial paper programs discussed above. As of September 30, 2014, there were no outstanding

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

borrowings under either credit facility. Prudential Financial expects that it may borrow under the five-year credit facility from time to time to fund its working capital needs and those of its subsidiaries. In addition, up to $300 million of the five-year facility may be drawn in the form of standby letters of credit that can be used to meet the Company’s operating needs.

The credit facilities contain representations and warranties, covenants and events of default that are customary for facilities of this type; however, borrowings under the facilities are not contingent on the Company’s credit ratings nor subject to material adverse change clauses. Borrowings under the credit facilities are conditioned on the continued satisfaction of other customary conditions, including the maintenance at all times of consolidated net worth, relating to the Company’s Financial Services Businesses only, of at least $18,985 million, which for this purpose is calculated as U.S. GAAP equity, excluding AOCI and excluding equity of noncontrolling interests. As of September 30, 2014, the consolidated net worth of the Company’s Financial Services Businesses exceeded the minimum amount required to borrow under the credit facilities.

Put Option Agreement for Senior Debt Issuance

In November 2013, Prudential Financial entered into a ten-year put option agreement with a Delaware trust upon the completion of the sale of $1.5 billion of trust securities by that Delaware trust in a Rule 144A private placement. The trust invested the proceeds from the sale of the trust securities in a portfolio of principal and interest strips of U.S. Treasury securities. The put option agreement provides Prudential Financial the right to sell to the trust at any time up to $1.5 billion of 4.419% senior notes due November 2023 and receive in exchange a corresponding amount of the principal and interest strips of the U.S. Treasury securities held by the trust. In return, the Company agreed to pay a semi-annual put premium to the trust at a rate of 1.777% per annum applied to the unexercised portion of the put option. The put option agreement with the trust provides Prudential Financial with a source of liquid assets.

The put option described above will be exercised automatically in full upon the Company’s failure to make certain payments to the trust, such as paying the put option premium or reimbursing the trust for its expenses, if the Company’s failure to pay is not cured within 30 days, and upon an event involving its bankruptcy. The Company is also required to exercise the put option if its consolidated stockholders’ equity, calculated in accordance with GAAP but excluding AOCI, falls below $7.0 billion, subject to adjustment in certain cases. The Company has a one-time right to unwind a prior voluntary exercise of the put option by repurchasing all of the senior notes then held by the trust in exchange for principal and interest strips of U.S. Treasury securities. Finally, any of the 4.419% senior notes that Prudential Financial issues may be redeemed prior to their maturity at par or, if greater, a make-whole price, following a voluntary exercise in full of the put option.

Long-term Debt

Surplus Notes

From 2011 through 2013, a captive reinsurance subsidiary of Prudential Insurance entered into agreements providing for the issuance and sale of up to $2.0 billion of ten-year fixed-rate surplus notes for the purpose of financing non-economic reserves under a regulation entitled “Valuation of Life Insurance Policies Model Regulation,” commonly known as “Regulation XXX.” Under these agreements, the captive receives in exchange for the surplus notes one or more credit-linked notes issued by a special-purpose affiliate of the Company in an aggregate principal amount equal to the surplus notes issued. At September 30, 2014, $1,750 million of surplus notes were outstanding under these agreements, an increase of $250 million from December 31, 2013.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

In December 2013, another captive reinsurance subsidiary entered into a twenty-year financing facility with external counterparties providing for the issuance and sale of a surplus note in an aggregate principal amount of up to $2.0 billion in order to finance non-economic reserves under a supporting guideline entitled “The Application of the Valuation of Life Insurance Policies Model Regulation,” commonly known as “Guideline AXXX.” In June 2014, the facility was amended to increase the current financing capacity available under the facility from $2.0 billion to $3.5 billion, increase the maximum potential size of the facility to $4.0 billion and add additional external counterparties. Similar to the agreements described above, the captive receives in exchange for the surplus note one or more credit linked notes issued by a special-purpose affiliate in an aggregate principal amount equal to the surplus note. As of September 30, 2014, an aggregate of $1,838 million of surplus notes were outstanding under the facility, an increase of $938 million from December 31, 2013.

Under each of the above transactions for the captive reinsurance subsidiaries, because valid rights of set-off exist, interest and principal payments on the surplus notes and the credit-linked notes issued are settled on a net basis, and the surplus notes are reflected in the Company’s total consolidated borrowings on a net basis.

Senior Notes

Medium-term notes. Prudential Financial maintains a medium-term notes program under its shelf registration statement with an authorized issuance capacity of $20 billion. As of September 30, 2014, the outstanding amount of medium-term notes issued under this program was $13.0 billion, an increase of $0.3 billion from December 31, 2013, due to $1.8 billion of issuances, as presented in the following table, offset by maturities of $1.5 billion.


Issue Date	Principal Amount		Interest Rate			Maturity Date
	(in millions)
May 15, 2014	$	500		4.600	%	May 15, 2044
May 15, 2014	$	700		3.500	%	May 15, 2024
August 14, 2014	$	350		2.350	%	August 15, 2019
August 14, 2014(1)	$	250		4.600	%	May 15, 2044

(1)	These notes form part of the same series as the 4.600% notes issued on May 15, 2014 increasing the aggregate principal amount of those notes to $750 million.

Retail medium-term notes. Prudential Financial maintains a retail medium-term notes program, including the InterNotes^® program, under its shelf registration statement with an authorized issuance capacity of $5.0 billion. The Company resumed this program beginning in September 2014 and issued $23 million of retail notes during the third quarter of 2014, with an average interest rate of approximately 4.5%. As of September 30, 2014, the outstanding balance of retail notes was $270 million.

Limited recourse note. In September 2014, Prudential Financial entered into a financing transaction, pursuant to which it issued a $245 million limited recourse note and, in return, obtained a $245 million asset-backed note from a Delaware master trust and ultimately contributed the asset-backed note to its subsidiary, PRIAC. As of September 30, 2014, no principal payments have been received or are currently due on the asset-backed note and, as a result, there was no payment obligation under the limited recourse note. Accordingly, neither of the notes is reflected in the Company’s Unaudited Interim Consolidated Financial Statements as of that date.

Mortgage debt. As of September 30, 2014, the Company’s insurance subsidiaries had mortgage debt of $487 million that has recourse only to real estate property held for investment by those subsidiaries. This represents an increase of $290 million from December 31, 2013, due to new borrowings in 2014.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

10. EMPLOYEE BENEFIT PLANS

Pension and Other Postretirement Plans

The Company has funded and non-funded non-contributory defined benefit pension plans, which cover substantially all of its employees. For some employees, benefits are based on final average earnings and length of service, while benefits for other employees are based on an account balance that takes into consideration age, service and earnings during their career.

The Company provides certain health care and life insurance benefits for its retired employees, their beneficiaries and covered dependents (“other postretirement benefits”). The health care plan is contributory; the life insurance plan is non-contributory. Substantially all of the Company’s U.S. employees may become eligible to receive other postretirement benefits if they retire after age 55 with at least 10 years of service or under certain circumstances after age 50 with at least 20 years of continuous service.

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


	Three Months Ended September 30,
	Pension Benefits						Other Postretirement Benefits
	2014			2013			2014			2013
	(in millions)
Components of net periodic (benefit) cost
Service cost	$	58		$	62		$	5		$	4
Interest cost		120			109			24			23
Expected return on plan assets		(178	)		(192	)		(29	)		(22	)
Amortization of prior service cost		(2	)		(3	)		(2	)		(3	)
Amortization of actuarial (gain) loss, net		22			23			5			14
Settlements		4			0			0			0
Special termination benefits		0			0			0			0

Net periodic (benefit) cost	$	24		$	(1	)	$	3		$	16


	Nine Months Ended September 30,
	Pension Benefits						Other Postretirement Benefits
	2014			2013			2014			2013
	(in millions)
Service cost	$	176		$	189		$	13		$	12
Interest cost		361			328			72			67
Expected return on plan assets		(534	)		(576	)		(87	)		(64	)
Amortization of prior service cost		(7	)		(8	)		(8	)		(9	)
Amortization of actuarial (gain) loss, net		65			69			19			42
Settlements		6			0			0			0
Special termination benefits		0			2			0			0

Net periodic (benefit) cost	$	67		$	4		$	9		$	48

During the nine months ended September 30, 2014, the Company made cash contributions of $135 million to its pension plans and anticipates making an additional $20 million of cash contributions during the remainder of 2014.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

11. SEGMENT INFORMATION

Segments

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

Adjusted Operating Income

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

•

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

•

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

•

the contribution to income (loss) of divested businesses that have been or will be sold or exited, including businesses that have been placed in wind down status, but that did not qualify for “discontinued operations” accounting treatment under U.S. GAAP; and

•

equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests.

These items are important to an understanding of overall results of operations. Adjusted operating income is not a substitute for income determined in accordance with U.S. GAAP, and the Company’s definition of adjusted operating income may differ from that used by other companies. However, the Company believes that the presentation of adjusted operating income as measured for management purposes enhances the understanding of results of operations by highlighting the results from ongoing operations and the underlying profitability factors of the Financial Services Businesses.

Realized investment gains (losses), net, and related charges and adjustments

Realized investment gains (losses), net

Adjusted operating income excludes “Realized investment gains (losses), net,” except for certain items described below. Significant activity excluded from adjusted operating income includes impairments and credit-related gains and losses from sales of securities, the timing of which depends largely on market credit cycles and can vary considerably across periods, and interest rate-related gains and losses from sales of securities, which are largely subject to the Company’s discretion and influenced by market opportunities, as well as the Company’s tax and capital profile. Additionally, certain gains and losses pertaining to derivative contracts that do not qualify for hedge accounting treatment are also excluded from adjusted operating income. Trends in the underlying profitability of the Company’s businesses can be more clearly identified without the fluctuating effects of these transactions.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The following table sets forth the significant components of “Realized investment gains (losses), net” that are included in adjusted operating income and, as a result, are reflected as adjustments to “Realized investment gains (losses), net” for purposes of calculating adjusted operating income:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(in millions)
Net gains (losses) from:(1)
Terminated hedges of foreign currency earnings	$	63	$	72	$	207	$	175
Current period yield adjustments	$	115	$	118	$	361	$	323
Principal source of earnings	$	34	$	27	$	61	$	96

(1)	In addition to the items in the table above, “Realized investment gains (losses), net, and related charges and adjustments” also includes an adjustment to reflect “Realized investment gains (losses), net” related to divested businesses as results of “Divested businesses”, discussed below.

Terminated Hedges of Foreign Currency Earnings. The amounts shown in the table above primarily reflect the impact of an intercompany arrangement between Corporate and Other operations and the International Insurance segment, pursuant to which the non-U.S. dollar-denominated earnings in all countries for a particular year, including its interim reporting periods, are translated at fixed currency exchange rates. The fixed rates are determined in connection with a currency hedging program designed to mitigate the risk that unfavorable rate changes will reduce the segment’s U.S. dollar equivalent earnings. Pursuant to this program, the Company’s Corporate and Other operations may execute forward currency contracts with third parties to sell the net exposure of projected earnings from the hedged currency in exchange for U.S. dollars at a specified exchange rate. The maturities of these contracts correspond with the future periods in which the identified non-U.S. dollar-denominated earnings are expected to be generated. These contracts do not qualify for hedge accounting under U.S. GAAP, so the resulting profits or losses are recorded in “Realized investment gains (losses), net.” When the contracts are terminated in the same period that the expected earnings emerge, the resulting positive or negative cash flow effect is included in adjusted operating income.

Current Period Yield Adjustments. The Company uses interest rate and currency swaps and other derivatives to manage interest and currency exchange rate exposures arising from mismatches between assets and liabilities, including duration mismatches. For derivative contracts that do not qualify for hedge accounting treatment, the periodic swap settlements, as well as certain other derivative related yield adjustments are recorded in “Realized investment gains (losses), net”, and are included in adjusted operating income to reflect the after-hedge yield of the underlying instruments. In certain instances, when these derivative contracts are terminated or offset before their final maturity, the resulting realized gains or losses are recognized in adjusted operating income over periods that generally approximate the expected terms of the derivatives or underlying instruments in order for adjusted operating income to reflect the after-hedge yield of the underlying instruments. Included in the amounts shown in the table above are gains on certain derivatives contracts that were terminated or offset before their final maturity of $27 million and $18 million for the three months ended September 30, 2014 and 2013, respectively, and $78 million and $54 million for the nine months ended September 30, 2014 and 2013, respectively. Additionally, as of September 30, 2014, there was a $331 million deferred net gain related to certain derivative contracts that were terminated or offset before their final maturity, primarily in the International Insurance segment.

Principal Source of Earnings. The Company conducts certain activities for which realized investment gains and losses are a principal source of earnings for its businesses and therefore included in adjusted operating income, particularly within the Company’s Asset Management segment. For example, Asset Management’s

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

strategic investing business makes investments for sale or syndication to other investors or for placement or co-investment in the Company’s managed funds and structured products. The realized investment gains and losses associated with the sale of these strategic investments, as well as related derivative results, are a principal activity for this business and included in adjusted operating income. In addition, the realized investment gains and losses associated with loans originated by the Company’s commercial mortgage operations, as well as related derivative results and retained mortgage servicing rights, are a principal activity for this business and included in adjusted operating income.

Other items reflected as adjustments to Realized investment gains (losses), net

The following table sets forth certain other items excluded from adjusted operating income and reflected as an adjustment to “Realized investment gains (losses), net” for purposes of calculating adjusted operating income:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2014			2013		2014			2013
	(in millions)
Net gains (losses) from:
Other trading account assets	$	(40	)	$	36	$	(7	)	$	121
Foreign currency exchange movements	$	(576	)	$	1,169	$	(576	)	$	(2,856	)
Other activities	$	(2	)	$	24	$	11		$	136

Other Trading Account Assets. The Company has certain investments in its general account portfolios that are classified as trading. These trading investments are carried at fair value and included in “Other trading account assets, at fair value” on the Company’s statements of financial position. Realized and unrealized gains and losses for these investments are recorded in “Other income.” Consistent with the exclusion of realized investment gains and losses with respect to other investments managed on a consistent basis, the net gains or losses on these investments are excluded from adjusted operating income.

Foreign Currency Exchange Movements. The Company has certain assets and liabilities for which, under U.S. GAAP, the changes in value, including those associated with changes in foreign currency exchange rates during the period, are recorded in “Other income.” To the extent the foreign currency exposure on these assets and liabilities is economically hedged or considered part of the Company’s capital funding strategies for its international subsidiaries, the change in value included in “Other income” is excluded from adjusted operating income. The amounts in the table above are largely driven by non-yen denominated insurance liabilities in the Company’s Japanese insurance operations. The insurance liabilities are supported by investments denominated in corresponding currencies, including a significant portion designated as available-for-sale. While these non-yen denominated assets and liabilities are economically hedged, unrealized gains and losses on available-for-sale investments, including those arising from foreign currency exchange rate movements, are recorded in “Accumulated other comprehensive income (loss)” under U.S. GAAP, while the non-yen denominated liabilities are re-measured for foreign currency exchange rate movements, and the related change in value is recorded in earnings within “Other income.” Due to this non-economic volatility that is reflected in U.S. GAAP earnings, the change in value recorded within “Other income” is excluded from adjusted operating income.

Other Activities. The Company excludes certain other items from adjusted operating income that are consistent with similar adjustments described above. The significant items within other activities shown in the table above included the following:

In connection with disputes arising out of the Chapter 11 bankruptcy petition filed by Lehman Brothers Holdings Inc., the Company previously recorded losses related to a portion of its counterparty exposure on

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

derivative transactions it had previously held with Lehman Brothers and its affiliates. The Company recorded estimated recoveries related to this matter of $2 million and $18 million in the three and nine months ended September 30, 2014, respectively, and $19 million and $136 million in the three and nine months ended September 30, 2013, respectively. These recoveries are recorded within “Other income” within the Company’s Corporate and Other operations. Consistent with the exclusion of credit-related losses recorded in “Realized investment gains (losses), net”, the impact of this estimated recovery is excluded from adjusted operating income.

The Company records valuation adjustments for non-performance risk that relates to the uncollateralized portion of certain derivative contracts between a subsidiary of the Company and third parties and liquidity risk associated with certain derivatives. These adjustments are recorded within “Other income.” Consistent with the exclusion of the mark-to-market on derivatives recorded in “Realized investment gains (losses), net”, the impact of these risks is excluded from adjusted operating income. The net impact of these risks was to exclude from adjusted operating income net losses of $4 million and net gains of $7 million for the three months ended September 30, 2014 and 2013, respectively, and net losses of $6 million and net gains of $9 million for the nine months ended September 30, 2014 and 2013, respectively.

Related charges

Charges that relate to realized investment gains and losses are also excluded from adjusted operating income, and include the following:

•

the portion of the amortization of deferred policy acquisition costs, value of business acquired, unearned revenue reserves and deferred sales inducements for certain products that are related to net realized investment gains and losses.

•

policyholder dividends and interest credited to policyholders’ account balances that relate to certain life policies that pass back certain realized investment gains and losses to the policyholder, and reserves for future policy benefits for certain policies that are affected by net realized investment gains and losses.

•

market value adjustments paid or received upon a contractholder’s surrender of certain of the Company’s annuity products as these amounts mitigate the net realized investment gains or losses incurred upon the disposition of the underlying invested assets.

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

Adjusted operating income excludes net investment gains and losses on trading account assets supporting insurance liabilities, which is consistent with the exclusion of realized investment gains and losses with respect to other investments supporting insurance liabilities managed on a consistent basis. In addition, to be consistent

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

with the historical treatment of charges related to realized investment gains and losses on investments, adjusted operating income also excludes the change in contractholder liabilities due to asset value changes in the pool of investments (including changes in the fair value of commercial mortgage and other loans) supporting these experience-rated contracts, which are reflected in “Interest credited to policyholders’ account balances.” These adjustments are in addition to the exclusion from adjusted operating income of net investment gains and losses on the related derivatives and commercial mortgage and other loans through “Realized investment gains (losses), net, and related charges and adjustments,” as discussed above. The result of this approach is that adjusted operating income for these products includes net fee revenue and interest spread the Company earns on these experience-rated contracts, and excludes changes in fair value of the pool of investments, both realized and unrealized, that are expected to ultimately accrue to the contractholders.

Divested businesses

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

Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests

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

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

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Adjusted Operating Income before income taxes for Financial Services Businesses by Segment:
Individual Annuities	$	367		$	821		$	1,145		$	1,593
Retirement		256			237			906			744
Asset Management		200			173			593			514

Total U.S. Retirement Solutions and Investment Management Division		823			1,231			2,644			2,851

Individual Life		97			148			380			426
Group Insurance		(73	)		68			(21	)		99

Total U.S. Individual Life and Group Insurance Division		24			216			359			525

International Insurance		845			778			2,566			2,505

Total International Insurance Division		845			778			2,566			2,505

Corporate Operations		(339	)		(312	)		(1,022	)		(973	)

Total Corporate and Other		(339	)		(312	)		(1,022	)		(973	)

Adjusted Operating Income before income taxes for Financial Services Businesses		1,353			1,913			4,547			4,908

Reconciling items:
Realized investment gains (losses), net, and related adjustments		(1,161	)		(1,319	)		(1,314	)		(7,322	)
Charges related to realized investment gains (losses), net		29			763			(99	)		1,533
Investment gains (losses) on trading account assets supporting insurance liabilities, net		(131	)		103			195			(273	)
Change in experience-rated contractholder liabilities due to asset value changes		93			(73	)		(139	)		255
Divested businesses		(7	)		43			113			(12	)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests		8			11			37			1

Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures for Financial Services Businesses		184			1,441			3,340			(910	)

Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures for Closed Block Business		100			85			169			108

Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures	$	284		$	1,526		$	3,509		$	(802	)

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The Individual Annuities segment results reflect deferred policy acquisition costs as if the individual annuity business is a stand-alone operation. The elimination of intersegment costs capitalized in accordance with this policy is included in consolidating adjustments within Corporate and Other operations.

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


	Revenue												Total Assets
	Three Months Ended September 30,						Nine Months Ended September 30,						September 30, 2014		December 31, 2013
	2014			2013			2014			2013			September 30, 2014		December 31, 2013
	(in millions)
Financial Services Businesses:
Individual Annuities	$	1,191		$	1,120		$	3,519		$	3,307		$	169,250	$	160,778
Retirement		2,397			1,525			5,397			4,382			172,567		170,762
Asset Management		721			649			2,101			1,953			49,292		45,040

Total U.S. Retirement Solutions and Investment Management Division		4,309			3,294			11,017			9,642			391,109		376,580

Individual Life		1,281			1,041			3,895			3,408			70,126		64,990
Group Insurance		1,349			1,342			4,053			4,143			40,839		39,185

Total U.S. Individual Life and Group Insurance Division		2,630			2,383			7,948			7,551			110,965		104,175

International Insurance		5,002			5,259			15,329			17,549			181,669		168,677

Total International Insurance Division		5,002			5,259			15,329			17,549			181,669		168,677

Corporate Operations		(175	)		(153	)		(479	)		(439	)		9,793		13,947

Total Corporate and Other		(175	)		(153	)		(479	)		(439	)		9,793		13,947

Total		11,766			10,783			33,815			34,303			693,536		663,379

Reconciling items:
Realized investment gains (losses), net, and related adjustments		(1,161	)		(1,320	)		(1,314	)		(7,325	)
Charges related to realized investment gains (losses), net		(16	)		(27	)		(27	)		(181	)
Investment gains (losses) on trading account assets supporting insurance liabilities, net		(131	)		103			195			(273	)
Divested businesses		162			179			554			495
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests		(4	)		(3	)		(8	)		(75	)

Total Financial Services Businesses		10,616			9,715			33,215			26,944			693,536		663,379

Closed Block Business		1,764			1,595			5,165			4,578			70,611		68,402

Total per Unaudited Interim Consolidated Financial Statements	$	12,380		$	11,310		$	38,380		$	31,522		$	764,147	$	731,781

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(in millions)
Asset Management segment intersegment revenues	$	163	$	151	$	473	$	454

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

12. INCOME TAXES

The Company’s liability for income taxes includes the liability for unrecognized tax benefits, interest and penalties which relate to tax years still subject to review by the Internal Revenue Service (“IRS”) or other taxing authorities. Audit periods remain open for review until the statute of limitations has passed. Generally, for tax years which produce net operating losses, capital losses or tax credit carryforwards (“tax attributes”), the statute of limitations does not close, to the extent of these tax attributes, until the expiration of the statute of limitations for the tax year in which they are fully utilized. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the liability for income taxes.

The Company does not anticipate any significant changes within the next 12 months to its total unrecognized tax benefits related to tax years for which the statute of limitations has not expired.

Listed below are the tax years that remain subject to examination by major tax jurisdiction, at September 30, 2014:


Major Tax Jurisdiction		Open Tax Years
United States		2007 – 2013
Japan		Fiscal years ended March 31, 2010 – 2014
Korea		Fiscal years ended March 31, 2010 – 2013 and the period ended December 31, 2013

The dividends received deduction (“DRD”) reduces the amount of dividend income subject to U.S. tax and is a significant component of the difference between the Company’s effective tax rate and the federal statutory tax rate of 35%. The DRD for the current period was estimated using information from 2013 and current year results, and was adjusted to take into account the current year’s equity market performance. The actual current year DRD can vary from the estimate based on factors such as, but not limited to, changes in the amount of dividends received that are eligible for the DRD, changes in the amount of distributions received from mutual fund investments, changes in the account balances of variable life and annuity contracts, and the Company’s taxable income before the DRD.

In August 2007, the IRS released Revenue Ruling 2007-54, which included, among other items, guidance on the methodology to be followed in calculating the DRD related to variable life insurance and annuity contracts. In September 2007, the IRS released Revenue Ruling 2007-61. Revenue Ruling 2007-61 suspended Revenue Ruling 2007-54 and informed taxpayers that the U.S. Treasury Department and the IRS intend to address through new guidance the issues considered in Revenue Ruling 2007-54, including the methodology to be followed in determining the DRD related to variable life insurance and annuity contracts. In May 2010, the IRS issued an Industry Director Directive (“IDD”) confirming that the methodology for calculating the DRD set forth in

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Revenue Ruling 2007-54 should not be followed. The IDD also confirmed that the IRS guidance issued before Revenue Ruling 2007-54, which guidance the Company relied upon in calculating its DRD, should be used to determine the DRD. In February 2014, the IRS released Revenue Ruling 2014-7, which modified and superseded Revenue Ruling 2007-54, by removing the provisions of Revenue Ruling 2007-54 related to the methodology to be followed in calculating the DRD and obsoleting Revenue Ruling 2007-61. These activities had no impact on the Company’s results in 2013 or in the first nine months of 2014. However, there remains the possibility that the IRS and the U.S. Treasury will address, through subsequent guidance, the issues related to the calculation of the DRD. For the last several years, the revenue proposals included in the Obama Administration’s budgets included a proposal that would change the method used to determine the amount of the DRD. A change in the DRD, including the possible retroactive or prospective elimination of this deduction through guidance or legislation, could increase actual tax expense and reduce the Company’s consolidated net income.

For tax years 2007 through 2014, the Company is participating in the IRS’s Compliance Assurance Program (“CAP”). Under CAP, the IRS assigns an examination team to review completed transactions as they occur in order to reach agreement with the Company on how they should be reported in the relevant tax return. If disagreements arise, accelerated resolutions programs are available to try to resolve the disagreements in a timely manner before the tax return is filed.

In July 2014, the IRS issued an IDD relating to the hedging of variable annuity guaranteed minimum benefits (“Hedging IDD”). The Hedging IDD provides an elective safe harbor tax accounting method for these hedging activities that can be applied to open years under IRS examination beginning with the earliest open year. The Company is analyzing the potential impact of electing this tax accounting method.

Total income tax expense includes additional U.S. income tax expense related to the realization of local deferred tax assets recorded in the Statement of Financial Position as of the acquisition date for Prudential Gibraltar Financial Life Insurance Company, Ltd. (“Prudential Gibraltar”) and AIG Star Life Insurance Co., Ltd, AIG Edison Life Insurance Company, AIG Financial Assurance Japan K.K., and AIG Edison Service Co., Ltd. (collectively, the “Star and Edison Businesses”). As of September 30, 2014, additional U.S. income tax expense related to the utilization of opening balance sheet local deferred tax assets has been recognized between the Statement of Operations and Other Comprehensive Income as follows:


	Prudential Gibraltar			Star and Edison Businesses		Total
	(in millions)
Opening balance sheet local deferred tax assets after valuation allowance that will result in additional U.S. income tax expense	$	56		$	678	$	734
Additional U.S. income tax expense (benefit) recognized in the Statement of Operations:
2009		13			0		13
2010		6			0		6
2011		(29	)		252		223
2012		51			333		384
2013		15			40		55
Nine months ended September 30, 2014		0			53		53

Subtotal		56			678		734
Additional U.S. income tax expense (benefit) recognized in Other Comprehensive Income		0			0		0

Unrecognized balance of additional U.S. income tax expense	$	0		$	0	$	0

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

On January 1, 2012, the Star and Edison Businesses merged into Gibraltar Life. The majority of additional U.S. income tax expense recognized in 2012 was a result of the merger. During 2013, the Company changed its repatriation assumption for Gibraltar Life and Prudential Gibraltar, which resulted in the Company recording an additional U.S. income tax expense of $108 million in the first nine months of 2013. Future losses in pre-tax income of Gibraltar Life, such as that caused by the impact of foreign currency exchange rate movements on certain non-yen denominated assets and liabilities, may reduce the amount of additional U.S income tax expense recognized in the Consolidated Statements of Operations and increase the amount of additional U.S. income tax expense recognized in Other Comprehensive Income.

13. FAIR VALUE OF ASSETS AND LIABILITIES

Fair Value Measurement—Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative fair value guidance establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level 1—Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities. The Company’s Level 1 assets and liabilities primarily include certain cash equivalents and short term investments, equity securities and derivative contracts that trade on an active exchange market.

Level 2—Fair value is based on significant inputs, other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets and liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities, and other market observable inputs. The Company’s Level 2 assets and liabilities include: fixed maturities (corporate public and private bonds, most government securities, certain asset-backed and mortgage-backed securities, etc.), certain equity securities (mutual funds, which do not actively trade and are priced based on a net asset value), certain commercial mortgage loans, short-term investments and certain cash equivalents (primarily commercial paper), and certain over-the-counter derivatives.

Level 3—Fair value is based on at least one or more significant unobservable inputs for the asset or liability. The assets and liabilities in this category may require significant judgment or estimation in determining the fair value. The Company’s Level 3 assets and liabilities primarily include: certain private fixed maturities and equity securities, certain manually priced public equity securities and fixed maturities, certain highly structured over-the-counter derivative contracts, certain commercial mortgage loans, certain consolidated real estate funds for which the Company is the general partner, and embedded derivatives resulting from certain products with guaranteed benefits.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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


	As of September 30, 2014
	Level 1		Level 2		Level 3		Netting(1)			Total
	(in millions)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	0	$	16,456	$	0	$			$	16,456
Obligations of U.S. states and their political subdivisions		0		5,905		7					5,912
Foreign government bonds		0		86,838		2					86,840
Corporate securities		0		158,464		1,401					159,865
Asset-backed securities		0		6,518		4,842					11,360
Commercial mortgage-backed securities		0		14,014		417					14,431
Residential mortgage-backed securities		0		6,196		7					6,203

Subtotal		0		294,391		6,676					301,067
Trading account assets:(2)
U.S. Treasury securities and obligations of U.S. government authorities and agencies		0		191		0					191
Obligations of U.S. states and their political subdivisions		0		190		0					190
Foreign government bonds		0		690		12					702
Corporate securities		0		19,330		129					19,459
Asset-backed securities		0		904		439					1,343
Commercial mortgage-backed securities		0		2,559		40					2,599
Residential mortgage-backed securities		0		1,717		2					1,719
Equity securities		1,400		223		721					2,344
All other(3)		312		9,997		7		(9,035	)		1,281

Subtotal		1,712		35,801		1,350		(9,035	)		29,828
Equity securities, available-for-sale		6,743		2,837		298					9,878
Commercial mortgage and other loans		0		304		0					304
Other long-term investments		15		176		1,517		(9	)		1,699
Short-term investments		3,295		1,714		0					5,009
Cash equivalents		3,176		7,769		0					10,945
Other assets		2		123		2					127

Subtotal excluding separate account assets		14,943		343,115		9,843		(9,044	)		358,857
Separate account assets(4)		50,291		218,514		23,811					292,616

Total assets	$	65,234	$	561,629	$	33,654	$	(9,044	)	$	651,473

Future policy benefits(5)	$	0	$	0	$	5,320	$			$	5,320
Other liabilities		2		6,833		6		(6,590	)		251
Notes of consolidated VIEs		0		0		5,367					5,367

Total liabilities	$	2	$	6,833	$	10,693	$	(6,590	)	$	10,938

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


	As of December 31, 2013
	Level 1		Level 2		Level 3		Netting(1)			Total
	(in millions)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	0	$	15,400	$	0	$			$	15,400
Obligations of U.S. states and their political subdivisions		0		3,735		0					3,735
Foreign government bonds		0		82,787		1					82,788
Corporate securities		0		152,449		1,329					153,778
Asset-backed securities		0		7,147		3,442					10,589
Commercial mortgage-backed securities		0		13,708		165					13,873
Residential mortgage-backed securities		0		6,695		8					6,703

Subtotal		0		281,921		4,945					286,866
Trading account assets:(2)
U.S. Treasury securities and obligations of U.S. government authorities and agencies		0		266		0					266
Obligations of U.S. states and their political subdivisions		0		190		0					190
Foreign government bonds		0		643		0					643
Corporate securities		0		16,865		115					16,980
Asset-backed securities		0		876		403					1,279
Commercial mortgage-backed securities		0		2,466		0					2,466
Residential mortgage-backed securities		0		1,828		2					1,830
Equity securities		1,309		225		842					2,376
All other(3)		591		7,899		6		(7,246	)		1,250

Subtotal		1,900		31,258		1,368		(7,246	)		27,280
Equity securities, available-for-sale		6,938		2,668		304					9,910
Commercial mortgage and other loans		0		158		0					158
Other long-term investments		19		109		1,396		5			1,529
Short-term investments		6,139		1,046		0					7,185
Cash equivalents		2,461		4,521		0					6,982
Other assets		3		209		4					216

Subtotal excluding separate account assets		17,460		321,890		8,017		(7,241	)		340,126
Separate account assets(4)		49,182		213,275		22,603					285,060

Total assets	$	66,642	$	535,165	$	30,620	$	(7,241	)	$	625,186

Future policy benefits(5)	$	0	$	0	$	441	$			$	441
Other liabilities		1		9,458		5		(7,257	)		2,207
Notes of consolidated VIEs		0		0		3,254					3,254

Total liabilities	$	1	$	9,458	$	3,700	$	(7,257	)	$	5,902

(1)	“Netting” amounts represent cash collateral of $2,454 million and $(16) million as of September 30, 2014 and December 31, 2013, respectively, and the impact of offsetting asset and liability positions held with the same counterparty, subject to master netting arrangements.

(2)	Includes “Trading account assets supporting insurance liabilities” and “Other trading account assets.”

(3)	Level 1 represents cash equivalents and short term investments. All other amounts primarily represent derivative assets.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

(4)

Separate account assets represent segregated funds that are invested for certain customers. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. Separate account assets classified as Level 3 consist primarily of real estate and real estate investment funds. Separate account liabilities are not included in the above table as they are reported at contract value and not fair value in the Company’s Unaudited Interim Consolidated Statement of Financial Position.

(5)

As of September 30, 2014, the net embedded derivative liability position of $5.3 billion includes $0.8 billion of embedded derivatives in an asset position and $6.1 billion of embedded derivatives in a liability position. As of December 31, 2013, the net embedded derivative liability position of $0.4 billion includes $1.5 billion of embedded derivatives in an asset position and $1.9 billion of embedded derivatives in a liability position.

The methods and assumptions the Company uses to estimate the fair value of assets and liabilities measured at fair value on a recurring basis are summarized below.

Fixed Maturity Securities—The fair values of the Company’s public fixed maturity securities are generally based on prices obtained from independent pricing services. Prices for each security are generally sourced from multiple pricing vendors, and a vendor hierarchy is maintained by asset type based on historical pricing experience and vendor expertise. The Company ultimately uses the price from the pricing service highest in the vendor hierarchy based on the respective asset type. The pricing hierarchy is updated for new financial products and recent pricing experience. Consistent with the fair value hierarchy described above, securities with validated quotes from pricing services are generally reflected within Level 2, as they are primarily based on observable pricing for similar assets and/or other market observable inputs. If the pricing information received from third party pricing services is deemed not reflective of market activity or other inputs observable in the market, the Company may challenge the price through a formal process with the pricing service or classify the securities as Level 3. If the pricing service updates the price to be more consistent with the presented market observations, the security remains within Level 2.

Internally-developed valuations or indicative broker quotes are also used to determine fair value in circumstances where vendor pricing is not available, or where the Company ultimately concludes that pricing information received from the independent pricing service is not reflective of market activity. If the Company concludes the values from both pricing services and brokers are not reflective of market activity, it may override the information with an internally-developed valuation. As of September 30, 2014 and December 31, 2013, overrides on a net basis were not material. Pricing service overrides, internally-developed valuations and indicative broker quotes are generally included in Level 3 in the fair value hierarchy.

The fair value of private fixed maturities, which are comprised of investments in private placement securities, originated by internal private asset managers, are primarily determined using a discounted cash flow model. If the fair value is determined using pricing inputs that are observable in the market, the securities have been reflected within Level 2; otherwise a Level 3 classification is used.

Trading Account Assets—Trading account assets consist primarily of fixed maturity securities, equity securities and derivatives whose fair values are determined consistent with similar instruments described above under “Fixed Maturity Securities” and below under “Equity Securities” and “Derivative Instruments.”

Equity Securities—Equity securities consist principally of investments in common and preferred stock of publicly traded companies, perpetual preferred stock, privately traded securities, as well as mutual fund shares. The fair values of most publicly traded equity securities are based on quoted market prices in active markets for identical assets and are classified within Level 1 in the fair value hierarchy. Estimated fair values for most privately traded equity securities are determined using discounted cash flow, earnings multiple and other valuation models that require a substantial level of judgment around inputs and therefore are classified within Level 3. The fair values of mutual fund shares that transact regularly (but do not trade in active markets because

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

they are not publicly available) are based on transaction prices of identical fund shares and are classified within Level 2 in the fair value hierarchy. The fair values of perpetual preferred stock are based on inputs obtained from independent pricing services that are primarily based on indicative broker quotes. As a result, the fair values of perpetual preferred stock are classified as Level 3.

Commercial Mortgage and Other Loans—The fair value of commercial mortgage loans held for investment and accounted for using the fair value option are determined based on the present value of the expected future cash flows discounted at the appropriate U.S. Treasury rate, adjusted for the current market spread for similar quality loans. The quality ratings for these loans, a primary determinant of the appropriate credit spread and a significant component of the pricing input, are based on internally-developed estimates. As a result, these loans are included in Level 3 in the fair value hierarchy.

The fair value of other loans held and accounted for using the fair value option is determined utilizing pricing indicators from the whole loan market, where investors are committed to purchase these loans at a pre-determined price, which is considered the principal exit market for these loans. The Company has evaluated the valuation inputs used for these assets, including the existence of pre-determined exit prices, the terms of the loans, prevailing interest rates and credit risk, and deemed that the primary pricing inputs are Level 2 inputs in the fair value hierarchy.

Other Long-Term Investments—Other long-term investments include limited partnerships which are consolidated because the Company is either deemed to exercise control or considered the primary beneficiary of a variable interest entity. These entities are considered investment companies and follow specialized industry accounting whereby their assets are carried at fair value. The investments held by these entities include various feeder fund investments in underlying master funds (whose underlying holdings generally include public fixed maturities, equity securities and mutual funds), as well as wholly-owned real estate held within other investment funds. The fair value is determined by reference to the underlying direct investments, with publicly traded equity securities based on quoted prices in active markets reflected in Level 1, and public fixed maturities and mutual funds priced via quotes from pricing services or observable data reflected in Level 2. The fair value of investments in funds that are subject to significant liquidity restrictions are reflected in Level 3.

The fair value of real estate held in consolidated investment funds is determined through an independent appraisal process. The appraisals generally utilize a discounted cash flow model, supplemented with replacement cost estimates and comparable recent sales data when available. These appraisals and the related assumptions are updated at least annually. Since many of the assumptions utilized are unobservable and are considered to be significant inputs to the valuation, the real estate investments within other long-term investments have been reflected within Level 3 in the fair value hierarchy.

The fair value of fund investments, where the fair value option has been elected, is primarily determined by the fund managers. Since the valuations may be based on unobservable market inputs and cannot be validated by the Company, these investments have been included within Level 3 in the fair value hierarchy.

Derivative Instruments—Derivatives are recorded at fair value either as assets, within “Other trading account assets,” or “Other long-term investments,” or as liabilities, within “Other liabilities,” except for embedded derivatives which are recorded with the associated host contract. The fair values of derivative contracts can be affected by changes in interest rates, foreign exchange rates, commodity prices, credit spreads, market volatility, expected returns, non-performance risk (“NPR”), liquidity and other factors. Liquidity valuation adjustments are made to reflect the cost of exiting significant risk positions, and consider the bid-ask spread, maturity, complexity, and other specific attributes of the underlying derivative position.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The Company’s exchange-traded futures and options include Treasury futures, Eurodollar futures, commodity futures, Eurodollar options and commodity options. Exchange-traded futures and options are valued using quoted prices in active markets and are classified within Level 1 in the fair value hierarchy.

The majority of the Company’s derivative positions are traded in the over-the-counter (“OTC”) derivative market and are classified within Level 2 in the fair value hierarchy. OTC derivatives classified within Level 2 are valued using models that utilize actively quoted or observable market input values from external market data providers, third-party pricing vendors and/or recent trading activity. The Company’s policy is to use mid-market pricing in determining its best estimate of fair value. The fair values of most OTC derivatives, including interest rate and cross currency swaps, currency forward contracts, commodity swaps, commodity forward contracts, single name credit default swaps, loan commitments held for sale and “to be announced” (“TBA”) forward contracts on highly rated mortgage-backed securities issued by U.S. government sponsored entities are determined using discounted cash flow models. The fair values of European style option contracts are determined using Black-Scholes option pricing models. These models’ key inputs include the contractual terms of the respective contract, along with significant observable inputs, including interest rates, currency rates, credit spreads, equity prices, index dividend yields, NPR, volatility and other factors.

The Company’s cleared interest rate swaps and credit derivatives linked to an index are valued using models that utilize actively quoted or observable market inputs, including Overnight Indexed Swap discount rates, obtained from external market data providers, third-party pricing vendors and/or recent trading activity. These derivatives are classified as Level 2 in the fair value hierarchy.

The vast majority of the Company’s derivative agreements are with highly rated major international financial institutions. To reflect the market’s perception of its own and the counterparty’s NPR, the Company incorporates additional spreads over LIBOR into the discount rate used in determining the fair value of OTC derivative assets and liabilities that are not otherwise collateralized.

Derivatives classified as Level 3 include look-back equity options and other structured products. These derivatives are valued based upon models, such as Monte Carlo simulation models and other techniques that utilize significant unobservable inputs. Level 3 methodologies are validated through periodic comparison of the Company’s fair values to external broker-dealer values.

Cash Equivalents and Short-Term Investments—Cash equivalents and short-term investments include money market instruments, commercial paper and other highly liquid debt instruments. Certain money market instruments are valued using unadjusted quoted prices in active markets that are accessible for identical assets and are primarily classified as Level 1. The remaining instruments in this category are generally fair valued based on market observable inputs and these investments have primarily been classified within Level 2.

Separate Account Assets—Separate account assets include fixed maturity securities, treasuries, equity securities and real estate investments for which values are determined consistent with similar instruments described above under “Fixed Maturity Securities,” “Equity Securities” and “Other Long-Term Investments.”

Notes of Consolidated VIEs—The fair values of these notes are based on broker quotes and classified within Level 3. See Note 5 and the Fair Value Option section below for additional information.

Other Liabilities—Other liabilities include certain derivative instruments, the fair values of which are determined consistent with similar derivative instruments described above under “Derivative Instruments.”

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Future Policy Benefits—The liability for future policy benefits primarily includes general account liabilities for the optional living benefit features of the Company’s variable annuity contracts, including guaranteed minimum accumulation benefits (“GMAB”), guaranteed minimum withdrawal benefits (“GMWB”) and guaranteed minimum income and withdrawal benefits (“GMIWB”), accounted for as embedded derivatives. The fair values of the GMAB, GMWB and GMIWB liabilities are calculated as the present value of future expected benefit payments to customers less the present value of assessed rider fees attributable to the embedded derivative feature. This methodology could result in either a liability or contra-liability balance, given changing capital market conditions and various actuarial assumptions. Since there is no observable active market for the transfer of these obligations, the valuations are calculated using internally-developed models with option pricing techniques. The models are based on a risk neutral valuation framework and incorporate premiums for risks inherent in valuation techniques, inputs, and the general uncertainty around the timing and amount of future cash flows. The determination of these risk premiums requires the use of management judgment.

The significant inputs to the valuation models for these embedded derivatives include capital market assumptions, such as interest rate levels and volatility assumptions, the Company’s market-perceived NPR, as well as actuarially determined assumptions, including contractholder behavior, such as lapse rates, benefit utilization rates, withdrawal rates, and mortality rates. Since many of these assumptions are unobservable and are considered to be significant inputs to the liability valuation, the liability included in future policy benefits has been reflected within Level 3 in the fair value hierarchy.

Capital market inputs and actual policyholders’ account values are updated each quarter based on capital market conditions as of the end of the quarter, including interest rates, equity markets and volatility. In the risk neutral valuation, the initial swap curve drives the total return used to grow the policyholders’ account values. The Company’s discount rate assumption is based on the LIBOR swap curve adjusted for an additional spread relative to LIBOR to reflect NPR.

Actuarial assumptions, including contractholder behavior and mortality, are reviewed at least annually, and updated based upon emerging experience, future expectations and other data, including any observable market data. These assumptions are generally updated in the third quarter of each year unless a material change that the Company feels is indicative of a long term trend is observed in an interim period.

Transfers between Levels 1 and 2—Transfers into or out of Level 1 and 2 are generally reported as the values as of the beginning of the period in which the transfer occurs. Periodically there are transfers between Level 1 and Level 2 for assets held in the Company’s Separate Account. The fair value of foreign common stock held in the Company’s Separate Account may reflect differences in market levels between the close of foreign trading markets and the close of U.S. trading markets for the respective day. Dependent on the existence of such a timing difference, the assets may move between Level 1 and Level 2. In addition, the classification of Separate Account funds may vary dependent on the availability of information to the public. Should a fund’s net asset value become publicly observable, the fund would be transferred from Level 2 to Level 1. During the three months ended September 30, 2014, $26 million were transferred from Level 1 to Level 2 and $22 million were transferred from Level 2 to Level 1. During the nine months ended September 30, 2014, $0.2 billion were transferred from Level 1 to Level 2 and $0.1 billion were transferred from Level 2 to Level 1. During the three months ended September 30, 2013, there were no transfers from Level 1 to Level 2 and $1.3 billion were transferred from Level 2 to Level 1. During the nine months ended September 30, 2013, $0.1 billion were transferred from Level 1 to Level 2 and $3.6 billion were transferred from Level 2 to Level 1.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Level 3 Assets and Liabilities by Price Source—The table below presents the balances of Level 3 assets and liabilities measured at fair value with their corresponding pricing sources.


	As of September 30, 2014
	Internal(1)		External(2)		Total
	(in millions)
Obligations of U.S. states and their political subdivisions	$	7	$	0	$	7
Foreign government bonds		0		14		14
Corporate securities		828		702		1,530
Asset-backed securities		221		5,060		5,281
Commercial mortgage-backed securities		10		447		457
Residential mortgage-backed securities		3		6		9
Equity securities		142		877		1,019
Other long-term investments		2		1,515		1,517
Other assets		9		0		9

Subtotal excluding separate account assets(3)		1,222		8,621		9,843
Separate account assets		22,908		903		23,811

Total assets	$	24,130	$	9,524	$	33,654

Future policy benefits	$	5,320	$	0	$	5,320
Other liabilities		3		3		6
Notes of consolidated VIEs		0		5,367		5,367

Total liabilities	$	5,323	$	5,370	$	10,693


	As of December 31, 2013
	Internal(1)		External(2)		Total
	(in millions)
Foreign government bonds	$	0	$	1	$	1
Corporate securities		660		784		1,444
Asset-backed securities		283		3,562		3,845
Commercial mortgage-backed securities		14		151		165
Residential mortgage-backed securities		3		7		10
Equity securities		141		1,005		1,146
Other long-term investments		9		1,387		1,396
Other assets		10		0		10

Subtotal excluding separate account assets(3)		1,120		6,897		8,017
Separate account assets		21,665		938		22,603

Total assets	$	22,785	$	7,835	$	30,620

Future policy benefits	$	441	$	0	$	441
Other liabilities		5		0		5
Notes of consolidated VIEs		0		3,254		3,254

Total liabilities	$	446	$	3,254	$	3,700

(1)	Represents valuations reflecting both internally-derived and market inputs, as well as third-party pricing information or quotes. See below for additional information related to internally-developed valuation for significant items in the above table.

(2)	Represents unadjusted prices from independent pricing services and independent indicative broker quotes where pricing inputs are not readily available.

(3)	Includes assets classified as fixed maturities available-for-sale, trading account assets supporting insurance liabilities and other trading account assets.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Quantitative Information Regarding Internally—Priced Level 3 Assets and Liabilities—The tables below present quantitative information on significant internally-priced Level 3 assets and liabilities (see narrative below for quantitative information for separate account assets).


	As of September 30, 2014
	Fair Value		Valuation Techniques	Unobservable Inputs	Minimum		Maximum	Weighted Average	Impact of Increase in Input on Fair Value(1)
	(in millions)
Assets:
Corporate securities	$	828	Discounted cash flow	Discount rate	1.11%	-	15%	7.73%	Decrease
			Market comparables	EBITDA multiples(2)	6.00X	-	6.20X	6.13X	Increase
			Liquidation	Liquidation value	22.12%	-	100.00%	84.30%	Increase

Asset-backed securities	$	221	Discounted cash flow	Prepayment rate(3)	2.82%	-	28.03%	5.91%	Increase
				Default rate(3)	0.49%	-	6.14%	0.76%	Decrease
				Loss severity(3)	35.00%	-	45.00%	40.76%	Decrease
				Liquidity premium	1.00%	-	2.00%	1.90%	Decrease
				Average life (years)	0.2	-	13.77	4.99	Increase
				Comparable spreads	0.23%	-	5.58%	1.02%	Decrease
				Comparable security yields	0.66%	-	10.00%	7.02%	Decrease

Liabilities:
Future policy benefits(4)	$	5,320	Discounted cash flow	Lapse rate(5)	0%	-	14%		Decrease
				NPR spread(6)	0.04%	-	1.14%		Decrease
				Utilization rate(7)	63%	-	96%		Increase
				Withdrawal rate(8)	74%	-	100%		Increase
				Mortality rate(9)	0%	-	14%		Decrease
				Equity volatility curve	16%	-	28%		Increase


	As of December 31, 2013
	Fair Value		Valuation Techniques	Unobservable Inputs	Minimum		Maximum	Weighted Average	Impact of Increase in Input on Fair Value(1)
	(in millions)
Assets:
Corporate securities	$	660	Discounted cash flow	Discount rate	1.25%	-	15%	8.52%	Decrease
			Market comparables	EBITDA multiples(2)	5.0X	-	8.0X	6.0X	Increase
			Liquidation	Liquidation value	11.61%	-	100.0%	59.17%	Increase

Asset-backed securities	$	283	Discounted cash flow	Prepayment rate(3)	2.82%	-	27.41%	10.23%	Increase
				Default rate(3)	0.49%	-	31.85%	2.62%	Decrease
				Loss severity(3)	15.06%	-	45.00%	33.00%	Decrease
				Liquidity premium	1.00%	-	2.00%	1.90%	Decrease
				Average life (years)	0.16	-	14.76	5.05	Increase
				Comparable spreads	0.19%	-	45.19%	3.65%	Decrease
				Comparable security yields	0.61%	-	10.00%	6.52%	Decrease

Liabilities:
Future policy benefits(4)	$	441	Discounted cash flow	Lapse rate(5)	0%	-	11%		Decrease
				NPR spread(6)	0.08%	-	1.09%		Decrease
				Utilization rate(7)	70%	-	94%		Increase
				Withdrawal rate(8)	86%	-	100%		Increase
				Mortality rate(9)	0%	-	13%		Decrease
				Equity volatility curve	15%	-	28%		Increase

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

(1)	Conversely, the impact of a decrease in input would have the opposite impact for the fair value as that presented in the table.

(2)	EBITDA multiples represent multiples of earnings before interest, taxes, depreciation and amortization, and are amounts used when the reporting entity has determined that market participants would use such multiples when pricing the investments.

(3)	In isolation, an increase in prepayment rate or a decrease in default rate or loss severity would generally result in an increase in fair value, although the interrelationships between these inputs depend on specific market conditions.

(4)

Future policy benefits primarily represent general account liabilities for the optional living benefit features of the Company’s variable annuity contracts which are accounted for as embedded derivatives. Since the valuation methodology for these liabilities uses a range of inputs that vary at the contract level over the cash flow projection period, presenting a range, rather than weighted average, is a more meaningful representation of the unobservable inputs used in the valuation.

(5)

Lapse rates are adjusted at the contract level based on the in-the-moneyness of the living benefit and reflect other factors, such as the applicability of any surrender charges. Lapse rates are reduced when contracts are more in-the-money. Lapse rates are also generally assumed to be lower for the period where surrender charges apply.

(6)

To reflect NPR, the Company incorporates an additional spread over LIBOR into the discount rate used in the valuation of individual living benefit contracts in a liability position and generally not to those in a contra-liability position. The NPR spread reflects the financial strength ratings of the Company, as these are insurance liabilities and senior to debt. The additional spread over LIBOR is determined by utilizing the credit spreads associated with issuing funding agreements, adjusted for any illiquidity risk premium.

(7)

The utilization rate assumption estimates the percentage of contracts that will utilize the benefit during the contract duration, and begin lifetime withdrawals at various time intervals from contract inception. The remaining contractholders are assumed to either begin lifetime withdrawals immediately or never utilize the benefit. Utilization assumptions may vary by product type, tax status and age. The impact of changes in these assumptions is highly dependent on the product type, the age of the contractholder at the time of the sale, and the timing of the first lifetime income withdrawal.

(8)

The withdrawal rate assumption estimates the magnitude of annual contractholder withdrawals relative to the maximum allowable amount under the contract. These assumptions may vary based on the product type, contractholder age, tax status, and withdrawal timing. The fair value of the liability will generally increase the closer the withdrawal rate is to 100%.

(9)

Range reflects the mortality rate for the vast majority of business with living benefits, with policyholders ranging from 35 to 90 years old. While the majority of living benefits have a minimum age requirement, certain benefits do not have an age restriction. This results in contractholders for certain benefits with mortality rates approaching 0%. Based on historical experience, the Company applies a set of age and duration specific mortality rate adjustments compared to standard industry tables. A mortality improvement assumption is also incorporated into the overall mortality table.

Interrelationships Between Unobservable Inputs—In addition to the sensitivities of fair value measurements to changes in each unobservable input in isolation, as reflected in the table above, interrelationships between these inputs may also exist, such that a change in one unobservable input may give rise to a change in another or multiple inputs. Examples of such interrelationships for significant internally-priced Level 3 assets and liabilities are as follows:

Corporate Securities—The rate used to discount future cash flows reflects current risk-free rates plus credit and liquidity spread requirements that market participants would use to value an asset. The discount rate may be influenced by many factors, including market cycles, expectations of default, collateral, term, and asset complexity. Each of these factors can influence discount rates, either in isolation, or in response to other factors.

Asset-Backed Securities—Interrelationships may exist between the prepayment rate, the default rate and/or loss severity, depending on specific market conditions. In stronger business cycles, prepayment rates are generally driven by overall market interest rates, and accompanied by lower default rates and loss severity. During weaker cycles, prepayments may decline, as default rates and loss severity increase. Additionally, the impact of these factors on average life varies with the structure and subordination.

Future Policy Benefits—The Company expects efficient benefit utilization and withdrawal rates to generally be correlated with lapse rates. However, behavior is generally highly dependent on the facts and circumstances surrounding the individual contractholder, such as their liquidity needs or tax situation, which could drive lapse behavior independent of other contractholder behavior assumptions. To the extent more efficient contractholder behavior results in greater in-the-moneyness at the contract level, lapse rates may decline for those contracts. Similarly, to the extent that increases in equity volatility are correlated with overall declines in the capital markets, lapse rates may decline as contracts become more in-the-money.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Separate Account Assets—In addition to the significant internally-priced Level 3 assets and liabilities presented and described above, the Company also has internally-priced separate account assets reported within Level 3. Changes in the fair value of separate account assets are borne by customers and thus are offset by changes in separate account liabilities on the Company’s Consolidated Statement of Financial Position. As a result, changes in value associated with these investments do not impact the Company’s Consolidated Statement of Operations. In addition, fees earned by the Company related to the management of most separate account assets classified as Level 3 do not change due to changes in the fair value of these investments. Quantitative information about significant internally-priced Level 3 separate account assets is as follows:

Real Estate and Other Invested Assets—Separate account assets include $21,959 million and $20,806 million of investments in real estate as of September 30, 2014 and December 31, 2013, respectively, that are classified as Level 3 and reported at fair value. In general, these fair value estimates are based on property appraisal reports prepared by independent real estate appraisers. Key inputs and assumptions to the appraisal process include rental income and expense amounts, related growth rates, discount rates and capitalization rates. In cases where real estate investments are made through indirect investments, fair value is generally determined by the Company’s equity in net assets of the entities. The debt associated with real estate, other invested assets and the Company’s equity position in entities are externally valued. Because of the subjective nature of inputs and the judgment involved in the appraisal process, real estate investments and their corresponding debt are typically included in the Level 3 classification. Key unobservable inputs to real estate valuation include capitalization rates, which ranged from 4.50% to 9.75% (6.11% weighted average) as of September 30, 2014, and 4.15% to 11.00% (6.35% weighted average) as of December 31, 2013, and discount rates, which ranged from 6.00% to 15.00% (7.43% weighted average) as of September 30, 2014, and 6.00% to 15.00% (7.71% weighted average) as of December 31, 2013. Key unobservable inputs to real estate debt valuation include yield to maturity, which ranged from 1.66% to 9.55% (4.15% weighted average) as of September 30, 2014, and 1.13% to 6.85% (4.17% weighted average) as of December 31, 2013, and market spread over base rate, which ranged from 1.50% to 4.91% (2.73% weighted average) as of September 30, 2014, and 1.60% to 4.75% (2.87% weighted average) as of December 31, 2013.

Commercial Mortgage Loans—Separate account assets include $897 million and $793 million of commercial mortgage loans as of September 30, 2014 and December 31, 2013, respectively, that are classified as Level 3 and reported at fair value. Commercial mortgage loans are primarily valued internally using discounted cash flow techniques, as described further under “Fair Value of Financial Instruments.” The primary unobservable input used is the spread to discount cash flows, which ranged from 1.12% to 1.93% (1.33% weighted average) as of September 30, 2014, and 1.25% to 1.98% (1.47% weighted average) as of December 31, 2013. In isolation, an increase (decrease) in the value of this input would result in a lower (higher) fair value measurement.

Valuation Process for Fair Value Measurements Categorized within Level 3—The Company has established an internal control infrastructure over the valuation of financial instruments that requires ongoing oversight by its various Business Groups. These management control functions are segregated from the trading and investing functions. For invested assets, the Company has established oversight teams, often in the form of Pricing Committees within each asset management group. The teams, which typically include representation from investment, accounting, operations, legal and other disciplines are responsible for overseeing and monitoring the pricing of the Company’s investments and performing periodic due diligence reviews of independent pricing services. An actuarial valuation team oversees the valuation of optional living benefit features of the Company’s variable annuity contracts.

The Company has also established policies and guidelines that require the establishment of valuation methodologies and consistent application of such methodologies. These policies and guidelines govern the use of

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

inputs and price source hierarchies and provide controls around the valuation processes. These controls include appropriate review and analysis of investment prices against market activity or indicators of reasonableness, approval of price source changes, price overrides, methodology changes and classification of fair value hierarchy levels. For optional living benefit features of the Company’s variable annuity products, the actuarial valuation unit periodically performs baseline testing of contract input data and actuarial assumptions are reviewed at least annually, and updated based upon emerging experience, future expectations and other data, including any observable market data. The valuation policies and guidelines are reviewed and updated as appropriate.

Within the trading and investing functions, the Company has established policies and procedures that relate to the approval of all new transaction types, transaction pricing sources and fair value hierarchy coding within the financial reporting system. For variable annuity product changes or new launches of optional living benefit features, the actuarial valuation unit validates input logic and new product features and agrees new input data directly to source documents.

Changes in Level 3 assets and liabilities—The following tables provide summaries of the changes in fair values of Level 3 assets and liabilities as of the dates indicated, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at the end of their respective periods.


	Three Months Ended September 30, 2014
	Fixed Maturities Available-For-Sale
	U.S. Government		U.S. States		Foreign Government		Corporate			Asset- Backed			Commercial Mortgage- Backed			Residential Mortgage- Backed
	(in millions)
Fair Value, beginning of period	$	0	$	0	$	2	$	1,295		$	4,133		$	49		$	7
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		0		0		0		(3	)		3			3			0
Included in other comprehensive income (loss)		0		0		0		(23	)		(5	)		(3	)		0
Net investment income		0		0		0		(1	)		5			0			0
Purchases		0		2		0		315			1,193			373			1
Sales		0		0		0		(283	)		(121	)		(4	)		0
Issuances		0		0		0		0			0			0			0
Settlements		0		0		0		(82	)		(254	)		(1	)		(1	)
Foreign currency translation		0		0		0		(15	)		(15	)		0			0
Transfers into Level 3(2)		0		5		0		218			163			0			0
Transfers out of Level 3(2)		0		0		0		(20	)		(260	)		0			0

Fair Value, end of period	$	0	$	7	$	2	$	1,401		$	4,842		$	417		$	7

Unrealized gains (losses) for assets still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0	$	0	$	(1	)	$	0		$	0		$	0

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


	Three Months Ended September 30, 2014
	Trading Account Assets
	Foreign Government		Corporate			Asset- Backed			Commercial Mortgage- Backed		Residential Mortgage- Backed		Equity			All Other Activity
	(in millions)
Fair Value, beginning of period	$	12	$	129		$	453		$	2	$	2	$	763		$	6
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		0		0			0			0		0		(8	)		0
Other income		0		(14	)		(2	)		0		0		1			1
Purchases		0		100			12			36		0		9			0
Sales		0		(90	)		0			0		0		(25	)		0
Issuances		0		0			0			0		0		0			0
Settlements		0		(5	)		(4	)		0		0		0			0
Foreign currency translation		0		0			0			0		0		(19	)		0
Transfers into Level 3(2)		0		9			3			2		0		0			0
Transfers out of Level 3(2)		0		0			(23	)		0		0		0			0

Fair Value, end of period	$	12	$	129		$	439		$	40	$	2	$	721		$	7

Unrealized gains (losses) for assets still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0		$	0		$	0	$	0	$	(6	)	$	0
Other income	$	0	$	(9	)	$	(2	)	$	0	$	0	$	1		$	0


	Three Months Ended September 30, 2014
	Equity Securities Available- For-Sale			Commercial Mortgage and Other Loans		Other Long-term Investments			Cash Equivalents		Other Assets
	(in millions)
Fair Value, beginning of period	$	299		$	0	$	1,442		$	0	$	4
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		2			0		(9	)		0		0
Other income		0			0		15			0		0
Included in other comprehensive income (loss)		2			0		0			0		0
Net investment income		0			0		1			0		0
Purchases		8			0		97			0		0
Sales		(10	)		0		(2	)		0		0
Issuances		0			0		0			0		0
Settlements		0			0		(23	)		0		(2	)
Foreign currency translation		(4	)		0		3			0		0
Other(1)		0			0		(7	)		0		0
Transfers into Level 3(2)		2			0		0			0		0
Transfers out of Level 3(2)		(1	)		0		0			0		0

Fair Value, end of period	$	298		$	0	$	1,517		$	0	$	2

Unrealized gains (losses) for assets still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0		$	0	$	(2	)	$	0	$	0
Other income	$	0		$	0	$	6		$	0	$	0

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


	Three Months Ended September 30, 2014
	Separate Account Assets (4)			Future Policy Benefits			Other Liabilities			Notes of consolidated VIEs
	(in millions)
Fair Value, beginning of period	$	23,779		$	(3,400	)	$	(5	)	$	(4,539	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		0			(1,690	)		0			92
Interest credited to policyholders’ account balances		655			0			0			0
Net investment income		6			0			0			0
Purchases		228			0			0			0
Sales		(218	)		0			0			220
Issuances		0			(230	)		0			(1,140	)
Settlements		(608	)		0			0			0
Foreign currency translation		(1	)		0			0			0
Other(1)		(57	)		0			(1	)		0
Transfers into Level 3(2)		47			0			0			0
Transfers out of Level 3(2)		(20	)		0			0			0

Fair Value, end of period	$	23,811		$	(5,320	)	$	(6	)	$	(5,367	)

Unrealized gains (losses) for assets/liabilities still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0		$	(1,713	)	$	0		$	93
Interest credited to policyholders’ account	$	414		$	0		$	0		$	0


	Nine Months Ended September 30, 2014
	Fixed Maturities Available-For-Sale
	U.S. Government		U.S. States		Foreign Government		Corporate			Asset- Backed			Commercial Mortgage- Backed			Residential Mortgage- Backed
	(in millions)
Fair Value, beginning of period	$	0	$	0	$	1	$	1,329		$	3,442		$	165		$	8
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		0		0		0		7			13			4			0
Included in other comprehensive income (loss)		0		0		0		44			1			(1	)		0
Net investment income		0		0		0		3			14			0			0
Purchases		0		2		1		624			2,285			869			1
Sales		0		0		0		(566	)		(170	)		(10	)		0
Issuances		0		0		0		0			0			0			0
Settlements		0		0		0		(231	)		(986	)		(5	)		(2	)
Foreign currency translation		0		0		0		(9	)		(12	)		0			0
Other(1)		0		0		0		4			(2	)		0			0
Transfers into Level 3(2)		0		5		0		276			1,142			0			0
Transfers out of Level 3(2)		0		0		0		(80	)		(885	)		(605	)		0

Fair Value, end of period	$	0	$	7	$	2	$	1,401		$	4,842		$	417		$	7

Unrealized gains (losses) for assets still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0	$	0	$	(17	)	$	1		$	0		$	0

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


	Nine Months Ended September 30, 2014
	Trading Account Assets
	Foreign Government		Corporate			Asset- Backed			Commercial Mortgage- Backed			Residential Mortgage- Backed		Equity			All Other Activity
	(in millions)
Fair Value, beginning of period	$	0	$	115		$	403		$	0		$	2	$	842		$	6
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		0		0			0			0			0		(6	)		0
Other income		0		(8	)		2			0			0		12			1
Net investment income		0		0			1			0			0		0			0
Purchases		12		163			102			87			0		23			0
Sales		0		(141	)		(9	)		0			0		(59	)		0
Issuances		0		0			0			0			0		0			0
Settlements		0		(9	)		(28	)		0			0		(79	)		0
Foreign currency translation		0		0			0			0			0		(11	)		0
Transfers into Level 3(2)		0		9			44			4			0		0			0
Transfers out of Level 3(2)		0		0			(76	)		(51	)		0		(1	)		0

Fair Value, end of period	$	12	$	129		$	439		$	40		$	2	$	721		$	7

Unrealized gains (losses) for assets still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0		$	0		$	0		$	0	$	(6	)	$	0
Other income	$	0	$	(4	)	$	2		$	0		$	0	$	15		$	1


	Nine Months Ended September 30, 2014
	Equity Securities Available- For-Sale			Commercial Mortgage and Other Loans		Other Long-term Investments			Cash Equivalents		Other Assets
	(in millions)
Fair Value, beginning of period	$	304		$	0	$	1,396		$	0	$	4
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		6			0		(6	)		0		0
Other income		0			0		74			0		0
Included in other comprehensive income (loss)		3			0		0			0		0
Net investment income		0			0		(1	)		0		0
Purchases		26			0		191			0		0
Sales		(34	)		0		(2	)		0		0
Issuances		0			0		0			0		0
Settlements		0			0		(88	)		0		(2	)
Foreign currency translation		(3	)		0		7			0		0
Other(1)		1			0		(59	)		0		0
Transfers into Level 3(2)		3			0		5			0		0
Transfers out of Level 3(2)		(8	)		0		0			0		0

Fair Value, end of period	$	298		$	0	$	1,517		$	0	$	2

Unrealized gains (losses) for assets still held(3):
Included in earnings:
Realized investment gains (losses), net	$	(2	)	$	0	$	(7	)	$	0	$	0
Other income	$	0		$	0	$	74		$	0	$	0

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


	Nine Months Ended September 30, 2014
	Separate Account Assets(4)			Future Policy Benefits			Other Liabilities			Notes of consolidated VIEs
	(in millions)
Fair Value, beginning of period	$	22,603		$	(441	)	$	(5	)	$	(3,254	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		6			(4,204	)		2			91
Interest credited to policyholders’ account balances		2,008			0			0			0
Net investment income		18			0			0			0
Purchases		1,060			0			0			0
Sales		(546	)		0			0			220
Issuances		0			(675	)		0			(2,424	)
Settlements		(1,272	)		0			0			0
Foreign currency translation		(1	)		0			0			0
Other(1)		0			0			(3	)		0
Transfers into Level 3(2)		50			0			0			0
Transfers out of Level 3(2)		(115	)		0			0			0

Fair Value, end of period	$	23,811		$	(5,320	)	$	(6	)	$	(5,367	)

Unrealized gains (losses) for assets/liabilities still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0		$	(4,220	)	$	2		$	91
Interest credited to policyholders’ account	$	1,269		$	0		$	0		$	0


	Three Months Ended September 30, 2013
	Fixed Maturities Available-For-Sale
	U.S. Government		U.S. States		Foreign Government			Corporate			Asset- Backed			Commercial Mortgage- Backed			Residential Mortgage- Backed
	(in millions)
Fair Value, beginning of period	$	0	$	0	$	13		$	1,383		$	4,009		$	243		$	11
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		0		0		0			(11	)		9			35			0
Included in other comprehensive income (loss)		0		0		0			(20	)		(4	)		(16	)		0
Net investment income		0		0		0			(6	)		7			0			0
Purchases		0		0		1			91			515			91			0
Sales		0		0		0			(12	)		(80	)		(34	)		0
Issuances		0		0		0			0			0			0			0
Settlements		0		0		(1	)		(158	)		(251	)		(7	)		(3	)
Foreign currency translation		0		0		0			15			13			1			0
Other(1)		0		0		0			0			(84	)		0			0
Transfers into Level 3(2)		0		0		0			69			2			0			0
Transfers out of Level 3(2)		0		0		(12	)		(153	)		(46	)		(149	)		0

Fair Value, end of period	$	0	$	0	$	1		$	1,198		$	4,090		$	164		$	8

Unrealized gains (losses) for assets still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0	$	0		$	0		$	7		$	0		$	0

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


	Three Months Ended September 30, 2013
	Trading Account Assets
	U.S. Government		Corporate			Asset- Backed			Commercial Mortgage- Backed			Residential Mortgage- Backed		Equity			All Other Activity
	(in millions)
Fair Value, beginning of period	$	0	$	90		$	424		$	54		$	2	$	884		$	14
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		0		0			0			0			0		0			(3	)
Other income		0		(2	)		(1	)		(1	)		0		5			1
Net investment income		0		0			2			0			0		0			0
Purchases		0		17			156			0			0		7			0
Sales		0		(6	)		(1	)		0			0		(5	)		0
Issuances		0		0			0			0			0		0			0
Settlements		0		(8	)		(44	)		0			0		(30	)		(4	)
Foreign currency translation		0		0			1			0			0		17			0
Other(1)		0		0			(19	)		0			0		0			0
Transfers into Level 3(2)		0		0			2			0			0		0			0
Transfers out of Level 3(2)		0		(6	)		(6	)		(49	)		0		0			0

Fair Value, end of period	$	0	$	85		$	514		$	4		$	2	$	878		$	8

Unrealized gains (losses) for assets still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0		$	0		$	0		$	0	$	0		$	(2	)
Other income	$	0	$	0		$	0		$	0		$	0	$	9		$	1


	Three Months Ended September 30, 2013
	Equity Securities Available- For-Sale			Commercial Mortgage and Other Loans			Other Long-term Investments			Other Assets
	(in millions)
Fair Value, beginning of period	$	292		$	21		$	1,082		$	6
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		10			(2	)		(1	)		0
Other income		0			0			19			0
Included in other comprehensive income (loss)		2			0			0			0
Net investment income		0			0			1			0
Purchases		8			0			27			0
Sales		(38	)		0			0			0
Issuances		0			0			0			0
Settlements		0			0			(23	)		0
Foreign currency translation		7			0			(27	)		0
Other(1)		0			0			(68	)		0
Transfers into Level 3(2)		1			0			0			0
Transfers out of Level 3(2)		0			0			0			0

Fair Value, end of period	$	282		$	19		$	1,010		$	6

Unrealized gains (losses) for assets/liabilities still held(3):
Included in earnings:
Other income	$	0		$	0		$	20		$	0

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


	Three Months Ended September 30, 2013
	Separate Account Assets(4)			Future Policy Benefits			Other Liabilities			Notes of consolidated VIEs
	(in millions)
Fair Value, beginning of period	$	21,672		$	(365	)	$	(6	)	$	(2,055	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		0			(1,351	)		1			30
Interest credited to policyholders’ account balances		736			0			0			0
Purchases		528			0			0			0
Sales		(166	)		0			0			0
Issuances		0			(212	)		0			(292	)
Settlements		(372	)		0			0			(13	)
Other(1)		0			0			(1	)		0
Transfers into Level 3(2)		3			0			0			0
Transfers out of Level 3(2)		(54	)		0			0			0

Fair Value, end of period	$	22,347		$	(1,928	)	$	(6	)	$	(2,330	)

Unrealized gains (losses) for assets/liabilities still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0		$	(1,359	)	$	0		$	29
Interest credited to policyholders’ account	$	464		$	0		$	0		$	0


	Nine Months Ended September 30, 2013
	Fixed Maturities Available-For-Sale
	U.S. Government		U.S. States		Foreign Government			Corporate			Asset- Backed			Commercial Mortgage- Backed			Residential Mortgage- Backed
	(in millions)
Fair Value, beginning of period	$	0	$	0	$	0		$	1,630		$	3,703		$	124		$	11
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		0		0		0			(5	)		20			36			0
Included in other comprehensive income (loss)		0		0		(1	)		(8	)		(5	)		(17	)		0
Net investment income		0		0		0			(4	)		28			0			0
Purchases		0		0		5			393			1,898			328			0
Sales		0		0		(1	)		(72	)		(306	)		(37	)		0
Issuances		0		0		0			0			0			0			0
Settlements		0		0		(3	)		(555	)		(1,036	)		(38	)		(3	)
Foreign currency translation		0		0		0			(96	)		(92	)		(8	)		0
Other(1)		0		0		0			0			(84	)		0			0
Transfers into Level 3(2)		0		0		13			302			10			0			0
Transfers out of Level 3(2)		0		0		(12	)		(387	)		(46	)		(224	)		0

Fair Value, end of period	$	0	$	0	$	1		$	1,198		$	4,090		$	164		$	8

Unrealized gains (losses) for assets still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0	$	0		$	0		$	12		$	0		$	0

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


	Nine Months Ended September 30, 2013
	Trading Account Assets
	U.S. Government		Corporate			Asset- Backed			Commercial Mortgage- Backed			Residential Mortgage- Backed		Equity			All Other Activity
	(in millions)
Fair Value, beginning of period	$	0	$	134		$	430		$	8		$	2	$	1,098		$	25
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		0		0			0			0			0		(1	)		(15	)
Other income		0		(3	)		7			(1	)		0		45			2
Net investment income		0		0			4			0			0		0			0
Purchases		0		20			321			76			0		10			0
Sales		0		(11	)		(2	)		(1	)		0		(108	)		0
Issuances		0		0			0			0			0		0			0
Settlements		0		(48	)		(216	)		(1	)		0		(43	)		(4	)
Foreign currency translation		0		0			(7	)		(1	)		0		(123	)		0
Other(1)		0		0			(19	)		0			0		0			0
Transfers into Level 3(2)		0		3			4			0			0		0			0
Transfers out of Level 3(2)		0		(10	)		(8	)		(76	)		0		0			0

Fair Value, end of period	$	0	$	85		$	514		$	4		$	2	$	878		$	8

Unrealized gains (losses) for assets still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0		$	0		$	0		$	0	$	0		$	(15	)
Other income	$	0	$	(3	)	$	8		$	1		$	0	$	41		$	2


	Nine Months Ended September 30, 2013
	Equity Securities Available- For-Sale			Commercial Mortgage and Other Loans			Other Long-term Investments			Other Assets
	(in millions)
Fair Value, beginning of period	$	330		$	48		$	1,053		$	8
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		11			0			0			(2	)
Other income		0			0			103			0
Included in other comprehensive income (loss)		45			0			0			0
Net investment income		0			0			(1	)		0
Purchases		20			0			86			0
Sales		(61	)		0			0			0
Issuances		0			0			6			0
Settlements		(3	)		(29	)		(121	)		0
Foreign currency translation		(44	)		0			(8	)		0
Other(1)		(18	)		0			(108	)		0
Transfers into Level 3(2)		2			0			0			0
Transfers out of Level 3(2)		0			0			0			0

Fair Value, end of period	$	282		$	19		$	1,010		$	6

Unrealized gains (losses) for assets/liabilities still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0		$	0		$	(3	)	$	(2	)
Other income	$	0		$	0		$	103		$	0

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


	Nine Months Ended September 30, 2013
	Separate Account Assets(4)			Future Policy Benefits			Other Liabilities			Notes of consolidated VIEs
	(in millions)
Fair Value, beginning of period	$	21,132		$	(3,348	)	$	0		$	(1,406	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		0			2,037			(3	)		32
Interest credited to policyholders’ account balances		1,884			0			0			0
Purchases		1,309			0			0			0
Sales		(483	)		0			0			0
Issuances		0			(619	)		0			(932	)
Settlements		(1,593	)		0			0			(24	)
Foreign currency translation		0			2			0			0
Other(1)		140			0			(3	)		0
Transfers into Level 3(2)		62			0			0			0
Transfers out of Level 3(2)		(104	)		0			0			0

Fair Value, end of period	$	22,347		$	(1,928	)	$	(6	)	$	(2,330	)

Unrealized gains (losses) for assets/liabilities still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0		$	1,970		$	(3	)	$	32
Interest credited to policyholders’ account	$	1,135		$	0		$	0		$	0

(1)	Other primarily represents reclasses of certain assets between reporting categories.

(2)	Transfers into or out of Level 3 are reported as the value as of the beginning of the quarter in which the transfer occurs.

(3)	Unrealized gains or losses related to assets still held at the end of the period do not include amortization or accretion of premiums and discounts.

(4)

Separate account assets represent segregated funds that are invested for certain customers. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. Separate account liabilities are not included in the above table as they are reported at contract value and not fair value in the Company’s Unaudited Interim Consolidated Statement of Financial Position.

Transfers—Transfers into Level 3 are generally the result of unobservable inputs utilized within valuation methodologies and the use of indicative broker quotes for assets that were previously valued using observable inputs. Transfers out of Level 3 are generally due to the use of observable inputs in valuation methodologies as well as the availability of pricing service information for certain assets that the Company is able to validate.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Derivative Fair Value Information

The following tables present the balance of derivative assets and liabilities measured at fair value on a recurring basis, as of the date indicated, by primary underlying. These tables include non-performance risk and exclude embedded derivatives which are typically recorded with the associated host contract. The derivative assets and liabilities shown below are included in “Other trading account assets,” “Other long-term investments” or “Other liabilities” in the tables presented previously in this note, under the headings “Assets and Liabilities by Hierarchy Level” and “Changes in Level 3 Assets and Liabilities.”


	As of September 30, 2014
	Level 1		Level 2		Level 3		Netting(1)			Total
	(in millions)
Derivative assets:
Interest Rate	$	6	$	7,665	$	6	$	0		$	7,677
Currency		0		531		0		0			531
Credit		0		2		0		0			2
Currency/Interest Rate		0		1,080		0		0			1,080
Equity		2		733		6		0			741
Commodity		1		0		0		0			1
Netting(1)		0		0		0		(9,044	)		(9,044	)

Total derivative assets	$	9	$	10,011	$	12	$	(9,044	)	$	988

Derivative liabilities:
Interest Rate	$	2	$	5,496	$	3	$	0		$	5,501
Currency		0		566		0		0			566
Credit		0		36		0		0			36
Currency/Interest Rate		0		493		0		0			493
Equity		0		90		0		0			90
Commodity		1		0		0		0			1
Netting(1)		0		0		0		(6,590	)		(6,590	)

Total derivative liabilities	$	3	$	6,681	$	3	$	(6,590	)	$	97

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


	As of December 31, 2013
	Level 1		Level 2		Level 3		Netting(1)			Total
	(in millions)
Derivative assets:
Interest Rate	$	10	$	6,122	$	8	$	0		$	6,140
Currency		0		593		0		0			593
Credit		0		3		0		0			3
Currency/Interest Rate		0		647		0		0			647
Equity		14		376		0		0			390
Commodity		1		0		0		0			1
Netting(1)		0		0		0		(7,241	)		(7,241	)

Total derivative assets	$	25	$	7,741	$	8	$	(7,241	)	$	533

Derivative liabilities:
Interest Rate	$	5	$	7,597	$	5	$	0		$	7,607
Currency		0		425		0		0			425
Credit		0		49		0		0			49
Currency/Interest Rate		0		857		0		0			857
Equity		1		474		0		0			475
Commodity		0		0		0		0			0
Netting(1)		0		0		0		(7,257	)		(7,257	)

Total derivative liabilities	$	6	$	9,402	$	5	$	(7,257	)	$	2,156

(1)	“Netting” amounts represent cash collateral and the impact of offsetting asset and liability positions held with the same counterparty.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Changes in Level 3 derivative assets and liabilities—The following tables provide a summary of the changes in fair value of Level 3 derivative assets and liabilities for the three and nine months ended September 30, 2014, as well as the portion of gains or losses included in income for the three and nine months ended September 30, 2014, attributable to unrealized gains or losses related to those assets and liabilities still held at September 30, 2014.


	Three Months Ended September 30, 2014					Nine Months Ended September 30, 2014
	Derivative Assets- Equity		Derivative Assets- Interest Rate			Derivative Assets- Equity		Derivative Assets- Interest Rate
	(in millions)
Fair Value, beginning of period	$	6	$	6		$	0	$	3
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		1		(3	)		2		0
Other income		0		0			0		0
Purchases		0		0			0		0
Sales		0		0			0		0
Issuances		0		0			0		0
Settlements		0		0			0		0
Transfers into Level 3(1)		0		0			5		0
Transfers out of Level 3(1)		0		0			0		0

Fair Value, end of period	$	7	$	3		$	7	$	3

Unrealized gains (losses) for the period relating to those Level 3 assets that were still held at the end of the period:
Included in earnings:
Realized investment gains (losses), net	$	1	$	(3	)	$	2	$	0
Other income	$	0	$	0		$	0	$	0


	Three Months Ended September 30, 2013						Nine Months Ended September 30, 2013
	Derivative Assets- Equity			Derivative Assets- Interest Rate			Derivative Assets- Equity			Derivative Assets- Interest Rate
	(in millions)
Fair Value, beginning of period	$	8		$	2		$	19		$	3
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		(3	)		(1	)		(14	)		(2	)
Other income		0			0			0			0
Purchases		0			0			0			0
Sales		0			0			0			0
Issuances		0			0			0			0
Settlements		(4	)		0			(4	)		0
Transfers into Level 3(1)		0			0			0			0
Transfers out of Level 3(1)		0			0			0			0

Fair Value, end of period	$	1		$	1		$	1		$	1

Unrealized gains (losses) for the period relating to those Level 3 assets that were still held at the end of the period:
Included in earnings:
Realized investment gains (losses), net	$	(3	)	$	(1	)	$	(14	)	$	(2	)
Other income	$	0		$	0		$	0		$	0

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

(1)	Transfers into or out of Level 3 are generally reported as the value as of the beginning of the quarter in which the transfer occurs.

Nonrecurring Fair Value Measurements—Certain assets and liabilities are measured at fair value on a nonrecurring basis. There were no fair value reserve adjustments for the three months ended September 30, 2014 and there were $4 million of adjustments for the nine months ended September 30, 2014, on certain commercial mortgage loans. The carrying value of these loans as of September 30, 2014 was $46 million. There were no nonrecurring fair value adjustments for the three and nine months ended September 30, 2013. The reserve adjustments were based on discounted cash flows utilizing market rates or the fair value of the underlying real estate collateral and the underlying assets were classified as Level 3 in the valuation hierarchy.

There were no intangible asset impairments recorded for the three and nine months ended September 30, 2014 and 2013.

For mortgage servicing rights, there were valuation reserve decreases of $8 million and $5 million for the nine months ended September 30, 2014 and 2013, respectively. There were valuation reserve increases of $1 million for the three months ended September 30, 2014 and valuation reserve decreases of $6 million for the three months ended September 30, 2013. Mortgage servicing rights are revalued based on internal models and classified as Level 3 in the valuation hierarchy. There were no impairments for both the nine months ended September 30, 2014 and 2013, on real estate held for investment. There were no impairments recorded for the three months ended September 30, 2014 and impairments of $1 million were recorded for the three months ended September 30, 2013. These impairments were based primarily on appraised value and classified as Level 3 in the valuation hierarchy. For certain cost method investments, there were $2 million of impairments recorded for the three and nine months ended September 30, 2014. Impairments of $6 million were recorded for the three months ended September 30, 2013 and $15 million for the nine months ended September 30, 2013. The methodologies utilized were primarily discounted future cash flow and, where appropriate, valuations provided by the general partners taking into consideration investment-related expenses. These cost method investments are classified as Level 3 in the valuation hierarchy.

Fair Value Option

The fair value option provides the Company an option to elect fair value as an alternative measurement for selected financial assets and financial liabilities not otherwise reported at fair value. Such elections have been made by the Company to help mitigate volatility in earnings that results from different measurement attributes. Electing the fair value option also allows the Company to achieve consistent accounting for certain assets and liabilities.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The following table presents information regarding changes in fair values recorded in earnings for commercial mortgage and other loans, other long-term investments and notes issued by consolidated variable interest entities, where the fair value option has been elected.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Assets:
Commercial mortgage and other loans:
Changes in instrument-specific credit risk	$	0		$	0		$	0		$	0
Other changes in fair value	$	0		$	1		$	0		$	3
Other long-term investments:
Changes in fair value	$	1		$	8		$	43		$	39
Liabilities:
Notes issued by consolidated variable interest entities:
Changes in fair value	$	(92	)	$	(30	)	$	(91	)	$	(32	)

Changes in fair value are reflected in “Realized investment gains (losses), net” for commercial mortgage and other loans and “Other income” for other long-term investments and notes issued by consolidated variable interest entities. Changes in fair value due to instrument-specific credit risk are estimated based on changes in credit spreads and quality ratings for the period reported.

Interest income on commercial mortgage and other loans is included in net investment income. The Company recorded $5 million and $4 million of interest income for the three months ended September 30, 2014 and 2013, respectively, and $8 million and $9 million for the nine months ended September 30, 2014 and 2013, respectively, on fair value option loans. Interest income on these loans is recorded based on the effective interest rates as determined at the closing of the loan.

The fair values and aggregate contractual principal amounts of commercial mortgage and other loans, for which the fair value option has been elected, were $304 million and $299 million, respectively, as of September 30, 2014, and $158 million and $154 million, respectively, as of December 31, 2013. As of September 30, 2014, there were no loans in non-accrual status and none of the loans are more than 90 days past due and still accruing.

The fair value of other long-term investments was $1,024 million as of September 30, 2014 and $873 million as of December 31, 2013.

The fair values and aggregate contractual principal amounts of limited recourse notes issued by consolidated VIEs, for which the fair value option has been elected at issuance, were $5,367 million and $5,361 million, respectively, as of September 30, 2014, and $3,254 million and $3,276 million, respectively as of December 31, 2013. Interest expense recorded for these liabilities was $46 million and $29 million for the three months ended September 30, 2014 and 2013, respectively, and $136 million and $69 million for the nine months ended September 30, 2014 and 2013, respectively.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Fair Value of Financial Instruments

The table below presents the carrying amount and fair value by fair value hierarchy level of certain financial instruments that are not reported at fair value. The financial instruments presented below are reported at carrying value on the Company’s Unaudited Interim Consolidated Statements of Financial Position. However, in some cases, as described below, the carrying amount equals or approximates fair value.


	September 30, 2014
	Fair Value								Carrying Amount(1)
	Level 1		Level 2		Level 3		Total		Total
	(in millions)
Assets:
Fixed maturities, held-to-maturity	$	0	$	1,844	$	1,339	$	3,183	$	2,880
Commercial mortgage and other loans		0		589		45,677		46,266		44,532
Policy loans		0		0		11,857		11,857		11,857
Other long-term investments		0		0		2,366		2,366		2,033
Short-term investments		0		526		0		526		526
Cash and cash equivalents		5,167		1,110		0		6,277		6,277
Accrued investment income		0		3,209		0		3,209		3,209
Other assets		196		2,557		168		2,921		2,921

Total assets	$	5,363	$	9,835	$	61,407	$	76,605	$	74,235

Liabilities:
Policyholders’ account balances—investment contracts	$	0	$	40,776	$	58,090	$	98,866	$	97,376
Securities sold under agreements to repurchase		0		9,039		0		9,039		9,039
Cash collateral for loaned securities		0		4,569		0		4,569		4,569
Short-term debt		0		4,513		0		4,513		4,429
Long-term debt		1,259		18,640		5,110		25,009		22,597
Notes of consolidated VIEs		0		0		23		23		30
Other liabilities		0		6,988		179		7,167		7,167
Separate account liabilities—investment contracts		0		81,693		23,642		105,335		105,335

Total liabilities	$	1,259	$	166,218	$	87,044	$	254,521	$	250,542

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


	December 31, 2013
	Fair Value								Carrying Amount(1)
	Level 1		Level 2		Level 3		Total		Total
	(in millions)
Assets:
Fixed maturities, held-to-maturity	$	0	$	2,065	$	1,488	$	3,553	$	3,312
Commercial mortgage and other loans		0		639		42,010		42,649		40,850
Policy loans		0		0		11,766		11,766		11,766
Other long-term investments		0		0		2,470		2,470		2,203
Short-term investments		0		518		0		518		518
Cash and cash equivalents		3,661		796		0		4,457		4,457
Accrued investment income		0		3,089		0		3,089		3,089
Other assets		162		2,147		252		2,561		2,561

Total assets	$	3,823	$	9,254	$	57,986	$	71,063	$	68,756

Liabilities:
Policyholders’ account balances—investment contracts	$	0	$	39,347	$	57,253	$	96,600	$	95,476
Securities sold under agreements to repurchase		0		7,898		0		7,898		7,898
Cash collateral for loaned securities		0		5,040		0		5,040		5,040
Short-term debt		0		2,718		0		2,718		2,669
Long-term debt		1,078		19,453		5,038		25,569		23,553
Notes of consolidated VIEs		0		0		39		39		48
Other liabilities		0		5,803		266		6,069		6,069
Separate account liabilities—investment contracts		0		82,071		22,163		104,234		104,234

Total liabilities	$	1,078	$	162,330	$	84,759	$	248,167	$	244,987

(1)

Carrying values presented herein differ from those in the Company’s Unaudited Interim Consolidated Statement of Financial Position because certain items within the respective financial statement captions are not considered financial instruments or out of scope under authoritative guidance relating to disclosures of the fair value of financial instruments. Financial statement captions excluded from the above table are not considered financial instruments.

The fair values presented above have been determined by using available market information and by applying market valuation methodologies, as described in more detail below.

Fixed Maturities, Held-to-Maturity

The fair values of public fixed maturity securities are generally based on prices from third-party pricing services, which are reviewed to validate reasonableness. However, for certain public fixed maturity securities and investments in private placement fixed maturity securities, this information is either not available or not reliable. For these public fixed maturity securities, the fair value is based on indicative broker quotes, if available, or determined using a discounted cash flow model or internally-developed values. For private fixed maturities, fair value is determined using a discounted cash flow model. In determining the fair value of certain fixed maturity securities, the discounted cash flow model may also use unobservable inputs, which reflect the Company’s own assumptions about the inputs market participants would use in pricing the security.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Commercial Mortgage and Other Loans

The fair value of most commercial mortgage loans is based upon the present value of the expected future cash flows discounted at the appropriate U.S. Treasury rate or foreign government bond rate (for non-U.S. dollar-denominated loans) plus an appropriate credit spread for similar quality loans. The quality ratings for these loans, a primary determinant of the credit spreads and a significant component of the pricing process, are based on an internally-developed methodology.

Certain commercial mortgage loans are valued incorporating other factors, including the terms of the loans, the principal exit strategies for the loans, prevailing interest rates and credit risk. Other loan valuations are primarily based upon the present value of the expected future cash flows discounted at the appropriate local government bond rate and local market swap rates or credit default swap spreads, plus an appropriate credit spread and liquidity premium. The credit spread and liquidity premium are a significant component of the pricing inputs, and are based upon an internally-developed methodology, which takes into account, among other factors, the credit quality of the loans, the property type of the collateral, the weighted average coupon and the weighted average life of the loans.

Policy Loans

During the fourth quarter of 2013, the Company changed the valuation technique used to fair value policy loans. For the period ended December 31, 2013, the fair value of policy loans was determined by discounting expected cash flows at the current loan coupon rate. As a result, the carrying value of the policy loans approximates the fair value for the year ended December 31, 2013. Prior to this change, the fair value of U.S. insurance policy loans was calculated by discounting expected cash flows based upon current U.S. Treasury rates and historical loan repayment patterns, while Japanese insurance policy loans used the risk-free proxy based on the yen LIBOR.

Other Long-term Investments

Other long-term investments include investments in joint ventures and limited partnerships. The estimated fair values of these cost method investments are generally based on the Company’s share of the net asset value (“NAV”) as provided in the financial statements of the investees. In certain circumstances, management may adjust the NAV by a premium or discount when it has sufficient evidence to support applying such adjustments. No such adjustments were made as of September 30, 2014 and December 31, 2013.

Short-Term Investments, Cash and Cash Equivalents, Accrued Investment Income and Other Assets

The Company believes that due to the short-term nature of certain assets, the carrying value approximates fair value. These assets include: certain short-term investments which are not securities, are recorded at amortized cost and include quality loans; cash and cash equivalent instruments; accrued investment income; and other assets that meet the definition of financial instruments, including receivables, such as reinsurance recoverables, unsettled trades, accounts receivable and restricted cash.

Policyholders’ Account Balances—Investment Contracts

Only the portion of policyholders’ account balances related to products that are investment contracts (those without significant mortality or morbidity risk) are reflected in the table above. For fixed deferred annuities, single premium endowments, payout annuities and other similar contracts without life contingencies, fair values are derived using discounted projected cash flows based on interest rates that are representative of the

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Company’s financial strength ratings, and hence reflect the Company’s own NPR. For guaranteed investment contracts, funding agreements, structured settlements without life contingencies and other similar products, fair values are derived using discounted projected cash flows based on interest rates being offered for similar contracts with maturities consistent with those of the contracts being valued. For those balances that can be withdrawn by the customer at any time without prior notice or penalty, the fair value is the amount estimated to be payable to the customer as of the reporting date, which is generally the carrying value. For defined contribution and defined benefit contracts and certain other products, the fair value is the market value of the assets supporting the liabilities.

Securities Sold Under Agreements to Repurchase

The Company receives collateral for selling securities under agreements to repurchase, or pledges collateral under agreements to resell. Repurchase and resale agreements are also generally short-term in nature, and therefore, the carrying amounts of these instruments approximate fair value.

Cash Collateral for Loaned Securities

Cash collateral for loaned securities represents the collateral received or paid in connection with loaning or borrowing securities, similar to the securities sold under agreement to repurchase above. For these transactions, the carrying value of the related asset or liability approximates fair value, as they equal the amount of cash collateral received or paid.

Debt

The fair value of short-term and long-term debt, as well as notes issued by consolidated VIEs, is generally determined by either prices obtained from independent pricing services, which are validated by the Company, or discounted cash flow models. With the exception of the notes issued by consolidated VIEs for which recourse is limited to the assets of the respective VIE and does not extend to the general credit of the Company, the fair values of these instruments consider the Company’s own NPR. Discounted cash flow models predominately use market observable inputs such as the borrowing rates currently available to the Company for debt and financial instruments with similar terms and remaining maturities. For commercial paper issuances and other debt with a maturity of less than 90 days, the carrying value approximates fair value.

A portion of the senior secured notes issued by Prudential Holdings, LLC (the “IHC debt”) is insured by a third-party financial guarantee insurance policy. The effect of the third-party credit enhancement is not included in the fair value measurement of the IHC debt and the methodologies used to determine fair value consider the Company’s own NPR.

Other Liabilities

Other liabilities are primarily payables, such as reinsurance payables, unsettled trades, drafts and accrued expense payables. Due to the short term until settlement of most of these liabilities, the Company believes that carrying value approximates fair value.

Separate Account Liabilities—Investment Contracts

Only the portion of separate account liabilities related to products that are investments contracts are reflected in the table above. Separate account liabilities are recorded at the amount credited to the contractholder, which reflects the change in fair value of the corresponding separate account assets including contractholder deposits less withdrawals and fees. Therefore, carrying value approximates fair value.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

14. DERIVATIVE INSTRUMENTS

Types of Derivative Instruments and Derivative Strategies

Interest Rate Contracts

Interest rate swaps, options, and futures are used by the Company to reduce risks from changes in interest rates, manage interest rate exposures arising from mismatches between assets and liabilities (including duration mismatches) and to hedge against changes in the value of assets it owns or anticipates acquiring or selling.

Swaps may be attributed to specific assets or liabilities or may be used on a portfolio basis. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed upon notional principal amount.

The Company also uses swaptions, interest rate caps, and interest rate floors to manage interest rate risk. A swaption is an option to enter into a swap with a forward starting effective date. The Company pays a premium for purchased swaptions and receives a premium for written swaptions. In an interest rate cap, the buyer receives payments at the end of each period in which the interest rate exceeds the agreed strike price. Similarly, in an interest rate floor, the buyer receives payments at the end of each period in which the interest rate is below the agreed strike price. Swaptions and interest rate caps and floors are included in interest rate options.

In exchange-traded interest rate futures transactions, the Company purchases or sells a specified number of contracts, the values of which are determined by the values of underlying referenced investments, and posts variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. The Company enters into exchange-traded futures with regulated futures commission’s merchants who are members of a trading exchange.

Equity Contracts

Equity index options are contracts which will settle in cash based on differentials in the underlying indices at the time of exercise and the strike price. The Company uses combinations of purchases and sales of equity index options to hedge the effects of adverse changes in equity indices within a predetermined range.

Total return swaps are contracts whereby the Company agrees with other parties to exchange, at specified intervals, the difference between the return on an asset (or market index) and LIBOR based on a notional amount. The Company generally uses total return swaps to hedge the effect of adverse changes in equity indices.

Foreign Exchange Contracts

Currency derivatives, including currency futures, options, forwards, and swaps are used by the Company to reduce risks from changes in currency exchange rates with respect to investments denominated in foreign currencies that the Company either holds or intends to acquire or sell, and to hedge the currency risk associated with net investments in foreign operations and anticipated earnings of its foreign operations.

Under currency forwards, the Company agrees with other parties to deliver a specified amount of an identified currency at a specified future date. Typically, the price is agreed upon at the time of the contract and payment for such a contract is made at the specified future date. As noted above, the Company uses currency forwards to mitigate the impact of changes in currency exchange rates on U.S. dollar equivalent earnings generated by certain of its non-U.S. businesses, primarily its international insurance and investments operations. The Company executes forward sales of the hedged currency in exchange for U.S. dollars at a specified exchange

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

rate. The maturities of these forwards correspond with the future periods in which the non-U.S. dollar-denominated earnings are expected to be generated. These earnings hedges do not qualify for hedge accounting.

Under currency swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between one currency and another at an exchange rate and calculated by reference to an agreed principal amount. Generally, the principal amount of each currency is exchanged at the beginning and termination of the currency swap by each party.

Credit Contracts

The Company writes credit default swaps for which it receives a premium to insure credit risk. These are used by the Company to enhance the return on the Company’s investment portfolio by creating credit exposure similar to an investment in public fixed maturity cash instruments. With these derivatives the Company sells credit protection on an identified name, or an index of names, and in return receives a quarterly premium. This premium or credit spread generally corresponds to the difference between the yield on the referenced names (or an index’s referenced names) public fixed maturity cash instruments and swap rates, at the time the agreement is executed. If there is an event of default by the referenced name or one of the referenced names in the index, as defined by the agreement, then the Company is obligated to pay the referenced amount of the contract to the counterparty and receive in return the referenced defaulted security or similar security or (in the case of a credit default index) pay the referenced amount less the auction recovery rate. See credit derivatives written section for further discussion of guarantees. In addition to selling credit protection the Company has purchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio.

Other Contracts

TBAs. The Company uses TBA forward contracts to gain exposure to the investment risk and return of mortgage-backed securities. TBA transactions can help the Company enhance the return on its investment portfolio, and can provide a more liquid and cost effective method of achieving these goals than purchasing or selling individual mortgage-backed pools. Typically, the price is agreed upon at the time of the contract and payment for such a contract is made at a specified future date. Additionally, pursuant to the Company’s mortgage dollar roll program, TBAs or mortgage-backed securities are transferred to counterparties with a corresponding agreement to repurchase them at a future date. These transactions do not qualify as secured borrowings and are accounted for as derivatives.

Loan Commitments. In its mortgage operations, the Company enters into commitments to fund commercial mortgage loans at specified interest rates and other applicable terms within specified periods of time. These commitments are legally binding agreements to extend credit to a counterparty. Loan commitments for loans that will be held for sale are recognized as derivatives and recorded at fair value. The determination of the fair value of loan commitments accounted for as derivatives considers various factors including, among others, terms of the related loan, the intended exit strategy for the loans based upon either securitization valuation models or investor purchase commitments, prevailing interest rates, origination income or expense, and the value of service rights. Loan commitments that relate to the origination of mortgage loans that will be held for investment are not accounted for as derivatives and accordingly are not recognized in the Company’s financial statements. See Note 15 for a further discussion of these loan commitments.

Embedded Derivatives. The Company sells variable annuity products, which may include guaranteed benefit features that are accounted for as embedded derivatives. These embedded derivatives are marked to market through “Realized investment gains (losses), net” based on the change in value of the underlying

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

contractual guarantees, which are determined using valuation models. The Company maintains a portfolio of derivative instruments that is intended to economically hedge the risks related to the above products’ features. The derivatives may include, but are not limited to equity options, total return swaps, interest rate swaptions, caps, floors, and other instruments.

Prior to disposal in the fourth quarter of 2013, the Company invested in fixed maturities that, in addition to a stated coupon, provided a return based upon the results of an underlying portfolio of fixed income investments and related investment activity. The Company accounted for these investments as available-for-sale fixed maturities containing embedded derivatives. Such embedded derivatives are marked to market through “Realized investment gains (losses), net,” based upon the change in value of the underlying portfolio.

Synthetic Guarantees. The Company sells synthetic guaranteed investment contracts, through both full service and investment-only sales channels, to qualified pension plans. The assets are owned by the trustees of such plans, who invest the assets according to the contract terms agreed to with the Company. The contracts contain a guarantee of a minimum rate of return on participant balances supported by the underlying assets, and a guarantee of liquidity to meet certain participant-initiated withdrawals from the contract. Under U.S. GAAP, these contracts are accounted for as derivatives and recorded at fair value.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The table below provides a summary of the gross notional amount and fair value of derivatives contracts by the primary underlying, excluding embedded derivatives which are recorded with the associated host. Many derivative instruments contain multiple underlyings. The fair value amounts below represent the gross fair value of derivative contracts prior to taking into account the netting effects of master netting agreements, cash collateral held with the same counterparty, and non-performance risk. This netting impact results in total derivative assets of $988 million and $533 million as of September 30, 2014 and December 31, 2013, respectively, and total derivative liabilities of $97 million and $2,156 million as of September 30, 2014 and December 31, 2013, respectively, reflected in the Unaudited Interim Consolidated Statement of Financial Position.


Primary Underlying/ Instrument Type	September 30, 2014							December 31, 2013
			Gross Fair Value							Gross Fair Value
	Notional(1)		Assets		Liabilities			Notional(1)(2)		Assets(2)		Liabilities(2)
	(in millions)
Derivatives Designated as Hedge Accounting Instruments:
Interest Rate
Interest Rate Swaps	$	2,031	$	21	$	(228	)	$	2,556	$	26	$	(253	)
Foreign Currency
Foreign Currency Forwards		572		9		(15	)		534		1		(32	)
Currency/Interest Rate
Foreign Currency Swaps		10,495		377		(308	)		9,502		233		(553	)

Total Qualifying Hedges	$	13,098	$	407	$	(551	)	$	12,592	$	260	$	(838	)

Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Swaps	$	174,914	$	7,307	$	(5,055	)	$	171,337	$	5,727	$	(7,051	)
Interest Rate Futures		32,615		6		(2	)		34,424		10		(5	)
Interest Rate Options		25,194		343		(213	)		25,308		370		(297	)
Interest Rate Forwards		3,636		0		(3	)		1,452		0		(6	)
Foreign Currency
Foreign Currency Forwards		17,836		520		(550	)		13,122		587		(393	)
Foreign Currency Options		183		5		0			118		5		0
Currency/Interest Rate
Foreign Currency Swaps		10,075		702		(185	)		7,787		414		(304	)
Credit
Credit Default Swaps		1,652		2		(36	)		1,890		3		(49	)
Equity
Equity Futures		90		1		0			262		1		(1	)
Equity Options		82,157		520		(34	)		61,231		388		(12	)
Total Return Swaps		14,384		220		(56	)		11,554		1		(462	)
Commodity
Commodity Futures		39		1		(1	)		37		1		0
Synthetic GICs(3)		76,241		6		0			78,110		8		0

Total Non-Qualifying Derivatives(4)	$	439,016	$	9,633	$	(6,135	)	$	406,632	$	7,515	$	(8,580	)

Total Derivatives(5)	$	452,114	$	10,040	$	(6,686	)	$	419,224	$	7,775	$	(9,418	)

(1)	Notional amounts are presented on a gross basis and include derivatives used to offset existing positions.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

(2)	Prior periods have been revised to include the gross notional amount and fair value of derivative contracts used in a broker-dealer capacity.

(3)	The gross notional amount as of December 31, 2013 has been revised from $60,758 million to $78,110 million to correct the previously reported amount. This amount does not impact the Unaudited Interim Consolidated Financial Statements.

(4)

Based on notional amounts, most of the Company’s derivatives do not qualify for hedge accounting as follows: i) derivatives that economically hedge embedded derivatives do not qualify for hedge accounting because changes in the fair value of the embedded derivatives are already recorded in net income, ii) derivatives that are utilized as macro hedges of the Company’s exposure to various risks typically do not qualify for hedge accounting because they do not meet the criteria required under portfolio hedge accounting rules, and iii) synthetic guaranteed investment contracts (GICs), which are product standalone derivatives do not qualify as hedging instruments under hedge accounting rules.

(5)

Excludes embedded derivatives which contain multiple underlyings. The fair value of these embedded derivatives was a net liability of $5,299 million as of September 30, 2014 and a net liability of $430 million as of December 31, 2013, included in “Future policy benefits” and “Fixed maturities, available-for-sale.”

Offsetting Assets and Liabilities

The following table presents recognized derivative instruments (including bifurcated embedded derivatives), and repurchase and reverse repurchase agreements that are offset in the balance sheet, and/or are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in the balance sheet.


	September 30, 2014
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statement of Financial Position			Net Amounts Presented in the Statement of Financial Position		Financial Instruments/ Collateral			Net Amount
	(in millions)
Offsetting of Financial Assets:
Derivatives	$	9,939	$	(9,044	)	$	895	$	585		$	1,480
Securities purchased under agreement to resell		898		0			898		(898	)		0

Total Assets	$	10,837	$	(9,044	)	$	1,793	$	(313	)	$	1,480


Offsetting of Financial Liabilities:
Derivatives	$	6,684	$	(6,590	)	$	94	$	(90	)	$	4
Securities sold under agreement to repurchase		9,039		0			9,039		(9,039	)		0

Total Liabilities	$	15,723	$	(6,590	)	$	9,133	$	(9,129	)	$	4


	December 31, 2013
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statement of Financial Position			Net Amounts Presented in the Statement of Financial Position		Financial Instruments/ Collateral			Net Amount
	(in millions)
Offsetting of Financial Assets:
Derivatives	$	7,721	$	(7,241	)	$	480	$	(535	)	$	(55	)
Securities purchased under agreement to resell		656		0			656		(656	)		0

Total Assets	$	8,377	$	(7,241	)	$	1,136	$	(1,191	)	$	(55	)


Offsetting of Financial Liabilities:
Derivatives	$	9,408	$	(7,257	)	$	2,151	$	(1,999	)	$	152
Securities sold under agreement to repurchase		7,898		0			7,898		(7,898	)		0

Total Liabilities	$	17,306	$	(7,257	)	$	10,049	$	(9,897	)	$	152

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

For information regarding the rights of offset associated with the derivative assets and liabilities in the table above see “—Counterparty Credit Risk” below. For securities purchased under agreements to resell and securities sold under agreements to repurchase, the Company monitors the value of the securities and maintains collateral, as appropriate, to protect against credit exposure. Where the Company has entered into repurchase and resale agreements with the same counterparty, in the event of default, the Company would generally be permitted to exercise rights of offset. For additional information on the Company’s accounting policy for securities repurchase and resale agreements, see Note 2 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2013.

Cash Flow, Fair Value and Net Investment Hedges

The primary derivative instruments used by the Company in its fair value, cash flow, and net investment hedge accounting relationships are interest rate swaps, currency swaps and currency forwards. These instruments are only designated for hedge accounting in instances where the appropriate criteria are met. The Company does not use futures, options, credit, equity or embedded derivatives in any of its fair value, cash flow or net investment hedge accounting relationships.

The following table provides the financial statement classification and impact of derivatives used in qualifying and non-qualifying hedge relationships, excluding the offset of the hedged item in an effective hedge relationship.


	Three Months Ended September 30, 2014
	Realized Investment Gains/ (Losses)			Net Investment Income			Other Income		Interest Expense			Interest Credited To Policyholders’ Account Balances		Accumulated Other Comprehensive Income(1)
	(in millions)
Derivatives Designated as Hedge Accounting Instruments:
Fair value hedges
Interest Rate	$	14		$	(14	)	$	0	$	0		$	0	$	0
Currency		(1	)		0			0		0			0		0

Total fair value hedges		13			(14	)		0		0			0		0

Cash flow hedges
Interest Rate		0			0			0		(6	)		0		5
Currency/Interest Rate		0			1			68		0			0		383

Total cash flow hedges		0			1			68		(6	)		0		388

Net investment hedges
Currency		0			0			0		0			0		9
Currency/Interest Rate		0			0			0		0			0		76

Total net investment hedges		0			0			0		0			0		85

Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate		798			0			0		0			0		0
Currency		99			0			0		0			0		0
Currency/Interest Rate		377			0			3		0			0		0
Credit		(9	)		0			0		0			0		0
Equity		77			0			0		0			0		0
Commodity		0			0			0		0			0		0
Embedded Derivatives		(1,695	)		0			0		0			0		0

Total non-qualifying hedges		(353	)		0			3		0			0		0

Total	$	(340	)	$	(13	)	$	71	$	(6	)	$	0	$	473

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


	Nine Months Ended September 30, 2014
	Realized Investment Gains/ (Losses)			Net Investment Income			Other Income		Interest Expense			Interest Credited To Policyholders’ Account Balances		Accumulated Other Comprehensive Income(1)
	(in millions)
Derivatives Designated as Hedge Accounting Instruments:
Fair value hedges
Interest Rate	$	6		$	(45	)	$	0	$	0		$	2	$	0
Currency		5			0			0		0			0		0

Total fair value hedges		11			(45	)		0		0			2		0

Cash flow hedges
Interest Rate		0			0			0		(17	)		0		10
Currency/Interest Rate		0			4			46		0			0		291

Total cash flow hedges		0			4			46		(17	)		0		301

Net investment hedges
Currency		0			0			0		0			0		8
Currency/Interest Rate		0			0			0		0			0		47

Total net investment hedges		0			0			0		0			0		55

Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate		4,177			0			0		0			0		0
Currency		51			0			0		0			0		0
Currency/Interest Rate		380			0			2		0			0		0
Credit		(10	)		0			0		0			0		0
Equity		(903	)		0			0		0			0		0
Commodity		0			0			0		0			0		0
Embedded Derivatives		(4,137	)		0			0		0			0		0

Total non-qualifying hedges		(442	)		0			2		0			0		0

Total	$	(431	)	$	(41	)	$	48	$	(17	)	$	2	$	356

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


	Three Months Ended September 30, 2013
	Realized Investment Gains/ (Losses)			Net Investment Income			Other Income			Interest Expense			Interest Credited To Policyholders’ Account Balances		Accumulated Other Comprehensive Income(1)
	(in millions)
Derivatives Designated as Hedge Accounting Instruments:
Fair value hedges
Interest Rate	$	8		$	(17	)	$	0		$	0		$	6	$	0
Currency		(6	)		0			0			0			0		0

Total fair value hedges		2			(17	)		0			0			6		0

Cash flow hedges
Interest Rate		0			0			0			(6	)		0		3
Currency/Interest Rate		0			1			(24	)		0			0		(260	)

Total cash flow hedges		0			1			(24	)		(6	)		0		(257	)

Net investment hedges
Currency		0			0			(4	)		0			0		0
Currency/Interest Rate		0			0			0			0			0		(3	)

Total net investment hedges		0			0			(4	)		0			0		(3	)

Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate		(540	)		0			0			0			0		0
Currency		62			0			0			0			0		0
Currency/Interest Rate		(215	)		0			(2	)		0			0		0
Credit		(1	)		0			0			0			0		0
Equity		(706	)		0			0			0			0		0
Commodity		0			0			0			0			0		0
Embedded Derivatives		(1,322	)		0			0			0			0		0

Total non-qualifying hedges		(2,722	)		0			(2	)		0			0		0

Total	$	(2,720	)	$	(16	)	$	(30	)	$	(6	)	$	6	$	(260	)

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


	Nine Months Ended September 30, 2013
	Realized Investment Gains/ (Losses)			Net Investment Income			Other Income			Interest Expense			Interest Credited To Policyholders’ Account Balances		Accumulated Other Comprehensive Income(1)
	(in millions)
Derivatives Designated as Hedge Accounting Instruments:
Fair value hedges
Interest Rate	$	80		$	(56	)	$	0		$	0		$	17	$	0
Currency		(54	)		0			0			0			0		0

Total fair value hedges		26			(56	)		0			0			17		0

Cash flow hedges
Interest Rate		0			0			0			(17	)		0		20
Currency/Interest Rate		0			0			(60	)		0			0		(118	)

Total cash flow hedges		0			0			(60	)		(17	)		0		(98	)

Net investment hedges
Currency		0			0			(4	)		0			0		7
Currency/Interest Rate		0			0			0			0			0		154

Total net investment hedges		0			0			(4	)		0			0		161

Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate		(4,071	)		0			0			0			0		0
Currency		(513	)		0			0			0			0		0
Currency/Interest Rate		84			0			0			0			0		0
Credit		(11	)		0			0			0			0		0
Equity		(2,515	)		0			0			0			0		0
Commodity		0			0			0			0			0		0
Embedded Derivatives		2,025			0			0			0			0		0

Total non-qualifying hedges		(5,001	)		0			0			0			0		0

Total	$	(4,975	)	$	(56	)	$	(64	)	$	(17	)	$	17	$	63

(1)	Amounts deferred in “Accumulated other comprehensive income (loss).”

For the three and nine months ended September 30, 2014, the ineffective portion of derivatives accounted for using hedge accounting was not material to the Company’s results of operations. Also, there were no material amounts reclassified into earnings relating to instances in which the Company discontinued cash flow hedge accounting because the forecasted transaction did not occur by the anticipated date or within the additional time period permitted by the authoritative guidance for the accounting for derivatives and hedging. In addition, there were no instances in which the Company discontinued fair value hedge accounting due to a hedged firm commitment no longer qualifying as a fair value hedge.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Presented below is a roll forward of current period cash flow hedges in “Accumulated other comprehensive income (loss)” before taxes:


	(in millions)
Balance, December 31, 2013	$	(446	)
Net deferred gains/(losses) on cash flow hedges from January 1 to September 30, 2014		341
Amount reclassified into current period earnings		(40	)

Balance, September 30, 2014	$	(145	)

Using September 30, 2014 values, it is anticipated that a pre-tax gain of approximately $13 million will be reclassified from “Accumulated other comprehensive income (loss)” to earnings during the subsequent twelve months ending September 30, 2015, offset by amounts pertaining to the hedged items. As of September 30, 2014, the Company does not have any qualifying cash flow hedges of forecasted transactions other than those related to the variability of the payment or receipt of interest or foreign currency amounts on existing financial instruments. The maximum length of time for which these variable cash flows are hedged is 29 years. Income amounts deferred in “Accumulated other comprehensive income (loss)” as a result of cash flow hedges are included in “Net unrealized investment gains (losses)” in the Unaudited Interim Consolidated Statements of Equity.

For effective net investment hedges, the amounts, before applicable taxes, recorded in the cumulative translation adjustment account within “Accumulated other comprehensive income (loss)” was $411 million and $356 million as of September 30, 2014 and December 31, 2013.

Credit Derivatives

Credit derivatives, where the Company has written credit protection on a single name reference, had outstanding notional amounts of $7 million and $5 million as of September 30, 2014 and December 31, 2013, respectively. These credit derivatives are reported at fair value as an asset of less than $1 million, as of both September 30, 2014 and December 31, 2013. These credit derivatives have a NAIC designation of 2. The Company has also written credit protection on an index reference, and has a notional amount of $251 million, reported at fair value as a liability of $1 million as of September 30, 2014. This credit derivative has a NAIC designation of 3, which is based on the lowest rated single name reference included in the index. As of December 31, 2013, the Company had no outstanding written credit protection on an index reference.

The Company’s maximum amount at risk under these credit derivatives equals the aforementioned notional amounts and assumes the value of the underlying referenced securities become worthless. These single name credit derivatives have maturities of less than 2 years, while the credit protection on the index reference has a maturity of less than 10 years. This excludes a credit derivative related to surplus notes issued by a subsidiary of Prudential Insurance (noted below).

The Company also entered into a credit derivative that will require the Company to make certain payments in the event of deterioration in the value of the surplus notes issued by a subsidiary of Prudential Insurance. The notional amount of this credit derivative is $500 million and the fair value as of September 30, 2014 and December 31, 2013 was a liability of $5 million and $4 million, respectively. No collateral was pledged in either period.

In addition to writing credit protection, the Company has purchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio. As of September 30, 2014 and December 31, 2013, the Company had $894 million and $1,399 million of outstanding notional amounts, respectively, reported at fair value as a liability of $28 million and $42 million, respectively.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Counterparty Credit Risk

The Company is exposed to credit-related losses in the event of non-performance by counterparties to financial derivative transactions. The Company manages credit risk by entering into derivative transactions with highly rated major international financial institutions and other creditworthy counterparties, and by obtaining collateral where appropriate. Additionally, limits are set on single party credit exposures which are subject to periodic management review.

The credit exposure of the Company’s OTC derivative transactions is represented by the contracts with a positive fair value at the reporting date. To reduce credit exposures, the Company seeks to (i) enter into OTC derivative transactions pursuant to master agreements that provide for a netting of payments and receipts with a single counterparty, and (ii) enter into agreements that allow the use of credit support annexes, which are bilateral rating-sensitive agreements that require collateral postings at established threshold levels. Cleared derivatives are transactions between the Company and a counterparty where the transactions are cleared through a clearinghouse, such that each derivative counterparty is only exposed to the default of the clearinghouse. These cleared transactions require initial and daily variation margin collateral postings and include certain interest rate swaps and credit default swaps entered into on or after June 10, 2013, related to guidelines under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Company also enters into exchange-traded futures and certain options transactions through regulated exchanges and these transactions are settled on a daily basis, thereby reducing credit risk exposure in the event of non-performance by counterparties to such financial instruments.

Under fair value measurements, the Company incorporates the market’s perception of its own and the counterparty’s non-performance risk in determining the fair value of the portion of its OTC derivative assets and liabilities that are uncollateralized. Credit spreads are applied to the derivative fair values on a net basis by counterparty. To reflect the Company’s own credit spread, a proxy based on relevant debt spreads is applied to OTC derivative net liability positions. Similarly, the Company’s counterparty’s credit spread is applied to OTC derivative net asset positions.

Certain of the Company’s derivative agreements with some of its counterparties contain credit-rating related triggers. If the Company’s credit rating were to fall below a certain level, the counterparties to the derivative instruments could request termination at the then fair value of the derivative or demand immediate full collateralization on derivative instruments in net liability positions. If a downgrade occurred and the derivative positions were terminated, the Company anticipates it would be able to replace the derivative positions with other counterparties in the normal course of business. As of September 30, 2014, there were no net liability derivative positions by counterparty with credit-risk-related contingent features. As such, the Company has not posted any collateral related to these positions and the Company would not be required to post any additional collateral to the counterparties if the credit-risk-related contingent features underlying these agreements had been triggered as of September 30, 2014.

15. COMMITMENTS AND GUARANTEES, CONTINGENT LIABILITIES AND LITIGATION AND REGULATORY MATTERS

Commitments and Guarantees

Commercial Mortgage Loan Commitments


	September 30, 2014		December 31, 2013
	(in millions)
Total outstanding mortgage loan commitments	$	3,051	$	2,365
Portion of commitment where prearrangement to sell to investor exists	$	677	$	587

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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

Commitments to Purchase Investments (excluding Commercial Mortgage Loans)


	September 30, 2014		December 31, 2013
	(in millions)
Expected to be funded from the general account and other operations outside the separate accounts(1)	$	5,268	$	5,461
Expected to be funded from separate accounts	$	34	$	274

(1)	Includes a remaining commitment of $213 million and $256 million at September 30, 2014 and December 31, 2013, respectively, related to the Company’s agreement to co-invest with the Fosun Group (Fosun) in a private equity fund, managed by Fosun, for the Chinese marketplace.

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

Guarantees of Investee Debt

In the normal course of business, the Company provides guarantees related to real estate investments held in its separate accounts. The entities in which the separate accounts invest obtain financing, typically secured by the real estate investments, and the Company, on behalf of the separate accounts, guarantees their obligations to assist them in doing so. These guarantees expire at various times over the next twelve years. Any payments that may become required from the separate accounts under these guarantees would first be reduced by the proceeds from the sale of the underlying collateral, if any, and then by collection against the assets of the separate accounts. As of September 30, 2014, the Company’s assessment is that it is unlikely payments will be required from the separate accounts’ assets.

Prior to 2013, management of the Company made a decision to significantly reduce the exposure to guarantee obligations of the separate accounts’ investee entities. As a result, the guarantee agreements entered into by the Company, on behalf of the separate accounts, have been amended or drafted in such a way to ensure that any potential obligations are limited to the assets of the separate accounts. As of December 31, 2013 and through September 30, 2014, the Company does not have material exposure under these guarantees, as the guarantee obligations, except for a de minimis amount, are now limited to the assets of the separate accounts.

Indemnification of Securities Lending Transactions


	September 30, 2014		December 31, 2013
	(in millions)
Indemnification provided to mutual fund and separate account clients for securities lending	$	15,405	$	15,598
Fair value of related collateral associated with above indemnifications	$	15,859	$	15,965
Accrued liability associated with guarantee	$	0	$	0

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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

Credit Derivatives Written

As discussed further in Note 14, the Company writes credit derivatives under which the Company is obligated to pay the counterparty the referenced amount of the contract and receive in return the defaulted security or similar security.

Guarantees of Asset Values


	September 30, 2014		December 31, 2013
	(in millions)
Guaranteed value of third parties’ assets	$	76,241	$	78,110
Fair value of collateral supporting these assets	$	78,038	$	79,458
Asset associated with guarantee, carried at fair value	$	6	$	8

Certain contracts underwritten by the Retirement segment include guarantees related to financial assets owned by the guaranteed party. These contracts are accounted for as derivatives and carried at fair value. The collateral supporting these guarantees is not reflected on the Company’s balance sheet.

Guarantees of Credit Enhancements


	September 30, 2014		December 31, 2013
	(in millions)
Guarantees of credit enhancements of debt instruments associated with commercial real estate assets	$	123	$	156
Fair value of properties and associated tax credits that secure the guarantee	$	158	$	220
Accrued liability associated with guarantee	$	0	$	0

The Company arranges for credit enhancements of certain debt instruments that provide financing primarily for affordable multi-family real estate assets, including certain tax-exempt bond financings. The credit enhancements provide assurances to the debt holders as to the timely payment of amounts due under the debt instruments. The remaining contractual maturities for these guarantees are up to fifteen years. The Company’s obligations to reimburse required credit enhancement payments are secured by mortgages on the related real estate. The Company receives certain ongoing fees for providing these enhancement arrangements and anticipates the extinguishment of its obligation under these enhancements prior to maturity through the aggregation and transfer of its positions to a substitute enhancement provider.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Indemnification of Serviced Mortgage Loans


	September 30, 2014		December 31, 2013
	(in millions)
Maximum exposure under indemnification agreements for mortgage loans serviced by the Company	$	1,202	$	1,173
First-loss exposure portion of above	$	375	$	371
Accrued liability associated with guarantees	$	15	$	17

As part of the commercial mortgage activities of the Company’s Asset Management segment, the Company provides commercial mortgage origination, underwriting and servicing for certain government sponsored entities, such as Fannie Mae and Freddie Mac. The Company has agreed to indemnify the government sponsored entities for a portion of the credit risk associated with certain of the mortgages it services through a delegated authority arrangement. Under these arrangements, the Company originates multi-family mortgages for sale to the government sponsored entities based on underwriting standards they specify, and makes payments to them for a specified percentage share of losses they incur on certain loans serviced by the Company. The Company’s percentage share of losses incurred generally varies from 2% to 20% of the loan balance, and is typically based on a first-loss exposure for a stated percentage of the loan balance, plus a shared exposure with the government sponsored entity for any losses in excess of the stated first-loss percentage, subject to a contractually specified maximum percentage. The Company services $9,715 million of mortgages subject to these loss-sharing arrangements as of September 30, 2014, all of which are collateralized by first priority liens on the underlying multi-family residential properties. As of September 30, 2014, these mortgages had an average debt service coverage ratio of 1.97 times and an average loan-to-value ratio of 61%. The Company’s total share of losses related to indemnifications that were settled was $1.0 million and $0.4 million, for the nine months ended September 30, 2014 and 2013, respectively.

Other Guarantees


	September 30, 2014		December 31, 2013
	(in millions)
Other guarantees where amount can be determined	$	346	$	404
Accrued liability for other guarantees and indemnifications	$	5	$	7

The Company is also subject to other financial guarantees and indemnity arrangements. The Company has provided indemnities and guarantees related to acquisitions, dispositions, investments and other transactions that are triggered by, among other things, breaches of representations, warranties or covenants provided by the Company. These obligations are typically subject to various time limitations, defined by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum potential obligation is subject to contractual limitations, while in other cases such limitations are not specified or applicable. Included above are $314 million and $323 million as of September 30, 2014 and December 31, 2013, respectively, of yield maintenance guarantees related to certain investments the Company sold. The Company does not expect to make any payments on these guarantees and is not carrying any liabilities associated with these guarantees.

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

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Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Contingent Liabilities

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

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

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

Litigation and Regulatory Matters

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

The Company establishes accruals for litigation and regulatory matters when it is probable that a loss has been incurred and the amount of that loss can be reasonably estimated. For litigation and regulatory matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established but the matter, if material, is disclosed, including matters discussed below. The Company estimates that as of September 30, 2014, the aggregate range of reasonably possible losses in excess of accruals established for those litigation and regulatory matters for which such an estimate currently can be made is not material (i.e. less than $250 million). Any estimate is not an indication of expected loss, if any, or the Company’s maximum possible loss exposure on such matters. The Company reviews relevant information with respect to its litigation and regulatory matters on a quarterly and annual basis and updates its accruals, disclosures and estimates of reasonably possible loss based on such reviews.

Individual Annuities, Individual Life and Group Insurance

In January 2013, a qui tam action on behalf of the State of Florida, Total Asset Recovery Services v. Met Life Inc., et al., Manulife Financial Corporation, et. al., Prudential Financial, Inc., The Prudential Insurance Company of America, and Prudential Insurance Agency, LLC. filed in the Circuit Court of Leon County, Florida, was served on the Company. The complaint alleges that the Company failed to escheat life insurance proceeds to

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Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

the State of Florida in violation of the Florida False Claims Act and seeks injunctive relief, compensatory damages, civil penalties, treble damages, prejudgment interest, attorneys’ fees and costs. In March 2013, the Company filed a motion to dismiss the complaint. In August 2013, the court dismissed the complaint with prejudice. In September 2013, plaintiff filed an appeal with Florida’s Circuit Court of the Second Judicial Circuit in Leon County. In September 2014, the Florida District Court of Appeal First District affirmed the trial Court’s decision.

In September 2012, the State of West Virginia, through its State Treasurer, filed a lawsuit, State of West Virginia ex. Rel. John D. Perdue v. Prudential Insurance Company of America, in the Circuit Court of Putnam County, West Virginia. The complaint alleges violations of the West Virginia Uniform Unclaimed Property Fund Act by failing to properly identify and report all unclaimed insurance policy proceeds which should either be paid to beneficiaries or escheated to West Virginia. The complaint seeks to examine the records of Prudential Insurance to determine compliance with the West Virginia Uniform Unclaimed Property Fund Act, and to assess penalties and costs in an undetermined amount. In October 2012, the State of West Virginia commenced a second action, State of West Virginia ex. Rel. John D. Perdue v. Pruco Life Insurance Company making the same allegations stated in the action against Prudential Insurance. In April 2013, the Company filed motions to dismiss the complaints in both of the West Virginia actions. In December 2013, the Court granted the Company’s motions and dismissed the complaints with prejudice. In January, 2014, the State of West Virginia appealed the decisions.

In January 2012, a Global Resolution Agreement entered into by the Company and a third party auditor became effective upon its acceptance by the unclaimed property departments of 20 states and jurisdictions. Under the terms of the Global Resolution Agreement, the third party auditor acting on behalf of the signatory states will compare expanded matching criteria to the Social Security Master Death File (“SSMDF”) to identify deceased insureds and contractholders where a valid claim has not been made. In February 2012, a Regulatory Settlement Agreement entered into by the Company to resolve a multi-state market conduct examination regarding its adherence to state claim settlement practices became effective upon its acceptance by the insurance departments of 20 states and jurisdictions. The Regulatory Settlement Agreement applies prospectively and requires the Company to adopt and implement additional procedures comparing its records to the SSMDF to identify unclaimed death benefits and prescribes procedures for identifying and locating beneficiaries once deaths are identified. Substantially all other jurisdictions that are not signatories to the Global Resolution Agreement or the Regulatory Settlement Agreement have entered into similar agreements with the Company.

The Company is one of several companies subpoenaed by the New York Attorney General regarding its unclaimed property procedures. Additionally, the New York State Department of Financial Services (“NY DFS”) has requested that 172 life insurers (including the Company) provide data to the NY DFS regarding use of the SSMDF. The New York Office of Unclaimed Funds is conducting an audit of the Company’s compliance with New York’s unclaimed property laws. In February 2012, the Massachusetts Office of the Attorney General requested information regarding the Company’s unclaimed property procedures. In December 2013, this matter was closed without prejudice.

From July 2010 to December 2010, four purported nationwide class actions were filed challenging the use of retained asset accounts to settle death benefit claims of beneficiaries of a group life insurance contract owned by the United States Department of Veterans Affairs that covers the lives of members and veterans of the U.S. armed forces. In 2011, the cases were consolidated in the United States District Court for the District of Massachusetts by the Judicial Panel for Multi-District Litigation as In re Prudential Insurance Company of America SGLI/VGLI Contract Litigation. The consolidated complaint alleges that the use of the retained assets accounts that earn interest and are available to be withdrawn by the beneficiary, in whole or in part, at any time, to settle death benefit claims is in violation of federal law, and asserts claims of breach of contract, breaches of

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Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

fiduciary duty and the duty of good faith and fair dealing, fraud and unjust enrichment and seeks compensatory and punitive damages, disgorgement of profits, equitable relief and pre and post-judgment interest. In March 2011, the motion to dismiss was denied. In January 2012, plaintiffs filed a motion to certify the class. In August 2012, the court denied plaintiffs’ class certification motion without prejudice pending the filing of summary judgment motions on the issue of whether plaintiffs sustained an actual injury. In October 2012, the parties filed motions for summary judgment. In November 2013, the Court issued a Memorandum and Order stating that the named plaintiffs: (1) did not suffer a cognizable legal injury; (2) are not entitled to any damages based on allegations of delay in payment of benefits; and (3) are not entitled to disgorgement of profits as a remedy. The Court ordered further briefing on whether nominal damages should be awarded and whether any equitable relief should be granted. In February 2014, the parties filed briefs on the issues addressed in the Court’s order. In August 2014, the Court granted preliminary approval of a proposed settlement of this matter as a class action settlement. If final approval is obtained from the Court, the anticipated class action settlement will be within the amount reserved for this matter.

In September 2010, Huffman v. The Prudential Insurance Company, a purported nationwide class action brought on behalf of beneficiaries of group life insurance contracts owned by ERISA-governed employee welfare benefit plans was filed in the United States District Court for the Eastern District of Pennsylvania, challenging the use of retained asset accounts in employee welfare benefit plans to settle death benefit claims as a violation of ERISA and seeking injunctive relief and disgorgement of profits. In July 2011, the Company’s motion for judgment on the pleadings was denied. In February 2012, plaintiffs filed a motion to certify the class. In April 2012, the Court stayed the case pending the outcome of a case involving another insurer that is before the Third Circuit Court of Appeals. In August 2014, the Court lifted the stay, and in September 2014, Plaintiffs filed a motion seeking leave to amend the complaint.

From November 2002 to March 2005, eleven separate complaints were filed against the Company and the law firm of Leeds Morelli & Brown in New Jersey state court and in the New Jersey Superior Court, Essex County as Lederman v. Prudential Financial, Inc., et al. The complaints allege that an alternative dispute resolution agreement entered into among Prudential Insurance, over 235 claimants who are current and former Prudential Insurance employees, and Leeds Morelli & Brown (the law firm representing the claimants) was illegal and that Prudential Insurance conspired with Leeds Morelli & Brown to commit fraud, malpractice, breach of contract, and violate racketeering laws by advancing legal fees to the law firm with the purpose of limiting Prudential’s liability to the claimants. In February 2010, the New Jersey Supreme Court assigned the cases for centralized case management to the Superior Court, Bergen County. The Company participated in a court-ordered mediation that resulted in a settlement involving 193 of the remaining 235 plaintiffs. The amounts paid to the 193 plaintiffs were within existing reserves for this matter. In December 2013, the Company participated in court-ordered mediation that resulted in a December 2013 settlement involving 40 of the remaining 42 plaintiffs with litigation against the Company, including plaintiffs who had not yet appealed the dismissal of their claims. The amounts paid to the 40 plaintiffs were within existing reserves for this matter. In July 2014, the Court granted the Company’s summary judgment motion dismissing with prejudice the complaint of one of the two remaining plaintiffs asserting claims against the Company. In August 2014, an appeal was filed from the Court’s summary judgment decision.

Other Matters

In September 2014, Lehman Brothers Special Financing Inc. (“LBSF”) through Lehman Brothers Holdings Inc. (“LBHI”), the Plan Administrator under the Modified Third Amended Joint Chapter 11 Plan of LBHI and its affiliated debtors, filed a Third Amended Complaint in the United States Bankruptcy Court for the Southern District of New York against certain indenture trustees, certain special purpose entities, and a putative class of

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Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

158 noteholders, including Gibraltar Life Insurance Company, Ltd. (f/k/a AIG Edison—GA Non Dima), in its adversary proceeding to recover funds alleged to have been paid improperly to the noteholders.

In October 2012, a shareholder derivative lawsuit, Stephen Silverman, Derivatively on Behalf of Prudential Financial, Inc. v. John R. Strangfeld, et. al., was filed in the United States District Court for the District of New Jersey, alleging breaches of fiduciary duties, waste of corporate assets and unjust enrichment by certain senior officers and directors. The complaint names as defendants the Company’s Chief Executive Officer, the Chief Financial Officer, the Principal Accounting Officer, certain members of the Company’s Board of Directors and a former Director. The complaint alleges that the defendants made false and misleading statements regarding the Company’s current and future financial condition based on, among other things, the alleged failure to disclose: (i) potential liability for benefits that should either have been paid to policyholders or their beneficiaries, or escheated to applicable states; and (ii) the extent of the Company’s exposure for alleged state and federal law violations concerning the settlement of claims and the escheatment of unclaimed property. The complaint seeks an undetermined amount of damages, attorneys’ fees and costs, and equitable relief including a direction for the Company to reform and to improve its corporate governance and internal procedures to comply with applicable laws.

In October 2012, the Board of Directors received a shareholder demand letter (the “Demand”), containing allegations of wrongdoing similar to those alleged in the Silverman complaint. The Demand alleges that the Company’s Senior Management: (i) breached their fiduciary duties of loyalty and good faith in connection with the management, operation and oversight of the Company’s business; (ii) breached their fiduciary duty of good faith to establish and maintain adequate internal controls; and (iii) breached their fiduciary duties by disseminating false, misleading and/or incomplete information, all in connection with the Company’s alleged failure to use the SSDMF and to pay beneficiaries and escheat funds to states. The Demand requests that the Board of Directors: (a) undertake an independent internal investigation into Senior Management’s violations of New Jersey and/or federal law; and (b) commence a civil action against each member of Senior Management to recover for the benefit of the Company the amount of damages sustained by the Company as a result of the alleged breaches described above. In response to the Demand, the Board of Directors formed a Special Litigation Committee that has retained an outside law firm to investigate the Demand’s allegations. In September 2013, before the conclusion of the Special Litigation Committee’s investigation, the shareholder who submitted the Demand filed a shareholder derivative lawsuit, Paul Memo, Derivatively on Behalf of Prudential Financial, Inc. v. John R. Strangfeld, Jr. et. al., in New Jersey Superior Court, Essex County. The complaint (the “Memo complaint”) names as defendants the Company’s Chief Executive Officer, the Vice Chairman, a former Chief Financial Officer, the Principal Accounting Officer, certain members of the Company’s Board of Directors and a former Director. The complaint repeats the allegations in the Demand and seeks an undetermined amount of damages, attorneys’ fees and costs, and equitable relief including a direction for the Company to reform and to improve its corporate governance and internal procedures to comply with applicable laws. In March 2014, the Special Litigation Committee completed its investigation into the Demand’s allegations and concluded that it is neither appropriate nor in the best interests of the Company’s shareholders to pursue any litigation arising from allegations contained in the Demand or in the Memo complaint, and that the Company should seek dismissal of the Memo complaint. In July 2014, the Company filed a motion to dismiss the complaint.

In August 2012, a purported class action lawsuit, City of Sterling Heights General Employees’ Retirement System v. Prudential Financial, Inc., et al., was filed in the United States District Court for the District of New Jersey, alleging violations of federal securities law. The complaint names as defendants the Company’s Chief Executive Officer, the Chief Financial Officer, the Principal Accounting Officer and certain members of the Company’s Board of Directors. The complaint alleges that knowingly false and misleading statements were made regarding the Company’s current and future financial condition based on, among other things, the alleged failure to disclose: (i) potential liability for benefits that should either have been paid to policyholders or their

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Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

beneficiaries, or escheated to applicable states; and (ii) the extent of the Company’s exposure for alleged state and federal law violations concerning the settlement of claims and the escheatment of unclaimed property. The complaint seeks an undetermined amount of damages, interest, attorneys’ fees and costs. In May 2013, the complaint was amended to add three additional putative institutional investors as lead plaintiffs: National Shopmen Pension Fund, The Heavy & General Laborers’ Locals 472 & 172 Pension & Annuity Funds, and Roofers Local No. 149 Pension Fund. In June 2013, the Company moved to dismiss the amended complaint. In February 2014, the Court denied the Company’s motion to dismiss. In July 2014, plaintiffs’ filed a motion to certify a class comprised of investors who purchased shares of the Company’s Common Stock between May 5, 2010 and November 4, 2011.

In October 2006, a purported class action lawsuit, Bouder v. Prudential Financial, Inc. and Prudential Insurance Company of America, was filed in the United States District Court for the District of New Jersey, claiming that Prudential failed to pay overtime to insurance agents in violation of federal and Pennsylvania law, and that improper deductions were made from these agents’ wages in violation of state law. The complaint sought back overtime pay and statutory damages, recovery of improper deductions, interest, and attorneys’ fees. In March 2008, the court conditionally certified a nationwide class on the federal overtime claim. Separately, in March 2008, a purported nationwide class action lawsuit was filed in the United States District Court for the Southern District of California, Wang v. Prudential Financial, Inc. and Prudential Insurance, claiming that the Company failed to pay its agents overtime and provide other benefits in violation of California and federal law and seeking compensatory and punitive damages in unspecified amounts. In September 2008, Wang was transferred to the United States District Court for the District of New Jersey and consolidated with the Bouder matter. Subsequent amendments to the complaint resulted in additional allegations involving purported violations of an additional nine states’ overtime and wage payment laws. In February 2010, Prudential moved to decertify the federal overtime class that had been conditionally certified in March 2008 and moved for summary judgment on the federal overtime claims of the named plaintiffs. In July 2010, plaintiffs filed a motion for class certification of the state law claims. In August 2010, the district court granted Prudential’s motion for summary judgment, dismissing the federal overtime claims. In January 2013, the Court denied plaintiffs’ motion for class certification in its entirety. In July 2013, the Court granted plaintiffs’ motion for reconsideration, permitting plaintiffs to file a motion to certify a class of employee insurance agents seeking recovery under state wage and hour laws. In September 2013, plaintiffs filed a renewed motion for class certification.

Since April 2012, the Company has filed ten actions seeking to recover damages attributable to investments in residential mortgage-backed securities (“RMBS”). Eight actions were filed in New Jersey state court, captioned The Prudential Insurance Company of America, et al. v. JP Morgan Chase, et al.; The Prudential Insurance Company of America, et al. v. Morgan Stanley, et al.; The Prudential Insurance Company of America, et al. v. Nomura Securities International, Inc., et al.; The Prudential Insurance Company of America, et al. v. Barclays Bank PLC, et al.; The Prudential Insurance Company of America, et al. v. Goldman Sachs & Company, et al.; The Prudential Insurance Company of America, et al. v. RBS Financial Products, Inc., et al.; The Prudential Insurance Company of America, et al. v. Countrywide Financial Corp., et al.; and The Prudential Insurance Company of America, et al. v. UBS Securities LLC., et al. Additionally, two actions were filed in the United States District Court for the District of New Jersey: The Prudential Insurance Company of America v. Credit Suisse Securities (USA) LLC, et al. and The Prudential Insurance Company of America v. Bank of America National Association and Merrill Lynch & Co., Inc., et al. Among other allegations stemming from the defendants’ origination, underwriting and sales of RMBS, the complaints assert claims of common law fraud, negligent misrepresentation, breaches of the New Jersey Civil RICO statute and, in some lawsuits, federal securities claims. The complaints seek unspecified damages.

Seven of the defendants (J.P. Morgan, Barclays, Nomura, RBS, Goldman Sachs, Countrywide, and UBS) removed the lawsuits from New Jersey state court to the United States District Court for the District of New

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Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Jersey. The Countrywide defendants also made an application to the Judicial Panel on Multi-District Litigation to transfer that case to the United States District Court for the Central District of California. In August 2013, that application was granted. Except for the Nomura and Goldman Sachs actions, the Company filed motions to remand the lawsuits to New Jersey state court. The J.P. Morgan, Barclays, RBS and UBS lawsuits were subsequently remanded to New Jersey state court.

Each of the Goldman Sachs, Morgan Stanley, Nomura, Credit Suisse, Barclays, Bank of America/Merrill Lynch, J.P. Morgan, RBS, UBS and Countrywide defendants filed motions to dismiss the complaints against them. The motions to dismiss filed by Goldman Sachs, J.P. Morgan, Morgan Stanley, and Credit Suisse have been denied in their entirety. In December 2013, the lawsuit against Goldman Sachs was settled. In March 2014, the motion to dismiss filed by Countrywide was granted in part, dismissing the federal securities, successor-liability, fraudulent transfer, and New Jersey RICO claims, and the court, sua sponte, remanded the remaining claims to New Jersey state court for further consideration. In April 2014, the Company filed an appeal with the United States Court of Appeals for the Ninth Circuit, challenging the court’s March 2014 order granting, in part, Countrywide’s motion to dismiss. In June 2014, Countrywide filed a motion to dismiss the remaining claims pending against it in New Jersey state court. In April 2014, Bank of America/Merrill Lynch’s motion to dismiss was granted in part and denied in part, with the court upholding the common law and equitable fraud claims, and the 1933 Securities Act claims. The court dismissed with prejudice the negligent representation claim, dismissed without prejudice the New Jersey civil RICO claims and certain common law fraud claims and permitted the Company 45 days to file an amended complaint. In June 2014, the Company filed an amended complaint against Bank of America/Merrill Lynch. In July 2014, Bank of America/Merrill Lynch filed motions to dismiss all remaining claims against it. The actions filed against Bank of America/Merrill Lynch are currently pending in New Jersey federal court. The motions to dismiss filed by Bank of America/Merrill Lynch, Barclays, Countrywide, Nomura, RBS and UBS are pending. In July 2014, the lawsuit against J.P. Morgan was settled. In August 2014, the lawsuit against Credit Suisse was settled.

In June 2014, the Company, together with nine other institutional investors, filed six actions against certain RMBS trustees. The actions were filed in New York state court, captioned BlackRock Allocation Target Shares: Series S Portfolio, et al. v. U.S. Bank Nat’l Ass’n, et al.; BlackRock Balanced Capital Portfolio (FI), et al. v. Deutsche Bank Nat’l Trust Co., et al.; BlackRock Allocation Target Shares: Series S Portfolio, et al. v. The Bank of New York Mellon, et al.; BlackRock Allocation Target Shares: Series S Portfolio, et al. v. Wells Fargo, Nat’l Ass’n, et al.; BlackRock Balanced Capital Portfolio (FI), et al. v. Citibank N.A., et al.; and BlackRock Core Active LIBOR Fund B, et al. v. HSBC Bank USA, Nat’l Ass’n, et al. The actions, which are brought derivatively on behalf of more than 2,200 RMBS trusts, seek unspecified damages attributable to the trustees’ alleged failure to: (i) enforce the trusts’ respective repurchase rights against sellers of defective mortgage loans; and (ii) properly monitor the respective mortgage loan servicers. The complaints assert claims for breach of contract, breach of fiduciary duty, negligence and violations of the Trust Indenture Act of 1939. In July 2014, the Company amended its complaint against each of the six defendants.

In May 2014, Prudential Investment Portfolios 2, on behalf of the Prudential Core Short-Term Bond Fund and the Prudential Core Taxable Money Market Fund (the “Funds”), filed an action against ten banks in the United States District Court for the District of New Jersey asserting that the banks participated in the setting of LIBOR, a major benchmark interest rate. The action is captioned Prudential Investment Portfolios 2, f/k/a Dryden Core Investment Fund, o/b/o Prudential Core Short-Term Bond Fund and Prudential Core Taxable Money Market Fund v. Bank of America Corporation et al. The Complaint alleges that the defendant banks manipulated LIBOR, and asserts, among other things, claims for common law fraud, negligent misrepresentation, breach of contract, intentional interference with contract and with prospective economic relations, unjust enrichment, breaches of the New Jersey Civil RICO statute, and violations of the Sherman Act. In June 2014, the

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United States Judicial Panel on Multidistrict Litigation transferred the action to the United States District Court for the Southern District of New York, where it has been consolidated for pre-trial purposes with other pending LIBOR-related actions. In October 2014, the Funds filed an amended complaint.

Summary

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

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PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Supplemental Combining Statements of Financial Position

September 30, 2014 and December 31, 2013 (in millions)


	September 30, 2014							December 31, 2013
	Financial Services Businesses		Closed Block Business			Consolidated		Financial Services Businesses		Closed Block Business			Consolidated
ASSETS
Fixed maturities, available-for-sale, at fair value	$	256,119	$	44,948		$	301,067	$	243,654	$	43,212		$	286,866
Fixed maturities, held-to-maturity, at amortized cost		2,880		0			2,880		3,312		0			3,312
Trading account assets supporting insurance liabilities, at fair value		20,507		0			20,507		20,827		0			20,827
Other trading account assets, at fair value		9,003		318			9,321		6,111		342			6,453
Equity securities, available-for-sale, at fair value		6,377		3,501			9,878		6,026		3,884			9,910
Commercial mortgage and other loans		34,549		10,287			44,836		31,335		9,673			41,008
Policy loans		6,928		4,929			11,857		6,753		5,013			11,766
Other long-term investments		8,315		2,545			10,860		8,304		2,024			10,328
Short-term investments		4,789		746			5,535		5,837		1,866			7,703

Total investments		349,467		67,274			416,741		332,159		66,014			398,173
Cash and cash equivalents		15,447		1,775			17,222		10,797		642			11,439
Accrued investment income		2,605		604			3,209		2,505		584			3,089
Deferred policy acquisition costs		16,219		366			16,585		16,101		411			16,512
Value of business acquired		3,394		0			3,394		3,675		0			3,675
Other assets		13,788		592			14,380		13,082		751			13,833
Separate account assets		292,616		0			292,616		285,060		0			285,060

TOTAL ASSETS	$	693,536	$	70,611		$	764,147	$	663,379	$	68,402		$	731,781

LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits	$	165,985	$	49,862		$	215,847	$	156,601	$	50,258		$	206,859
Policyholders’ account balances		133,814		5,319			139,133		131,298		5,359			136,657
Policyholders’ dividends		121		6,783			6,904		97		5,418			5,515
Securities sold under agreements to repurchase		4,979		4,060			9,039		4,128		3,770			7,898
Cash collateral for loaned securities		3,270		1,299			4,569		4,230		810			5,040
Income taxes		9,078		(444	)		8,634		6,010		(588	)		5,422
Short-term debt		4,354		75			4,429		2,594		75			2,669
Long-term debt		20,997		1,600			22,597		21,953		1,600			23,553
Other liabilities		12,139		491			12,630		13,618		307			13,925
Notes issued by consolidated variable interest entities		5,397		0			5,397		3,302		0			3,302
Separate account liabilities		292,616		0			292,616		285,060		0			285,060

Total liabilities		652,750		69,045			721,795		628,891		67,009			695,900


EQUITY
Accumulated other comprehensive income		13,328		173			13,501		8,586		95			8,681
Other attributed equity		26,875		1,393			28,268		25,299		1,298			26,597

Total attributed equity		40,203		1,566			41,769		33,885		1,393			35,278

Noncontrolling interests		583		0			583		603		0			603

Total equity		40,786		1,566			42,352		34,488		1,393			35,881

TOTAL LIABILITIES AND EQUITY	$	693,536	$	70,611		$	764,147	$	663,379	$	68,402		$	731,781

See Notes to Unaudited Interim Supplemental Combining Financial Information

108

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Supplemental Combining Statements of Operations

Three Months Ended September 30, 2014 and 2013 (in millions)


	Three Months Ended September 30,
	2014									2013
	Financial Services Businesses			Closed Block Business			Consolidated			Financial Services Businesses			Closed Block Business			Consolidated
REVENUES
Premiums	$	6,024		$	620		$	6,644		$	5,512		$	629		$	6,141
Policy charges and fee income		1,496			0			1,496			1,257			0			1,257
Net investment income		3,093			748			3,841			2,917			733			3,650
Asset management and service fees		949			0			949			858			0			858
Other income		(621	)		(4	)		(625	)		1,490			24			1,514
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities		(1	)		(1	)		(2	)		(197	)		(162	)		(359	)
Other-than-temporary impairments on fixed maturity securities transferred to Other comprehensive income		(3	)		0			(3	)		169			147			316
Other realized investment gains (losses), net		(321	)		401			80			(2,291	)		224			(2,067	)

Total realized investment gains (losses), net		(325	)		400			75			(2,319	)		209			(2,110	)

Total revenues		10,616			1,764			12,380			9,715			1,595			11,310

BENEFITS AND EXPENSES
Policyholders’ benefits		6,578			756			7,334			5,463			774			6,237
Interest credited to policyholders’ account balances		847			35			882			725			34			759
Dividends to policyholders		20			725			745			25			557			582
Amortization of deferred policy acquisition costs		337			9			346			(461	)		9			(452	)
General and administrative expenses		2,650			139			2,789			2,522			136			2,658

Total benefits and expenses		10,432			1,664			12,096			8,274			1,510			9,784

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURES		184			100			284			1,441			85			1,526

Income tax expense (benefit)		(287	)		53			(234	)		473			24			497

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURES		471			47			518			968			61			1,029
Equity in earnings of operating joint ventures, net of taxes		5			0			5			3			0			3

INCOME (LOSS) FROM CONTINUING OPERATIONS		476			47			523			971			61			1,032
Income (loss) from discontinued operations, net of taxes		0			0			0			8			0			8

NET INCOME (LOSS)		476			47			523			979			61			1,040
Less: Income (loss) attributable to noncontrolling interests		11			0			11			13			0			13

NET INCOME (LOSS) ATTRIBUTABLE TO PRUDENTIAL FINANCIAL, INC.	$	465		$	47		$	512		$	966		$	61		$	1,027

See Notes to Unaudited Interim Supplemental Combining Financial Information

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PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Supplemental Combining Statements of Operations

Nine Months Ended September 30, 2014 and 2013 (in millions)


	Nine Months Ended September 30,
	2014									2013
	Financial Services Businesses			Closed Block Business			Consolidated			Financial Services Businesses			Closed Block Business			Consolidated
REVENUES
Premiums	$	16,610		$	1,970		$	18,580		$	18,160		$	1,987		$	20,147
Policy charges and fee income		4,517			0			4,517			3,988			0			3,988
Net investment income		9,175			2,258			11,433			8,733			2,266			10,999
Asset management and service fees		2,781			0			2,781			2,558			0			2,558
Other income		145			32			177			(2,354	)		41			(2,313	)
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities		(83	)		(30	)		(113	)		(531	)		(316	)		(847	)
Other-than-temporary impairments on fixed maturity securities transferred to Other comprehensive income		52			14			66			421			280			701
Other realized investment gains (losses), net		18			921			939			(4,031	)		320			(3,711	)

Total realized investment gains (losses), net		(13	)		905			892			(4,141	)		284			(3,857	)

Total revenues		33,215			5,165			38,380			26,944			4,578			31,522

BENEFITS AND EXPENSES
Policyholders’ benefits		17,727			2,459			20,186			18,021			2,459			20,480
Interest credited to policyholders’ account balances		2,973			102			3,075			2,101			102			2,203
Dividends to policyholders		66			1,990			2,056			119			1,468			1,587
Amortization of deferred policy acquisition		1,236			29			1,265			(43	)		29			(14	)
General and administrative expenses		7,873			416			8,289			7,656			412			8,068

Total benefits and expenses		29,875			4,996			34,871			27,854			4,470			32,324

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURES		3,340			169			3,509			(910	)		108			(802	)

Income tax expense (benefit)		575			68			643			(634	)		29			(605	)

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURES		2,765			101			2,866			(276	)		79			(197	)
Equity in earnings of operating joint ventures, net of taxes		11			0			11			54			0			54

INCOME (LOSS) FROM CONTINUING OPERATIONS		2,776			101			2,877			(222	)		79			(143	)
Income (loss) from discontinued operations, net of taxes		8			0			8			11			0			11

NET INCOME (LOSS)		2,784			101			2,885			(211	)		79			(132	)
Less: Income (loss) attributable to noncontrolling interests		45			0			45			75			0			75

NET INCOME (LOSS) ATTRIBUTABLE TO PRUDENTIAL FINANCIAL, INC.	$	2,739		$	101		$	2,840		$	(286	)	$	79		$	(207	)

See Notes to Unaudited Interim Supplemental Combining Financial Information

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Supplemental Combining Financial Information

1. BASIS OF PRESENTATION

The supplemental combining financial information presents the consolidated financial position and results of operations for Prudential Financial, Inc. and its subsidiaries (together, the “Company”), separately reporting the Financial Services Businesses and the Closed Block Business. The Financial Services Businesses and the Closed Block Business are both fully integrated operations of the Company and are not separate legal entities. The supplemental combining financial information presents the results of the Financial Services Businesses and the Closed Block Business as if they were separate reporting entities and should be read in conjunction with the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

The Company has outstanding two classes of common stock. The Common Stock reflects the performance of the Financial Services Businesses and the Class B Stock reflects the performance of the Closed Block Business.

The Closed Block Business was established on the date of demutualization and includes the assets and liabilities of the Closed Block (see Note 6 to the Unaudited Interim Consolidated Financial Statements for a description of the Closed Block). It also includes assets held outside the Closed Block necessary to meet insurance regulatory capital requirements related to products included within the Closed Block; deferred policy acquisition costs related to the Closed Block policies; the principal amount of the IHC debt (as discussed below) and related unamortized debt issuance costs, as well as an interest rate swap related to the IHC debt; and certain other related assets and liabilities. The Financial Services Businesses consist of the U.S. Retirement Solutions and Investment Management, U.S. Individual Life and Group Insurance, and International Insurance divisions and Corporate and Other operations.

2. ALLOCATION OF RESULTS

This supplemental combining financial information reflects the assets, liabilities, revenues and expenses directly attributable to the Financial Services Businesses and the Closed Block Business, as well as allocations deemed reasonable by management in order to fairly present the financial position and results of operations of the Financial Services Businesses and the Closed Block Business on a stand-alone basis. While management considers the allocations utilized to be reasonable, management has the discretion to make operational and financial decisions that may affect the allocation methods and resulting assets, liabilities, revenues and expenses of each business. In addition, management has limited discretion over accounting policies and the appropriate allocation of earnings between the two businesses. The Company is subject to agreements which provide that, in most instances, the Company may not change the allocation methodology or accounting policies for the allocation of earnings between the Financial Services Businesses and Closed Block Business without the prior consent of the Class B Stock holders or IHC debt bond insurer.

General corporate overhead not directly attributable to a specific business that has been incurred in connection with the generation of the businesses’ revenues is generally allocated between the Financial Services Businesses and the Closed Block Business based on the general and administrative expenses of each business as a percentage of the total general and administrative expenses for all businesses.

Prudential Holdings, LLC, a wholly-owned subsidiary of Prudential Financial, Inc., has outstanding senior secured notes (the “IHC debt”), of which net proceeds of $1.66 billion were allocated to the Financial Services Businesses concurrent with the demutualization on December 18, 2001. The IHC debt is serviced by the cash flows of the Closed Block Business, and the results of the Closed Block Business reflect interest expense associated with the IHC debt.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Supplemental Combining Financial Information

Income taxes are allocated between the Financial Services Businesses and the Closed Block Business as if they were separate companies based on the taxable income or losses and other tax characterizations of each business. If the Financial Services Businesses generate tax benefits, such as net operating losses, it is entitled to record such tax benefits to the extent they are expected to be utilized on a consolidated basis. However, if the Closed Block Business generates tax benefits, it will receive the full benefit in cash, and the Financial Services Businesses will subsequently recover the payment at the time the benefits are actually utilized on a consolidated basis.

Holders of Common Stock have no interest in a separate legal entity representing the Financial Services Businesses; holders of the Class B Stock have no interest in a separate legal entity representing the Closed Block Business; and holders of each class of common stock are subject to all of the risks associated with an investment in the Company.

In the event of a liquidation, dissolution or winding-up of the Company, holders of Common Stock and holders of Class B Stock would be entitled to receive a proportionate share of the net assets of the Company that remain after paying all liabilities and the liquidation preferences of any preferred stock.

The results of the Financial Services Businesses are subject to certain risks pertaining to the Closed Block. These include any expenses and liabilities from litigation affecting the Closed Block policies as well as the consequences of certain potential adverse tax determinations. In connection with the sale of the Class B Stock and IHC debt, the cost of indemnifying the investors with respect to certain matters will be borne by the Financial Services Businesses.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) addresses the consolidated financial condition of Prudential Financial as of September 30, 2014, compared with December 31, 2013, and its consolidated results of operations for the three and nine months ended September 30, 2014 and 2013. You should read the following analysis of our consolidated financial condition and results of operations in conjunction with the MD&A, the “Risk Factors” section, and the audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as well as the statements under “Forward-Looking Statements” and the Unaudited Interim Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Overview

Prudential Financial has two classes of common stock outstanding. The Common Stock, which is publicly traded (NYSE:PRU), reflects the performance of the Financial Services Businesses, while the Class B Stock, which was issued through a private placement and does not trade on any exchange, reflects the performance of the Closed Block Business. The Financial Services Businesses and the Closed Block Business are discussed below.

Financial Services Businesses

Our Financial Services Businesses consist of three operating divisions, which together encompass six segments, and our Corporate and Other operations. The U.S. Retirement Solutions and Investment Management division consists of our Individual Annuities, Retirement and Asset Management segments. The U.S. Individual Life and Group Insurance division consists of our Individual Life and Group Insurance segments. The International Insurance division consists of our International Insurance segment. Our Corporate and Other operations include corporate items and initiatives that are not allocated to business segments, as well as businesses that have been sold or exited, including businesses that have been placed in wind down, but that did not qualify for “discontinued operations” accounting treatment under U.S. GAAP.

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

We seek growth internally and through acquisitions, joint ventures or other forms of business combinations or investments. Our principal acquisition focus is in our current business lines, both domestic and international.

Closed Block Business

In connection with demutualization, we ceased offering domestic participating products. The liabilities for our traditional domestic in force participating products were segregated, together with assets, in a regulatory mechanism referred to as the “Closed Block.” The Closed Block is designed generally to provide for reasonable expectations for future policy dividends after demutualization of holders of participating individual life insurance policies and annuities included in the Closed Block by allocating assets that will be used exclusively for payment of benefits, including policyholder dividends, expenses and taxes with respect to these products. See Note 6 to the Unaudited Interim Consolidated Financial Statements and “Business—Demutualization and Separation of the Businesses” in our 2013 Annual Report on Form 10-K for more information on the Closed Block.

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Executive Summary

Prudential Financial, a financial services leader with approximately $1.160 trillion of assets under management as of September 30, 2014, has operations in the United States, Asia, Europe and Latin America. Through our subsidiaries and affiliates, we offer a wide array of financial products and services, including life insurance, annuities, retirement-related services, mutual funds, and investment management. We offer these products and services to individual and institutional customers through one of the largest distribution networks in the financial services industry.

On October 28, 2014, we announced that we have entered into a memorandum of understanding with Inversiones La Construcción S.A. (“ILC”), the investment subsidiary of the Chilean Construction Chamber, to acquire an indirect ownership interest in Administradora de Fondos de Pensiones Habitat S.A. (“AFP Habitat”), a leading provider of retirement services in Chile. We expect to acquire indirectly between approximately 34% and 40% of AFP Habitat from ILC, depending on the results of a pre-closing partial tender offer by ILC to acquire additional shares of AFP Habitat from public shareholders. We would acquire the indirect interest in the AFP Habitat shares from subsidiaries of ILC for 925 Chilean pesos per share, for a total purchase price of approximately $530 million to $620 million at current exchange rates. It is expected that the transaction would result in equal ownership positions for us and ILC, with a controlling stake in AFP Habitat held through a joint holding company. The transaction, which is subject to certain conditions, including receipt of regulatory approvals, is expected to close in the first half of 2015. This acquisition will enable us to participate in the growing Chilean pension market.

On June 10, 2014, Prudential Financial’s Board of Directors authorized the Company to repurchase at management’s discretion up to $1.0 billion of its outstanding Common Stock during the period from July 1, 2014 through June 30, 2015. We purchased 2.8 million shares in the third quarter of 2014 under this authorization at a total cost of $250 million. The timing and amount of any share repurchases will be determined by management based upon market conditions and other considerations, and such repurchases may be effected in the open market, through derivative, accelerated repurchase and negotiated transactions and through prearranged trading plans designed to comply with Rule 10b5-1(c) under the Securities Exchange Act of 1934 (the “Exchange Act”), as amended. We purchased 12 million shares of our Common Stock at a total cost of $1.0 billion, under the prior twelve-month $1.0 billion share repurchase authorization that expired on June 30, 2014, including 5.9 million shares purchased in the first six months of 2014 at a total cost of $500 million.

On each of February 11, 2014, May 13, 2014 and August 12, 2014, Prudential Financial’s Board of Directors declared a cash dividend of $0.53 per share of Common Stock.

On January 2, 2014, we completed the acquisition of UniAsia Life Assurance Berhad, an established life insurance company in Malaysia, through the formation of a joint venture with Bank Simpanan Nasional (“BSN”), a bank owned by the Malaysian government. The joint venture paid cash consideration of $158 million, 70% of which was provided by Prudential Insurance and 30% of which was provided by BSN. Subsequent to the acquisition, we renamed the acquired company Gibraltar BSN Life Berhad.

Regulatory Developments

Prudential Financial is a “Designated Financial Company” under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). As a Designated Financial Company, Prudential Financial is subject to supervision and examination by the Federal Reserve Bank of Boston and to prudential regulatory standards under the Dodd-Frank Act. The Financial Stability Board (the “FSB”), consisting of representatives of national financial authorities of the G20 nations, has also identified Prudential Financial as a global systemically important insurer that is to be subject to enhanced regulation.

Pursuant to the Collins Amendment of the Dodd Frank Act requiring the establishment of capital requirements for Designated Financial Companies, the FRB announced in September 2014 that it would begin a

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quantitative impact study to evaluate the potential effects of a revised regulatory capital framework on insurance holding companies. Prudential Financial has elected to respond to FRB requests for information in connection with this study.

At the direction of the FSB, the International Association of Insurance Supervisors (the “IAIS”) is currently developing a model framework (“ComFrame”) for the supervision of internationally active insurance groups (“IAIGs”) that contemplates “group wide supervision” across national boundaries. Prudential Financial qualifies as an IAIG. We have participated in field testing to assist the IAIS in its development of ComFrame. On October 23, 2014, the IAIS released preliminary elements of its risk-based global insurance capital standards, known as the “Basic Capital Requirements” (“BCR”). The IAIS is scheduled to seek G20 endorsement of the proposed BCR framework in November 2014. Global systemically important insurers (“G-SII”), such as Prudential Financial, will be required to report their BCR results beginning in 2015 on a confidential basis, depending on the directions of domestic group wide supervisors. The BCR will continue to be revised and refined by the IAIS once the confidential reporting period begins, and a final capital framework is not anticipated until 2019.

In February 2014, the New York State Department of Financial Services (“NY DFS”) notified us that it does not agree with our calculation of statutory reserves (including the applicable credit for reinsurance) for New York purposes in respect of certain variable annuity products. We are continuing discussions with the NY DFS regarding the proper level of statutory reserves (including the applicable credit for reinsurance) for these and other products. If we are ultimately required to establish material additional reserves on a New York statutory accounting basis or post material amounts of additional collateral with respect to such variable annuity or other products, our ability to deploy capital held within our U.S. domestic insurance subsidiaries for other purposes could be affected. Most of our U.S. operating insurance companies are licensed in New York, but none are domiciled in New York.

The National Association of Insurance Commissioners (“NAIC”), the NY DFS and other regulators continue to review life insurers’ use of captive reinsurance companies. On June 4, 2014, Rector & Associates, Inc., a consulting firm commissioned by the NAIC, presented a revised report to the NAIC’s Principle-Based Reserving Implementation Task Force that recommended, among other things, placing limitations on the types of assets that may be used to finance reserves associated with certain term and universal life insurance policies and making adoption of new regulations contemplated by the Rector Report by individual states an NAIC accreditation standard. On August 17, 2014, the NAIC Executive Committee adopted the regulatory framework proposed by Rector & Associates, including recommendations to have various technical working groups of the NAIC propose regulations and guidelines to implement the new framework. These technical working groups are in various stages of developing and proposing regulations and guidelines. The NAIC’s Principle-Based Reserving Implementation Task Force has voted to expose for comment a new Actuarial Guideline (AG48) designed to implement many of the recommendations in the Rector Report related to the determination of the portion of the reserves that may be supported by specified asset classes in connection with certain transactions involving captive reinsurance companies. In addition, another committee of the NAIC continues to consider changes to the NAIC accreditation standards that would regulate captive reinsurance companies that assume business directly written in more than one state as “multi-state reinsurers” and apply accreditation standards to those captives that historically were applicable only to traditional insurers. For information on our use of captive reinsurance companies and the potential effects of these proposals on us, see “—Liquidity and Capital Resources—Capital—Captive Reinsurance Companies” below.

For additional information on the potential impacts of regulation on the Company, including the topics described above, see “Business—Regulation” and “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2013.

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Impact of a Low Interest Rate Environment

Domestic Financial Services Businesses

As interest rates in the U.S. continue to remain lower than historical levels, our current reinvestment yields are consequently lower than the overall portfolio yield, primarily for our investments in fixed maturity securities and commercial mortgage loans. With the Federal Reserve Board’s stated intention to keep interest rates low for a considerable time, our overall portfolio yields are expected to continue to decline.

For the domestic Financial Services Businesses’ general account, we expect annual scheduled payments and prepayments to be approximately 10% of the fixed maturity security and commercial mortgage loan portfolios through 2015. The domestic Financial Services Businesses’ general account has approximately $161 billion of such assets (based on net carrying value) as of September 30, 2014. As these assets mature, the current average portfolio yield for fixed maturities and commercial mortgage loans of approximately 4.5% is expected to decline due to reinvesting in a lower interest rate environment. Included in the $161 billion of fixed maturity securities and commercial mortgage loans are approximately $72 billion that are subject to call or redemption features at the issuer’s option and have a weighted average interest rate of approximately 5%. As of September 30, 2014, approximately 80% of these assets contain prepayment penalties.

The reinvestment of scheduled payments and prepayments at rates below the current portfolio yield, including in some cases at rates below those guaranteed under our insurance contracts, will impact future operating results to the extent we do not, or are unable to, reduce crediting rates on in-force blocks of business, or effectively utilize other asset/liability management strategies described below, in order to maintain current net interest margins. As of September 30, 2014, our domestic Financial Services Businesses have approximately $157 billion of insurance liabilities and policyholder account balances. Of this amount, approximately $50 billion represents contracts with crediting rates that may be adjusted over the life of the contract, subject to guaranteed minimums. The following table sets forth the related account values by range of guaranteed minimum crediting rates and the related range of the difference, in basis points (bps), between rates being credited to contractholders as of September 30, 2014, and the respective guaranteed minimums.


	Account Values with Crediting Rates:
	At guaranteed minimum			1-49 bps above guaranteed minimum			50-99 bps above guaranteed minimum			100-150 bps above guaranteed minimum			Greater than 150 bps above guaranteed minimum			Total
	($ in billions)
Range of Guaranteed Minimum Crediting Rates:
Less than 1.00%	$	0.7		$	0.0		$	0.0		$	0.0		$	0.0		$	0.7
1.00% - 1.99%		1.9			2.3			10.8			1.3			0.3			16.6
2.00% - 2.99%		2.2			0.0			0.6			1.7			0.2			4.7
3.00% - 4.00%		24.0			1.9			0.5			0.2			0.0			26.6
Greater than 4.00%		0.9			0.0			0.0			0.0			0.0			0.9

Total	$	29.7		$	4.2		$	11.9		$	3.2		$	0.5		$	49.5

Percentage of total		60	%		9	%		24	%		6	%		1	%		100	%

Although we may have the ability to lower crediting rates for those contracts above guaranteed minimums, our willingness to do so may be limited by competitive pressures.

Our domestic Financial Services Businesses also have approximately $14 billion of insurance liabilities and policyholder account balances representing participating contracts for which the investment income risk is expected to ultimately accrue to contractholders. The crediting rates for these contracts are periodically adjusted based on the yield earned on the related assets. The remaining $93 billion of the $157 billion of insurance

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liabilities and policyholder account balances in our domestic Financial Services Businesses represents long duration products such as group annuities, structured settlements and other insurance products that have fixed and guaranteed terms, for which underlying assets may have to be reinvested at interest rates that are lower than portfolio rates. We seek to mitigate the impact of a prolonged low interest rate environment on these contracts through asset/liability management, as discussed further below.

For the domestic Financial Services Businesses’ general account, assuming a hypothetical scenario where the average 10-year U.S. Treasury rate is 2.50% for the period from October 1, 2014 through December 31, 2015, and credit spreads remain unchanged from levels as of September 30, 2014, we estimate that the unfavorable impact to net interest margins included in pre-tax adjusted operating income of reinvesting in such an environment, compared to reinvesting at current average portfolio yields, would be approximately $1 million in 2014 and $32 million in 2015. This impact is most significant in the Retirement and Individual Annuities segments. This hypothetical scenario only reflects the impact related to the approximately $50 billion of contracts shown in the table above, and does not reflect: i) any benefit from potential changes to the crediting rates on the corresponding contractholder liabilities where the Company has the contractual ability to do so, or other potential mitigants such as changes in investment mix that we may implement as funds are reinvested; ii) any impact related to assets that do not directly support our liabilities; iii) any impact from other factors, including but not limited to, new business, contractholder behavior, changes in competitive conditions, and changes in capital markets; and/or iv) any impact from other factors described below.

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

Japanese Insurance Operations

Our Japanese insurance operations have experienced a low interest rate environment for many years. As of September 30, 2014, these operations have $130 billion of insurance liabilities and policyholder account balances, which are predominantly comprised of long duration insurance products that have fixed and guaranteed terms, for which underlying assets may have to be reinvested at interest rates that are lower than portfolio rates. Also included in the $130 billion are approximately $7 billion of insurance liabilities and policyholder account balances with crediting rates that may be adjusted over the life of the contract, subject to guaranteed minimums; however, for these contracts, most of the current crediting rates are substantially at or near contractual minimums. Although we have the ability to lower crediting rates in some cases for those contracts above guaranteed minimum crediting rates, the majority of this business has credited interest rates which are determined by formula. Our Japanese insurance operations employ a proactive asset/liability management program in order to mitigate the unfavorable impact that the current interest rate environment has on our net interest margins, and includes strategies similar to those described for the domestic Financial Services Businesses above.

Results of Operations

Net income of our Financial Services Businesses attributable to Prudential Financial, Inc. for the third quarter and first nine months of 2014 was $465 million and $2,739 million, respectively, compared to net income of $966 million and a net loss of $286 million for the third quarter and first nine months of 2013, respectively.

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We analyze performance of the segments and Corporate and Other operations of the Financial Services Businesses using a measure called adjusted operating income. See “—Consolidated Results of Operations—Segment Measures” for a discussion of adjusted operating income and its use as a measure of segment operating performance.

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Adjusted operating income before income taxes for the Financial Services Businesses for the third quarter and first nine months of 2014 was $1,353 million and $4,547 million, respectively, compared to $1,913 million and $4,908 million for the third quarter and first nine months of 2013, respectively. Shown below are the contributions of each segment and Corporate and Other operations to our adjusted operating income for the periods indicated and a reconciliation of adjusted operating income of our segments and Corporate and Other operations to income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Adjusted operating income before income taxes for Financial Services Businesses by segment:
Individual Annuities	$	367		$	821		$	1,145		$	1,593
Retirement		256			237			906			744
Asset Management		200			173			593			514

Total U.S. Retirement Solutions and Investment Management Division		823			1,231			2,644			2,851

Individual Life		97			148			380			426
Group Insurance		(73	)		68			(21	)		99

Total U.S. Individual Life and Group Insurance Division		24			216			359			525

International Insurance		845			778			2,566			2,505

Total International Insurance Division		845			778			2,566			2,505

Corporate Operations		(339	)		(312	)		(1,022	)		(973	)

Total Corporate and Other		(339	)		(312	)		(1,022	)		(973	)

Adjusted operating income before income taxes for the Financial Services Businesses		1,353			1,913			4,547			4,908

Reconciling Items:
Realized investment gains (losses), net, and related adjustments(1)		(1,161	)		(1,319	)		(1,314	)		(7,322	)
Charges related to realized investment gains (losses), net(2)		29			763			(99	)		1,533
Investment gains (losses) on trading account assets supporting insurance liabilities, net(3)		(131	)		103			195			(273	)
Change in experience-rated contractholder liabilities due to asset value changes(4)		93			(73	)		(139	)		255
Divested businesses(5)		(7	)		43			113			(12	)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(6)		8			11			37			1

Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures for Financial Services Businesses		184			1,441			3,340			(910	)
Income (loss) from continuing operations before income taxes for Closed Block Business		100			85			169			108

Consolidated income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures	$	284		$	1,526		$	3,509		$	(802	)

(1)	Represents “Realized investment gains (losses), net,” and related adjustments. See “—Realized Investment Gains and Losses” and Note 11 to our Unaudited Interim Consolidated Financial Statements for additional information.

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(2)

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

(3)	Represents net investment gains and losses on trading account assets supporting insurance liabilities. See “—Experience-Rated Contractholder Liabilities, Trading Account Assets Supporting Insurance Liabilities and Other Related Investments.”

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

(5)	See “—Divested Businesses.”

(6)

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

Results for the periods presented above reflect the following:

Individual Annuities. Results for the third quarter and first nine months of 2014 decreased in comparison to the prior year periods. The decreases reflect unfavorable comparative impacts on reserves and the amortization of DAC and other costs from changes in the estimated profitability of the business, including those resulting from annual reviews and updates of assumptions performed in the third quarter of each year. The decreases for both periods were partially offset by higher net asset-based fee income.

Retirement. Results for the third quarter and first nine months of 2014 increased in comparison to the prior year periods. Results for both periods reflect higher net investment spread results and higher fee income, including the contribution of two significant longevity reinsurance transactions in the third quarter of 2014, partially offset by higher expenses and unfavorable comparative impacts from annual reviews and updates of assumptions.

Asset Management. Results for the third quarter and first nine months of 2014 increased in comparison to the prior year periods. The increases for both periods primarily reflect higher asset management fees, net of expenses, driven by higher assets under management due to market appreciation and positive net flows over the past twelve months. Also contributing to the increase in both periods is increased performance-based incentive fees, net of expenses.

Individual Life. Results for the third quarter and first nine months of 2014 decreased in comparison to the prior year periods. The decreases for both periods reflect unfavorable comparative impacts from our annual reviews and updates of assumptions, partially offset by lower integration costs associated with the acquisition of The Hartford Life business, higher net contributions from investment results and more favorable mortality experience, net of reinsurance and reserve updates.

Group Insurance. Results for the third quarter and first nine months of 2014 decreased in comparison to the prior year periods, primarily reflecting unfavorable comparative impacts from our annual reviews and updates of assumptions, as well as higher operating expenses, partially offset by more favorable comparative underwriting results and a higher contribution from net investment spread results.

International Insurance. Results for the third quarter of 2014 increased in comparison to the prior year period reflecting a favorable comparative impact from our annual reviews and updates of assumptions, net business growth, the absence of integration costs associated with our acquisition of the former Star and Edison businesses and more favorable mortality experience. These impacts were partially offset by higher expenses and less favorable foreign currency exchange rates.

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Results for the first nine months of 2014 increased in comparison to the prior year period, reflecting the favorable comparative impact from our annual reviews and updates of assumptions, net business growth and the absence of integration costs associated with our acquisition of the former Star and Edison businesses. These items were partially offset by less favorable foreign currency exchange rates as well as benefits to prior year results from both the impact of a gain on our investment, through a consortium, in China Pacific Group in 2013 and from accelerated earnings due to surrenders of certain fixed annuities.

Corporate and Other operations. Results for the third quarter and first nine months of 2014 reflect increased losses compared to the prior year periods. The increased losses for both periods reflect lower income from our qualified pension plan and a charge in the third quarter of 2014 associated with our annual reviews and updates of assumptions. Also contributing to the decline for the first nine months was a higher level of corporate expenses, partially offset by lower interest expense.

Closed Block Business. Income from continuing operations before income taxes for the third quarter and first nine months of 2014 increased in comparison to the prior year periods. Results primarily reflect an increase in net realized investment gains, partially offset by increases in the policyholder dividend obligation expense.

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Consolidated Results of Operations

The following table summarizes net income (loss) for the Financial Services Businesses and the Closed Block Business for the periods presented.


	Three Months Ended September 30,					Nine Months Ended September 30,
	2014			2013		2014		2013
	(in millions)
Financial Services Businesses:
Revenues	$	10,616		$	9,715	$	33,215	$	26,944
Benefits and expenses		10,432			8,274		29,875		27,854

Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures for Financial Services Businesses		184			1,441		3,340		(910	)
Income tax expense (benefit)		(287	)		473		575		(634	)

Income (loss) from continuing operations before equity in earnings of operating joint ventures for Financial Services Businesses		471			968		2,765		(276	)
Equity in earnings of operating joint ventures, net of taxes		5			3		11		54

Income (loss) from continuing operations for Financial Services Businesses		476			971		2,776		(222	)
Income (loss) from discontinued operations, net of taxes		0			8		8		11

Net income (loss)—Financial Services Businesses		476			979		2,784		(211	)
Less: Income attributable to noncontrolling interests		11			13		45		75

Net income (loss) of Financial Services Businesses attributable to Prudential Financial, Inc.	$	465		$	966	$	2,739	$	(286	)


Closed Block Business:
Revenues	$	1,764		$	1,595	$	5,165	$	4,578
Benefits and expenses		1,664			1,510		4,996		4,470

Income (loss) from continuing operations before income taxes for Closed Block Business		100			85		169		108
Income tax expense (benefit)		53			24		68		29

Income (loss) from continuing operations for Closed Block Business		47			61		101		79
Income (loss) from discontinued operations, net of taxes		0			0		0		0

Net income (loss)—Closed Block Business		47			61		101		79
Less: Income attributable to noncontrolling interests		0			0		0		0

Net income (loss) of Closed Block Business attributable to Prudential Financial, Inc.	$	47		$	61	$	101	$	79


Consolidated:

Net income (loss) attributable to Prudential Financial, Inc.	$	512		$	1,027	$	2,840	$	(207	)

Results of Operations—Financial Services Businesses

Three Month Comparison. Income from continuing operations for the Financial Services Businesses decreased $495 million, from $971 million in the third quarter of 2013 to $476 million in the third quarter of 2014. Results for the current quarter compared to the year ago quarter reflect the following:

•

$1,766 million lower net pre-tax earnings resulting from the impact of foreign currency exchange rate movements on certain non-yen denominated assets and liabilities within our Japanese insurance

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operations which are economically matched and offset in AOCI, primarily driven by the strengthening of the Japanese yen against the U.S. dollar in the third quarter of 2013 (see “—Results of Operations for Financial Services Businesses by Segment—International Insurance Division—Impact of foreign currency exchange rate movements on earnings—U.S. GAAP earnings impact of products denominated in non-local currencies” for additional information);

•

$742 million less favorable results, on a pre-tax basis, associated with our Capital Protection Framework, driven by a decrease in interest rates in the current quarter compared to an increase in the year ago quarter, reflecting our management of interest rate risk through this framework (see “—Results of Operations for Financial Services Businesses by Segment—Corporate and Other—Capital Protection Framework” for additional information); and

•

$709 million unfavorable variance, before taxes, from adjustments to deferred policy acquisition and other costs as well as reserves, reflecting updates to the estimated profitability of our businesses primarily driven by the impact of our annual reviews and updates of assumptions performed in the third quarter of each year. This excludes the impact associated with the variable annuity hedging program discussed below (see “—Results of Operations for Financial Services Businesses by Segment” for additional information).

Partially offsetting these decreases in income from continuing operations were the following items:

•

$1,318 million favorable variance, before income taxes, reflecting the net impact from changes in the value of our embedded derivatives and related hedge positions associated with certain variable annuities (see “—Results of Operations for Financial Services Businesses by Segment—U.S. Retirement Solutions and Investment Management Division—Individual Annuities—Variable Annuity Living Benefits Hedging Program Results” for additional information);

•

$760 million favorable impact reflecting a tax benefit in the current quarter compared to tax expense in the year ago quarter (see “—Income Taxes” for additional information); and

•

$662 million favorable impact from net pre-tax realized gains (losses), excluding the impact of the hedging program associated with certain variable annuities described above, primarily reflecting changes in the market value of derivatives due to a decrease in interest rates in the current quarter compared to an increase in interest rates in the year ago quarter and trading gains on fixed maturities (see “—Realized Investment Gains and Losses” for additional information).

In addition to these impacts, results reflect business growth including the impact of higher account values, particularly within our U.S. Retirement Solutions and Investment Management Division (see “—Results of Operations for Financial Services Businesses by Segment” for additional information).

Nine Month Comparison. Income (loss) from continuing operations for the Financial Services Businesses increased $2,998 million, from a loss of $222 million in the first nine months of 2013 to income of $2,776 million in the first nine months of 2014. Results for the current period compared to the year ago reflect the following:

•

$3,210 million favorable variance, before income taxes, reflecting the net impact from changes in the value of our embedded derivatives and related hedge positions associated with certain variable annuities;

•

$3,082 million favorable impact from net pre-tax realized gains (losses), excluding the impact of the hedging program associated with certain variable annuities described above, primarily reflecting changes in the market value of derivatives due to a decrease in interest rates in the first nine months of 2014 compared to an increase in interest rates in the year ago period; and

•

$2,165 million higher net pre-tax earnings resulting from the impact of foreign currency exchange rate movements on certain non-yen denominated assets and liabilities within our Japanese insurance operations which are economically matched and offset in AOCI, primarily driven by the weakening of the Japanese yen against the U.S. dollar in the first nine months of 2013.

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Partially offsetting these increases in income (loss) from continuing operations were the following items:

•

$3,654 million less favorable results, on a pre-tax basis, associated with our Capital Protection Framework, driven by a decrease in interest rates in the first nine months of 2014 compared to an increase in the year ago period, reflecting our management of interest rate risk through this framework;

•

$1,209 million unfavorable impact reflecting tax expense in the current period compared to a tax benefit in the year ago period, largely driven by pre-tax income in the current period compared to a loss in the year ago period;

•

$871 million unfavorable variance, before taxes, from adjustments to deferred policy acquisition and other costs as well as reserves, reflecting updates to the estimated profitability of our businesses primarily driven by the impact of our annual reviews and updates of assumptions performed in the third quarter of each year. This excludes the impact associated with the variable annuity hedging program discussed above; and

•

$66 million unfavorable impact, before taxes, from the absence in 2014 of the gain in the first quarter of 2013 from the sale of our remaining indirect investment in China Pacific Group.

In addition to these impacts, results reflect business growth including the impact of higher account values, particularly within our U.S. Retirement Solutions and Investment Management Division.

Results of Operations—Closed Block Business

For a discussion of the results of operations for the Closed Block Business, see “—Results of Operations of Closed Block Business,” below.

Segment Measures

Adjusted Operating Income. In managing our business, we analyze operating performance separately for our Financial Services Businesses and our Closed Block Business. For the Financial Services Businesses, we analyze our segments’ operating performance using “adjusted operating income.” Results of the Closed Block Business for all periods are evaluated and presented only in accordance with U.S. GAAP. Adjusted operating income does not equate to “income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures” or “net income” as determined in accordance with U.S. GAAP but is the measure of segment profit or loss we use to evaluate segment performance and allocate resources, and consistent with authoritative guidance, is our measure of segment performance. The adjustments to derive adjusted operating income are important to an understanding of our overall results of operations. Adjusted operating income is not a substitute for income determined in accordance with U.S. GAAP, and our definition of adjusted operating income may differ from that used by other companies. However, we believe that the presentation of adjusted operating income as we measure it for management purposes enhances the understanding of our results of operations by highlighting the results from ongoing operations and the underlying profitability of the Financial Services Businesses.

See Note 11 to the Unaudited Interim Consolidated Financial Statements for further information on the presentation of segment results and our definition of adjusted operating income.

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

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

Account Values. For our Individual Annuity and Retirement businesses, assets are reported at account value, which do not correspond to U.S. GAAP assets. Net sales (redemptions) in our Individual Annuity business and net additions (withdrawals) in our Retirement business do not correspond to revenues under U.S. GAAP, but are used as a relevant measure of business activity.

Accounting Policies & Pronouncements

Application of Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires the application of accounting policies that often involve a significant degree of judgment. Management, on an ongoing basis, reviews estimates and assumptions used in the preparation of financial statements. If management determines that modifications in assumptions and estimates are appropriate given current facts and circumstances, the Company’s results of operations and financial position as reported in the Unaudited Interim Consolidated Financial Statements could change significantly.

Management believes the accounting policies relating to the following areas are most dependent on the application of estimates and assumptions and require management’s most difficult, subjective, or complex judgments:

•

Deferred policy acquisition costs (“DAC”) and other costs, including deferred sales inducements and value of business acquired;

•

Goodwill;

•

Valuation of investments, including derivatives, and the recognition of other-than-temporary impairments;

•

Policyholder liabilities;

•

Pension and other postretirement benefits;

•

Taxes on income; and

•

Reserves for contingencies, including reserves for losses in connection with unresolved legal matters.

DAC and Other Costs

We amortize DAC and other costs over the expected lives of the respective contracts, based on our estimates of the level and timing of gross margins, gross profits, or gross premiums, depending on the type of contract. Variability in the level of amortization expense has historically been driven by our variable annuities and variable life insurance contracts, for which costs are amortized in proportion to total gross profits. In calculating gross profits for these contracts, we consider mortality, persistency, and other elements as well as rates of return on investments and the costs related to our guaranteed minimum death and guaranteed minimum income benefits. We estimate the amounts of gross profits that will be included in our U.S. GAAP results and in adjusted operating income, and utilize these estimates to calculate distinct amortization rates and expense amounts. For variable annuities in our Individual Annuities segment, U.S. GAAP gross profits and amortization rates include the impacts of the embedded derivatives associated with certain of the optional living benefit features of our variable annuity contracts and related hedging activities.

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The near-term future equity rate of return assumptions used in evaluating DAC and deferred sales inducements for our domestic variable annuity and variable life insurance products are derived using a reversion to the mean approach, a common industry practice. Under this approach, we consider historical equity returns and adjust projected equity returns over an initial future period (the “near-term”) so that equity returns converge to the long-term expected rate of return. If the near-term projected future rate of return is greater than our near-term maximum future rate of return, we use our maximum future rate of return. Historically, we have utilized a four year near-term period and a 13% maximum future rate of return in applying this methodology. Beginning in the third quarter of 2014, we adjust future projected equity returns over a five year near-term period and utilize a 15% maximum. As of September 30, 2014, our variable annuities and variable life insurance businesses assume an 8.0% long-term equity expected rate of return and a 4.2% near-term mean reversion equity rate of return.

The weighted average rate of return assumptions for these businesses consider many factors specific to each business, including asset durations, asset allocations and other factors. We generally update the near term equity rates of return and our estimate of total gross profits each quarter to reflect the result of the reversion to the mean approach, which assumes a convergence to the long-term equity expected rates of return. These market performance related adjustments to our estimate of total gross profits result in cumulative adjustments to prior amortization, reflecting the application of the new required rate of amortization to all prior periods’ gross profits.

For additional information on our policies for DAC and other costs and for the remaining critical accounting estimates listed above, see our Annual Report on Form 10-K for the year ended December 31, 2013, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Accounting Policies & Pronouncements—Application of Critical Accounting Estimates.”

Adoption of New Accounting Pronouncements

See Note 2 to our Unaudited Interim Consolidated Financial Statements for a discussion of newly adopted accounting pronouncements.

Results of Operations for Financial Services Businesses by Segment

U.S. Retirement Solutions and Investment Management Division

Individual Annuities

The Individual Annuities segment offers certain variable annuities that provide our contractholders with tax-deferred asset accumulation together with a base death benefit and a suite of optional guaranteed living benefits (including versions with guaranteed death benefits) and annuitization options. It also offers fixed annuities that provide a guarantee of principal and interest credited at rates we determine, subject to certain contractual minimums. As the investment return on the contractholder funds is generally attributed directly to the contractholder, we derive our revenue mainly from fee income generated on variable annuity account values, investment income earned on fixed annuity account values, and certain other management fees. Our expenses primarily consist of interest credited and other benefits to contractholders, amortization of DAC and other costs, non-deferred expenses related to the selling and servicing of the various products we offer, costs of hedging certain risks associated with these products, the change in reserves for benefit guarantees and other general business expenses. These drivers of our business results are generally included in adjusted operating income, with exceptions related to certain guarantees, as discussed below.

The U.S. GAAP accounting and our adjusted operating income treatment for our guarantees differ depending upon the specific feature. The reserves for our guaranteed minimum death benefit (“GMDB”) and guaranteed minimum income benefit (“GMIB”) features are calculated based on our best estimate of actuarial and capital markets return assumptions. The risks associated with these benefit features are retained and results are included in adjusted operating income. In contrast, certain of our optional guaranteed living benefit features

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are accounted for as embedded derivatives and reported at fair value. Under U.S. GAAP, the fair values of these benefit features are based on assumptions a market participant would use in valuing these embedded derivatives. We hedge or limit our exposure to certain risks associated with these features through our living benefits hedging program and product design elements. Adjusted operating income, as discussed below in “—Adjusted Operating Income” and “—Revenues, Benefits and Expenses” excludes amounts related to changes in the market value of the embedded derivatives and related hedge positions, and the related impact to amortization of DAC and other costs. The items excluded from adjusted operating income are discussed below in “—Variable Annuity Living Benefits Hedging Program Results.”

Account Values

Account values are a significant driver of our operating results. Since most fees are determined by the level of separate account assets, fee income varies according to the level of account values. Additionally, our fee income generally drives other items such as our pattern of amortization of DAC and other costs. Account values are driven by net flows from new business sales, the impact of market changes which can be either positive or negative, and outflows related to surrenders, withdrawals, benefit payments and policy charges. The annuity industry competitive landscape, which has been dynamic over the last few years, may impact our net flows and new business sales. The following table sets forth account value information for the periods indicated.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Total Individual Annuities(1):
Beginning total account value	$	159,528		$	141,474		$	154,140		$	135,342
Sales		2,574			2,404			7,559			9,081
Surrenders and withdrawals		(2,182	)		(1,864	)		(6,596	)		(5,617	)

Net sales		392			540			963			3,464
Benefit payments		(454	)		(393	)		(1,346	)		(1,196	)

Net flows		(62	)		147			(383	)		2,268
Change in market value, interest credited and other activity		(1,791	)		6,570			5,635			12,125
Policy charges		(892	)		(813	)		(2,609	)		(2,357	)

Ending total account value	$	156,783		$	147,378		$	156,783		$	147,378

(1)

Includes variable and fixed annuities sold as retail investment products. Investments sold through defined contribution plan products are included with such products within the Retirement segment. Variable annuity account values were $153.2 billion and $143.7 billion as of September 30, 2014 and 2013, respectively. Fixed annuity account values were $3.6 billion and $3.7 billion as of September 30, 2014 and 2013, respectively.

Our account values are significantly impacted by net sales and the impact of market performance. The increase in account values as of September 30, 2014 compared to September 30, 2013 was largely driven by favorable changes in the market value of contractholder funds, primarily reflecting equity market appreciation over the last twelve months. Positive net sales also contributed to account value growth, but to a lesser extent. The decline in net sales for the three months ended September 30, 2014 compared to the prior year period reflects higher surrenders and withdrawals, primarily driven by partial withdrawals from contracts with certain legacy optional living benefit features, partially offset by higher sales of our Prudential Defined Income Variable Annuity, or PDI. The decline in net sales for the nine months ended September 30, 2014 compared to the prior year period reflects a decline in sales of our products with the highest daily benefit, partially offset by higher sales of PDI, and higher surrenders and withdrawals, primarily driven by partial withdrawals from contracts with certain legacy optional living benefit features. Partially offsetting these net increases in account values were higher policy charges on contractholder accounts.

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Operating Results

The following table sets forth the Individual Annuities segment’s operating results for the periods indicated.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Operating results:
Revenues	$	1,191		$	1,120		$	3,519		$	3,307
Benefits and expenses		824			299			2,374			1,714

Adjusted operating income		367			821			1,145			1,593
Realized investment gains (losses), net, and related adjustments		(635	)		(2,742	)		(169	)		(4,991	)
Related charges		44			740			77			1,494

Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures	$	(224	)	$	(1,181	)	$	1,053		$	(1,904	)

Adjusted Operating Income

Three Month Comparison. Adjusted operating income decreased $454 million. Excluding the impacts of changes in the estimated profitability of the business, discussed below, adjusted operating income increased $33 million. The increase was driven by higher asset-based fee income due to growth in average variable annuity account values, as discussed in “—Account Values” above, net of an increase in asset-based commissions, amortization costs and reserve provisions for the GMDB and GMIB features of our variable annuity products.

The impacts of changes in the estimated profitability of the business include adjustments to the amortization of DAC and other costs and to the reserves for the GMDB and GMIB features of our variable annuity products. These adjustments resulted in a net charge of $36 million and a net benefit of $451 million in the third quarter of 2014 and 2013, respectively. The $36 million net charge in the third quarter of 2014 primarily reflects the impact of unfavorable fund performance and lower expected rates of return on fixed income investments within contractholder accounts and on future expected claims relative to our assumptions. Partially offsetting this charge was a $14 million net benefit resulting from an annual review and update of assumptions, primarily driven by modifications to our economic and actuarial assumptions. The $451 million net benefit in the third quarter of 2013 included a $301 million net benefit resulting from the annual review and update of assumptions and other refinements performed in that period. The remaining net benefit reflected the impact of favorable market performance on contractholder accounts relative to our assumptions.

Nine Month Comparison. Adjusted operating income decreased $448 million. Excluding the impacts of changes in the estimated profitability of the business, discussed below, adjusted operating income increased $201 million. The increase was driven by higher asset-based fee income due to growth in average variable annuity account values, as discussed in “—Account Values” above, net of an increase in asset-based commissions. Also contributing to the increase were lower amortization costs and reserve provisions for the GMDB and GMIB features of our variable annuity products.

Adjustments to the amortization of DAC and other costs and to the reserves for the GMDB and GMIB features of our variable annuity products resulted in a net charge of $61 million and a net benefit of $588 million in the first nine months of 2014 and 2013, respectively. The $61 million net charge in the first nine months of 2014 primarily reflects the impact of lower expected rates of return on fixed income investments within contractholder accounts and on future expected claims relative to our assumptions, which more than offset a net favorable impact from equity market performance. Partially offsetting this charge was a $14 million net benefit resulting from an annual review and update of assumptions, as discussed above. The $588 million net benefit in

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the first nine months of 2013 included a $301 million net benefit resulting from the annual review and update of assumptions and other refinements performed in that period, as discussed above. The remaining net benefit reflected the impact of positive market performance on contractholder accounts relative to our assumptions, as discussed above.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues, as shown in the table above under “—Operating Results,” increased $71 million. The increase was driven by a $92 million increase in policy charges and fee income, asset management and service fees and other income, due to growth in average variable annuity account values, as discussed in “—Account Values” above. Partially offsetting this increase was a $15 million decline in net investment income, driven by lower reinvestment rates and lower average account values in the general account due to surrenders of legacy general account products.

Benefits and expenses, as shown in the table above under “—Operating Results,” increased $525 million. Absent the $487 million net increase related to the impacts of certain changes in our estimated profitability of the business discussed above, benefits and expenses increased $38 million. General and administrative expenses, net of capitalization, increased $40 million, driven by higher asset-based commissions and asset management costs due to account value growth, as discussed above. Partially offsetting this increase was a $12 million decrease in interest credited to policyholders’ account balances driven by lower average account values in the general account, as discussed above.

Nine Month Comparison. Revenues increased $212 million, primarily driven by a $268 million increase in policy charges and fee income, asset management and service fees and other income, due to growth in average variable annuity account values. Partially offsetting this increase was a $54 million decline in net investment income, driven by lower reinvestment rates and lower average account values in the general account due to surrenders of legacy general account products.

Benefits and expenses increased $660 million. Absent the $649 million net increase related to the impacts of certain changes in our estimated profitability of the business discussed above, benefits and expenses increased $11 million. General and administrative expenses, net of capitalization, increased $93 million, driven by higher asset-based commissions and asset management costs due to account value growth. Interest expense increased $13 million, driven by higher borrowing rates, partially offset by repayments of debt. Partially offsetting these increases was a $41 million decrease in interest credited to policyholders’ account balances driven by lower average account values in the general account. Amortization of DAC decreased $31 million primarily due to lower amortization rates, and policyholders’ benefits, including the change in reserves, decreased $23 million primarily due to lower benefit accrual rates.

Variable Annuity Risks and Risk Mitigants

The primary risk exposures of our variable annuity contracts relate to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including capital markets assumptions, such as equity market returns, interest rates and market volatility, and actuarial assumptions, such as contractholder longevity/mortality, the timing and amount of annuitization and withdrawals, and contract lapses. For our actuarial assumptions, we have retained the risk that actual experience will differ from the assumptions used in the original pricing of these products. For our capital markets assumptions, we hedge or limit our exposure to the risk created by capital markets fluctuations through a combination of product design elements, such as an automatic rebalancing element, also referred to as an asset transfer feature, and inclusion of certain optional living benefits in our living benefits hedging program.

Our automatic rebalancing element occurs at the contract level, and transfers assets between certain variable investment sub-accounts selected by the annuity contractholder and, depending on the benefit feature, a fixed-rate account in the general account or a bond fund sub-account within the separate accounts. The automatic

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rebalancing element associated with currently-sold highest daily benefit products uses a designated bond fund sub-account within the separate accounts. The transfers are based on the static mathematical formula used with the particular benefit which considers a number of factors, including, but not limited to, the impact of investment performance on the contractholder’s total account value. The objective of the automatic rebalancing element is to help mitigate our exposure to equity market risk and market volatility. Other product design elements we utilize include, among others, asset allocation restrictions, minimum issuance age requirements and certain limitations on the amount of contractholder deposits, as well as required allocation to our general account for certain of our products. In addition, certain fees are based on the greater of a benefit guarantee amount or the account value, which helps preserve certain revenue streams when market fluctuations cause account values to decline.

We use our living benefits hedging program to manage the risk associated with certain of our optional living benefit guarantees. This program represents a balance among three objectives that seek to: 1) provide severe scenario protection, 2) minimize net income volatility associated with an internally-defined hedge target, and 3) maintain capital efficiency. Through our hedge program, we enter into derivative positions that seek to replicate the net change in our hedge target, discussed further below. In addition to mitigating capital markets risk and income statement volatility, the hedging program is also focused on a long-term goal of accumulating assets that could be used to pay claims under these benefits irrespective of market path. For additional information regarding this program see “—Variable Annuities Living Benefits Hedging Program Results” below.

For our optional living benefits features, claims will primarily represent the funding of contractholder lifetime withdrawals after the cumulative withdrawals have first exhausted the contractholder account value. Due to the age of the block, limited claim payments have occurred to date, and they are not expected to increase significantly within the next five years, based upon current assumptions. The timing and amount of actual future claims depend on actual returns on contractholder account value and actual contractholder behavior relative to our assumptions. The majority of our current optional living benefits features provide for guaranteed lifetime contractholder withdrawal payments inclusive of a “highest daily” contract value. In the first quarter of 2013, we launched our PDI variable annuity, to complement the variable annuity products we offer with the highest daily benefit. PDI also provides for guaranteed lifetime contractholder withdrawal payments, but restricts contractholder asset allocation to a single bond fund sub-account within the separate account.

The majority of our variable annuity contracts with optional living benefits features, and all new contracts sold with our highest daily living benefits feature, include two risk mitigants in the form of an automatic rebalancing element and inclusion in our living benefits hedging program. The guaranteed benefits features of certain legacy products that were sold prior to our implementation of the automatic rebalancing element product feature are included in our living benefits hedge program. Certain legacy guaranteed minimum accumulation benefit (GMAB) products include the automatic rebalancing element, but are not included in the hedging program. Our contracts with the GMIB feature and our PDI product have neither risk mitigant.

For our GMDBs, we provide a benefit payable in the event of death. Our base GMDB is generally equal to a return of cumulative deposits adjusted for any partial withdrawals. Certain products include an optional enhanced GMDB based on the greater of a minimum return on the contract value or an enhanced value. We have retained the risk that the total amount of death benefit payable may be greater than the contractholder account value. However, a substantial portion of the account values associated with GMDBs are subject to an automatic rebalancing element because the contractholder also selected a living benefit feature which includes an automatic rebalancing element. All of the variable annuity account values with living benefit features also contain GMDBs. The living and death benefit features for these contracts cover the same insured life and, consequently, we have insured both the longevity and mortality risk on these lives.

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The following table sets forth the risk profile of our optional living benefits and GMDB features as of the periods indicated.


	September 30, 2014					December 31, 2013					September 30, 2013
	Account Value		% of Total			Account Value		% of Total			Account Value		% of Total
	(in millions)
Optional living benefit/GMDB features(1):
Both risk mitigants(2)	$	109,160		71	%	$	105,630		71	%	$	100,418		70	%
Hedging program only		11,533		8	%		12,229		8	%		11,914		8	%
Automatic rebalancing only		1,873		1	%		2,280		2	%		2,365		2	%
Neither risk mitigant—PDI		2,272		2	%		793		0	%		338		0	%
Neither risk mitigant—Other Products		3,382		2	%		3,666		3	%		3,583		3	%

Total optional living benefit/GMDB features	$	128,220				$	124,598				$	118,618


GMDB features only(3):
Neither risk mitigant		24,952		16	%		25,869		16	%		25,079		17	%

Total variable annuity account value	$	153,172				$	150,467				$	143,697

(1)	All contracts with optional living benefit guarantees also contain GMDB features, covering the same insured life.

(2)	Contracts with both risk mitigants have optional living benefits that are included in our living benefits hedging program, and have an automatic rebalancing element.

(3)	Reflects contracts that only include a GMDB feature and do not have an automatic rebalancing element.

For contracts with optional living benefit/GMDB features, the increase in account values that include both risk mitigants as of September 30, 2014 compared to the prior periods primarily reflects sales of our latest product offerings with our highest daily optional living benefits feature, as well as market appreciation. The net increase in account values related to contracts with neither risk mitigant was driven by sales of our PDI product.

Variable Annuity Living Benefits Hedging Program Results

Under U.S. GAAP, the liability for certain optional living benefit features is accounted for as an embedded derivative and recorded at fair value, based on assumptions a market participant would use in valuing these features. The fair value is calculated as the present value of future expected benefit payments to contractholders less the present value of assessed rider fees attributable to the applicable living benefit features using option pricing techniques. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information regarding the methodology and assumptions used in calculating the fair value under U.S. GAAP.

As noted within “—Variable Annuity Risks and Risk Mitigants” above, we maintain a hedge program to manage the risk associated with certain of these guarantees. Our hedge program utilizes an internally-defined hedge target. We review our hedge target and hedge program on an ongoing basis, and may periodically adjust them based on our evaluation of the risks associated with the guarantees and other factors. Based on our review in the third quarter of 2013, we adjusted our hedge target so that, as currently defined, it includes the following modifications to the assumptions used in the U.S. GAAP valuation:

•

The impact of non-performance risk (“NPR”) is excluded to maximize protection against the entire projected claim irrespective of the possibility of our own default.

•

The assumptions used in the projection of customer account values and living benefit costs are adjusted to reflect our assumed return and volatility expectations for the underlying investments.

•

Actuarial assumptions are adjusted to remove risk margins and reflect our best estimates.

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Due to these modifications, we expect differences each period between the change in the value of the embedded derivative as defined by U.S. GAAP and the change in the value of the hedge positions used to replicate the hedge target, thus potentially increasing volatility in U.S. GAAP earnings. Application of the valuation methodologies described above could result in either a liability or contra-liability balance for the fair value of the embedded derivative under U.S. GAAP and/or the value of the hedge target, given changing capital market conditions and various actuarial assumptions. The following table provides a reconciliation between the fair value of the embedded derivative as defined by U.S. GAAP and the value of our hedge target as of the periods indicated.


	As of September 30, 2014			As of December 31, 2013
	(in billions)
Embedded derivative liability as defined by U.S. GAAP	$	5.3		$	0.5
Less: NPR Adjustment		(4.7	)		(2.2	)

Embedded derivative liability as defined by U.S. GAAP, excluding NPR		10.0			2.7
Less: Amount of embedded derivative liability, excluding NPR, excluded from hedge target liability		5.3			3.9

Hedge target liability/(contra-liability)	$	4.7		$	(1.2	)

We seek to replicate the changes in our hedge target by entering into a range of exchange-traded, cleared and over the counter equity and interest rate derivatives to hedge certain capital market risks present in our hedge target. The instruments include, but are not limited to, interest rate swaps, swaptions, floors and caps as well as equity options, total return swaps and equity futures. The following table sets forth the market and notional values of these instruments as of the periods indicated.


	As of September 30, 2014								As of December 31, 2013
	Equity				Interest Rate				Equity					Interest Rate
Instrument	Notional		Market Value		Notional		Market Value		Notional		Market Value			Notional		Market Value
	(in billions)
Futures	$	0.0	$	0.0	$	0.0	$	0.0	$	0.2	$	0.0		$	0.0	$	0.0
Swaps(1)		14.0		0.1		80.6		1.6		11.1		(0.5	)		72.2		(2.8	)
Options		9.6		0.5		21.9		0.1		7.1		0.4			23.6		0.1

Total	$	23.6	$	0.6	$	102.5	$	1.7	$	18.4	$	(0.1	)	$	95.8	$	(2.7	)

(1)	Includes interest rate swaps for which offsetting positions exist in Corporate and Other operations, reflecting the impact of managing interest rate risk through capital management strategies other than hedging of particular exposures. See “—Corporate and Other.”

Due to cash flow timing differences between our hedging instruments and the corresponding hedge target, as well as other factors such as updates to actuarial assumptions which are not hedged, the market value of the hedge portfolio compared to our hedge target measured as of any specific point in time may be different and is not expected to be fully offsetting. In addition to the derivatives held as part of the hedging program, we have cash and other invested assets available to cover the future claims payable under these guarantees and other liabilities. For additional information on the liquidity needs associated with our hedging program, see “—Liquidity and Capital Resources—Liquidity—Liquidity associated with other activities—Hedging activities associated with living benefit guarantees.”

The primary sources of differences between the changes in the fair value of the hedge positions and the hedge target, other than changes related to actuarial valuation assumption updates, fall into one of three categories:

•

Fund Performance—In order to project future account value changes, we make certain assumptions about how each underlying fund will perform. We map contractholder funds to indices that we believe

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are comparable, are readily tradable and have active derivative markets. The difference between the modeled fund performance and actual fund performance results in basis differences that can be either positive or negative.

•

Rebalancing Costs and Volatility—We incur rebalancing costs related to basis differences between the hedge positions and the hedge target. Our hedge program is also subject to the impact of implied and realized market volatility on the hedge positions relative to our hedge target, which can lead to positive or negative results.

•

Liability Basis—We make assumptions about expected changes in the hedge target related to contractholder behavior, which are not hedged, and capital markets impacts, which we attempt to replicate with our hedge program. The difference between the actual change in the hedge target and the expected changes we have modeled results in basis differences, which can be either positive or negative.

The net impact of both the change in the fair value of the embedded derivative associated with our living benefit features and the change in the fair value of the related hedge positions is included in “Realized investment gains (losses), net, and related adjustments” and the related impact to the amortization of DAC and other costs is included in “Related charges,” both of which are excluded from adjusted operating income. The following table shows the net impact of changes in the embedded derivative and related hedge positions, as well as the related amortization of DAC and other costs, for the periods indicated.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(1)
	(in millions)
Hedge Program Results:
Change in fair value of hedge positions	$	1,009		$	(1,370	)	$	3,936		$	(6,906	)
Change in value of hedge target		(1,131	)		1,590			(3,926	)		6,663

Net hedging impact(2)		(122	)		220			10			(243	)

Reconciliation of Hedge Program Results to U.S. GAAP Results:
Net hedging impact (from above)	$	(122	)	$	220		$	10		$	(243	)
Change in portions of U.S. GAAP liability, before NPR, excluded from hedge target(3)		(248	)		108			(1,158	)		465
Change in the NPR adjustment		676			(928	)		1,890			(3,012	)

Net impact from changes in the U.S. GAAP embedded derivative and hedge positions—reported in Individual Annuities		306			(600	)		742			(2,790	)

Related benefit (charge) to amortization of DAC and other costs		(296	)		194			(278	)		946

Net impact of assumption updates and other refinements(4)		(631	)		(1,533	)		(631	)		(1,533	)

Net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs—reported in Individual Annuities(2)	$	(621	)	$	(1,939	)	$	(167	)	$	(3,377	)

(1)	Positive amount represents income; negative amount represents a loss.

(2)

Excludes $(322) million and $226 million for the three months ended September 30, 2014 and 2013, respectively, and $(1,784) million and $1,135 million for the nine months ended September 30, 2014 and 2013, respectively representing the impact of managing interest rate risk through capital management strategies other than hedging of particular exposures. Because this decision is based on the capital considerations of the Company as a whole, the impact is reported in Corporate and Other operations. See “—Corporate and Other.”

(3)	Represents the impact attributable to the difference between the value of the hedge target and the value of the embedded derivative as defined by U.S. GAAP, before adjusting for NPR, as discussed above.

(4)

Represents the total U.S. GAAP impact of assumption updates and other refinements on our hedge target, net of related changes in the NPR adjustment, related changes in amounts attributable to the difference between the value of the hedge target and the value of the embedded derivative as defined by U.S. GAAP, and related amortization of DAC and other costs.

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Results for all periods reflect the net impacts of changes in the value of our hedge target and related hedge positions. The net hedging charge of $122 million for the three months ended September 30, 2014 was primarily driven by fund underperformance relative to indices and unfavorable liability basis, partially offset by lower realized volatility. The net benefit of $10 million for the nine months ended September 30, 2014 was primarily driven by lower realized volatility, offset by unfavorable liability basis. The net hedging benefit of $220 million for the three months ended September 30, 2013 was primarily driven by fund outperformance relative to indices and favorable liability basis. The net hedging charge of $243 million for the nine months ended September 30, 2013 was primarily driven by fund underperformance relative to indices and higher realized volatility, partially offset by favorable liability basis. Each of these items resulted in related impacts to the amortization of DAC and other costs in all periods.

Declining interest rates in 2014 drove increases in the base embedded derivative liability before NPR which resulted in corresponding increases in the NPR adjustment of $676 million and $1,890 million for the three and nine months ended September 30, 2014, respectively. Rising interest rates in 2013 drove decreases in the base embedded derivative liability before NPR which resulted in corresponding declines in the NPR adjustment of $928 million and $3,012 million for the three and nine months ended September 30, 2013. Each of these items resulted in related impacts to the amortization of DAC and other costs in all periods.

The net charges from the impact of assumption updates and other refinements of $631 million and $1,533 million for the three and nine months ended September 30, 2014 and 2013, respectively, were primarily driven by modifications to our economic and actuarial assumptions to reflect our review of emerging experience, future expectations and other data, and other refinements. The net charge for the three and nine months ended September 30, 2014 includes $45 million related to prior periods. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.

For information regarding the Capital Protection Framework we use to evaluate and support the risks of our hedging program, see “—Liquidity and Capital Resources—Capital.”

Retirement

Operating Results

The following table sets forth the Retirement segment’s operating results for the periods indicated.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Operating results:
Revenues	$	2,397		$	1,525		$	5,397		$	4,382
Benefits and expenses		2,141			1,288			4,491			3,638

Adjusted operating income		256			237			906			744
Realized investment gains (losses), net, and related adjustments		91			(208	)		302			(567	)
Related charges		(2	)		(2	)		(1	)		(1	)
Investment gains (losses) on trading account assets supporting insurance liabilities, net		(209	)		51			136			(615	)
Change in experience-rated contractholder liabilities due to asset value changes		171			(21	)		(80	)		597

Income from continuing operations before income taxes and equity in earnings of operating joint ventures	$	307		$	57		$	1,263		$	158

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Adjusted Operating Income

Three Month Comparison. Adjusted operating income increased $19 million. The increase was driven by higher net investment spread results reflecting higher income on institutional investment products primarily from higher returns on non-coupon investments, partially offset by lower reinvestment rates. Also contributing to the increase was higher fee income primarily driven by increases in institutional investment products account values including the contribution of two significant longevity reinsurance transactions in the third quarter of 2014. These increases were partially offset by higher general and administrative expenses, net of capitalization, primarily driven by higher costs to support corporate initiatives and compensation costs. Results also include an unfavorable comparative impact from our annual reviews and updates of assumptions, which resulted in net charges of $13 million and $4 million for the third quarter of 2014 and 2013, respectively, related to adjustments to the amortization of DAC, value of business acquired (“VOBA”) and reserves on our products. The net charge in the third quarter of 2014 was driven by unfavorable updates to actuarial and economic assumptions, while the net charge in the third quarter of 2013 was driven by unfavorable updates to actuarial assumptions, partially offset by favorable updates to economic assumptions.

Nine Month Comparison. Adjusted operating income increased $162 million. The increase was driven by higher net investment spread results reflecting higher income on institutional investment products primarily from higher returns on non-coupon investments and reinvestments within certain asset portfolios into higher yielding securities. Also contributing to the increase was higher fee income driven by increases in institutional investment products account values from higher average investment-only stable value account values and the contribution of two significant longevity reinsurance transactions in the third quarter of 2014, as well as higher full service account values primarily from market appreciation. These net increases were partially offset by higher general and administrative expenses, net of capitalization, primarily driven by an unfavorable comparative adjustment to the amortization of VOBA to reflect the impact on estimated gross profits from higher than expected lapses, as well as higher costs to support corporate initiatives. Results also include an unfavorable comparative impact from our annual reviews and updates of assumptions, as discussed above.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues, as shown in the table above under “—Operating Results,” increased $872 million. Premiums increased $860 million primarily driven by two significant longevity reinsurance transactions in the third quarter of 2014 and a net increase in sales of single premium annuities. This increase in premiums resulted in a corresponding increase in policyholders’ benefits, as discussed below. Net investment income increased $27 million primarily reflecting higher income on institutional investment products driven by higher returns on non-coupon investments, partially offset by lower reinvestment rates. Policy charges and fee income, asset management and service fees and other income decreased $15 million primarily from lower income on derivatives used in portfolio duration management, partially offset by higher fee income on institutional investment products account values.

Benefits and expenses, as shown in the table above under “—Operating Results,” increased $853 million. Excluding the net increase from the annual reviews and updates of assumptions, as discussed above, benefits and expenses increased $844 million. Policyholders’ benefits, including the change in policy reserves, increased $851 million primarily reflecting the increase in premiums discussed above. General and administrative expenses, net of capitalization, increased $7 million primarily driven by higher costs to support corporate initiatives and compensation costs. Interest credited to policyholders’ account balances decreased $14 million, driven by maturities of contracts with higher crediting rates, as well as the impact of crediting rate reductions on full service general account stable value account values, partially offset by the impact of net flows.

Nine Month Comparison. Revenues increased $1,015 million. Premiums increased $853 million primarily driven by two significant longevity reinsurance transactions in the third quarter of 2014 and a net increase in sales of single premium annuities. This increase in premiums resulted in a corresponding increase in policyholders’ benefits, as discussed below. Net investment income increased $132 million primarily reflecting

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higher income on institutional investment products driven by higher returns on non-coupon investments and reinvestments within certain asset portfolios into higher yielding securities. Policy charges and fee income, asset management and service fees and other income increased $30 million primarily from higher fee income driven by higher average investment-only stable value account values, two significant longevity reinsurance transactions in the third quarter of 2014 and increases in full service account values, as discussed above.

Benefits and expenses increased $853 million. Excluding the net increase from the annual reviews and updates of assumptions, as discussed above, benefits and expenses increased $844 million. Policyholders’ benefits, including the change in policy reserves, increased $856 million primarily reflecting the increase in premiums discussed above. General and administrative expenses, net of capitalization, increased $29 million primarily driven by an unfavorable comparative adjustment to the amortization of VOBA, as discussed above and higher costs to support corporate initiatives. Partially offsetting these increases was a $39 million decrease in interest credited to policyholders’ account balances primarily reflecting the impact of crediting rate reductions on full service general account stable value account values.

Account Values

Our account values are a significant driver of our operating results, and are primarily driven by net additions (withdrawals) and the impact of market changes. The income we earn on our fee-based products varies with the level of fee-based account values, since many policy fees are determined by these values. The investment income and interest we credit to policyholders on our spread-based products varies with the level of general account values. To a lesser extent, changes in account values impact our pattern of amortization of DAC and VOBA, and general and administrative expenses. The following table shows the changes in the account values and net additions (withdrawals) of Retirement segment products for the periods indicated. Net additions (withdrawals) are deposits and sales or additions, as applicable, minus withdrawals and benefits. Account values include both internally- and externally-managed client balances as the total balances drive revenue for the Retirement segment. For more information on internally-managed balances see “—Asset Management.”


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Full Service:
Beginning total account value	$	181,577		$	157,738		$	173,502		$	148,405
Deposits and sales		5,190			5,455			18,305			14,831
Withdrawals and benefits		(4,221	)		(4,627	)		(16,290	)		(12,925	)
Change in market value, interest credited and interest income and other activity		(2,011	)		6,798			5,018			15,053

Ending total account value	$	180,535		$	165,364		$	180,535		$	165,364

Net additions	$	969		$	828		$	2,015		$	1,906

Institutional Investment Products:
Beginning total account value	$	148,971		$	144,101		$	149,402		$	141,435
Additions		30,962			5,034			34,770			13,239
Withdrawals and benefits		(3,634	)		(2,487	)		(11,253	)		(7,268	)
Change in market value, interest credited and interest income(1)		940			412			4,134			113
Other(1)(2)		(1,713	)		40			(1,527	)		(419	)

Ending total account value	$	175,526		$	147,100		$	175,526		$	147,100

Net additions	$	27,328		$	2,547		$	23,517		$	5,971

(1)	Prior period amounts have been reclassified to conform to current period presentation.

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(2)	“Other” activity includes the effect of foreign exchange rate changes associated with our United Kingdom longevity reinsurance business and changes in asset balances for externally-managed accounts.

The increase in full service account values as of September 30, 2014 compared to September 30, 2013 primarily reflects the impact of equity market appreciation on the market value of customer funds. The increase in net additions for the three months ended September 30, 2014 compared to the prior year period was primarily due to a lower volume of large plan withdrawals, partially offset by lower plan sales. The increase in net additions for the nine months ended September 30, 2014 compared to the prior year period was primarily due to an increase from net plan sales partially offset by an increase in net participant withdrawals.

The increase in institutional investment products account values as of September 30, 2014 compared to September 30, 2013 was primarily driven by $29 billion of additions resulting from two significant longevity reinsurance transactions in the third quarter of 2014. The increase in net additions for both the three and nine months ended September 30, 2014 compared to the prior year periods was primarily due to additions resulting from these two significant longevity reinsurance transactions, partially offset by decreases in sales and increases in withdrawals of investment-only stable value accounts, primarily driven by existing intermediary relationships reaching saturation levels and an increase in the number of competitors in the marketplace.

Asset Management

Operating Results

The following table sets forth the Asset Management segment’s operating results for the periods indicated.


	Three Months Ended September 30,					Nine Months Ended September 30,
	2014			2013		2014			2013
	(in millions)
Operating results:
Revenues	$	721		$	649	$	2,101		$	1,953
Expenses		521			476		1,508			1,439

Adjusted operating income		200			173		593			514
Realized investment gains (losses), net, and related adjustments		(20	)		10		(13	)		(2	)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests		5			11		34			64

Income from continuing operations before income taxes and equity in earnings of operating joint ventures	$	185		$	194	$	614		$	576

Adjusted Operating Income

Three Month Comparison. Adjusted operating income increased $27 million. The increase reflects improved results from performance-based incentive fees, net of expenses, primarily related to certain equity and real estate funds. The increase also reflects higher asset management fees, net of expenses, as a result of higher assets under management due to market appreciation and positive net asset flows over the last twelve months.

Nine Month Comparison. Adjusted operating income increased $79 million. The increase primarily reflects higher asset management fees, net of expenses, as a result of higher assets under management due to market appreciation and positive net asset flows over the last twelve months. The increase also reflects higher performance-based incentive fees, net of expenses, primarily related to certain equity and fixed income funds.

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Revenues and Expenses

The following table sets forth the Asset Management segment’s revenues, presented on a basis consistent with the table above under “—Operating Results,” by type.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(in millions)
Revenues by type:
Asset management fees by source:
Institutional customers	$	216	$	210	$	655	$	620
Retail customers(1)		186		161		536		460
General account		108		101		315		310

Total asset management fees		510		472		1,506		1,390

Incentive fees		31		8		69		24
Transaction fees		4		5		19		19
Strategic investing		3		15		40		28
Commercial mortgage(2)		24		24		67		89

Other related revenues(3)		62		52		195		160

Service, distribution and other revenues(4)		149		125		400		403

Total revenues	$	721	$	649	$	2,101	$	1,953

(1)

Consists of fees from: (a) individual mutual funds and variable annuities and variable life insurance separate account assets; (b) funds invested in proprietary mutual funds through our defined contribution plan products; and (c) third party sub-advisory relationships. Revenues from fixed annuities and the fixed-rate accounts of variable annuities and variable life insurance are included in the general account.

(2)	Includes mortgage origination and spread lending revenues of our commercial mortgage origination and servicing business.

(3)	Future revenues will be impacted by the level and diversification of our strategic investments, the commercial real estate market, and other domestic and international markets.

(4)

Includes payments from Wells Fargo under an agreement dated as of July 30, 2004, implementing arrangements with respect to money market mutual funds in connection with the combination of our retail securities brokerage and clearing operations with those of Wells Fargo. The agreement extends for ten years after termination of the Wachovia Securities joint venture, which occurred on December 31, 2009. The revenue from Wells Fargo under this agreement was $19 million for both the three months ended September 30, 2014 and 2013, and $58 million and $55 million for the nine months ended September 30, 2014 and 2013, respectively.

Three Month Comparison. Revenues, as shown in the table above, increased $72 million. Asset management fees increased $38 million primarily as a result of higher assets under management due to market appreciation and positive net asset flows over the past twelve months. Service, distribution and other revenues increased $24 million reflecting higher fees and net investment income related to certain consolidated funds. Performance-based incentive fees increased $23 million primarily related to certain equity and real estate funds. Partially offsetting these increases was a $12 million decrease in strategic investing revenues, primarily reflecting lower income from fixed income co-investments and seed investments.

Expenses, as shown in the table above under “—Operating Results,” increased $45 million, primarily driven by higher compensation costs.

Nine Month Comparison. Revenues increased $148 million. Asset management fees increased $116 million primarily as a result of higher assets under management due to market appreciation and positive net asset flows over the past twelve months. Performance-based incentive fees increased $45 million primarily related to certain equity and fixed income funds. Strategic investing revenues increased $12 million, primarily reflecting higher income from real estate co-investments and favorable valuation changes for certain real estate funds. Partially offsetting these increases was a $22 million decrease in commercial mortgage revenues, driven by the continued run off of the interim loan portfolio and lower agency production levels.

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Expenses increased $69 million, primarily driven by higher compensation costs.

Assets Under Management

The following table sets forth assets under management by asset class and source as of the dates indicated.


	September 30, 2014		December 31, 2013		September 30, 2013
	(in billions)
Assets Under Management (at fair market value):
Institutional customers:
Equity	$	64.0	$	63.4	$	60.3
Fixed income		263.9		243.8		236.0
Real estate		35.8		34.5		34.0

Institutional customers(1)		363.7		341.7		330.3

Retail customers:
Equity		121.3		117.0		107.6
Fixed income		56.3		51.5		49.3
Real estate		2.4		2.2		2.2

Retail customers(2)		180.0		170.7		159.1

General account:
Equity		7.8		8.9		8.3
Fixed income		364.4		347.2		349.2
Real estate		1.6		1.4		1.2

General account		373.8		357.5		358.7

Total assets under management	$	917.5	$	869.9	$	848.1

(1)	Consists of third-party institutional assets and group insurance contracts.

(2)

Consists of: (a) individual mutual funds and variable annuities and variable life insurance separate account assets; (b) funds invested in proprietary mutual funds through our defined contribution plan products; and (c) third-party sub-advisory relationships. Fixed annuities and the fixed-rate accounts of variable annuities and variable life insurance are included in the general account.

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The following table sets forth the component changes in assets under management by asset source for the periods indicated.


	Three Months Ended September 30,						Nine Months Ended September 30,						Twelve Months Ended September 30, 2014
	2014			2013			2014			2013			Twelve Months Ended September 30, 2014
	(in billions)
Institutional Customers:
Beginning Assets Under Management	$	367.0		$	319.1		$	341.7		$	313.7		$	330.3
Net additions (withdrawals), excluding money market activity:
Third party		(1.4	)		4.1			3.2			14.1			8.5
Affiliated		(0.7	)		(0.1	)		(0.6	)		(0.1	)		(0.9	)

Total		(2.1	)		4.0			2.6			14.0			7.6
Market appreciation		(0.9	)		7.0			19.9			3.2			27.0
Other increases (decreases)(1)		(0.3	)		0.2			(0.5	)		(0.6	)		(1.2	)

Ending Assets Under Management	$	363.7		$	330.3		$	363.7		$	330.3		$	363.7

Retail Customers:
Beginning Assets Under Management	$	180.1		$	152.4		$	170.7		$	138.7		$	159.1
Net additions (withdrawals), excluding money market activity:
Third party		1.2			(1.4	)		2.1			2.9			3.6
Affiliated		0.0			(2.2	)		(1.5	)		1.2			(1.1	)

Total		1.2			(3.6	)		0.6			4.1			2.5
Market appreciation		(1.1	)		10.0			8.7			16.7			18.7
Other increases (decreases)(1)		(0.2	)		0.3			0.0			(0.4	)		(0.3	)

Ending Assets Under Management	$	180.0		$	159.1		$	180.0		$	159.1		$	180.0

General Account:
Beginning Assets Under Management	$	374.4		$	354.5		$	357.5		$	374.6		$	358.7
Net additions (withdrawals), excluding money market activity:
Third party		0.0			0.0			0.0			0.0			0.0
Affiliated(2)		0.9			0.7			2.6			6.3			3.7

Total		0.9			0.7			2.6			6.3			3.7
Market appreciation		1.6			1.9			16.7			(3.8	)		17.7
Other increases (decreases)(1)		(3.1	)		1.6			(3.0	)		(18.4	)		(6.3	)

Ending Assets Under Management	$	373.8		$	358.7		$	373.8		$	358.7		$	373.8

(1)

Includes the effect of foreign exchange rate changes, net money market activity and transfers (to)/from the Retirement segment as a result of changes in the client contract form. The impact from foreign currency fluctuations, which primarily impact the general account, resulted in losses of $3.9 billion and gains of $1.4 billion for the three months ended September 30, 2014 and 2013, respectively, losses of $2.2 billion and $16.6 billion for the nine months ended September 30, 2014 and 2013, respectively, and losses of $6.6 billion for the twelve months ended September 30, 2014.

(2)	General account affiliated net additions (withdrawals) includes net additions of $7.9 billion for the nine months ended September 30, 2013 from the acquisition of the Hartford Life Business on January 2, 2013.

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Strategic Investments

The following table sets forth the strategic investments of the Asset Management segment at carrying value (including the value of derivative instruments used to mitigate equity market and currency risk) by asset class and source as of the dates indicated.


	September 30,
	2014		2013
	(in millions)
Co-Investments:
Real estate	$	310	$	377
Fixed income		104		88
Seed Investments:
Real estate		37		31
Public equity		277		160
Fixed income		206		172

Total	$	934	$	828

The $106 million increase in strategic investments was primarily driven by seed investments in newly-launched public equity funds.

U.S. Individual Life and Group Insurance Division

Individual Life

Operating Results

The following table sets forth the Individual Life segment’s operating results for the periods indicated.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Operating results:
Revenues	$	1,281		$	1,041		$	3,895		$	3,408
Benefits and expenses		1,184			893			3,515			2,982

Adjusted operating income		97			148			380			426
Realized investment gains (losses), net, and related adjustments		129			(122	)		677			(566	)
Related charges		(2	)		68			(140	)		217

Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures	$	224		$	94		$	917		$	77

On January 2, 2013, we acquired The Hartford’s individual life insurance business (the “Hartford Life Business”) through a reinsurance transaction. We expect total pre-tax integration costs of approximately $120 million, inclusive of capitalized expenses, to be incurred, including approximately $35 million during 2014, of which $24 million was incurred during the first nine months of 2014. Integration costs incurred to date total $84 million, inclusive of capitalized expenses of $6 million. After integration is complete, we expect annual cost savings of approximately $90 million and, as of September 30, 2014, we have achieved approximately 75% of this annual savings on a run rate basis. Actual integration costs may exceed, and actual cost savings may fall short of, such expectations.

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Adjusted Operating Income

Three Month Comparison. Adjusted operating income decreased $51 million, primarily reflecting an unfavorable comparative impact from our annual reviews and updates of assumptions and other refinements. Results for the third quarter of 2014 included a $63 million net charge from these impacts, driven by unfavorable updates to economic assumptions, while results for the third quarter of 2013 included a $27 million net benefit, driven by favorable updates to actuarial assumptions. In addition, the current quarter included $8 million of costs associated with the integration of The Hartford Life business, while the prior year period included $24 million of such costs. Excluding these impacts, adjusted operating income increased $23 million due to a higher net contribution from investment results driven by higher invested assets to support business growth and required capital and higher income from non-coupon investments, as well as more favorable mortality experience, net of reinsurance.

Nine Month Comparison. Adjusted operating income decreased $46 million, primarily reflecting an unfavorable comparative impact from our annual reviews and updates of assumptions and other refinements, as discussed above. In addition, the current period included $24 million of costs associated with the integration of The Hartford Life business, while the prior period included $43 million of such costs. Excluding these impacts, adjusted operating income increased $25 million. This increase was primarily driven by a higher net contribution from investment results, due to higher invested assets to support business growth and required capital and higher income from non-coupon investments, as well as the impact of cost savings associated with The Hartford Life business integration, and more favorable mortality experience, net of reinsurance. These increases were partially offset by unfavorable reserve updates for guaranteed minimum death benefits.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues, as shown in the table above under “—Operating Results,” increased $240 million. Excluding the impact of our annual reviews and updates of assumptions and other refinements, as discussed above, revenues increased $157 million. Policy charges and fees and asset management and service fees and other income increased $83 million driven by growth in our universal life insurance business, an increase in the amortization of unearned revenue reserves including the impact of changes in the estimated profitability of the business due to market performance and other experience relative to our assumptions, and increased affiliated reserve financing, which is offset by higher interest expense, as discussed below. Net investment income increased $62 million, reflecting higher invested assets resulting from business growth, required capital and increased unaffiliated reserve financing, which was offset by higher interest expense, as discussed below, as well as higher income from non-coupon investments.

Benefits and expenses, as shown in the table above under “—Operating Results,” increased $291 million. Excluding the impact of our annual reviews and updates of assumptions and other refinements, as well as integration costs, as discussed above, benefits and expenses increased $134 million. Policyholders’ benefits, including interest credited to account balances, increased $12 million, primarily reflecting universal life business growth, partially offset by more favorable mortality experience, net of reinsurance. Interest expense increased $38 million related to financing transactions with offsets in revenue, as discussed above. The amortization of DAC increased $39 million including the impact of changes in the estimated profitability of the business due to market performance and other experience relative to our assumptions.

Nine Month Comparison. Revenues increased $487 million. Excluding the impact of our annual reviews and updates of assumptions and other refinements, as discussed above, revenues increased $404 million. Policy charges and fees and asset management and service fees and other income increased $184 million, driven by growth in our universal life insurance business, an increase in the amortization of unearned revenue reserves including the impact of changes in the estimated profitability of the business due to market performance and other experience relative to our assumptions, and increased affiliated reserve financing, which is offset by higher interest expense, as discussed below. Net investment income increased $172 million, reflecting higher invested assets resulting from business growth, required capital and increased unaffiliated reserve financing, which was offset by higher interest expense, as discussed below, as well as higher income from non-coupon investments.

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Benefits and expenses increased $533 million. Excluding the impact of our annual reviews and updates of assumptions and other refinements, as well as integration costs, as discussed above, benefits and expenses increased $379 million. Policyholders’ benefits, including interest credited to account balances, increased $166 million, primarily reflecting universal life business growth, and unfavorable reserve updates for guaranteed minimum death benefits, partially offset by more favorable mortality experience, net of reinsurance. Interest expense increased $98 million related to financing transactions with offsets in revenue, as discussed above. The amortization of DAC increased $63 million including the impact of changes in the estimated profitability of the business due to market performance and other experience relative to our assumptions.

Sales Results

The following table sets forth individual life insurance annualized new business premiums, as defined under “—Segment Measures” above, by distribution channel and product, for the periods indicated.


	Three Months Ended September 30, 2014						Three Months Ended September 30, 2013
	Prudential Agents		Third Party		Total		Prudential Agents		Third Party		Total
	(in millions)
Variable Life	$	5	$	5	$	10	$	4	$	5	$	9
Universal Life(1)		10		33		43		9		98		107
Term Life		9		35		44		9		40		49

Total	$	24	$	73	$	97	$	22	$	143	$	165


	Nine Months Ended September 30, 2014						Nine Months Ended September 30, 2013
	Prudential Agents		Third Party		Total		Prudential Agents		Third Party		Total
	(in millions)
Variable Life	$	14	$	16	$	30	$	11	$	14	$	25
Universal Life(1)		30		130		160		30		358		388
Term Life		27		105		132		31		121		152

Total	$	71	$	251	$	322	$	72	$	493	$	565

(1)

Single pay life annualized new business premiums, which include 10% of excess (unscheduled) premiums, represented approximately 10% and 34% of Universal Life annualized new business premiums for the three months ended September 30, 2014 and 2013, respectively, and approximately 11% and 37% of Universal Life annualized new business premiums for the nine months ended September 30, 2014 and 2013, respectively.

Annualized new business premiums for both the third quarter and the first nine months of 2014 decreased relative to the comparable prior year periods. The decreases in both periods are primarily driven by pricing and other actions taken in 2013 to limit concentration of sales of universal life insurance products with secondary, or “no lapse”, guarantees.

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Group Insurance

Operating Results

The following table sets forth the Group Insurance segment’s operating results for the periods indicated.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Operating results:
Revenues	$	1,349		$	1,342		$	4,053		$	4,143
Benefits and expenses		1,422			1,274			4,074			4,044

Adjusted operating income		(73	)		68			(21	)		99
Realized investment gains (losses), net, and related adjustments		16			(4	)		41			(8	)
Related charges		0			(3	)		(3	)		(4	)

Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures	$	(57	)	$	61		$	17		$	87

Adjusted Operating Income

Three Month Comparison. Adjusted operating income decreased $141 million, primarily reflecting unfavorable comparative impacts from our annual reviews and updates of assumptions and other refinements. Results for the third quarter of 2014 include a $107 million net charge from these updates, which includes a $48 million net charge for certain group disability reserves related to prior periods. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information. Results for the third quarter of 2013 include a $45 million net benefit, reflecting favorable updates to actuarial assumptions and other refinements used in calculating both group life and group disability reserves. Excluding the effect of these items, adjusted operating income increased $11 million primarily driven by more favorable underwriting results in our group disability business and a higher contribution from net investment spread results. The favorable underwriting results for the group disability business reflect higher claim resolutions and fewer new claims for long-term contracts. Partially offsetting these increases were less favorable underwriting results from our group life business, reflecting higher claim severity for non-experience-rated contracts, as well as higher operating expenses.

Nine Month Comparison. Adjusted operating income decreased $120 million, primarily reflecting unfavorable comparative impacts from our annual reviews and updates of assumptions and other refinements, as discussed above. Excluding the effect of these items, adjusted operating income increased $32 million primarily driven by more favorable underwriting results in both our group disability and group life businesses and a higher contribution from net investment spread results, partially offset by higher operating expenses. The favorable underwriting results for the group disability business reflect higher claim resolutions and fewer new claims, partially offset by higher claim severity for long-term contracts. The favorable underwriting results for the group life business include more favorable results for experience-rated contracts.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues, as shown in the table above under “—Operating Results,” increased $7 million. Excluding an increase of $51 million resulting from the impacts of our annual reviews and updates of assumptions and other refinements, as discussed above, revenues decreased $44 million. The decrease reflects $54 million of lower premiums and policy charges and fee income in our group life and group disability businesses driven by lapses resulting from enhanced pricing discipline on contract renewals. Partially offsetting the decrease is an $11 million increase in net investment income driven by a higher contribution from net investment spread results due to higher non-coupon investment income.

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Benefits and expenses, as shown in the table above under “—Operating Results,” increased $148 million. Excluding an increase of $203 million resulting from the impacts of our annual reviews and updates of assumptions and other refinements, as discussed above, benefits and expenses decreased $55 million. The decrease reflects a $68 million decline in policyholders’ benefits, including the change in reserves, for our group disability and group life businesses. The decrease for both businesses includes reduced claim incidence, reflecting lapses. In addition, our disability business reflects higher claim resolutions for long-term contracts, while our group life business reflects higher claim severity for non-experience-rated contracts. Partially offsetting these decreases was an increase of $7 million in general and administrative expenses, including higher compensation costs, costs associated with our claims management process, and other costs to support business initiatives.

Nine Month Comparison. Revenues decreased $90 million. Excluding an increase of $51 million resulting from the impacts of our annual reviews and updates of assumptions and other refinements, as discussed above, revenues decreased $141 million. The decrease reflects $165 million of lower premiums and policy charges and fee income in our group life and group disability businesses driven by lapses resulting from enhanced pricing discipline on contract renewals. Partially offsetting the decrease is a $22 million increase in net investment income driven by a higher contribution from net investment spread results due to higher non-coupon investment income.

Benefits and expenses increased $30 million. Excluding an increase of $203 million resulting from the impacts of our annual reviews and updates of assumptions and other refinements, as discussed above, benefits and expenses decreased $173 million primarily reflecting a $214 million decrease in policyholders’ benefits, including the change in reserves, for our group life and group disability businesses. The decrease for both businesses includes reduced claim incidence, reflecting lapses. The decline in our group life business also reflects a lower level of claims for experience-rated contracts. The decline in our disability business also reflects higher claim resolutions, partially offset by higher claim severity for long-term contracts. Partially offsetting these decreases was an increase of $28 million in general and administrative expenses, including higher compensation costs, costs associated with our claims management process, and other costs to support business initiatives.

Benefits and Expense Ratios

The following table sets forth the Group Insurance segment’s benefits and administrative operating expense ratios for the periods indicated.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Benefits ratio(1):
Group life		89.9	%		84.8	%		89.6	%		89.3	%
Group disability		133.8	%		91.9	%		106.7	%		93.2	%
Administrative operating expense ratio(2):
Group life		11.5	%		11.1	%		10.8	%		9.9	%
Group disability		31.4	%		25.9	%		29.9	%		26.1	%

(1)	Ratio of policyholder benefits to earned premiums, policy charges and fee income.

(2)	Ratio of general and administrative expenses (excluding commissions) to gross premiums plus policy charges and fee income.

Three Month Comparison. The group life benefits ratio deteriorated 5.1 percentage points primarily driven by the impacts of our annual reviews and updates of assumptions and other refinements, as discussed above. Excluding these impacts, the group life benefits ratio deteriorated 0.7 percentage points, reflecting a decline in premiums and higher claim severity, partially offset by reduced claim incidence for non-experience-rated contracts and more favorable results for experience-rated contracts. The group disability benefits ratio deteriorated 41.9 percentage points primarily driven by the impacts of our annual reviews and updates of

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assumptions and other refinements, as discussed above. Excluding these impacts, the group disability benefits ratio improved 11.4 percentage points, reflecting higher claim resolutions and fewer new claims for long-term contracts, partially offset by a decline in premiums due to lapses. The group life administrative operating expense ratio deteriorated 0.4 percentage points reflecting a decline in premiums and an increase in operating expenses, as discussed above. The group disability administrative operating expense ratio deteriorated 5.5 percentage points reflecting a decline in premiums and an increase in operating expense including costs associated with our claims management process.

Nine Month Comparison. The group life benefits ratio deteriorated 0.3 percentage points primarily driven by the impacts of our annual reviews and updates of assumptions and other refinements, as discussed above. Excluding these impacts, the group life benefits ratio improved 1.1 percentage points, reflecting more favorable results for experience-rated contracts. The group disability benefits ratio deteriorated 13.5 percentage points primarily driven by the impacts of our annual reviews and updates of assumptions and other refinements, as discussed above. Excluding these impacts, the group disability benefits ratio improved 5.1 percentage points, reflecting higher claim resolutions and fewer new claims for long-term contracts, partially offset by a decline in premiums due to lapses. The group life administrative operating expense ratio deteriorated 0.9 percentage points reflecting a decline in premiums and an increase in operating expenses, as discussed above. The group disability administrative operating expense ratio deteriorated 3.8 percentage points reflecting a decline in premiums and an increase in operating expense including costs associated with our claims management process.

Sales Results

The following table sets forth the Group Insurance segment’s annualized new business premiums, as defined under “—Segment Measures” above, for the periods indicated.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(in millions)
Annualized new business premiums(1):
Group life	$	14	$	33	$	161	$	196
Group disability		13		13		58		65

Total	$	27	$	46	$	219	$	261

(1)	Amounts exclude new premiums resulting from rate changes on existing policies, from additional coverage under our Service members’ Group Life Insurance contract and from excess premiums on group universal life insurance that build cash value but do not purchase face amounts.

Annualized new business premiums decreased $19 million for the third quarter of 2014 compared to 2013 primarily driven by a large case sale in the third quarter of 2013. Annualized new business premiums decreased $42 million for the first nine months of 2014 compared to 2013 reflecting our pricing discipline for both group life and group disability products.

International Insurance Division

Foreign Currency Exchange Rate Movements and Related Hedging Strategies

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

The operations of our International Insurance Division are subject to currency fluctuations that can materially affect our U.S. dollar-equivalent earnings from period to period, even if earnings on a local currency

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basis are relatively constant. We enter into forward currency derivative contracts as part of our strategy to effectively fix the currency exchange rates for a portion of our prospective non-U.S. dollar-denominated earnings streams, thereby reducing earnings volatility from foreign currency exchange rate movements. The forward currency hedging program is primarily associated with our insurance operations in Japan and Korea. Separately, our Japanese insurance operations offer a variety of non-yen denominated products that are supported by investments in corresponding currencies. While these non-yen denominated assets and liabilities are economically matched, the accounting for changes in the value of these assets and liabilities due to changes in foreign currency exchange rate movements differs, resulting in volatility in reported U.S. GAAP earnings. For further information on the hedging strategies used to mitigate the risks of foreign currency exchange rate movements on earnings as well as the U.S. GAAP earnings impact from products denominated in non-local currencies, see “—Impact of foreign currency exchange rate movements on earnings.”

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

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


	September 30, 2014		December 31, 2013
	(in billions)
Instruments hedging foreign currency exchange rate exposure on U.S. dollar-equivalent earnings:
Forward currency hedging program(1)	$	2.2	$	2.7

Instruments hedging foreign currency exchange rate exposure on U.S. dollar-equivalent equity:
U.S. dollar-denominated assets held in yen-based entities(2):
Available-for-sale U.S. dollar-denominated investments, at amortized cost		12.2		8.1
Held-to-maturity U.S. dollar-denominated investments, at amortized cost		0.1		0.2
Other		0.1		0.1

Subtotal		12.4		8.4
Yen-denominated liabilities held in U.S. dollar-based entities(3)		0.8		0.8
Dual currency and synthetic dual currency investments(4)		0.8		0.9
Total instruments hedging foreign currency exchange rate exposure on U.S. dollar-equivalent equity		14.0		10.1

Total hedges	$	16.2	$	12.8

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

(2)	Excludes $28.8 billion and $27.6 billion as of September 30, 2014 and December 31, 2013, respectively, of U.S. dollar assets supporting U.S. dollar liabilities related to U.S. dollar-denominated products issued by our Japanese insurance operations.

(3)	The yen-denominated liabilities are reported in Corporate and Other operations.

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

147

Impact of foreign currency exchange rate movements on earnings

Forward currency hedging program

The financial results of our International Insurance segment reflect the impact of an intercompany arrangement with Corporate and Other operations pursuant to which the segment’s non-U.S. dollar-denominated earnings are translated at fixed currency exchange rates. The fixed rates are determined in connection with a foreign currency income hedging program designed to mitigate the impact of exchange rate changes on the segment’s U.S. dollar-equivalent earnings. Pursuant to this program, Corporate and Other operations execute forward currency contracts with third parties to sell the net exposure of projected earnings for certain currencies in exchange for U.S. dollars at specified exchange rates. The maturities of these contracts correspond with the future periods (typically on a three-year rolling basis) in which the identified non-U.S. dollar-denominated earnings are expected to be generated. In establishing the level of non-U.S. dollar-denominated earnings that will be hedged through this program, we exclude the anticipated level of U.S. dollar-denominated earnings that will be generated by dual currency and synthetic dual currency investments, as well as the anticipated level of non-yen denominated earnings that will be generated by non-yen denominated products and investments. As of September 30, 2014, we have hedged 100% of expected yen-based earnings for 2014 and 100%, 80% and 23% of expected yen-based earnings for 2015, 2016 and 2017, respectively. To the extent currently unhedged, our International Insurance segment’s future expected U.S. dollar-equivalent earnings will be impacted by yen exchange rate movements.

As a result of this intercompany arrangement, our International Insurance segment’s results for 2014 and 2013 reflect the impact of translating yen-denominated earnings at fixed currency exchange rates of 82 and 80 yen per U.S. dollar, respectively, and Korean won-denominated earnings at fixed currency exchange rates of 1150 and 1160 Korean won per U.S. dollar, respectively. Our 2015 results will reflect the impact of translating yen-denominated earnings at a fixed currency exchange rate of 91 yen per U.S. dollar and Korean won-denominated earnings at a fixed currency exchange rate of 1120 Korean won per U.S. dollar.

Results of Corporate and Other operations include any differences between the translation adjustments recorded by the segment at the fixed currency exchange rate versus the actual average rate during the period, and the gains or losses recorded from the forward currency contracts that settled during the period, which include the impact of any over or under hedging of actual earnings that differ from projected earnings. The table below presents, for the periods indicated, the increase (decrease) to revenues and adjusted operating income for the International Insurance segment and for Corporate and Other operations, reflecting the impact of this intercompany arrangement.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
International Insurance Segment:
Impact of intercompany arrangement(1)	$	63		$	70		$	206		$	178
Corporate and Other operations:
Impact of intercompany arrangement(1)		(63	)		(70	)		(206	)		(178	)
Settlement gains/(losses) on forward currency contracts		64			72			207			175

Net benefit/(detriment) to Corporate and Other operations		1			2			1			(3	)

Net impact on consolidated revenues and adjusted operating income	$	64		$	72		$	207		$	175

(1)	Represents the difference between non-U.S. dollar-denominated earnings translated on the basis of weighted average monthly currency exchange rates versus fixed currency exchange rates determined in connection with the forward currency hedging program.

As of September 30, 2014 and December 31, 2013, the notional amounts of these forward currency contracts were $2.8 billion and $3.5 billion, respectively, of which $2.2 billion and $2.7 billion, respectively, were related to our Japanese insurance operations.

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U.S. GAAP earnings impact of products denominated in non-local currencies

Our international insurance operations primarily offer products denominated in local currency; however, several of our international insurance operations, most notably our Japanese operations, also offer products denominated in non-local currencies, primarily comprised of U.S. and Australian dollar-denominated products. The non-yen denominated insurance liabilities related to these products are supported by investments denominated in corresponding currencies, including a significant portion designated as available-for-sale. While the impact from foreign currency exchange rate movements on these non-yen denominated assets and liabilities is economically matched, the accounting for changes in the value of these assets and liabilities due to changes in foreign currency exchange rate movements differs, resulting in volatility in U.S. GAAP earnings. For example, unrealized gains and losses on available-for-sale investments, including those arising from foreign currency exchange rate movements, are recorded in AOCI, whereas the non-yen denominated liabilities are remeasured for foreign currency exchange rate movements, and the related changes in value are recorded in earnings within “Other income.” Investments designated as held-to-maturity under U.S. GAAP are recorded at amortized cost on the balance sheet, but are remeasured for foreign currency exchange rate movements, with the related change in value recorded in earnings within “Other income.” Due to this non-economic volatility that is reflected in U.S. GAAP earnings, the gains and losses resulting from the remeasurement of these non-yen denominated liabilities, and certain related non-yen denominated assets, are excluded from adjusted operating income and included in “Realized investment gains (losses), net, and related adjustments.” Included in “Realized investment gains (losses), net, and related adjustments” were net losses of $586 million and net gains of $1,180 million for the three months ended September 30, 2014 and 2013, respectively, and net losses of $593 million and net losses of $2,758 million for the nine months ended September 30, 2014 and 2013, respectively.

As discussed in Note 1 to our Unaudited Interim Consolidated Financial Statements, Gibraltar Life’s current period results of operations represent earnings through August 31, 2014, and Gibraltar Life’s current period assets and liabilities represent balances as of August 31, 2014.

The following table presents these non-yen denominated insurance liabilities and related non-yen denominated assets subject to remeasurement through earnings within our international insurance operations as of September 30, 2014, as well as the impact to pre-tax U.S. GAAP earnings assuming a hypothetical 5% depreciation/appreciation in value of the yen relative to the applicable currency, based on balances as of September 30, 2014.


	Balances subject to remeasurement, as of September 30, 2014						Hypothetical increase (decrease) in pre-tax GAAP earnings(2)
	Assets(1)		Liabilities		Net Liabilities(1)		5% depreciation			5% appreciation
	(in billions)
U.S. dollar-denominated products(3)	$	3.4	$	20.9	$	17.5	$	(0.9	)	$	0.9
Australian dollar-denominated products		0.7		9.9		9.2		(0.5	)		0.5
Euro-denominated products		0.1		0.3		0.2		(0.0	)		0.0

Total	$	4.2	$	31.1	$	26.9	$	(1.4	)	$	1.4

(1)

Includes investments designated as held-to-maturity that are remeasured for foreign currency exchange rate movements with the change in value recorded in U.S. GAAP earnings; excludes $28.8 billion of available-for-sale investments supporting these non-yen denominated insurance liabilities for which the impact from foreign currency exchange rate movements is recorded in AOCI.

(2)	The U.S. GAAP earnings impacts would largely be offset by a corresponding increase (decrease) in AOCI.

(3)

Excludes $7.9 billion of insurance liabilities for U.S. dollar-denominated products associated with Prudential of Japan. These liabilities are coinsured to an affiliated U.S. domiciled insurance entity and supported by U.S. dollar-denominated assets and, as a result, are not subject to the remeasurement mismatch described above.

149

International Insurance

Operating Results

The results of our International Insurance operations are translated on the basis of weighted average monthly exchange rates, inclusive of the effects of the intercompany arrangement discussed above. To provide a better understanding of operating performance within the International Insurance segment, where indicated below, we have analyzed our results of operations excluding the effect of the year over year change in foreign currency exchange rates. Our results of operations, excluding the effect of foreign currency fluctuations, were derived by translating foreign currencies to U.S. dollars at uniform exchange rates for all periods presented, including for constant dollar information discussed below. The exchange rates used were Japanese yen at a rate of 82 yen per U.S. dollar and Korean won at a rate of 1150 won per U.S. dollar, both of which were determined in connection with the foreign currency income hedging program discussed above. In addition, for constant dollar information discussed below, activity denominated in U.S. dollars is generally reported based on the amounts as transacted in U.S. dollars. Annualized new business premiums presented on a constant exchange rate basis in the “Sales Results” section below reflect translation based on these same uniform exchange rates.

The following table sets forth the International Insurance segment’s operating results for the periods indicated.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Operating results:
Revenues:
Life Planner operations	$	2,284		$	2,173		$	7,024		$	6,774
Gibraltar Life and Other operations		2,718			3,086			8,305			10,775

		5,002			5,259			15,329			17,549

Benefits and expenses:
Life Planner operations		1,870			1,749			5,809			5,560
Gibraltar Life and Other operations		2,287			2,732			6,954			9,484

		4,157			4,481			12,763			15,044

Adjusted operating income:
Life Planner operations		414			424			1,215			1,214
Gibraltar Life and Other operations		431			354			1,351			1,291

		845			778			2,566			2,505

Realized investment gains (losses), net, and related adjustments(1)		(452	)		1,505			119			(2,799	)
Related charges		(12	)		(18	)		(32	)		(127	)
Investment gains (losses) on trading account assets supporting insurance liabilities, net		78			52			59			342
Change in experience-rated contractholder liabilities due to asset value changes		(78	)		(52	)		(59	)		(342	)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests		1			1			3			(64	)

Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures	$	382		$	2,266		$	2,656		$	(485	)

(1)	Includes gains and losses from changes in value of certain assets and liabilities relating to foreign currency exchange movements that are economically matched, as discussed above.

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Adjusted Operating Income

Three Month Comparison. Adjusted operating income from our Life Planner operations decreased $10 million including a net unfavorable impact of $4 million from currency fluctuations, inclusive of the currency hedging program discussed above. Both periods benefited from the impact of our annual reviews and updates of assumptions and other refinements, which resulted in a $17 million net benefit in the third quarter of 2014 compared to a $19 million net benefit in the third quarter of 2013, primarily driven by favorable updates to actuarial assumptions in both periods.

Excluding the effect of these items, adjusted operating income of our Life Planner operations decreased $4 million as favorable mortality experience and the growth of business in force driven by sales results and continued strong persistency were offset by higher expenses.

Adjusted operating income from our Gibraltar Life and Other operations increased $77 million including a net unfavorable impact of $10 million from currency fluctuations, inclusive of the currency hedging program discussed above. Both periods include the impact of our annual reviews and updates of assumptions and other refinements, which resulted in a $15 million net charge in the third quarter of 2014, including unfavorable updates to economic assumptions and other refinements, compared to a $108 million net charge in the third quarter of 2013, primarily driven by unfavorable updates to actuarial assumptions. In addition, results for the third quarter of 2013 included $8 million of integration costs related to the acquisition of the Star and Edison Businesses.

Excluding the effect of these items, adjusted operating income from our Gibraltar Life and Other operations decreased $14 million primarily reflecting less favorable mortality experience and higher expenses.

Nine Month Comparison. Adjusted operating income from our Life Planner operations increased $1 million including a net unfavorable impact of $13 million from currency fluctuations. Results for the first nine months of 2014 also include a $16 million net unfavorable impact primarily from reserve refinements in our Korean operation.

Excluding the effect of these items, as well as the impact from our annual reviews and updates of assumptions and other refinements as discussed above, adjusted operating income increased $32 million primarily reflecting growth of business in force driven by sales results and continued strong persistency as well as more favorable mortality experience. Partially offsetting these increases were higher expenses in the current period and the impact of an increase to reserves for guaranteed minimum death benefits driven by equity market movements in Japan.

Adjusted operating income from our Gibraltar Life and Other operations increased $60 million including a net unfavorable impact of $30 million from currency fluctuations. Results for the first nine months of 2013 also included a $66 million gain on our investment, through a consortium, in China Pacific Group, for which our remaining shares were sold in January 2013, as well as $17 million of integration costs related to the acquisition of the Star and Edison Businesses.

Excluding the effect of these items, as well as the impact from our annual reviews and updates of assumptions and other refinements as discussed above, adjusted operating income from our Gibraltar Life and Other operations increased $46 million primarily reflecting a gain on sales of fixed assets, the absence of certain policyholder dividend refinements that were made in the first quarter of 2013, higher net investment spreads and lower expenses. Partially offsetting these variances was a lesser impact from accelerated earnings due to surrenders of fixed annuities denominated in Australian and U.S. dollars as well as less favorable mortality experience.

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Revenues, Benefits and Expenses

Three Month Comparison. Revenues from our Life Planner operations, as shown in the table above under “—Operating Results,” increased $111 million including a net unfavorable impact of $50 million from currency fluctuations. Excluding the impact of currency fluctuations, revenues increased $161 million. This increase was primarily driven by higher premiums and policy charges and fee income of $136 million related to growth of business in force. Net investment income increased $32 million primarily reflecting investment portfolio growth, partially offset by the impact of lower reinvestment rates.

Benefits and expenses of our Life Planner operations, as shown in the table above under “—Operating Results,” increased $121 million including a net favorable impact of $46 million from currency fluctuations. Excluding the impact of currency fluctuations, benefits and expenses increased $167 million. Policyholder benefits, including changes in reserves, increased $163 million primarily driven by business growth and the impact from our annual updates and reviews of assumptions and other refinements, as discussed above, partially offset by the impact of favorable mortality experience. General and administrative expenses, net of capitalization, increased $18 million primarily due to higher technology expenditures and distribution costs. Partially offsetting these increases was a $12 million decrease in amortization of DAC driven by a favorable comparative impact from our annual reviews and updates of assumptions and other refinements, as discussed above.

Revenues from our Gibraltar Life and Other operations decreased $368 million including a net favorable impact of $45 million from currency fluctuations. Excluding the impact of currency fluctuations, revenues decreased $413 million, driven by a $416 million decline in premiums and policy charges and fee income. The decrease in premiums and policy charges and fee income primarily reflects the discontinuation of bank channel sales of yen-denominated single premium reduced death benefit whole life products.

Benefits and expenses of our Gibraltar Life and Other operations decreased $445 million including a net unfavorable impact of $55 million from currency fluctuations. Excluding the impact of currency fluctuations, benefits and expenses decreased $500 million. Policyholder benefits, including changes in reserves, decreased $497 million driven by the discontinuation of bank channel sales of yen-denominated single premium reduced death benefit whole life products.

Nine Month Comparison. Revenues from our Life Planner operations increased $250 million including a net unfavorable impact of $253 million from currency fluctuations. Excluding the impact of currency fluctuations, revenues increased $503 million. This increase was primarily driven by higher premiums and policy charges and fee income of $361 million related to growth of business in force. Net investment income increased $117 million primarily reflecting investment portfolio growth, partially offset by the impact of lower reinvestment rates.

Benefits and expenses of our Life Planner operations increased $249 million including a net favorable impact of $240 million from currency fluctuations. Excluding the impact of currency fluctuations, benefits and expenses increased $489 million. Policyholder benefits, including changes in reserves, increased $446 million primarily driven by business growth, the impact of our annual reviews and updates of assumptions and other refinements, an increase to reserves for guaranteed minimum death benefits driven by equity market movements in Japan and reserve refinements in our Korean operation, as discussed above, partially offset by favorable mortality experience. General and administrative expenses, net of capitalization, increased $46 million primarily due to higher distribution costs and technology expenditures.

Revenues from our Gibraltar Life and Other operations decreased $2,470 million including a net unfavorable impact of $2 million from currency fluctuations. Excluding the impact of currency fluctuations, revenues for Gibraltar Life decreased $2,468 million, driven by a $2,442 million decrease in premiums and policy charges and fee income. The decrease in premiums and policy charges and fee income primarily reflects the discontinuation of bank channel sales of yen-denominated single premium reduced death benefit whole life products, pricing actions taken on certain retirement and protection products in 2013 and lower premiums from the Life Consultant distribution channel. The decrease in revenues also includes the impact of $66 million from the sale of our investment in China Pacific Group during the first quarter of 2013, as discussed above.

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Benefits and expenses of our Gibraltar Life and Other operations decreased $2,530 million including a net unfavorable impact of $28 million from currency fluctuations. Excluding the impact of currency fluctuations, benefits and expenses decreased $2,558 million. Policyholder benefits, including changes in reserves, decreased $2,454 million driven by the discontinuation of bank channel sales of yen-denominated single premium reduced death benefit whole life products and pricing actions taken on certain retirement and protection products in 2013.

Sales Results

The following table sets forth annualized new business premiums, as defined under “—Segment Measures” above, on an actual and constant exchange rate basis for the periods indicated.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(in millions)
Annualized new business premiums:
On an actual exchange rate basis:
Life Planner operations	$	274	$	237	$	877	$	837
Gibraltar Life		409		407		1,207		1,364

Total	$	683	$	644	$	2,084	$	2,201

On a constant exchange rate basis:
Life Planner operations	$	298	$	258	$	957	$	900
Gibraltar Life		445		450		1,327		1,476

Total	$	743	$	708	$	2,284	$	2,376

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

The tables below present annualized new business premiums on a constant exchange rate basis, by product and distribution channel, for the periods indicated.


	Three Months Ended September 30, 2014										Three Months Ended September 30, 2013
	Life		Accident & Health		Retirement(1)		Annuity		Total		Life		Accident & Health		Retirement(1)		Annuity		Total
	(in millions)
Life Planners	$	179	$	29	$	76	$	14	$	298	$	137	$	22	$	88	$	11	$	258
Gibraltar Life:
Life Consultants		103		19		31		43		196		104		25		29		37		195
Banks(2)		118		0		3		56		177		171		1		2		26		200
Independent Agency		30		7		15		20		72		21		8		18		8		55

Subtotal		251		26		49		119		445		296		34		49		71		450

Total	$	430	$	55	$	125	$	133	$	743	$	433	$	56	$	137	$	82	$	708

(1)	Includes retirement income, endowment and variable universal life.

(2)

Single pay life annualized new business premiums, which include 10% of first year premiums, and 3-year limited pay annualized new business premiums, which include 100% of new business premiums, represented 8% and 59%, respectively, of total bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended September 30, 2014, and 33% and 50%, respectively, of total bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended September 30, 2013. Single pay and short-term limited pay products generally have less death benefit protection per premium paid than longer-term recurring premium products.

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Three Month Comparison. Annualized new business premiums, on a constant exchange rate basis, from our Life Planner operations increased $40 million. The increase reflects higher sales in our Japanese operations of term and U.S. dollar-denominated whole life products, partially offset by a net decline in retirement income products, as well as higher sales of whole life products and annuity products in our Korean operation and of whole life products in our Brazilian operation.

Annualized new business premiums, on a constant exchange rate basis, from our Gibraltar Life operations decreased $5 million. Bank channel sales declined $23 million due to the discontinuation of our yen-denominated single premium reduced death benefit whole life products in the fourth quarter of 2013, partially offset by higher sales of U.S. and Australian dollar-denominated annuity products and U.S. dollar-denominated whole life products. Independent Agency sales increased $17 million primarily driven by higher sales of Australian dollar-denominated annuity products and life protection products.


	Nine Months Ended September 30, 2014										Nine Months Ended September 30, 2013
	Life		Accident & Health		Retirement(1)		Annuity		Total		Life		Accident & Health		Retirement(1)		Annuity		Total
	(in millions)
Life Planners	$	539	$	88	$	286	$	44	$	957	$	439	$	80	$	348	$	33	$	900
Gibraltar Life:
Life Consultants		320		60		93		137		610		376		79		105		103		663
Banks(2)		338		1		7		152		498		557		2		6		70		635
Independent Agency		90		26		47		56		219		75		30		51		22		178

Subtotal		748		87		147		345		1,327		1,008		111		162		195		1,476

Total	$	1,287	$	175	$	433	$	389	$	2,284	$	1,447	$	191	$	510	$	228	$	2,376

(1)	Includes retirement income, endowment and variable universal life.

(2)

Single pay life annualized new business premiums, which include 10% of first year premiums, and 3-year limited pay annualized new business premiums, which include 100% of new business premiums, represented 6% and 53%, respectively, of total bank distribution channel annualized new business premiums, excluding annuity products, for the nine months ended September 30, 2014, and 44% and 42%, respectively, of total bank distribution channel annualized new business premiums, excluding annuity products, for the nine months ended September 30, 2013. Single pay and short-term limited pay products generally have less death benefit protection per premium paid than longer-term recurring premium products.

Nine Month Comparison. Annualized new business premiums, on a constant exchange rate basis, from our Life Planner operations increased $57 million. Results reflect higher sales of whole life products and annuity products in our Korean operation and of whole life products and accident and health products in our Brazilian operation. These increases were partially offset by a net decline in sales in our Japanese operations where commission rate changes resulted in lower sales of certain retirement products that more than offset an increase in sales of term life products.

Annualized new business premiums, on a constant exchange rate basis, from our Gibraltar Life operations decreased $149 million. Bank channel sales declined $137 million due to the discontinuation of our yen-denominated single premium reduced death benefit whole life products in the fourth quarter of 2013, partially offset by higher sales of U.S. and Australian dollar-denominated annuity products and U.S. dollar-denominated whole life products. Life Consultant sales declined $53 million primarily due to pricing actions taken in the second quarter of 2013 on certain retirement and protection products, partially offset by higher sales of Australian dollar-denominated annuity products. Independent Agency sales increased $41 million primarily driven by higher sales of Australian dollar-denominated annuity products.

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Corporate and Other

As described in our Annual Report on Form 10-K for the year ended December 31, 2013 under “Business—Financial Services Businesses—Corporate and Other,” Corporate and Other includes corporate operations, after allocations to our business segments, and divested businesses except those that qualify for “discontinued operations” accounting treatment under U.S. GAAP.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Operating results:
Capital debt interest expense	$	(156	)	$	(156	)	$	(454	)	$	(495	)
Operating debt interest expense, net of investment income		(40	)		(37	)		(104	)		(116	)
Pension and employee benefits		39			70			125			203
Other corporate activities(1)		(182	)		(189	)		(589	)		(565	)

Adjusted operating income		(339	)		(312	)		(1,022	)		(973	)

Realized investment gains (losses), net, and related adjustments		(290	)		243			(2,271	)		1,612
Related charges		1			(22	)		0			(46	)
Divested businesses		(7	)		43			113			(12	)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests		2			(1	)		0			1

Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures	$	(633	)	$	(49	)	$	(3,180	)	$	582

(1)	Includes consolidating adjustments.

Three Month Comparison. The loss from Corporate and Other operations, on an adjusted operating income basis, increased $27 million primarily driven by a decline in results from pension and employee benefits. Income from our qualified pension plan decreased $20 million driven by lower expected returns from a decline in value of fixed income plan assets and higher interest costs on the plan obligation from a higher discount rate.

Capital debt interest expense remained unchanged as average borrowing rates and average balances of capital debt were essentially unchanged. Net charges from other corporate activities remained unchanged as an unfavorable comparative impact for the change in our estimate of payments arising from use of the Social Security Master Death file matching criteria to identify both deceased policy and contract holders, an unfavorable impact from our annual reviews and updates of assumptions on the reserves for certain retained obligations relating to pre-demutualization policyholders, and increased costs for enhanced regulatory supervision were offset by reduced retained corporate expenses.

Nine Month Comparison. The loss from Corporate and Other operations, on an adjusted operating income basis, increased $49 million. Results from pension and employee benefits decreased $78 million. Income from our qualified pension plan decreased $59 million driven by lower expected returns from a decline in value of fixed income plan assets and higher interest costs on the plan obligation from a higher discount rate. Additionally, an unfavorable comparative impact of retained benefit expenses, including the impact of plan amendments in the first nine months of 2013 contributed to the decline in pension and employee benefits results. These declines were partially offset by lower post-retirement plan expense driven by higher expected returns from an increase in value of equity plan assets.

Higher net charges of $24 million from other corporate activities were primarily driven by an unfavorable comparative impact for the change in our estimate of payments arising from use of the Social Security Master Death file matching criteria to identify both deceased policy and contract holders, increased costs for enhanced

155

regulatory supervision and an unfavorable impact from our annual reviews and updates of assumptions on the reserves for certain retained obligations relating to pre-demutualization policyholders, partially offset by reduced retained corporate expenses and the absence of the accelerated recognition of deferred bond issuance costs related to capital and operating debt redeemed in the first nine months of 2013. Partially offsetting these impacts was a $41 million decrease in capital debt interest expense resulting primarily from the replacement of higher coupon debt with new issuances at lower rates during 2013. Operating debt interest expense, net of investment income, also decreased $12 million driven by higher income on higher levels of invested assets.

Capital Protection Framework

Corporate and Other operations includes the results related to our Capital Protection Framework, which includes the capital hedge program. The capital hedge program broadly addresses the equity market exposure of the statutory capital of the Company as a whole, under stress scenarios, using equity-based derivatives. We also manage certain risks associated with our variable annuity products through our living benefit hedging program, which is described under “—U.S. Retirement Solutions and Investment Management Division—Individual Annuities.” In addition, we may choose to manage certain capital market related risk associated with various operations of the Financial Services Businesses through capital management strategies other than hedging of particular exposures.

The hedging costs included in adjusted operating income related to these programs were $9 million and $30 million for the three and nine months ended September 30, 2014, respectively, and $10 million and $35 million for the three and nine months ended September 30, 2013, respectively. “Realized investment gains (losses), net and related adjustments” includes net losses of $404 million and $2,159 million for the three and nine months ended September 30, 2014, respectively, and net gains of $339 million and $1,500 million for the three and nine months ended September 30, 2013, respectively, primarily resulting from our utilization of capital management strategies to manage a portion of our interest rate risk. The net losses in 2014 and net gains in 2013 were driven by significant declines and increases, respectively, in interest rates during the respective periods. The capital consequences associated with this decision have been factored into our Capital Protection Framework.

Through our Capital Protection Framework, we hold on-balance sheet capital and maintain access to committed sources of capital to meet capital needs related to these hedging programs. We assess the composition of these hedging programs on an ongoing basis, and we may change them from time to time based on our evaluation of our risk position or other factors. For more information on our Capital Protection Framework, see “—Liquidity and Capital Resources.”

Results of Operations of Closed Block Business

We established the Closed Block Business effective as of the date of demutualization. The Closed Block Business includes our in force traditional domestic participating life insurance and annuity products and assets that are used for the payment of benefits and policyholder dividends on these policies, as well as other assets and equity and related liabilities that support these policies. We no longer offer these traditional domestic participating policies. See Note 6 to the Unaudited Interim Consolidated Financial Statements and “—Closed Block Business” for additional details.

Each year, the Board of Directors of Prudential Insurance determines the dividends payable on participating policies for the following year based on the experience of the Closed Block, including investment income, net realized and unrealized investment gains, mortality experience and other factors. Although Closed Block experience for dividend action decisions is based upon statutory results, at the time the Closed Block was established, we developed, as required by U.S. GAAP, an actuarial calculation of the timing of the maximum future earnings from the policies included in the Closed Block. If actual cumulative earnings in any given period are greater than the cumulative earnings we expected, we record this excess as a policyholder dividend

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obligation. We will subsequently pay this excess to Closed Block policyholders as an additional dividend unless it is otherwise offset by future Closed Block performance that is less favorable than we originally expected. The policyholder dividends we charge to expense within the Closed Block Business will include any change in our policyholder dividend obligation that we recognize for the excess of actual cumulative earnings in any given period over the cumulative earnings we expected in addition to the actual policyholder dividends declared by the Board of Directors of Prudential Insurance.

As of September 30, 2014, the excess of actual cumulative earnings over the expected cumulative earnings was $1,427 million, which was recorded as a policyholder dividend obligation. Actual cumulative earnings, as required by U.S. GAAP, reflect the recognition of realized investment gains and losses in the current period, as well as changes in assets and related liabilities that support the Closed Block policies. Additionally, the accumulation of net unrealized investment gains that have arisen subsequent to the establishment of the Closed Block have been reflected as a policyholder dividend obligation of $4,402 million at September 30, 2014, to be paid to Closed Block policyholders unless offset by future experience, with an offsetting amount reported in AOCI.

Operating Results

Management does not consider adjusted operating income to assess the operating performance of the Closed Block Business. Consequently, results of the Closed Block Business for all periods are presented only in accordance with U.S. GAAP. The following table sets forth the U.S. GAAP results for the Closed Block Business for the periods indicated.


	Three Months Ended September 30,				Nine Months Ended September 30,
	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(in millions)
U.S. GAAP results:
Revenues	$	1,764	$	1,595	$	5,165	$	4,578
Benefits and expenses		1,664		1,510		4,996		4,470

Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures	$	100	$	85	$	169	$	108

Income (loss) from Continuing Operations Before Income Taxes and Equity in Earnings of Operating Joint Ventures

Three Month Comparison. Income from continuing operations before income taxes and equity in earnings of operating joint ventures increased $15 million, primarily driven by an increase in net realized investment gains and an increase in net investment income, partially offset by unfavorable valuation changes in trading account assets and an unfavorable impact from net insurance activity. Net realized investment gains increased $191 million reflecting favorable changes in the value of derivatives and a commercial mortgage loan reserve release. Net investment income increased $15 million reflecting higher income from non-coupon investments, partially offset by the impact of lower reinvestment rates. The value of trading account assets declined $27 million primarily due to foreign currency translation losses on fixed maturities. Net insurance activity results declined $13 million primarily reflecting higher dividends to policyholders as a result of an increase in the 2014 dividend scale. As a result of the above and other variances, a $240 million policyholder dividend obligation expense was recorded in the third quarter of 2014, compared to $94 million in the third quarter of 2013. As noted above, as of September 30, 2014, the excess of actual cumulative earnings over the expected cumulative earnings was $1,427 million. If actual cumulative earnings fall below expected cumulative earnings in future periods, earnings volatility in the Closed Block Business, which is primarily due to changes in investment results, may not be offset by changes in the cumulative policyholder dividend obligation. For a discussion of Closed Block Business realized investment gains (losses), net, see “—Realized Investment Gains and Losses.”

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Nine Month Comparison. Income from continuing operations before income taxes and equity in earnings of operating joint ventures increased $61 million, primarily driven by an increase in net realized investment gains, partially offset by an unfavorable impact from net insurance activity and lower net investment income. Net realized investment gains increased $621 million reflecting favorable changes in the value of derivatives and higher trading gains on fixed maturities and equity securities. Net insurance activity results declined $68 million primarily reflecting higher dividends to policyholders as a result of an increase in the 2014 dividend scale. Net investment income declined $8 million primarily reflecting the impact of lower reinvestment rates, partially offset by higher income from non-coupon investments. As a result of the above and other variances, a $540 million policyholder dividend obligation expense was recorded in the first nine months of 2014, compared to $70 million in the first nine months of 2013.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues, as shown in the table above under “—Operating Results,” increased $169 million, primarily driven by a $191 million increase in net realized investment gains and a $15 million increase in net investment income, partially offset by a $27 million decline in the value of trading account assets, as discussed above. In addition, premiums declined $9 million, primarily due to the runoff of policies in force.

Benefits and expenses, as shown in the table above under “—Operating Results,” increased $154 million, primarily driven by a $168 million increase in dividends to policyholders, partially offset by an $18 million decrease in policyholders’ benefits, including changes in reserves. The increase in dividends to policyholders includes a $146 million increase in the policyholder dividend obligation expense reflecting higher cumulative earnings and a $22 million increase in dividends paid and accrued to policyholders as a result of an increase in the 2014 dividend scale, partially offset by a decline in policies in force. The decrease in policyholders’ benefits, including changes in reserves, was driven by the runoff of policies in force.

Nine Month Comparison. Revenues increased $587 million, primarily driven by a $621 million increase in net realized investment gains, partially offset by a $17 million decline in premiums and an $8 million decline in net investment income, as discussed above.

Benefits and expenses increased $526 million, primarily driven by a $522 million increase in dividends to policyholders including a $470 million increase in the policyholder dividend obligation expense reflecting higher cumulative earnings and a $52 million increase in dividends paid and accrued to policyholders as a result of an increase in the 2014 dividend scale, partially offset by the runoff of policies in force.

Income Taxes

Our income tax provision, on a consolidated basis, amounted to an income tax benefit of $234 million in the third quarter of 2014 compared to an expense of $497 million in the third quarter of 2013. The decrease in income tax expense is driven primarily by the decrease in pre-tax income from continuing operations before income taxes and equity in earnings of operating joint ventures in the current quarter compared to the year ago quarter. In addition, the tax rate for the third quarter of 2014 is based on the anticipated full year effective tax rate with certain adjustments for discrete items, while the tax rate for the third quarter of 2013 was based on the third quarter 2013 income, adjusted for discrete items and the quarter’s change in expected full year permanent differences.

Our income tax provision, on a consolidated basis, amounted to an income tax expense of $643 million in the first nine months of 2014 compared to a benefit of $605 million in the first nine months of 2013. The first nine months of 2014 and 2013 include $53 million and $108 million, respectively, of an additional U.S. tax expense related to the realization of a portion of the local deferred tax assets existing on the opening day balance sheet for the Star and Edison Businesses and Prudential Gibraltar. The U.S. tax expense for the first nine months

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of 2013 is reflective of a change in repatriation assumption for Gibraltar Life and Prudential Gibraltar. During the first nine months of 2013, we determined that in addition to U.S. GAAP earnings, we would repatriate an additional amount from Gibraltar Life and Prudential Gibraltar, but that such additional amount would not exceed the deferred tax assets recorded in the Statement of Financial Position as of the acquisition date for Prudential Gibraltar and the Star and Edison Businesses. The local utilization of the deferred tax asset coupled with the repatriation assumption related to the applicable earnings of our Japanese entities creates the effect of a “double tax” for U.S. GAAP purposes, whereas only one incidence of tax expense will actually be paid.

Excluding the impact of the “double tax,” the expense associated with income taxes increased $1,303 million, driven primarily by pre-tax income in the first nine months of 2014 compared with a pre-tax loss in the first nine months of 2013. In addition, the tax rate for the first nine months of 2014 is based on the anticipated full year effective tax rate with certain adjustments for discrete items, while the tax rate for first nine months of 2013 was limited to the tax benefit based on the first nine months of 2013 loss, adjusted for discrete items and expected full year permanent differences.

For additional information regarding income taxes, see Note 12 to the Unaudited Interim Consolidated Financial Statements.

Discontinued Operations

Included within net income are the results of businesses which are reflected as discontinued operations under U.S. GAAP. Income from discontinued operations, net of taxes, was $0 million and $8 million for the three months ended September 30, 2014 and 2013, respectively, and $8 million and $11 million for the nine months ended September 30, 2014 and 2013, respectively.

For additional information regarding discontinued operations, see Note 3 to the Unaudited Interim Consolidated Financial Statements.

Divested Businesses

Our income from continuing operations includes results from several businesses that have been or will be sold or exited that do not qualify for “discontinued operations” accounting treatment under U.S. GAAP. The results of these divested businesses are reflected in our Corporate and Other operations, but are excluded from adjusted operating income. A summary of the results of these divested businesses that have been excluded from adjusted operating income is as follows for the periods indicated:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Long-Term Care	$	(9	)	$	10		$	114		$	(49	)
Wealth Management Solutions		2			9			2			(1	)
Real Estate and Relocation Services		0			25			1			53
Individual Health Insurance		0			(2	)		(5	)		(12	)
Financial Advisory		0			(1	)		(2	)		(3	)
Other		0			2			3			0

Total divested businesses income (loss) excluded from adjusted operating income	$	(7	)	$	43		$	113		$	(12	)

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Long-Term Care. Results for the third quarter of 2014 decreased compared to the prior year period primarily reflecting an unfavorable comparative impact from annual reviews and updates of assumptions, partially offset by realized losses in 2013 from derivatives used in duration management, driven by the impact of rising interest rates. Results for the first nine months of 2014 increased compared to the prior year period primarily reflecting realized gains in 2014 from derivatives used in duration management, driven by the impact of declining interest rates, and sales of equity securities compared to realized losses in 2013 from derivatives used in duration management, driven by the impact of rising interest rates. An unfavorable comparative impact from annual reviews and updates of assumptions partially offset the improved results.

Real Estate and Relocation Services. Results for the first nine months of 2013 included gains associated with the sales of loans previously made to real estate brokerage franchises and income from equity method investments in real estate brokerage franchises, the majority of which investments were sold in the second half of 2013.

Experience-Rated Contractholder Liabilities,

Trading Account Assets Supporting Insurance Liabilities and Other Related Investments

Certain products included in the Retirement and International Insurance segments are experience-rated in that investment results associated with these products are expected to ultimately accrue to contractholders. The majority of investments supporting these experience-rated products are classified as trading and are carried at fair value. These trading investments are reflected on the statements of financial position as “Trading account assets supporting insurance liabilities, at fair value” (“TAASIL”). Realized and unrealized gains and losses for these investments are reported in “Other income.” Interest and dividend income for these investments is reported in “Net investment income.” To a lesser extent, these experience-rated products are also supported by derivatives and commercial mortgage and other loans. The derivatives that support these experience-rated products are reflected on the statement of financial position as “Other long-term investments” and are carried at fair value, and the realized and unrealized gains and losses are reported in “Realized investment gains (losses), net.” The commercial mortgage and other loans that support these experience-rated products are carried at unpaid principal, net of unamortized discounts and an allowance for losses, and are reflected on the statements of financial position as “Commercial mortgage and other loans.” Gains and losses on sales and changes in the valuation allowance for commercial mortgage and other loans are reported in “Realized investment gains (losses), net.”

Our Retirement segment has two types of experience-rated products that are supported by TAASIL and other related investments. Fully participating products are those for which the entire return on underlying investments is passed back to the policyholders through a corresponding adjustment to the related liability. The adjustment to the liability is based on changes in the fair value of all of the related assets, including commercial mortgage and other loans, which are carried at amortized cost, less any valuation allowance. Partially participating products are those for which only a portion of the return on underlying investments is passed back to the policyholders over time through changes to the contractual crediting rates. The crediting rates are typically reset semiannually, often subject to a minimum crediting rate, and returns are required to be passed back within ten years.

In our International Insurance segment, the experience-rated products are fully participating. As a result, the entire return on the underlying investments is passed back to policyholders through a corresponding adjustment to the related liability.

Adjusted operating income excludes net investment gains and losses on TAASIL, related derivatives and commercial mortgage and other loans. This is consistent with the exclusion of realized investment gains and losses with respect to other investments supporting insurance liabilities managed on a consistent basis. In addition, to be consistent with the historical treatment of charges related to realized investment gains and losses

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on investments, adjusted operating income also excludes the change in contractholder liabilities due to asset value changes in the pool of investments (including changes in the fair value of commercial mortgage and other loans) supporting these experience-rated contracts, which are reflected in “Interest credited to policyholders’ account balances.” The result of this approach is that adjusted operating income for these products includes net fee revenue and interest spread we earn on these experience-rated contracts, and excludes changes in fair value of the pool of investments, both realized and unrealized, that we expect will ultimately accrue to the contractholders.

The following tables set forth the impact on results for the periods indicated of these items that are excluded from adjusted operating income:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Retirement Segment:
Investment gains (losses) on:
Trading account assets supporting insurance liabilities, net	$	(209	)	$	51		$	136		$	(615	)
Derivatives		42			(24	)		(40	)		41
Commercial mortgages and other loans		14			(1	)		10			1
Change in experience-rated contractholder liabilities due to asset value changes(1)(2)		171			(21	)		(80	)		597

Net gains (losses)	$	18		$	5		$	26		$	24

International Insurance Segment:
Investment gains (losses) on trading account assets supporting insurance liabilities, net	$	78		$	52		$	59		$	342
Change in experience-rated contractholder liabilities due to asset value changes		(78	)		(52	)		(59	)		(342	)

Net gains (losses)	$	0		$	0		$	0		$	0

Total:
Investment gains (losses) on:
Trading account assets supporting insurance liabilities, net	$	(131	)	$	103		$	195		$	(273	)
Derivatives		42			(24	)		(40	)		41
Commercial mortgages and other loans		14			(1	)		10			1
Change in experience-rated contractholder liabilities due to asset value changes(1)(2)		93			(73	)		(139	)		255

Net gains (losses)	$	18		$	5		$	26		$	24

(1)

Decreases to contractholder liabilities due to asset value changes are limited by certain floors and therefore do not reflect cumulative declines in recorded asset values of $4 million and $20 million as of September 30, 2014 and 2013, respectively. We have recovered and expect to recover in future periods these declines in recorded asset values through subsequent increases in recorded asset values or reductions in crediting rates on contractholder liabilities.

(2)

Included in the amounts above related to the change in the liability to contractholders as a result of commercial mortgage and other loans are decreases of $21 million and $5 million for the three months ended September 30, 2014 and 2013, respectively, and decreases of $4 million and $47 million for the nine months ended September 30, 2014 and 2013, respectively. As prescribed by U.S. GAAP, changes in the fair value of commercial mortgage and other loans held for investment in our general account, other than when associated with impairments, are not recognized in income in the current period, while the impact of these changes in fair value are reflected as a change in the liability to fully participating contractholders in the current period.

The net impacts for the Retirement segment of changes in experience-rated contractholder liabilities and investment gains and losses on trading account assets supporting insurance liabilities and other related investments reflect timing differences between the recognition of the mark-to-market adjustments and the recognition of the

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recovery of these adjustments in future periods through subsequent increases in asset values or reductions in crediting rates on contractholder liabilities for partially participating products. These impacts also reflect the difference between the fair value of the underlying commercial mortgage and other loans and the amortized cost, less any valuation allowance, of these loans, as described above.

Valuation of Assets and Liabilities

Fair Value of Assets and Liabilities

The authoritative guidance related to fair value measurement establishes a framework that includes a three-level hierarchy used to classify the inputs used in measuring fair value. The level in the hierarchy within which the fair value falls is determined based on the lowest level input that is significant to the measurement. The fair values of assets and liabilities classified as Level 3 include at least one or more significant unobservable input in the measurement. See Note 13 to the Unaudited Interim Consolidated Financial Statements for an additional description of the valuation hierarchy levels.

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis, as of the periods indicated, split between the Financial Services Businesses and Closed Block Business, and the portion of such assets and liabilities that are classified in Level 3 of the valuation hierarchy. See Note 13 to the Unaudited Interim Consolidated Financial Statements for the balances of assets and liabilities measured at fair value on a recurring basis by hierarchy level presented on a consolidated basis.


	As of September 30, 2014								As of December 31, 2013
	Financial Services Businesses				Closed Block Business				Financial Services Businesses				Closed Block Business
	Total at Fair Value		Total Level 3(1)		Total at Fair Value		Total Level 3(1)		Total at Fair Value		Total Level 3(1)		Total at Fair Value			Total Level 3(1)
	(in millions)
Fixed maturities, available-for-sale	$	256,119	$	5,487	$	44,948	$	1,189	$	243,654	$	4,079	$	43,212		$	866
Trading account assets:
Fixed maturities		26,047		622		156		0		23,469		511		185			9
Equity securities		2,183		604		161		117		2,219		722		157			120
All other(2)		1,281		7		0		0		1,250		6		0			0

Subtotal		29,511		1,233		317		117		26,938		1,239		342			129
Equity securities, available-for-sale		6,377		297		3,501		1		6,026		298		3,884			6
Commercial mortgage and other loans		304		0		0		0		158		0		0			0
Other long-term investments		1,421		1,241		278		276		1,595		1,396		(66	)		0
Short-term investments		4,463		0		546		0		5,520		0		1,665			0
Cash equivalents		9,192		0		1,753		0		6,362		0		620			0
Other assets		127		2		0		0		131		4		85			0

Subtotal excluding separate account assets		307,514		8,260		51,343		1,583		290,384		7,016		49,742			1,001
Separate account assets		292,616		23,811		0		0		285,060		22,603		0			0

Total assets	$	600,130	$	32,071	$	51,343	$	1,583	$	575,444	$	29,619	$	49,742		$	1,001

Future policy benefits	$	5,320	$	5,320	$	0	$	0	$	441	$	441	$	0		$	0
Other liabilities(2)		249		6		2		0		2,201		5		6			0
Notes of consolidated VIEs		5,367		5,367		0		0		3,254		3,254		0			0

Total liabilities	$	10,936	$	10,693	$	2	$	0	$	5,896	$	3,700	$	6		$	0

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(1)

The amount of Level 3 assets taken as a percentage of total assets measured at fair value on a recurring basis totaled 5.3% and 5.1% as of September 30, 2014 and December 31, 2013, respectively, for the Financial Services Businesses, and 3.1% and 2.0% as of September 30, 2014 and December 31, 2013, respectively, for the Closed Block Business.

(2)	“All other” and “Other liabilities” primarily include derivatives. The amounts classified as Level 3 for the Financial Services Businesses exclude the impact of netting.

The determination of fair value, which for certain assets and liabilities is dependent on the application of estimates and assumptions, can have a significant impact on our results of operations and may require the application of a greater degree of judgment depending on market conditions, as the ability to value assets and liabilities can be significantly impacted by a decrease in market activity or a lack of transactions executed in an orderly manner. The following sections provide information regarding certain assets and liabilities of our Financial Services Businesses and our Closed Block Business which are valued using Level 3 inputs and could have a significant impact on our results of operations.

Fixed Maturity and Equity Securities

Fixed maturity securities included in Level 3 in our fair value hierarchy are generally priced based on internally-developed valuations or indicative broker quotes. For certain private fixed maturity and equity securities, the internally-developed valuation model uses significant unobservable inputs and, accordingly, such securities are included in Level 3 in our fair value hierarchy. Level 3 fixed maturity securities included approximately $6.0 billion and $4.3 billion as of September 30, 2014 and December 31, 2013, respectively, of public fixed maturities, with values primarily based on indicative broker quotes, and approximately $1.3 billion and $1.2 billion as of September 30, 2014 and December 31, 2013, respectively, of private fixed maturities, with values primarily based on internally-developed models. Significant unobservable inputs used included: issue specific credit adjustments, material non-public financial information, management judgment, estimation of future earnings and cash flows, default rate assumptions, liquidity assumptions and indicative quotes from market makers. These inputs are usually considered unobservable, as not all market participants have access to this data.

The impact our determination of fair value for fixed maturity and equity securities has on our results of operations is dependent on our classification of the security as either trading, available-for-sale, or held-to-maturity. For our investments classified as trading, the impact of changes in fair value is recorded within “Other income.” For our investments classified as available-for-sale, the impact of changes in fair value is recorded as an unrealized gain or loss in AOCI, a separate component of equity. Our investments classified as held-to-maturity are carried at amortized cost.

Other Long-Term Investments

Other long-term investments classified in Level 3 primarily include real estate held in consolidated investment funds and fund investments where the fair value option has been elected. The fair value of real estate held in consolidated investment funds is determined through an independent appraisal process. The appraisals generally utilize a discounted cash flow model. The appraisals also include replacement cost estimates and recent sales data as alternate methods of fair value. These appraisals and the related assumptions are updated at least annually. Since many of the assumptions utilized are unobservable and are considered to be significant inputs to the valuation, the real estate investments within other long-term investments are reflected within Level 3. Consolidated real estate investment funds classified as Level 3 totaled approximately $0.5 billion as of both September 30, 2014 and December 31, 2013. The fair value of fund investments, where the fair value option has been elected, is primarily determined by the fund managers. Since the valuations may be based on unobservable market inputs and cannot be validated by the Company, these investments are included within Level 3. Investments in these funds included in Level 3 totaled approximately $1.0 billion and $0.9 billion as of September 30, 2014 and December 31, 2013, respectively.

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Separate Account Assets

Separate account assets included in Level 3 primarily include real estate investments for which values are determined as described above under “Other long-term investments.” Separate account liabilities are reported at contract value and not at fair value.

Variable Annuity Optional Living Benefit Features

Future policy benefits classified in Level 3 primarily include liabilities related to guarantees associated with the optional living benefit features of certain variable annuity contracts offered by our Individual Annuities segment, including guaranteed minimum accumulation benefits (“GMAB”), guaranteed minimum withdrawal benefits (“GMWB”) and guaranteed minimum income and withdrawal benefits (“GMIWB”). These benefits are accounted for as embedded derivatives and carried at fair value with changes in fair value included in “Realized investment gains (losses), net.” The fair values of the GMAB, GMWB and GMIWB liabilities are calculated as the present value of future expected benefit payments to customers less the present value of assessed rider fees attributable to the embedded derivative feature. This methodology could result in either a liability or contra-liability balance, based on capital market conditions and various policyholder behavior assumptions. Since there is no observable active market for the transfer of these obligations, the valuations are calculated using internally-developed models with option pricing techniques. These models utilize significant assumptions that are primarily unobservable, including assumptions as to lapse rates, NPR, utilization rates, withdrawal rates, mortality rates and equity market volatility. Future policy benefits classified as Level 3 were net liabilities of $5.3 billion and $0.4 billion as of September 30, 2014 and December 31, 2013, respectively. For additional information, see “—Results of Operations for Financial Services Businesses by Segment—U.S. Retirement Solutions and Investment Management Division—Individual Annuities.”

Notes of Consolidated VIEs

As discussed in Note 5 to the Unaudited Interim Consolidated Financial Statements, notes of consolidated VIEs represent non-recourse notes issued by certain asset-backed investment vehicles, primarily CLOs, which we are required to consolidate. We have elected the fair value option for these notes, which are valued based on broker quotes.

For additional information about the key estimates and assumptions used in our determination of fair value, see Note 13 to the Unaudited Interim Consolidated Financial Statements.

Realized Investment Gains and Losses

Realized investment gains and losses are generated from numerous sources, including the following significant items:

•

sale of investments

•

adjustments to the cost basis of investments for other-than-temporary impairments

•

recognition of other-than-temporary impairments in earnings for foreign denominated securities that are approaching maturity and are in an unrealized loss position due to foreign currency exchange rate movements

•

prepayment premiums received on private fixed maturity securities

•

net changes in the allowance for losses, certain restructurings and foreclosures on commercial mortgage and other loans

•

fair value changes on commercial mortgage loans carried at fair value

•

fair value changes on embedded derivatives and free-standing derivatives that do not qualify for hedge accounting treatment

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The level of other-than-temporary impairments generally reflects economic conditions and is expected to increase when economic conditions worsen and to decrease when economic conditions improve. Historically, the causes of other-than-temporary impairments have been specific to each individual issuer and have not directly resulted in impairments to other securities within the same industry or geographic region. We may also realize additional credit and interest rate related losses through sales of investments pursuant to our credit risk and portfolio management objectives. For additional information regarding our policies regarding other-than-temporary-impairments for fixed maturity and equity securities, 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, 2013.

We use interest rate and currency swaps and other derivatives to manage interest and currency exchange rate exposures arising from mismatches between assets and liabilities, including duration mismatches. We use derivative contracts to mitigate the risk that unfavorable changes in currency exchange rates will materially affect U.S. dollar equivalent earnings generated by certain of our non-U.S. businesses. We also use equity-based and interest rate derivatives to hedge a portion of the risks embedded in certain variable annuity products with optional living benefit guarantees. Derivative contracts also include forward purchases and sales of “to be announced” (“TBA”) mortgage-backed securities primarily related to our dollar roll program. Many of these derivative contracts do not qualify for hedge accounting and, consequently, we recognize the changes in fair value of such contracts from period to period in current earnings, although we do not necessarily account for the related assets or liabilities the same way.

Accordingly, realized investment gains and losses from our derivative activities can contribute significantly to fluctuations in net income. For a further discussion of optional living benefit guarantees and related hedge positions in our Individual Annuities segment, see “—Results of Operations for Financial Services Businesses by Segment—U.S. Retirement Solutions and Investment Management Division—Individual Annuities” above.

Adjusted operating income generally excludes “Realized investment gains (losses), net,” subject to certain exceptions. These exceptions primarily include realized investment gains or losses within certain of our businesses for which such gains or losses are a principal source of earnings, gains or losses associated with terminating hedges of foreign currency earnings and current period yield adjustments, and related charges and adjustments. Other-than-temporary impairments, interest rate related losses and credit related losses on sales (other than those related to certain of our businesses which primarily originate investments for sale or syndication to unrelated investors) are excluded from adjusted operating income.

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The following table sets forth “Realized investment gains (losses), net,” by investment type for the Financial Services Businesses and Closed Block Business, as well as related charges and adjustments associated with the Financial Services Businesses, for the periods indicated. For additional details regarding adjusted operating income, which is our measure of performance for the segments of our Financial Services Businesses, see Note 11 to the Unaudited Interim Consolidated Financial Statements.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Realized investment gains (losses), net:
Financial Services Businesses	$	(325	)	$	(2,319	)	$	(13	)	$	(4,141	)
Closed Block Business		400			209			905			284

Consolidated realized investment gains (losses), net	$	75		$	(2,110	)	$	892		$	(3,857	)


Financial Services Businesses:
Realized investment gains (losses), net:
Fixed maturity securities	$	71		$	300		$	450		$	595
Equity securities		8			18			72			82
Commercial mortgage and other loans		63			25			79			61
Derivative instruments		(463	)		(2,685	)		(618	)		(4,907	)
Other		(4	)		23			4			28

Total	$	(325	)	$	(2,319	)	$	(13	)	$	(4,141	)

Related adjustments		(836	)		1,000			(1,301	)		(3,181	)

Realized investment gains (losses), net, and related adjustments		(1,161	)		(1,319	)		(1,314	)		(7,322	)

Related charges		29			763			(99	)		1,533

Realized investment gains (losses), net, and related charges and adjustments	$	(1,132	)	$	(556	)	$	(1,413	)	$	(5,789	)

Closed Block Business:
Realized investment gains (losses), net:
Fixed maturity securities	$	92		$	69		$	338		$	118
Equity securities		177			181			366			287
Commercial mortgage and other loans		28			5			28			7
Derivative instruments		107			(45	)		177			(123	)
Other		(4	)		(1	)		(4	)		(5	)

Total	$	400		$	209		$	905		$	284

2014 to 2013 Three Month Comparison

Financial Services Businesses

The Financial Services Businesses’ net realized investment losses were $325 million in the third quarter of 2014, compared to net realized investment losses of $2,319 million in the third quarter of 2013.

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Net realized gains on fixed maturity securities were $71 million in the third quarter of 2014, compared to net realized gains of $300 million in the third quarter of 2013, as set forth in the following table.


	Three Months Ended September 30,
	2014			2013
	(in millions)
Realized investment gains (losses), net—Fixed Maturity Securities—Financial Services Businesses
Gross realized investment gains:
Gross gains on sales and maturities(1)	$	157		$	449
Private bond prepayment premiums		36			28

Total gross realized investment gains		193			477

Gross realized investment losses:
Net other-than-temporary impairments recognized in earnings(2)		(4	)		(28	)
Gross losses on sales and maturities(1)		(104	)		(147	)
Credit related losses on sales		(14	)		(2	)

Total gross realized investment losses		(122	)		(177	)

Realized investment gains (losses), net—Fixed Maturity Securities	$	71		$	300

Net gains (losses) on sales and maturities—Fixed Maturity Securities(1)	$	53		$	302

(1)	Amounts exclude prepayment premiums, other-than-temporary impairments, and credit related losses through sales of investments pursuant to our credit risk objectives.

(2)	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.

Net gains on sales and maturities of fixed maturity securities in the third quarter of 2014 of $53 million were primarily due to maturities of U.S. dollar-denominated securities within our International Insurance segment. Net gains on sales and maturities of fixed maturity securities in the third quarter of 2013 of $302 million were primarily due to sales within our International Insurance segment which were initiated for purposes of duration management. See below for additional information regarding the other-than-temporary impairments of fixed maturity securities in the third quarter of 2014 and 2013.

Net realized gains on equity securities were $8 million and $18 million in the third quarter of 2014 and 2013, respectively, and included net gains on sales of equity securities of $17 million and $19 million, respectively. Both periods’ gains were offset by other-than-temporary impairments of $9 million and $1 million, respectively. See below for additional information regarding other-than-temporary impairments of equity securities in the third quarter of 2014 and of 2013.

Net realized gains on commercial mortgage and other loans in the third quarter were $63 million, primarily driven by a net decrease in the loan loss reserve of $52 million, including the impact of assumption updates. Net realized gains on commercial mortgage and other loans in the third quarter of 2013 were $25 million, primarily related to a net decrease in the loan loss reserve of $32 million. For additional information regarding our commercial mortgage and other loan loss reserves see “—General Account Investments—Commercial Mortgage and Other Loans—Commercial Mortgage and Other Loan Quality.”

Net realized losses on derivatives were $463 million in the third quarter of 2014, compared to net realized losses of $2,685 million in the third quarter of 2013. The net derivative losses in the third quarter of 2014 primarily reflect $1,006 million of losses on product related embedded derivatives and related hedge positions mainly associated with certain variable annuity contracts. Offsetting these losses are net gains of $363 million on currency derivatives used to hedge foreign denominated investments as the U.S. dollar strengthened against various currencies, $142 million of gains on interest rate derivatives used to manage duration as longer-term

167

interest rates decreased and $39 million of gains representing fees earned on fee-based synthetic guaranteed investment contracts which are accounted for as derivatives. The net derivative losses in 2013 primarily reflect net losses of $2,507 million on product related embedded derivatives and related hedge positions mainly associated with certain variable annuity contracts as well as net mark-to-market losses of $155 million on interest rate derivatives used to manage duration as interest rates increased.

Related adjustments include the portions of “Realized investment gains (losses), net” that are included in adjusted operating income and the portions of “Other income” and “Net investment income” that are excluded from adjusted operating income. These adjustments are made to arrive at “Realized investment gains (losses), net, and related adjustments” which are excluded from adjusted operating income. Results for the third quarter of 2014 include net negative related adjustments of $836 million driven by the impact of foreign currency exchange rate movements on certain non-yen denominated assets and liabilities within our Japanese insurance operations for which the foreign currency exposure is economically matched and offset in AOCI, and by settlements on interest rate and currency derivatives. Results for the third quarter of 2013 include net positive related adjustments of $1,000 million primarily driven by the impact of foreign currency exchange rate movements on certain non-yen denominated assets and liabilities within our Japanese insurance operations, as discussed above.

Charges that relate to “Realized investment gains (losses), net and related adjustments” are also excluded from adjusted operating income, and may be reflected as net charges or net benefits. Results include net related benefits of $29 million and $763 million for the third quarter of 2014 and of 2013, respectively. The benefits in both periods were driven by the impact of derivative activity on the amortization of deferred policy acquisition and other costs and certain policyholder reserves. For additional information, see Note 11 to the Unaudited Interim Consolidated Financial Statements.

During the third quarter of 2014, we recorded other-than-temporary impairments of $23 million in earnings, compared to $33 million in the third quarter of 2013. The following tables set forth, for the periods indicated, the composition of other-than-temporary impairments recorded in earnings attributable to the Financial Services Businesses by asset type, and for fixed maturity securities, by reason.


	Three Months Ended September 30,
	2014		2013
	(in millions)
Other-than-temporary impairments recorded in earnings—Financial Services Businesses(1)
Public fixed maturity securities	$	3	$	20
Private fixed maturity securities		1		8

Total fixed maturity securities		4		28
Equity securities		9		1
Other invested assets(2)		10		4

Total	$	23	$	33

(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.

(2)	Includes other-than-temporary impairments relating to investments in joint ventures and partnerships.

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	Three Months Ended September 30,
	2014		2013
	(in millions)
Other-than-temporary impairments on fixed maturity securities recorded in earnings—Financial Services Businesses(1)
Due to credit events or adverse conditions of the respective issuer(2)	$	2	$	26
Due to other accounting guidelines(3)		2		2

Total	$	4	$	28

(1)	Excludes the portion of other-than-temporary impairment 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.

(2)

Represents circumstances where we believe credit events or other adverse conditions of the respective issuers have caused, or will lead to, a deficiency in the contractual cash flows related to the investment. The amount of the impairment recorded in earnings is the difference between the amortized cost of the debt 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.

(3)	Primarily represents circumstances where securities with losses from foreign currency exchange rate movements approach maturity or where we intend to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis.

Fixed maturity security other-than-temporary impairments in the third quarter of 2014 were concentrated in the finance, industrial other and technology sectors within corporate securities. These other-than-temporary impairments were primarily related to securities we intend to sell, or securities with liquidity concerns, downgrades in credit, bankruptcy or other adverse financial conditions of the respective issuers. During the third quarter of 2014, we recorded other-than-temporary impairments of $2 million related to securities with unrealized losses from foreign currency exchange rate movements that are approaching maturity. Fixed maturity security other-than-temporary impairments in the third quarter of 2013 were concentrated in asset-backed securities collateralized by sub-prime mortgages and the consumer non-cyclical and consumer cyclical sectors within corporate securities. These other-than-temporary impairments were primarily related to intent to sell securities or related to securities with liquidity concerns, downgrades in credit, bankruptcy or other adverse financial conditions of the respective issuers.

Equity security other-than-temporary impairments in the third quarter of 2014 were primarily driven by the extent and duration of declines in values. Equity security other-than-temporary impairments in the third quarter of 2013 were primarily driven by circumstances where the decline in value was maintained for one year or greater or where we intended to sell the security.

Closed Block Business

For the Closed Block Business, net realized investment gains in the third quarter of 2014 were $400 million, compared to net realized investment gains of $209 million in the third quarter of 2013.

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Net realized gains on fixed maturity securities were $92 million in the third quarter of 2014, compared to net realized gains of $69 million in the third quarter of 2013, as set forth in the following table.


	Three Months Ended September 30,
	2014			2013
	(in millions)
Realized investment gains (losses), net—Fixed Maturity Securities—Closed Block Business
Gross realized investment gains:
Gross gains on sales and maturities(1)	$	92		$	118
Private bond prepayment premiums		9			13

Total gross realized investment gains		101			131

Gross realized investment losses:
Net other-than-temporary impairments recognized in earnings(2)		(1	)		(15	)
Gross losses on sales and maturities(1)		(4	)		(43	)
Credit related losses on sales		(4	)		(4	)

Total gross realized investment losses		(9	)		(62	)

Realized investment gains (losses), net—Fixed Maturity Securities	$	92		$	69

Net gains (losses) on sales and maturities—Fixed Maturity Securities(1)	$	88		$	75

(1)	Amounts exclude prepayment premiums, other-than-temporary impairments, and credit related losses through sales of investments pursuant to our credit risk objectives.

(2)	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.

Net realized gains on equity securities were $177 million and $181 million in the third quarter of 2014 and 2013, respectively, primarily driven by net gains on sales of equity securities. See below for additional information regarding other-than-temporary impairments of fixed maturity securities in the third quarter of 2014 and 2013.

Net realized gains on commercial mortgage and other loans in the third quarter of 2014 were $28 million, primarily driven by a net decrease in the loan loss reserve of $28 million, including the impact of assumption updates. Net realized gains on commercial mortgage and other loans in the third quarter of 2013 were $5 million primarily driven by a net decrease in the loan loss reserve of $5 million. For additional information regarding our loan loss reserves, see “—General Account Investments—Commercial Mortgage and Other Loans—Commercial Mortgage and Other Loan Quality.”

Net realized gains on derivatives were $107 million in the third quarter of 2014, compared to net realized losses of $45 million in the third quarter of 2013. Derivative gains in the third quarter of 2014 primarily reflect net gains of $113 million on currency derivatives used to hedge foreign denominated investments as the U.S. dollar strengthened against various currencies. Derivative losses in the third quarter of 2013 primarily reflect net losses of $79 million on currency derivatives used to hedge foreign denominated investments as the U.S. dollar weakened against the euro and other currencies. Partially offsetting these losses were net gains of $21 million on interest rate derivatives primarily used to manage duration.

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During the third quarter of 2014, we recorded other-than-temporary impairments of $6 million in earnings, compared to $19 million in the third quarter of 2013. The following tables set forth, for the periods indicated, the composition of other-than-temporary impairments recorded in earnings attributable to the Closed Block Business by asset type, and for fixed maturity securities, by reason.


	Three Months Ended September 30,
	2014		2013
	(in millions)
Other-than-temporary impairments recorded in earnings—Closed Block Business(1)
Public fixed maturity securities	$	1	$	11
Private fixed maturity securities		0		4

Total fixed maturity securities		1		15
Equity securities		0		2
Other invested assets(2)		5		2

Total	$	6	$	19

(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.

(2)	Includes other-than-temporary impairments relating to investments in joint ventures and partnerships.


	Three Months Ended September 30,
	2014		2013
	(in millions)
Other-than-temporary impairments on fixed maturity securities recorded in earnings—Closed Block Business(1)
Due to credit events or adverse conditions of the respective issuer(2)	$	1	$	14
Due to other accounting guidelines		0		1

Total	$	1	$	15

(1)	Excludes the portion of other-than-temporary impairment 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.

(2)

Fixed maturity security other-than-temporary impairments in the third quarter of 2014 were concentrated in the consumer cyclical sector within corporate securities. Fixed maturity security other-than-temporary impairments in the third quarter of 2013 were concentrated in asset-backed securities collateralized by sub-prime mortgages and in the consumer non-cyclical sector within corporate securities. These other-than-temporary impairments reflect adverse financial conditions of the respective issuers.

During the third quarter of 2014 there were no other-than-temporary impairments on equity securities. Equity security other-than-temporary impairments in the third quarter of 2013 were primarily due to the extent and duration of declines in values.

2014 to 2013 Nine Month Comparison

Financial Services Businesses

The Financial Services Businesses’ net realized investment losses were $13 million in the first nine months of 2014, compared to net realized investment losses of $4,141 million in the first nine months of 2013.

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Net realized gains on fixed maturity securities were $450 million in the first nine months of 2014, compared to net realized gains of $595 million in the first nine months of 2013, as set forth in the following table.


	Nine Months Ended September 30,
	2014			2013
	(in millions)
Realized investment gains (losses), net—Fixed Maturity Securities—Financial Services Businesses
Gross realized investment gains:
Gross gains on sales and maturities(1)	$	729		$	953
Private bond prepayment premiums		69			57

Total gross realized investment gains		798			1,010

Gross realized investment losses:
Net other-than-temporary impairments recognized in earnings(2)		(31	)		(110	)
Gross losses on sales and maturities(1)		(280	)		(277	)
Credit related losses on sales		(37	)		(28	)

Total gross realized investment losses		(348	)		(415	)

Realized investment gains (losses), net—Fixed Maturity Securities	$	450		$	595

Net gains (losses) on sales and maturities—Fixed Maturity Securities(1)	$	449		$	676

(1)	Amounts exclude prepayment premiums, other-than-temporary impairments, and credit related losses through sales of investments pursuant to our credit risk objectives.

(2)	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.

Net gains on sales and maturities of fixed maturity securities in the first nine months of 2014 were $449 million primarily due to maturities of U.S. dollar-denominated securities within our International Insurance segment. Net gains on sales and maturities of fixed maturity securities in the first nine months of 2013 were $676 million, primarily due to sales within our International Insurance segment initiated for purposes of duration management as well as resulting from surrenders of fixed annuities denominated in Australian and U.S. dollars. See below for additional information regarding the other-than-temporary impairments of fixed maturity securities in the first nine months of 2014 and 2013.

Net realized gains on equity securities were $72 million and $82 million in the first nine months of 2014 and 2013, respectively, and included net gains on sales of equity securities of $95 million and $91 million, respectively. Both periods’ gains were primarily offset by other-than-temporary impairments of $23 million and $9 million, respectively. See below for additional information regarding other-than-temporary impairments of equity securities in the first nine months of 2014 and of 2013.

Net realized gains on commercial mortgage and other loans in the first nine months of 2014 were $79 million, primarily driven by a net decrease in the loan loss reserve of $60 million, including the impact of assumption updates. Net realized gains on commercial mortgage and other loans in the first nine months of 2013 were $61 million, primarily related to a net decrease in the loan loss reserve of $46 million. For additional information regarding our commercial mortgage and other loan loss reserves, see “—General Account Investments—Commercial Mortgage and Other Loans—Commercial Mortgage and Other Loan Quality.”

Net realized losses on derivatives were $618 million in the first nine months of 2014, compared to net realized losses of $4,907 million in the first nine months of 2013. The net derivative losses in the first nine months of 2014 primarily reflect net losses of $2,046 million on product related embedded derivatives and related hedge positions mainly associated with certain variable annuity contracts. Offsetting these losses are net gains of $888 million on interest rate derivatives used to manage duration as longer-term interest rates decreased

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and $125 million of gains representing fees earned on fee-based synthetic guaranteed investment contracts which are accounted for as derivatives. The net derivative losses in the first nine months of 2013 primarily reflect net losses of $3,789 million on product related embedded derivatives and related hedge positions mainly associated with certain variable annuity contracts as well as net mark-to-market losses of $761 million on interest rate derivatives used to manage duration as interest rates increased. Also contributing to the net derivative losses were net losses of $629 million on foreign currency derivatives used to hedge portfolio assets in our Japan business primarily due to the weakening of the Japanese yen against the U.S. dollar and other currencies. Partially offsetting these losses were net gains of $315 million on foreign currency forward contracts used to hedge the future income of non-U.S. businesses, predominantly in Japan, due to the strengthening of the U.S. dollar against the Japanese yen.

Related adjustments for the first nine months of 2014 include net negative adjustments of $1,301 million driven by settlements on interest rate and currency derivatives, and by the impact of foreign currency exchange rate movements on certain non-yen denominated assets and liabilities within our Japanese insurance operations, as discussed above. Related adjustments for the first nine months of 2013 include net negative adjustments of $3,181 million primarily driven by the impact of foreign currency exchange rate movements on certain non-yen denominated assets and liabilities within our Japanese insurance operations, as discussed above.

Related charges include net related charges of $99 million for the first nine months of 2014 compared to net related benefits of $1,533 million for the first nine months of 2013. Both periods’ results were driven by the impact of derivative activity on the amortization of deferred policy acquisition and other costs and certain policyholder reserves.

During the first nine months of 2014, we recorded other-than-temporary impairments of $64 million in earnings, compared to $129 million in the first nine months of 2013. The following tables set forth, for the periods indicated, the composition of other-than-temporary impairments recorded in earnings attributable to the Financial Services Businesses by asset type, and for fixed maturity securities, by reason.


	Nine Months Ended September 30,
	2014		2013
	(in millions)
Other-than-temporary impairments recorded in earnings—Financial Services Businesses(1)
Public fixed maturity securities	$	19	$	89
Private fixed maturity securities		12		21

Total fixed maturity securities		31		110
Equity securities		23		9
Other invested assets(2)		10		10

Total	$	64	$	129

(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.

(2)	Includes other-than-temporary impairments relating to investments in joint ventures and partnerships.

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	Nine Months Ended September 30,
	2014		2013
	(in millions)
Other-than-temporary impairments on fixed maturity securities recorded in earnings—Financial Services Businesses(1)
Due to credit events or adverse conditions of the respective issuer(2)	$	20	$	56
Due to other accounting guidelines(3)		11		54

Total	$	31	$	110

(1)	Excludes the portion of other-than-temporary impairment 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.

(2)

(3)	Primarily represents circumstances where securities with losses from foreign currency exchange rate movements approach maturity or where we intend to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis.

Fixed maturity security other-than-temporary impairments in the first nine months of 2014 were concentrated in the consumer cyclical, utility, finance and communications sectors within corporate securities and in asset-backed securities collateralized by sub-prime mortgages. These other-than-temporary impairments were primarily related to securities we intend to sell, or securities with liquidity concerns, downgrades in credit, bankruptcy or other adverse financial conditions of the respective issuers. During the first nine months of 2014, we recorded other-than-temporary impairments of $6 million related to securities with unrealized losses from foreign currency exchange rate movements that are approaching maturity. Fixed maturity security other-than-temporary impairments in the first nine months of 2013 were concentrated in the asset-backed securities collateralized by sub-prime mortgages, and in the communications, utility and consumer non-cyclical sectors within corporate securities. These other-than-temporary impairments were primarily related to securities we intend to sell, or related to securities with liquidity concerns, downgrades in credit, bankruptcy or other adverse financial conditions of the respective issuers. During the first nine months of 2013, we recorded other-than-temporary impairments of $2 million related to securities with unrealized losses from foreign currency exchange rate movements that are approaching maturity.

Equity security other-than-temporary impairments in the first nine months of 2014 were primarily due to the extent and duration of declines in values. Equity security other-than-temporary impairments in the first nine months of 2013 were primarily driven by circumstances where the decline in value was maintained for one year or greater or where we intended to sell the security.

Closed Block Business

For the Closed Block Business, net realized investment gains in the first nine months of 2014 were $905 million, compared to net realized investment gains of $284 million in the first nine months of 2013.

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Net realized gains on fixed maturity securities were $338 million in the first nine months of 2014, compared to net realized gains of $118 million in the first nine months of 2013, as set forth in the following table.


	Nine Months Ended September 30,
	2014			2013
	(in millions)
Realized investment gains (losses), net—Fixed Maturity Securities—Closed Block Business
Gross realized investment gains:
Gross gains on sales and maturities(1)	$	373		$	213
Private bond prepayment premiums		24			26

Total gross realized investment gains		397			239

Gross realized investment losses:
Net other-than-temporary impairments recognized in earnings(2)		(16	)		(36	)
Gross losses on sales and maturities(1)		(31	)		(74	)
Credit related losses on sales		(12	)		(11	)

Total gross realized investment losses		(59	)		(121	)

Realized investment gains (losses), net—Fixed Maturity Securities	$	338		$	118

Net gains (losses) on sales and maturities—Fixed Maturity Securities(1)	$	342		$	139

(1)	Amounts exclude prepayment premiums, other-than-temporary impairments, and credit related losses through sales of investments pursuant to our credit risk objectives.

(2)	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.

Net realized gains on equity securities were $366 million and $287 million in the first nine months of 2014 and 2013, respectively, resulting from net gains on sales of equity securities. See below for additional information regarding the other-than-temporary impairments of equity securities in the first nine months of 2014 and 2013.

Net realized gains on commercial mortgage and other loans in the first nine months of 2014 were $28 million, primarily driven by a net decrease in the loan loss reserve of $30 million, including the impact of assumption updates. Net realized gains on commercial mortgage and other loans in the first nine months of 2013 were $7 million, primarily related to a net decrease in the loan loss reserve of $10 million. For additional information regarding our loan loss reserves, see “—General Account Investments—Commercial Mortgage and Other Loans—Commercial Mortgage and Other Loan Quality.”

Net realized gains on derivatives were $177 million in the first nine months of 2014, compared to net realized losses of $123 million in the first nine months of 2013. Derivative gains in the first nine months of 2014 primarily reflect net gains of $109 million on currency derivatives used to hedge foreign denominated investments as the U.S. dollar strengthened against various currencies, $40 million net gains on interest rate derivatives primarily used to manage duration and net gains of $32 million on TBA forward contracts as longer-term interest rates decreased. Derivative losses in the first nine months of 2013 primarily reflect net losses of $76 million on interest rate derivatives primarily used to manage duration as interest rates increased as well as losses of $48 million on currency derivatives used to hedge foreign denominated investments as the U.S. dollar weakened against the euro.

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During the first nine months of 2014, we recorded other-than-temporary impairments of $24 million in earnings, compared to $44 million in the first nine months of 2013. The following tables set forth, for the periods indicated, the composition of other-than-temporary impairments recorded in earnings attributable to the Closed Block Business by asset type, and for fixed maturity securities, by reason.


	Nine Months Ended September 30,
	2014		2013
	(in millions)
Other-than-temporary impairments recorded in earnings —Closed Block Business(1)
Public fixed maturity securities	$	10	$	26
Private fixed maturity securities		6		10

Total fixed maturity securities		16		36
Equity securities		3		2
Other invested assets(2)		5		6

Total	$	24	$	44

(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.

(2)	Includes other-than-temporary impairments relating to investments in joint ventures and partnerships.


	Nine Months Ended September 30,
	2014		2013
	(in millions)
Other-than-temporary impairments on fixed maturity securities recorded in earnings—Closed Block Business(1)
Due to credit events or adverse conditions of the respective issuer(2)	$	15	$	31
Due to other accounting guidelines		1		5

Total	$	16	$	36

(1)	Excludes the portion of other-than-temporary impairment 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.

(2)

Fixed maturity security other-than-temporary impairments in the first nine months of 2014 were concentrated in the consumer cyclical and communications sectors within corporate securities and in asset-backed securities collateralized by sub-prime mortgages. Fixed maturity security other-than-temporary impairments in the first nine months of 2013 were concentrated in asset-backed securities collateralized by sub-prime mortgages and in the consumer non-cyclical, communications, and utility sectors within corporate securities. These other-than-temporary impairments reflect adverse financial conditions of the respective issuers.

Equity security other-than-temporary impairments in the first nine months of both 2014 and 2013 were primarily due to the extent and duration of declines in values.

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General Account Investments

Portfolio Composition

Our investment portfolio consists of public and private fixed maturity securities, commercial mortgage and other loans, policy loans, and non-coupon investments, which include equity securities and other long-term investments such as joint ventures and limited partnerships, real estate held through direct ownership and seed money investments in separate accounts. The composition of our general account reflects, within the discipline provided by our risk management approach, our need for competitive results and the selection of diverse investment alternatives available primarily through our Asset Management segment. The size of our portfolio enables us to invest in asset classes that may be unavailable to the typical investor.

The following tables set forth the composition of the investments of our general account apportioned between the Financial Services Businesses and the Closed Block Business as of the dates indicated.


	September 30, 2014
	Financial Services Businesses		Closed Block Business		Total		% of Total
	($ in millions)
Fixed maturities:
Public, available-for-sale, at fair value	$	222,694	$	29,275	$	251,969		62.0	%
Public, held-to-maturity, at amortized cost		2,211		0		2,211		0.5
Private, available-for-sale, at fair value		33,149		15,673		48,822		12.0
Private, held-to-maturity, at amortized cost		669		0		669		0.2
Trading account assets supporting insurance liabilities, at fair value		20,507		0		20,507		5.0
Other trading account assets, at fair value		1,461		318		1,779		0.4
Equity securities, available-for-sale, at fair value		6,370		3,501		9,871		2.4
Commercial mortgage and other loans, at book value		34,202		10,287		44,489		10.9
Policy loans, at outstanding balance		6,928		4,929		11,857		2.9
Other long-term investments(1)		7,281		2,545		9,826		2.4
Short-term investments		4,534		746		5,280		1.3

Total general account investments		340,006		67,274		407,280		100.0	%

Invested assets of other entities and operations(2)		9,461		0		9,461

Total investments	$	349,467	$	67,274	$	416,741

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	December 31, 2013
	Financial Services Businesses		Closed Block Business		Total		% of Total
	($ in millions)
Fixed maturities:
Public, available-for-sale, at fair value	$	212,689	$	27,401	$	240,090		61.3	%
Public, held-to-maturity, at amortized cost		2,500		0		2,500		0.7
Private, available-for-sale, at fair value		30,650		15,811		46,461		11.9
Private, held-to-maturity, at amortized cost		812		0		812		0.2
Trading account assets supporting insurance liabilities, at fair value		20,827		0		20,827		5.3
Other trading account assets, at fair value		1,341		342		1,683		0.4
Equity securities, available-for-sale, at fair value		6,019		3,884		9,903		2.5
Commercial mortgage and other loans, at book value		31,133		9,673		40,806		10.4
Policy loans, at outstanding balance		6,753		5,013		11,766		3.0
Other long-term investments(1)		7,172		2,024		9,196		2.4
Short-term investments		5,445		1,866		7,311		1.9

Total general account investments		325,341		66,014		391,355		100.0	%

Invested assets of other entities and operations(2)		6,818		0		6,818

Total investments	$	332,159	$	66,014	$	398,173

(1)

Other long-term investments consist of real estate and non-real estate-related investments in joint ventures and partnerships, investment real estate held through direct ownership and other miscellaneous investments. For additional information regarding these investments, see “—Other Long-Term Investments” below.

(2)

Includes invested assets of our asset management and derivative operations. Excludes assets of our asset management operations that are managed for third parties and those assets classified as “Separate account assets” on our balance sheet. For additional information regarding these investments, see “—Invested Assets of Other Entities and Operations” below.

The increase in general account investments attributable to the Financial Services Businesses in the first nine months of 2014 was primarily due to a net increase in fair value driven by a decrease in interest rates in the U.S. and Japan as well as portfolio growth driven by the reinvestment of net investment income and net business inflows. The general account investments attributable to the Closed Block Business also increased in the first nine months of 2014, primarily due to a net increase in fair value driven by a decrease in interest rates in the U.S. For information regarding the methodology used in determining the fair value of our fixed maturities, see Note 13 to the Unaudited Interim Consolidated Financial Statements.

We have substantial insurance operations in Japan, with 43% of our Financial Services Businesses’ general account investments relating to our Japanese insurance operations as of both September 30, 2014 and December 31, 2013.

178

The following table sets forth the composition related to the investments of our Japanese insurance operations’ general account as of the dates indicated.


	September 30, 2014		December 31, 2013
	(in millions)
Fixed maturities:
Public, available-for-sale, at fair value	$	119,295	$	112,501
Public, held-to-maturity, at amortized cost		2,211		2,500
Private, available-for-sale, at fair value		7,844		6,762
Private, held-to-maturity, at amortized cost		669		812
Trading account assets supporting insurance liabilities, at fair value		1,956		1,925
Other trading account assets, at fair value		746		884
Equity securities, available-for-sale, at fair value		2,643		2,557
Commercial mortgage and other loans, at book value		7,208		6,581
Policy loans, at outstanding balance		2,308		2,280
Other long-term investments(1)		1,847		1,576
Short-term investments		294		541

Total Japanese general account investments	$	147,021	$	138,919

(1)	Other long-term investments consist of real estate and non-real estate-related investments in joint ventures and partnerships, investment real estate held through direct ownership, derivatives, and other miscellaneous investments.

The increase in general account investments related to our Japanese insurance operations in the first nine months of 2014 was primarily attributable to a net increase in fair value driven by declining interest rates, as well as portfolio growth as a result of net business inflows and the reinvestment of net investment income, partially offset by the translation impact of the yen weakening against the U.S. dollar.

The functional currency of our Japanese insurance subsidiaries is the yen and, although the majority of the Japanese general account is invested in yen-denominated investments, our Japanese insurance operations also hold significant investments denominated in U.S. and Australian dollars.

As of September 30, 2014, our Japanese insurance operations had $48.3 billion, at fair value, of investments denominated in U.S. dollars, including $3.7 billion that were hedged to yen through third party derivative contracts and $31.1 billion that support liabilities denominated in U.S. dollars, with the remainder hedging our foreign currency exchange rate exposure on U.S. dollar-equivalent equity. As of December 31, 2013, our Japanese insurance operations had $42.6 billion, at fair value, of investments denominated in U.S. dollars, including $3.5 billion that were hedged to yen through third party derivative contracts and $29.9 billion that support liabilities denominated in U.S. dollars, with the remainder hedging our foreign currency exchange rate exposure on U.S. dollar-equivalent equity. The $5.7 billion increase in the fair value of U.S. dollar-denominated investments from December 31, 2013, is primarily attributable to a net increase in fair value driven by declining interest rates, as well as portfolio growth as a result of business inflows and the reinvestment of net investment income.

Our Japanese insurance operations had $12.0 billion and $8.5 billion, at fair value, of investments denominated in Australian dollars that support liabilities denominated in Australian dollars as of September 30, 2014 and December 31, 2013, respectively. The $3.5 billion increase in the fair value of Australian dollar-denominated investments from December 31, 2013, is primarily attributable to a net increase in fair value driven by declining interest rates, as well as portfolio growth as a result of business inflows and the reinvestment of net investment income.

For additional information regarding U.S. and Australian dollar investments held in our Japanese insurance operations, see “—Results of Operations for Financial Services Businesses by Segment—International Insurance Division,” above.

179

Investment Results

The following tables set forth the income yield and investment income for each major investment category of our general account for the periods indicated. The yields are based on net investment income as reported under U.S. GAAP and as such do not include certain interest related items, such as settlements of duration management swaps which are included in realized gains and losses.


	Three Months Ended September 30, 2014
	Financial Services Businesses						Closed Block Business						Combined
	Yield(1)			Amount			Yield(1)			Amount			Yield(1)			Amount
	($ in millions)
Fixed maturities		3.83	%	$	2,211			5.08	%	$	485			4.01	%	$	2,696
Trading account assets supporting insurance liabilities		3.71			192			0.00			0			3.71			192
Equity securities		6.24			75			2.94			17			5.17			92
Commercial mortgage and other loans		4.57			381			5.31			134			4.74			515
Policy loans		5.11			89			5.99			73			5.48			162
Short-term investments and cash equivalents		0.22			7			1.73			3			0.26			10
Other investments		8.71			185			10.98			78			9.28			263

Gross investment income before investment expenses		3.96			3,140			5.37			790			4.18			3,930
Investment expenses		(0.13	)		(82	)		(0.27	)		(42	)		(0.15	)		(124	)

Investment income after investment expenses		3.83	%		3,058			5.10	%		748			4.03	%		3,806

Investment results of other entities and operations(2)					35						0						35

Total investment income				$	3,093					$	748					$	3,841


	Three Months Ended September 30, 2013
	Financial Services Businesses						Closed Block Business						Combined
	Yield(1)			Amount			Yield(1)			Amount			Yield(1)			Amount
	($ in millions)
Fixed maturities		3.76	%	$	2,133			5.16	%	$	495			3.96	%	$	2,628
Trading account assets supporting insurance liabilities		3.69			192			0.00			0			3.69			192
Equity securities		6.92			72			3.45			21			5.65			93
Commercial mortgage and other loans		4.96			353			5.70			139			5.15			492
Policy loans		4.82			81			6.17			77			5.40			158
Short-term investments and cash equivalents		0.24			7			0.78			2			0.27			9
Other investments		6.34			126			6.49			36			6.37			162

Gross investment income before investment expenses		3.86			2,964			5.26			770			4.09			3,734
Investment expenses		(0.12	)		(65	)		(0.25	)		(37	)		(0.14	)		(102	)

Investment income after investment expenses		3.74	%		2,899			5.01	%		733			3.95	%		3,632

Investment results of other entities and operations(2)					18						0						18

Total investment income				$	2,917					$	733					$	3,650

(1)

Yields are annualized, for interim periods, and are based on quarterly average carrying values except for fixed maturities, equity securities and securities lending activity. Yields for fixed maturities are based on amortized cost. Yields for equity securities are based on cost. Yields for fixed maturities and short-term investments and cash equivalents are calculated net of liabilities and rebate expenses corresponding to securities lending activity. Yields exclude investment income on assets other than those included in invested assets.

(2)	Includes investment income of our asset management operations and derivative operations, as described below under “—Invested Assets of Other Entities and Operations.”

180

See below for a discussion of the change in the Financial Services Businesses’ yields. The increase in net investment income yield attributable to the Closed Block Business for the three months ended September 30, 2014, compared to the three months ended September 30, 2013, was primarily due to higher income from non-coupon investments, partially offset by lower fixed income reinvestment rates.

The following tables set forth the income yield and investment income for each major investment category of our general account for the periods indicated. The yields are based on net investment income as reported under U.S. GAAP and as such do not include certain interest rate related items, such as settlements of duration management swaps which are included in realized gains and losses.


	Nine Months Ended September 30, 2014
	Financial Services Businesses						Closed Block Business						Combined
	Yield(1)			Amount			Yield(1)			Amount			Yield(1)			Amount
	($ in millions)
Fixed maturities		3.86	%	$	6,578			5.15	%	$	1,450			4.05	%	$	8,028
Trading account assets supporting insurance liabilities		3.76			579			0.00			0			3.76			579
Equity securities		6.25			218			3.55			63			5.34			281
Commercial mortgage and other loans		4.72			1,134			5.40			395			4.88			1,529
Policy loans		5.04			256			5.99			218			5.44			474
Short-term investments and cash equivalents		0.22			19			1.21			6			0.26			25
Other investments		9.00			564			12.79			242			9.88			806

Gross investment income before investment expenses		4.02			9,348			5.49			2,374			4.25			11,722
Investment expenses		(0.13	)		(255	)		(0.27	)		(116	)		(0.15	)		(371	)

Investment income after investment expenses		3.89	%		9,093			5.22	%		2,258			4.10	%		11,351

Investment results of other entities and operations(2)					82						0						82

Total investment income				$	9,175					$	2,258					$	11,433


	Nine Months Ended September 30, 2013
	Financial Services Businesses						Closed Block Business						Combined
	Yield(1)			Amount			Yield(1)			Amount			Yield(1)			Amount
	($ in millions)
Fixed maturities		3.75	%	$	6,416			5.29	%	$	1,515			3.97	%	$	7,931
Trading account assets supporting insurance liabilities		3.80			584			0.00			0			3.80			584
Equity securities		6.53			200			3.55			65			5.42			265
Commercial mortgage and other loans		5.07			1,042			5.79			413			5.25			1,455
Policy loans		4.76			235			5.95			221			5.27			456
Short-term investments and cash equivalents		0.21			23			0.96			5			0.24			28
Other investments		6.45			379			9.46			160			7.12			539

Gross investment income before investment expenses		3.84			8,879			5.47			2,379			4.10			11,258
Investment expenses		(0.12	)		(222	)		(0.26	)		(113	)		(0.14	)		(335	)

Investment income after investment expenses		3.72	%		8,657			5.21	%		2,266			3.96	%		10,923

Investment results of other entities and operations(2)					76						0						76

Total investment income				$	8,733					$	2,266					$	10,999

(1)

(2)	Includes investment income of our asset management operations and derivative operations.

181

See below for a discussion of the change in the Financial Services Businesses’ yields. The net investment income yield attributable to the Closed Block Business for the nine months ended September 30, 2014, remained relatively flat compared to the nine months ended September 30, 2013, as higher income from non-coupon investments was mostly offset by lower fixed income reinvestment rates.

The following table sets forth the income yield and investment income for each major investment category of the Financial Services Businesses’ general account, excluding the Japanese insurance operations’ portion of the general account which is presented separately below, for the periods indicated. The yields are based on net investment income as reported under U.S. GAAP and as such do not include certain interest related items, such as settlements of duration management swaps which are included in realized gains and losses.


	Three Months Ended September 30, 2014						Three Months Ended September 30, 2013
	Yield(1)			Amount			Yield(1)			Amount
	($ in millions)
Fixed maturities		4.62	%	$	1,364			4.52	%	$	1,327
Trading account assets supporting insurance liabilities		3.88			182			3.83			182
Equity securities		6.74			52			7.88			47
Commercial mortgage and other loans		4.71			310			5.19			290
Policy loans		5.75			66			5.37			58
Short-term investments and cash equivalents		0.22			6			0.24			6
Other investments		9.03			139			5.01			67

Gross investment income before investment expenses		4.54			2,119			4.38			1,977
Investment expenses		(0.14	)		(40	)		(0.11	)		(25	)

Investment income after investment expenses		4.40	%		2,079			4.27	%		1,952

Investment results of other entities and operations(2)					35						18

Total investment income				$	2,114					$	1,970

(1)

(2)	Includes investment income of our asset management operations and derivative operations.

The increase in net investment income yield attributable to the Financial Services Businesses’ general account, excluding Japanese operations’ portfolio, for the three months ended September 30, 2014, compared to the three months ended September 30, 2013, was primarily the result of higher income from non-coupon investments and from reinvestments within certain asset portfolios into higher yielding securities, primarily during the second half of 2013.

182


	Nine Months Ended September 30, 2014						Nine Months Ended September 30, 2013
	Yield(1)			Amount			Yield(1)			Amount
	($ in millions)
Fixed maturities		4.69	%	$	4,097			4.61	%	$	3,957
Trading account assets supporting insurance liabilities		3.93			550			3.97			556
Equity securities		6.76			149			7.70			133
Commercial mortgage and other loans		4.83			916			5.31			850
Policy loans		5.65			189			5.43			169
Short-term investments and cash equivalents		0.22			16			0.22			20
Other investments		9.73			439			6.41			238

Gross investment income before investment expenses		4.62			6,356			4.46			5,923
Investment expenses		(0.14	)		(133	)		(0.12	)		(104	)

Investment income after investment expenses		4.48	%		6,223			4.34	%		5,819

Investment results of other entities and operations(2)					82						76

Total investment income				$	6,305					$	5,895

(1)

(2)	Includes investment income of our asset management operations and derivative operations.

The increase in net investment income yield attributable to the Financial Services Businesses’ general account, excluding Japanese operations’ portfolio, for the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013, was primarily the result of higher income from non-coupon investments and from reinvestments within certain asset portfolios into higher yielding securities, primarily during the second half of 2013.

183

The following table sets forth the income yield and investment income for each major investment category of our Japanese insurance operations’ general account for the periods indicated. The yields are based on net investment income as reported under U.S. GAAP and as such do not include certain interest related items, such as settlements of duration management swaps which are included in realized gains and losses.


	Three Months Ended September 30, 2014						Three Months Ended September 30, 2013
	Yield(1)			Amount			Yield(1)			Amount
	($ in millions)
Fixed maturities		3.00	%	$	847			2.95	%	$	806
Trading account assets supporting insurance liabilities		2.11			10			2.24			10
Equity securities		5.36			23			5.62			25
Commercial mortgage and other loans		4.03			71			4.12			63
Policy loans		3.87			23			3.80			23
Short-term investments and cash equivalents		0.21			1			0.21			1
Other investments		7.84			46			9.15			59

Gross investment income before investment expenses		3.14			1,021			3.12			987
Investment expenses		(0.13	)		(42	)		(0.12	)		(40	)

Total investment income		3.01	%	$	979			3.00	%	$	947

(1)

The net investment income yield on the Japanese insurance portfolio for the three months ended September 30, 2014, remained relatively flat compared to the three months ended September 30, 2013, as the addition of higher yielding assets into the portfolio as a result of increased sales of both U.S. and Australian dollar-denominated products was mostly offset by lower fixed income reinvestment rates in both the U.S. and Japan.

Both the U.S. dollar-denominated and Australian dollar-denominated fixed maturities that are not hedged to yen through third party derivative contracts provide a yield that is substantially higher than the yield on comparable yen-denominated fixed maturities. The average amortized cost of U.S. dollar-denominated fixed maturities that are not hedged to yen through third party derivative contracts for the three months ended September 30, 2014 and 2013, was approximately $34.5 billion and $32.0 billion, respectively. The majority of U.S. dollar-denominated fixed maturities support liabilities that are denominated in U.S. dollars. The average amortized cost of Australian dollar-denominated fixed maturities that are not hedged to yen through third party derivative contracts for the three months ended September 30, 2014 and 2013, was approximately $9.1 billion and $7.8 billion, respectively. The Australian dollar-denominated fixed maturities support liabilities that are denominated in Australian dollars.

184


	Nine Months Ended September 30, 2014						Nine Months Ended September 30, 2013
	Yield(1)			Amount			Yield(1)			Amount
	($ in millions)
Fixed maturities		3.00	%	$	2,481			2.88	%	$	2,459
Trading account assets supporting insurance liabilities		2.03			29			2.05			28
Equity securities		5.39			69			5.01			67
Commercial mortgage and other loans		4.29			218			4.21			192
Policy loans		3.87			67			3.61			66
Short-term investments and cash equivalents		0.24			3			0.18			3
Other investments		7.08			125			6.51			141

Gross investment income before investment expenses		3.14			2,992			3.00			2,956
Investment expenses		(0.13	)		(122	)		(0.12	)		(118	)

Total investment income		3.01	%	$	2,870			2.88	%	$	2,838

(1)

The increase in net investment income yield on the Japanese insurance portfolio for the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013, was primarily attributable to the addition of higher yielding assets into the portfolio as a result of increased sales of both U.S. and Australian dollar-denominated products, partially offset by lower fixed income reinvestment rates in both the U.S. and Japan.

Both the U.S. dollar-denominated and Australian dollar-denominated fixed maturities that are not hedged to yen through third party derivative contracts provide a yield that is substantially higher than the yield on comparable yen-denominated fixed maturities. The average amortized cost of U.S. dollar-denominated fixed maturities that are not hedged to yen through third party derivative contracts was approximately $33.7 billion and $31.8 billion for the nine months ended September 30, 2014, and 2013, respectively. The majority of U.S. dollar-denominated fixed maturities support liabilities that are denominated in U.S. dollars. The average amortized cost of Australian dollar-denominated fixed maturities that are not hedged to yen through third party derivative contracts was approximately $8.4 billion and $7.9 billion for the nine months ended September 30, 2014, and 2013, respectively. The Australian dollar-denominated fixed maturities support liabilities that are denominated in Australian dollars.

For additional information regarding U.S. and Australian dollar investments held in our Japanese insurance operations see, “—Results of Operations for Financial Services Businesses by Segment—International Insurance Division.”

185

Fixed Maturity Securities

Fixed Maturity Securities and Unrealized Gains and Losses by Industry Category

The following table sets forth the composition of the portion of our fixed maturity securities portfolio by industry category attributable to the Financial Services Businesses as of the dates indicated and the associated gross unrealized gains and losses.

Fixed Maturity Securities—Financial Services Businesses


	September 30, 2014								December 31, 2013
Industry(1)	Amortized Cost		Gross Unrealized Gains(2)		Gross Unrealized Losses(2)		Fair Value		Amortized Cost		Gross Unrealized Gains(2)		Gross Unrealized Losses(2)		Fair Value
	(in millions)
Corporate securities:
Finance	$	21,043	$	1,574	$	110	$	22,507	$	20,764	$	1,338	$	326	$	21,776
Consumer non-cyclical		21,617		2,103		260		23,460		21,965		1,888		653		23,200
Utility		16,283		1,605		164		17,724		18,335		1,299		659		18,975
Capital goods		9,984		1,022		111		10,895		10,025		901		266		10,660
Consumer cyclical		10,137		850		90		10,897		10,202		788		257		10,733
Foreign agencies		5,409		1,092		31		6,470		4,810		792		74		5,528
Energy		11,472		1,007		172		12,307		8,705		650		284		9,071
Communications		5,908		758		58		6,608		6,160		590		208		6,542
Basic industry		6,259		490		92		6,657		6,186		396		205		6,377
Transportation		5,853		614		35		6,432		5,712		477		116		6,073
Technology		3,563		295		44		3,814		3,589		286		103		3,772
Industrial other		2,734		269		24		2,979		2,440		205		52		2,593

Total corporate securities		120,262		11,679		1,191		130,750		118,893		9,610		3,203		125,300
Foreign government(3)		77,786		9,808		165		87,429		76,171		7,522		257		83,436
Residential mortgage-backed		5,128		364		7		5,485		5,872		356		34		6,194
Asset-backed securities(4)		7,867		281		69		8,079		7,591		218		173		7,636
Commercial mortgage-backed		10,011		276		47		10,240		9,772		360		104		10,028
U.S. Government		9,348		2,578		11		11,915		9,885		1,459		71		11,273
State & Municipal(5)		4,638		510		20		5,128		2,932		223		130		3,025

Total(6)	$	235,040	$	25,496	$	1,510	$	259,026	$	231,116	$	19,748	$	3,972	$	246,892

(1)	Investment data has been classified based on standard industry categorizations for domestic public holdings and similar classifications by industry for all other holdings.

(2)	Includes $307 million of gross unrealized gains and $4 million of gross unrealized losses as of September 30, 2014, compared to $265 million of gross unrealized gains and $24 million of gross unrealized losses as of December 31, 2013, on securities classified as held-to-maturity.

(3)	As of September 30, 2014 and December 31, 2013, based on amortized cost, 77% and 80%, respectively, represent Japanese government bonds held by our Japanese insurance operations, with no other individual country representing more than 9% of the balance.

(4)	Includes securities collateralized by sub-prime mortgages. See “—Asset-Backed Securities” below.

(5)	Includes securities related to the Build America Bonds program.

(6)

Excluded from the table above are securities held outside the general account in other entities and operations. For additional information regarding investments held outside the general account, see “—Invested Assets of Other Entities and Operations” below. Also excluded from the table above are fixed maturity securities classified as trading. See “—Trading Account Assets Supporting Insurance Liabilities” and “—Other Trading Account Assets” for additional information.

The increase in net unrealized gains from December 31, 2013 to September 30, 2014, was primarily due to a net decrease in interest rates in both the U.S. and Japan.

186

The following table sets forth the composition of the portion of our fixed maturity securities portfolio by industry category attributable to the Closed Block Business as of the dates indicated and the associated gross unrealized gains and losses.

Fixed Maturity Securities—Closed Block Business


	September 30, 2014								December 31, 2013
Industry(1)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in millions)
Corporate securities:
Utility	$	3,743	$	528	$	14	$	4,257	$	4,584	$	499	$	48	$	5,035
Consumer non-cyclical		4,897		514		22		5,389		4,693		480		47		5,126
Finance		4,298		363		12		4,649		4,001		294		15		4,280
Consumer cyclical		3,087		298		13		3,372		3,272		317		18		3,571
Capital goods		2,471		270		9		2,732		2,479		252		14		2,717
Energy		2,488		284		15		2,757		1,855		178		15		2,018
Communications		1,298		189		4		1,483		1,413		144		12		1,545
Basic industry		1,409		126		9		1,526		1,303		90		23		1,370
Transportation		1,243		149		4		1,388		1,313		120		9		1,424
Industrial other		1,012		70		9		1,073		954		61		13		1,002
Technology		725		60		7		778		665		53		8		710
Foreign agencies		395		49		2		442		460		38		6		492

Total corporate securities		27,066		2,900		120		29,846		26,992		2,526		228		29,290
Asset-backed securities(2)		3,888		54		56		3,886		3,747		34		141		3,640
Commercial mortgage-backed		4,199		63		31		4,231		3,960		60		59		3,961
U.S. Government		3,916		578		1		4,493		3,824		279		26		4,077
Residential mortgage-backed		1,197		57		2		1,252		1,080		55		6		1,129
Foreign government(3)		403		63		7		459		361		55		8		408
State & Municipal		678		104		1		781		664		51		7		708

Total(4)	$	41,347	$	3,819	$	218	$	44,948	$	40,628	$	3,060	$	475	$	43,213

(1)	Investment data has been classified based on standard industry categorizations for domestic public holdings and similar classifications by industry for all other holdings.

(2)	Includes securities collateralized by sub-prime mortgages. See “—Asset-Backed Securities” below.

(3)	As of September 30, 2014 and December 31, 2013, based on amortized cost, no individual foreign country represented more than 10% and 11%, respectively.

(4)	The table above excludes fixed maturity securities classified as trading. See “—Other Trading Account Assets” for additional information.

The increase in net unrealized gains from December 31, 2013 to September 30, 2014, was primarily due to a net decrease in U.S. interest rates.

Asset-Backed Securities

Included within asset-backed securities attributable to both the Financial Services Businesses and the Closed Block Business are securities collateralized by sub-prime mortgages. While there is no market standard definition, we define sub-prime mortgages as residential mortgages that are originated to weaker quality obligors as indicated by weaker credit scores, as well as mortgages with higher loan-to-value ratios or limited documentation.

187

The following tables set forth the amortized cost and fair value of our asset-backed securities attributable to the Financial Services Businesses as of the dates indicated, by credit quality, and for asset-backed securities collateralized by sub-prime mortgages, by year of issuance (vintage).

Asset-Backed Securities at Amortized Cost—Financial Services Businesses


	September 30, 2014
	Lowest Rating Agency Rating										Total Amortized Cost		Total December 31, 2013
Vintage	AAA		AA		A		BBB		BB and below		Total Amortized Cost		Total December 31, 2013
	(in millions)
Collateralized by sub-prime mortgages:
2014—2008	$	0	$	0	$	0	$	0	$	0	$	0	$	0
2007		0		0		0		0		309		309		353
2006		0		0		17		73		487		577		656
2005		0		0		19		28		200		247		268
2004 & Prior		0		2		25		21		504		552		606

Total collateralized by sub-prime mortgages		0		2		61		122		1,500		1,685		1,883

Other asset-backed securities:
Collateralized loan obligations		3,652		7		0		0		0		3,659		2,654
Collateralized by non-sub-prime mortgages		820		33		5		12		1		871		1,008
Collateralized by credit cards		277		0		6		0		0		283		497
Collateralized by auto loans		453		0		0		0		0		453		568
Other asset-backed securities(1)		188		494		96		25		113		916		981

Total asset-backed securities(2)	$	5,390	$	536	$	168	$	159	$	1,614	$	7,867	$	7,591

(1)	Includes asset-backed securities collateralized by education loans, aircraft, equipment leases, franchises, and timeshares. Approximately 96% of the $384 million of education loans included above carry a Department of Education guaranty as of September 30, 2014.

(2)	Excluded from the table above are asset-backed securities held outside the general account in other entities and operations. Also excluded from the table above are asset-backed securities classified as trading.

188

Asset-Backed Securities at Fair Value—Financial Services Businesses


	September 30, 2014
	Lowest Rating Agency Rating										Total Fair Value		Total December 31, 2013
Vintage	AAA		AA		A		BBB		BB and below		Total Fair Value		Total December 31, 2013
	(in millions)
Collateralized by sub-prime mortgages:
2014—2008	$	0	$	0	$	0	$	0	$	0	$	0	$	0
2007		0		0		0		0		338		338		334
2006		0		0		16		70		556		642		658
2005		0		0		19		28		202		249		259
2004 & Prior		0		2		25		21		496		544		577

Total collateralized by sub-prime mortgages		0		2		60		119		1,592		1,773		1,828

Other asset-backed securities:
Collateralized loan obligations		3,652		10		0		0		7		3,669		2,656
Collateralized by non-sub-prime mortgages		875		34		5		11		1		926		1,064
Collateralized by credit cards		287		0		6		0		0		293		510
Collateralized by auto loans		455		0		0		0		0		455		571
Other asset-backed securities(1)		196		512		106		26		123		963		1,007

Total asset-backed securities(2)	$	5,465	$	558	$	177	$	156	$	1,723	$	8,079	$	7,636

(1)	Includes asset-backed securities collateralized by education loans, aircraft, equipment leases, franchises and timeshares. Approximately 96% of the $401 million of education loans included above carry a Department of Education guaranty as of September 30, 2014.

(2)	Excluded from the table above are asset-backed securities held outside the general account in other entities and operations. Also excluded from the table above are asset-backed securities classified as trading.

The tables above provide ratings as assigned by nationally recognized rating agencies as of September 30, 2014, including Standard & Poor’s, Moody’s, and Fitch. In making our investment decisions, rather than relying solely on the rating agencies’ evaluations, we assign internal ratings to our asset-backed securities based upon our dedicated asset-backed securities unit’s independent evaluation of the underlying collateral and securitization structure, including any guarantees from monoline bond insurers.

On an amortized cost basis, asset-backed securities collateralized by sub-prime mortgages attributable to the Financial Services Businesses decreased from $1.883 billion as of December 31, 2013, to $1.685 billion as of September 30, 2014, primarily reflecting sales and principal paydowns. Gross unrealized losses related to our asset-backed securities collateralized by sub-prime mortgages attributable to the Financial Services Businesses were $59 million as of September 30, 2014, and $144 million as of December 31, 2013. For information regarding the methodology used in determining the fair value of our asset-backed securities collateralized by sub-prime mortgages, see Note 13 to the Unaudited Interim Consolidated Financial Statements.

The weighted average estimated subordination percentage of our asset-backed securities collateralized by sub-prime mortgages attributable to the Financial Services Businesses, excluding those supported by guarantees from monoline bond insurers, was 28% as of September 30, 2014. The subordination percentage represents the current weighted average estimated percentage of the capital structure subordinated to our investment holding that is available to absorb losses before the security incurs the first dollar loss of principal. As of September 30, 2014, based on amortized cost, approximately 59% of the asset-backed securities collateralized by sub-prime mortgages attributable to the Financial Services Businesses have estimated credit subordination percentages of 20% or more, and 39% have estimated credit subordination percentages of 30% or more.

189

In addition to subordination, certain securities, referred to as front pay or second pay securities, benefit from the prioritization of principal cash flows within the senior tranches of the structure. In most instances, these shorter duration senior securities have priority to principal cash flows over other securities in the structure, including longer duration senior securities. Included within the $1.685 billion of asset-backed securities collateralized by sub-prime mortgages attributable to the Financial Services Businesses as of September 30, 2014, were $245 million of securities, on an amortized cost basis, that represent front pay or second pay securities, depending on the overall structure of the securities.

The following tables set forth the amortized cost and fair value of our asset-backed securities attributable to the Closed Block Business as of the dates indicated, by credit quality, and for asset-backed securities collateralized by sub-prime mortgages, by year of issuance (vintage).

Asset-Backed Securities at Amortized Cost—Closed Block Business


	September 30, 2014												Total December 31, 2013
	Lowest Rating Agency Rating										Total Amortized Cost
Vintage	AAA		AA		A		BBB		BB and below		Total Amortized Cost
	(in millions)
Collateralized by sub-prime mortgages:
2014—2008	$	0	$	0	$	0	$	0	$	0	$	0	$	0
2007		0		1		20		0		117		138		239
2006		0		76		0		27		304		407		573
2005		0		0		54		10		81		145		186
2004 & Prior		0		1		11		13		365		390		433

Total collateralized by sub-prime mortgages		0		78		85		50		867		1,080		1,431

Other asset-backed securities:
Collateralized by auto loans		967		0		0		0		0		967		687
Collateralized by loan obligations		1,058		0		0		0		0		1,058		660
Collateralized by credit cards		177		0		0		0		0		177		336
Collateralized by education loans(1)		24		382		0		0		0		406		429
Other asset-backed securities(2)		103		37		50		2		8		200		204

Total asset-backed securities(3)	$	2,329	$	497	$	135	$	52	$	875	$	3,888	$	3,747

(1)	Approximately 98% of the $406 million of education loans included above carry a Department of Education guaranty as of September 30, 2014.

(2)	Includes asset-backed securities collateralized by franchises, equipment leases, aircraft, manufacturing and timeshares.

(3)	Excluded from the table above are asset-backed securities classified as trading.

190

Asset-Backed Securities at Fair Value—Closed Block Business


	September 30, 2014
	Lowest Rating Agency Rating										Total Fair Value		Total December 31, 2013
Vintage	AAA		AA		A		BBB		BB and below		Total Fair Value		Total December 31, 2013
	(in millions)
Collateralized by sub-prime mortgages:
2014—2008	$	0	$	0	$	0	$	0	$	0	$	0	$	0
2007		0		1		19		0		122		142		227
2006		0		75		0		26		293		394		506
2005		0		0		53		11		75		139		174
2004 & Prior		0		1		11		12		348		372		406

Total collateralized by sub-prime mortgages		0		77		83		49		838		1,047		1,313

Other asset-backed securities:
Collateralized by auto loans		968		0		0		0		0		968		689
Collateralized by loan obligations		1,057		0		0		0		5		1,062		665
Collateralized by credit cards		178		0		0		0		0		178		337
Collateralized by education loans(1)		24		400		0		0		0		424		425
Other asset-backed securities(2)		103		37		55		1		11		207		211

Total asset-backed securities(3)	$	2,330	$	514	$	138	$	50	$	854	$	3,886	$	3,640

(1)	Approximately 98% of the $424 million of education loans included above carry a Department of Education guaranty as of September 30, 2014.

(2)	Includes asset-backed securities collateralized by franchises, equipment leases, aircraft, manufacturing and timeshares.

(3)	Excluded from the table above are asset-backed securities classified as trading.

On an amortized cost basis, asset-backed securities collateralized by sub-prime mortgages attributable to the Closed Block Business decreased from $1.431 billion as of December 31, 2013, to $1.080 billion as of September 30, 2014, primarily reflecting sales and principal paydowns. Gross unrealized losses related to our asset-backed securities collateralized by sub-prime mortgages attributable to the Closed Block Business were $53 million as of September 30, 2014, and $127 million as of December 31, 2013. For information regarding the methodology used in determining the fair value of our asset-backed securities collateralized by sub-prime mortgages, see Note 13 to the Unaudited Interim Consolidated Financial Statements.

The weighted average estimated subordination percentage of asset-backed securities collateralized by sub-prime mortgages attributable to the Closed Block Business, excluding those supported by guarantees from monoline bond insurers, was 38% as of September 30, 2014. The subordination percentage represents the current weighted average estimated percentage of the capital structure subordinated to our investment holding that is available to absorb losses before the security incurs the first dollar loss of principal. As of September 30, 2014, based on amortized cost, approximately 82% of the asset-backed securities collateralized by sub-prime mortgages attributable to the Closed Block Business have estimated credit subordination percentages of 20% or more, and 56% have estimated credit subordination percentages of 30% or more.

In addition to subordination, certain securities, referred to as front pay or second pay securities, benefit from the prioritization of principal cash flows within the senior tranches of the structure. In most instances, these shorter duration senior securities have priority to principal cash flows over other securities in the structure, including longer duration senior securities. Included within the $1.080 billion of asset-backed securities collateralized by sub-prime mortgages attributable to the Closed Block Business as of September 30, 2014, were $42 million of securities, on an amortized cost basis, that represent front pay or second pay securities, depending on the overall structure of the securities.

191

Residential Mortgage-Backed Securities

The following tables set forth the amortized cost of our residential mortgage-backed securities attributable to the Financial Services Businesses and Closed Block Business as of the dates indicated.

Residential Mortgage-Backed Securities at Amortized Cost


	September 30, 2014
	Financial Services Businesses					Closed Block Business
	Amortized Cost		% of Total			Amortized Cost		% of Total
	($ in millions)
By security type:
Agency pass-through securities(1)	$	5,051		98.5	%	$	1,100		91.9	%
Collateralized mortgage obligations		77		1.5			97		8.1

Total residential mortgage-backed securities	$	5,128		100.0	%	$	1,197		100.0	%

Portion rated AA or higher(2)	$	5,058		98.6	%	$	1,100		91.9	%

	December 31, 2013
	Financial Services Businesses					Closed Block Business
	Amortized Cost		% of Total			Amortized Cost		% of Total
	($ in millions)
By security type:
Agency pass-through securities(1)	$	5,770		98.3	%	$	966		89.4	%
Collateralized mortgage obligations		102		1.7			114		10.6

Total residential mortgage-backed securities	$	5,872		100.0	%	$	1,080		100.0	%

Portion rated AA or higher(2)	$	5,779		98.4	%	$	966		89.4	%

(1)

As of September 30, 2014, of these securities, for the Financial Services Businesses, $3.790 billion are supported by U.S. government and $1.261 billion are supported by foreign governments. As of December 31, 2013, of these securities, for the Financial Services Businesses, $4.388 billion were supported by the U.S. government and $1.382 billion were supported by foreign governments. For the Closed Block Business, all of the securities are supported by the U.S. government as of both September 30, 2014 and December 31, 2013.

(2)	Based on lowest external rating agency rating.

192

Commercial Mortgage-Backed Securities

The following tables set forth the amortized cost and fair value of our commercial mortgage-backed securities attributable to the Financial Services Businesses as of the dates indicated, by credit quality and by year of issuance (vintage).

Commercial Mortgage-Backed Securities at Amortized Cost—Financial Services Businesses


	September 30, 2014												Total December 31, 2013
	Lowest Rating Agency Rating(1)										Total Amortized Cost
Vintage	AAA		AA		A		BBB		BB and below		Total Amortized Cost
	(in millions)
2014	$	2,011	$	0	$	0	$	0	$	0	$	2,011	$	0
2013		2,439		125		0		9		0		2,573		2,579
2012—2009		243		283		0		0		0		526		529
2008—2007		265		44		17		4		0		330		952
2006		2,599		94		7		4		0		2,704		3,132
2005		1,674		57		0		4		0		1,735		2,116
2004 & Prior		77		40		14		0		1		132		464

Total commercial mortgage-backed securities(2)(3)(4)	$	9,308	$	643	$	38	$	21	$	1	$	10,011	$	9,772

(1)	The table above provides ratings as assigned by nationally recognized rating agencies as of September 30, 2014, including Standard & Poor’s, Moody’s, Fitch and Realpoint.

(2)	Excluded from the table above are commercial mortgage-backed securities held outside the general account in other entities and operations. Also excluded from the table above are commercial mortgage-backed securities classified as trading.

(3)	Included in the table above, as of September 30, 2014, are downgraded super senior securities with amortized cost of $146 million in AA and $25 million in A.

(4)	Included in the table above, as of September 30, 2014, are agency commercial mortgage-backed securities with amortized cost of $443 million, all rated AA.

Commercial Mortgage-Backed Securities at Fair Value—Financial Services Businesses


	September 30, 2014												Total December 31, 2013
	Lowest Rating Agency Rating(1)										Total Fair Value
Vintage	AAA		AA		A		BBB		BB and below		Total Fair Value
	(in millions)
2014	$	2,029	$	0	$	0	$	0	$	0	$	2,029	$	0
2013		2,466		125		0		9		0		2,600		2,501
2012—2009		236		302		0		0		0		538		534
2008—2007		270		46		17		5		0		338		976
2006		2,682		100		7		4		0		2,793		3,283
2005		1,712		63		0		5		0		1,780		2,203
2004 & Prior		94		51		16		0		1		162		531

Total commercial mortgage-backed securities(2)(3)	$	9,489	$	687	$	40	$	23	$	1	$	10,240	$	10,028

(1)	The table above provides ratings as assigned by nationally recognized rating agencies as of September 30, 2014, including Standard & Poor’s, Moody’s, Fitch and Realpoint.

(2)	Excluded from the table above are commercial mortgage-backed securities held outside the general account in other entities and operations. Also excluded from the table above are commercial mortgage-backed securities classified as trading.

(3)	Included in the table above, as of September 30, 2014, are agency commercial mortgage-backed securities with fair value of $465 million, all rated AA.

193

Included in the tables above are commercial mortgage-backed securities collateralized by U.S. properties, all related to commercial mortgage-backed securities held by our Japanese insurance operations, with an amortized cost of $206 million in AAA, $56 million in AA, $9 million in A and $8 million in BBB as of September 30, 2014, and $380 million in AAA, $93 million in AA, $26 million in A and $8 million in BBB as of December 31, 2013. Commercial mortgage-backed securities collateralized by non-U.S. properties are immaterial for both years.

The following tables set forth the amortized cost and fair value of our commercial mortgage-backed securities attributable to the Closed Block Business as of the dates indicated, by credit quality and by year of issuance (vintage).

Commercial Mortgage-Backed Securities at Amortized Cost—Closed Block Business


	September 30, 2014
	Lowest Rating Agency Rating(1)										Total Amortized Cost		Total December 31, 2013
Vintage	AAA		AA		A		BBB		BB and below		Total Amortized Cost		Total December 31, 2013
	(in millions)
2014	$	1,193	$	82	$	0	$	0	$	0	$	1,275	$	0
2013		921		239		0		9		0		1,169		1,333
2012—2009		241		75		0		0		0		316		452
2008—2007		109		0		0		1		5		115		371
2006		843		1		0		0		0		844		1,038
2005		451		26		0		0		0		477		710
2004 & Prior		1		0		1		1		0		3		56

Total commercial mortgage-backed securities(2)(3)	$	3,759	$	423	$	1	$	11	$	5	$	4,199	$	3,960

(1)	The table above provides ratings as assigned by nationally recognized rating agencies as of September 30, 2014, including Standard & Poor’s, Moody’s, Fitch and Realpoint.

(2)	Included in the table above, as of September 30, 2014, are downgraded super senior securities with amortized cost of $27 million in AA.

(3)	Included in the table above, as of September 30, 2014, are agency commercial mortgage-backed securities with amortized cost of $20 million in AAA and $396 million in AA.

Commercial Mortgage-Backed Securities at Fair Value—Closed Block Business


	September 30, 2014
	Lowest Rating Agency Rating(1)										Total Fair Value		Total December 31, 2013
Vintage	AAA		AA		A		BBB		BB and below		Total Fair Value		Total December 31, 2013
	(in millions)
2014	$	1,195	$	84	$	0	$	0	$	0	$	1,279	$	0
2013		921		246		0		9		0		1,176		1,294
2012—2009		237		76		0		0		0		313		443
2008—2007		109		0		0		1		15		125		381
2006		853		1		0		0		0		854		1,062
2005		455		26		0		0		0		481		725
2004 & Prior		0		0		1		2		0		3		56

Total commercial mortgage-backed securities(2)	$	3,770	$	433	$	1	$	12	$	15	$	4,231	$	3,961

(1)	The table above provides ratings as assigned by nationally recognized rating agencies as of September 30, 2014, including Standard & Poor’s, Moody’s, Fitch and Realpoint.

(2)	Included in the table above, as of September 30, 2014, are agency commercial mortgage-backed securities with fair value of $19 million in AAA and $406 million in AA.

194

Fixed Maturity Securities Credit Quality

The Securities Valuation Office (“SVO”) of the NAIC, evaluates the investments of insurers for statutory reporting purposes and assigns fixed maturity securities to one of six categories called “NAIC Designations.” In general, NAIC Designations of “1” highest quality, or “2” high quality, include fixed maturities considered investment grade, which include securities rated Baa3 or higher by Moody’s or BBB- or higher by Standard & Poor’s. NAIC Designations of “3” through “6” generally include fixed maturities referred to as below investment grade, which include securities rated Ba1 or lower by Moody’s and BB+ or lower by Standard & Poor’s. The NAIC Designations for commercial mortgage-backed securities and non-agency residential mortgage-backed securities, including our asset-backed securities collateralized by sub-prime mortgages, are based on security level expected losses as modeled by an independent third-party (engaged by the NAIC) and the statutory carrying value of the security, including any purchase discounts or impairment charges previously recognized.

As a result of time lags between the funding of investments, the finalization of legal documents, and the completion of the SVO filing process, the fixed maturity portfolio generally includes securities that have not yet been rated by the SVO as of each balance sheet date. Pending receipt of SVO ratings, the categorization of these securities by NAIC Designation is based on the expected ratings indicated by internal analysis.

Investments of our international insurance companies are not subject to NAIC guidelines. Investments of our Japanese insurance operations are regulated locally by the Financial Services Agency, an agency of the Japanese government. The Financial Services Agency has its own investment quality criteria and risk control standards. Our Japanese insurance companies comply with the Financial Services Agency’s credit quality review and risk monitoring guidelines. The credit quality ratings of the investments of our Japanese insurance companies are based on ratings assigned by nationally recognized credit rating agencies, including Moody’s, Standard & Poor’s, or rating equivalents based on ratings assigned by Japanese credit ratings agencies.

The following table sets forth our fixed maturity portfolio by NAIC Designation attributable to the Financial Services Businesses as of the dates indicated.

Fixed Maturity Securities—Financial Services Businesses


(1)(2)	September 30, 2014								December 31, 2013
NAIC Designation	Amortized Cost		Gross Unrealized Gains(3)		Gross Unrealized Losses(3)(4)		Fair Value		Amortized Cost		Gross Unrealized Gains(3)		Gross Unrealized Losses(3)(4)		Fair Value
	(in millions)
1	$	182,594	$	20,790	$	1,006	$	202,378	$	179,543	$	15,520	$	2,811	$	192,252
2		42,936		4,019		373		46,582		42,659		3,563		938		45,284

Subtotal High or Highest Quality Securities(5)		225,530		24,809		1,379		248,960		222,202		19,083		3,749		237,536
3		6,651		407		67		6,991		6,321		412		152		6,581
4		2,092		135		41		2,186		2,058		191		51		2,198
5		494		115		21		588		322		31		16		337
6		273		30		2		301		213		31		4		240

Subtotal Other Securities(6)(7)		9,510		687		131		10,066		8,914		665		223		9,356

Total Fixed Maturities	$	235,040	$	25,496	$	1,510	$	259,026	$	231,116	$	19,748	$	3,972	$	246,892

(1)	Reflects equivalent ratings for investments of the international insurance operations.

(2)

Includes, as of September 30, 2014 and December 31, 2013, 438 securities with amortized cost of $1,576 million (fair value, $1,614 million) and 306 securities with amortized cost of $806 million (fair value, $831 million), respectively, that have been categorized based on expected NAIC Designations pending receipt of SVO ratings.

195

(3)	Includes $307 million of gross unrealized gains and $4 million of gross unrealized losses as of September 30, 2014, compared to $265 million of gross unrealized gains and $24 million of gross unrealized losses as of December 31, 2013, on securities classified as held-to-maturity.

(4)

As of September 30, 2014, includes gross unrealized losses of $80 million on public fixed maturities and $51 million on private fixed maturities considered to be other than high or highest quality and, as of December 31, 2013, includes gross unrealized losses of $181 million on public fixed maturities and $42 million on private fixed maturities considered to be other than high or highest quality.

(5)	On amortized cost basis, as of September 30, 2014, includes $197,673 million of public fixed maturities and $27,857 million of private fixed maturities and, as of December 31, 2013, includes $196,058 million of public fixed maturities and $26,144 million of private fixed maturities.

(6)	On an amortized cost basis, as of September 30, 2014, includes $5,932 million of public fixed maturities and $3,578 million of private fixed maturities and, as of December 31, 2013, includes $5,710 million of public fixed maturities and $3,204 million of private fixed maturities.

(7)

On an amortized cost basis, as of September 30, 2014, securities considered below investment grade based on lowest of external rating agency ratings, total $11.0 billion, or 5% of the total fixed maturities, and include securities considered high or highest quality by the NAIC based on the rules described above.

The following table sets forth our fixed maturity portfolio by NAIC Designation attributable to the Closed Block Business as of the dates indicated.

Fixed Maturity Securities—Closed Block Business


(1)	September 30, 2014								December 31, 2013
NAIC Designation	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses(2)		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses(2)		Fair Value
	(in millions)
1	$	24,129	$	2,227	$	104	$	26,252	$	23,521	$	1,543	$	307	$	24,757
2		13,625		1,446		56		15,015		14,166		1,359		118		15,407

Subtotal High or Highest Quality Securities(3)		37,754		3,673		160		41,267		37,687		2,902		425		40,164
3		2,406		114		25		2,495		1,957		106		23		2,040
4		971		12		22		961		760		24		21		763
5		163		9		11		161		138		9		5		142
6		53		11		0		64		86		19		1		104

Subtotal Other Securities(4)(5)		3,593		146		58		3,681		2,941		158		50		3,049

Total Fixed Maturities	$	41,347	$	3,819	$	218	$	44,948	$	40,628	$	3,060	$	475	$	43,213

(1)

Includes, as of September 30, 2014 and December 31, 2013, 72 securities with amortized cost of $954 million (fair value, $989 million) and 56 securities with amortized cost of $822 million (fair value, $837 million), respectively, that have been categorized based on expected NAIC Designations pending receipt of SVO ratings.

(2)

As of September 30, 2014, includes gross unrealized losses of $35 million on public fixed maturities and $23 million on private fixed maturities considered to be other than high or highest quality and, as of December 31, 2013, includes gross unrealized losses of $35 million on public fixed maturities and $15 million on private fixed maturities considered to be other than high or highest quality.

(3)	On an amortized cost basis, as of September 30, 2014, includes $25,132 million of public fixed maturities and $12,622 million of private fixed maturities and, as of December 31, 2013, includes $24,642 million of public fixed maturities and $13,045 million of private fixed maturities.

(4)	On an amortized cost basis, as of September 30, 2014, includes $1,810 million public fixed maturities and $1,783 million of private fixed maturities and, as of December 31, 2013, includes $1,407 million of public fixed maturities and $1,534 million of private fixed maturities.

(5)

On an amortized cost basis, as of September 30, 2014, securities considered below investment grade based on lowest of external rating agency ratings, totaled $4.6 billion, or 11% of the total fixed maturities, and include securities considered high or highest quality by the NAIC based on the rules described above.

Credit Derivative Exposure to Public Fixed Maturities

In addition to the credit exposure from public fixed maturities noted above, we sell credit derivatives to enhance the return on our investment portfolio by creating credit exposure similar to an investment in public fixed maturity cash instruments.

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In a credit derivative, we may sell credit protection on an identified name or a broad based index, and in return receive a quarterly premium. The majority of the underlying reference names in single name and index credit derivatives where we have sold credit protection, as well as all the counterparties to these agreements, are investment grade credit quality and our credit derivatives have a remaining term to maturity of ten years or less. The premium or credit spread generally corresponds to the difference between the yield on the reference name’s (or index’s underlying reference names) public fixed maturity cash instruments and swap rates at the time the agreement is executed. Credit derivative contracts are recorded at fair value with changes in fair value, including the premium received, recorded in “Realized investment gains (losses), net.”

As of September 30, 2014, the Financial Services Businesses had $253 million of outstanding notional amounts, reported at fair value as a liability of $1 million, where we have sold credit protection through credit derivatives. As of December 31, 2013, the Financial Services Businesses had no outstanding sell protection credit derivatives. The premium received for the credit derivatives we sell attributable to the Financial Services Businesses was less than $1 million for both the three and nine months ended September 30, 2014, and less than $1 million and $3 million for the three and nine months ended September 30, 2013, respectively, and is included in adjusted operating income as an adjustment to “Realized investment gains (losses), net.” This excludes a credit derivative related to surplus notes issued by a subsidiary of Prudential Insurance. See Note 14 to the Unaudited Interim Consolidated Financial Statements for additional information regarding this derivative.

As of both September 30, 2014 and December 31, 2013, the Closed Block Business had $5 million of outstanding notional amounts, reported at fair value as an asset of less than $1 million of exposure, where we have sold credit protection through credit derivatives.

In addition to selling credit protection, we have purchased credit protection using credit derivatives in order to hedge specific credit exposures in our investment portfolio. As of September 30, 2014 and December 31, 2013, the Financial Services Businesses had $723 million and $1,124 million of outstanding notional amounts, reported at fair value as a liability of $21 million and of $33 million, respectively. As of September 30, 2014 and December 31, 2013, the Closed Block Business had $171 million and $275 million of outstanding notional amounts, reported at fair value as a liability of $7 million and $9 million, respectively. The premium paid for the credit derivatives we purchase attributable to the Financial Services Businesses was $5 million and $19 million for the three and nine months ended September 30, 2014, and $8 million and $23 million for the three and nine months ended 2013, respectively, and is included in adjusted operating income as an adjustment to “Realized investment gains (losses), net.” See Note 14 to the Unaudited Interim Consolidated Financial Statements for additional information regarding credit derivatives and an overall description of our derivative activities.

Other-Than-Temporary Impairments of Fixed Maturity Securities

We maintain separate monitoring processes for public and private fixed maturities and create watch lists to highlight securities that require special scrutiny and management. Our public fixed maturity asset managers formally review all public fixed maturity holdings on a quarterly basis and more frequently when necessary to identify potential credit deterioration whether due to ratings downgrades, unexpected price variances, and/or company or industry specific concerns.

For private placements, our credit and portfolio management processes help ensure prudent controls over valuation and management. We have separate pricing and authorization processes to establish “checks and balances” for new investments. We apply consistent standards of credit analysis and due diligence for all transactions, whether they originate through our own in-house origination staff or through agents. Our regional offices closely monitor the portfolios in their regions. We set all valuation standards centrally, and we assess the fair value of all investments quarterly. Our private fixed maturity asset managers formally review all private fixed maturity holdings on a quarterly basis and more frequently when necessary to identify potential credit deterioration whether due to ratings downgrades, unexpected price variances, and/or company or industry specific concerns. For additional information regarding our policies regarding other-than-temporary impairments for fixed maturity securities, 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, 2013.

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Other-than-temporary impairments of general account fixed maturity securities attributable to the Financial Services Businesses that were recognized in earnings were $4 million and $28 million for the three months ended September 30, 2014 and 2013, respectively, and $31 million and $110 million for the nine months ended September 30, 2014 and 2013, respectively. Included in the other-than-temporary impairments of general account fixed maturities attributable to the Financial Services Businesses for the three months ended September 30, 2014 and 2013, were $0 million and $18 million, respectively, of other-than-temporary impairments on asset-backed securities collateralized by sub-prime mortgages. Other-than-temporary impairments of general account fixed maturities attributable to the Financial Services Businesses for the nine months ended September 30, 2014 and 2013 include $3 million and $30 million, respectively, of other-than-temporary impairments on asset-backed securities collateralized by sub-prime mortgages.

Other-than-temporary impairments of fixed maturity securities attributable to the Closed Block Business that were recognized in earnings were $1 million and $15 million for the three months ended September 30, 2014, and 2013, respectively, and $16 million and $36 million for the nine months ended September 30, 2014 and 2013, respectively. Included in the other-than-temporary impairments of fixed maturities attributable to the Closed Block Business for the three months ended September 30, 2014, and 2013, were $0 million and $10 million, respectively, of other-than-temporary impairments on asset-backed securities collateralized by sub-prime mortgages. Other-than-temporary impairments of general account fixed maturities attributable to the Closed Block Business for the nine months ended September 30, 2014 and 2013 include $2 million and $17 million, respectively, of other-than-temporary impairments on asset-backed securities collateralized by sub-prime mortgages. For a further discussion of other-than-temporary impairments, see “—Realized Investment Gains and Losses” above.

Trading Account Assets Supporting Insurance Liabilities

Certain products included in the Retirement and International Insurance segments are experience-rated, meaning that we expect the investment results associated with these products will ultimately accrue to contractholders. The investments supporting these experience-rated products, excluding commercial mortgage and other loans, are primarily classified as trading and are reflected on the balance sheet as “Trading account assets supporting insurance liabilities, at fair value.” Realized and unrealized gains and losses for these investments are reported in “Other income,” and excluded from adjusted operating income. Investment income for these investments is reported in “Net investment income,” and is included in adjusted operating income. The following table sets forth the composition of this portfolio as of the dates indicated.


	September 30, 2014				December 31, 2013
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Short-term investments and cash equivalents	$	328	$	328	$	697	$	697
Fixed maturities:
Corporate securities		11,914		12,466		12,109		12,616
Commercial mortgage-backed securities		2,555		2,582		2,417		2,441
Residential mortgage-backed securities		1,704		1,718		1,857		1,830
Asset-backed securities		1,168		1,189		1,096		1,107
Foreign government bonds		635		652		579		596
U.S. government authorities and agencies and obligations of U.S. states		308		358		303		341

Total fixed maturities		18,284		18,965		18,361		18,931
Equity securities		966		1,214		913		1,199

Total trading account assets supporting insurance liabilities	$	19,578	$	20,507	$	19,971	$	20,827

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As a percentage of amortized cost, 76% and 77% of the portfolio was publicly traded as of September 30, 2014 and December 31, 2013, respectively. As of both September 30, 2014 and December 31, 2013, 93% of the fixed maturity portfolio was considered high or highest quality based on NAIC or equivalent rating. As of September 30, 2014, $1.652 billion of the residential mortgage-backed securities were publicly traded agency pass-through securities, which are supported by implicit or explicit government guarantees, of which 99% have credit ratings of A or higher. Collateralized mortgage obligations, including approximately $42 million secured by “ALT-A” mortgages, represented the remaining $52 million of residential mortgage-backed securities, of which 41% have credit ratings of A or better and 59% are BBB and below. For a discussion of changes in the fair value of our trading account assets supporting insurance liabilities, see “—Experience-Rated Contractholder Liabilities, Trading Account Assets Supporting Insurance Liabilities and Other Related Investments,” above.

Other Trading Account Assets

Other trading account assets consist primarily of certain financial instruments that contain an embedded derivative where we elected to classify the entire instrument as a trading account asset rather than bifurcate. These instruments are carried at fair value, with realized and unrealized gains and losses reported in “Other income,” and excluded from adjusted operating income. Interest and dividend income from these investments is reported in “Net investment income,” and is included in adjusted operating income.

The following table sets forth the composition of our other trading account assets as of the dates indicated.


	September 30, 2014								December 31, 2013
	Financial Services Businesses				Closed Block Business				Financial Services Businesses				Closed Block Business
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Short-term investments and cash equivalents	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Fixed maturities		789		833		139		156		576		612		166		185
Equity securities(1)		554		628		142		162		646		729		138		157

Total other trading account assets	$	1,343	$	1,461	$	281	$	318	$	1,222	$	1,341	$	304	$	342

(1)	Included in equity securities are perpetual preferred stock securities that have characteristics of both debt and equity securities.

Included in the $789 million of fixed maturities attributable to the Financial Services Businesses as of September 30, 2014, on an amortized cost basis, are $145 million of asset-backed securities, 69% of which have credit ratings of A or above, 15% have BBB credit ratings, and the remaining 16% have BB and below credit ratings. There were no asset-backed securities included in the $139 million of fixed maturities attributable to the Closed Block Business, on an amortized cost basis, as of September 30, 2014.

Commercial Mortgage and Other Loans

Investment Mix

As of September 30, 2014 and December 31, 2013, we held approximately 11% and 10% of our general account investments in commercial mortgage and other loans, respectively. This percentage is net of a $123 million and $212 million allowance for losses as of September 30, 2014 and December 31, 2013, respectively.

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The following table sets forth the composition of our commercial mortgage and other loans portfolio, before the allowance for losses, as of the dates indicated.


	September 30, 2014				December 31, 2013
	Financial Services Businesses		Closed Block Business		Financial Services Businesses		Closed Block Business
	(in millions)
Commercial and agricultural mortgage loans	$	32,381	$	10,261	$	29,164	$	9,677
Uncollateralized loans		1,146		44		1,259		44
Residential property loans		458		0		544		0
Other collateralized loans		322		0		330		0

Total commercial mortgage and other loans(1)	$	34,307	$	10,305	$	31,297	$	9,721

(1)

Excluded from the table above are commercial mortgage and other loans held outside the general account in other entities and operations. For additional information regarding commercial mortgage and other loans held outside the general account, see “—Invested Assets of Other Entities and Operations” below.

We originate commercial and agricultural mortgage loans using a dedicated investment staff and a network of independent companies through our various regional offices. All loans are underwritten consistently to our standards using a proprietary quality rating system that has been developed from our experience in real estate and mortgage lending.

Uncollateralized loans primarily represent reverse dual currency loans and corporate loans which do not meet the definition of a security under authoritative accounting guidance.

Residential property loans primarily include Japanese recourse loans. Upon default of these recourse loans we can make a claim against the personal assets of the property owner, in addition to the mortgaged property. These loans are also backed by third party guarantors.

Other collateralized loans attributable to the Financial Services Businesses include collateralized structured loans and consumer loans.

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Composition of Commercial and Agricultural Mortgage Loans

Our commercial and agricultural mortgage loan portfolio strategy emphasizes diversification by property type and geographic location. The following tables set forth the breakdown of the gross carrying values of our general account investments in commercial and agricultural mortgage loans by geographic region and property type as of the dates indicated.


	September 30, 2014										December 31, 2013
	Financial Services Businesses					Closed Block Business					Financial Services Businesses					Closed Block Business
	Gross Carrying Value		% of Total			Gross Carrying Value		% of Total			Gross Carrying Value		% of Total			Gross Carrying Value		% of Total
	($ in millions)
Commercial and agricultural mortgage loans by region:
U.S. Regions:
Pacific	$	10,247		31.6	%	$	3,497		34.1	%	$	9,089		31.1	%	$	3,230		33.4	%
South Atlantic		6,305		19.5			1,873		18.3			5,671		19.4			1,711		17.7
Middle Atlantic		4,242		13.1			2,058		20.1			3,855		13.3			1,924		19.9
East North Central		2,631		8.1			742		7.2			2,678		9.2			725		7.4
West South Central		3,447		10.6			845		8.2			2,828		9.7			823		8.6
Mountain		1,475		4.6			208		2.0			1,448		5.0			278		2.9
New England		1,476		4.6			514		5.0			1,026		3.5			412		4.2
West North Central		541		1.7			88		0.9			555		1.9			104		1.1
East South Central		255		0.8			86		0.8			296		1.0			137		1.4

Subtotal-U.S.		30,619		94.6			9,911		96.6			27,446		94.1			9,344		96.6
Asia		666		2.0			0		0.0			723		2.5			0		0.0
Other		1,096		3.4			350		3.4			995		3.4			333		3.4

Total commercial and agricultural mortgage loans	$	32,381		100.0	%	$	10,261		100.0	%	$	29,164		100.0	%	$	9,677		100.0	%


	September 30, 2014										December 31, 2013
	Financial Services Businesses					Closed Block Business					Financial Services Businesses					Closed Block Business
	Gross Carrying Value		% of Total			Gross Carrying Value		% of Total			Gross Carrying Value		% of Total			Gross Carrying Value		% of Total
	($ in millions)
Commercial and agricultural mortgage loans by property type:
Industrial	$	5,989		18.5	%	$	1,487		14.5	%	$	5,778		19.8	%	$	1,612		16.7	%
Retail		6,168		19.0			2,533		24.7			6,085		20.9			2,612		27.0
Office		6,328		19.6			2,697		26.3			5,389		18.5			2,359		24.4
Apartments/Multi-Family		7,874		24.3			1,569		15.3			6,031		20.7			1,287		13.3
Other		2,830		8.7			677		6.6			2,806		9.6			653		6.7
Agricultural properties		1,648		5.1			722		7.0			1,598		5.4			585		6.0
Hospitality		1,544		4.8			576		5.6			1,477		5.1			569		5.9

Total commercial and agricultural mortgage loans	$	32,381		100.0	%	$	10,261		100.0	%	$	29,164		100.0	%	$	9,677		100.0	%

Loan-to-value and debt service coverage ratios are measures commonly used to assess the quality of commercial and agricultural mortgage loans. The loan-to-value ratio compares the amount of the loan to the fair

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value of the underlying property collateralizing the loan, and is commonly expressed as a percentage. Loan-to-value ratios greater than 100% indicate that the loan amount is greater than the collateral value. A smaller loan-to-value ratio indicates a greater excess of collateral value over the loan amount. The debt service coverage ratio compares a property’s net operating income to its debt service payments. Debt service coverage ratios less than 1.0 times indicate that property operations do not generate enough income to cover the loan’s current debt payments. A larger debt service coverage ratio indicates a greater excess of net operating income over the debt service payments.

As of September 30, 2014, our general account investments in commercial and agricultural mortgage loans attributable to the Financial Services Businesses had a weighted average debt service coverage ratio of 2.21 times, and a weighted average loan-to-value ratio of 55%. As of September 30, 2014, approximately 95% of commercial and agricultural mortgage loans attributable to the Financial Services Businesses were fixed rate loans. As of September 30, 2014, our general account investments in commercial and agricultural mortgage loans attributable to the Closed Block Business had a weighted average debt service coverage ratio of 2.18 times, and a weighted average loan-to-value ratio of 52%. As of September 30, 2014, approximately 99% of the commercial and agricultural mortgage loans attributable to the Closed Block Business were fixed rate loans. For those general account commercial and agricultural mortgage loans attributable to the Financial Services Businesses that were originated in 2014, the weighted average debt service coverage ratio was 2.44 times and the weighted average loan-to-value ratio was 60%.

The values utilized in calculating these loan-to-value ratios are developed as part of our periodic review of the commercial and agricultural mortgage loan portfolio, which includes an internal evaluation of the underlying collateral value. Our periodic review also includes a quality re-rating process, whereby we update the internal quality rating originally assigned at underwriting based on the proprietary quality rating system mentioned above. As discussed below, the internal quality rating is a key input in determining our allowance for loan losses.

For loans with collateral under construction, renovation or lease-up, a stabilized value and projected net operating income are used in the calculation of the loan-to-value and debt service coverage ratios. Our commercial and agricultural mortgage loan portfolio attributable to the Financial Services Businesses included approximately $1.4 billion and $0.7 billion of such loans as of September 30, 2014 and December 31, 2013, respectively, and our commercial and agricultural mortgage loan portfolio attributable to the Closed Block Business included approximately $0.2 billion and $0.1 billion of such loans as of September 30, 2014 and December 31, 2013, respectively. All else being equal, these loans are inherently more risky than those collateralized by properties that have already stabilized. As of September 30, 2014, there are no loan-specific reserves related to these loans attributable to the Financial Services Businesses or the Closed Block Business. In addition, these unstabilized loans are included in the calculation of our portfolio reserve as discussed below. For information regarding similar loans we hold as part of our commercial and agricultural mortgage operations, see “—Invested Assets of Other Entities and Operations” below.

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The following tables set forth the gross carrying value of our general account investments in commercial and agricultural mortgage loans attributable to the Financial Services Businesses and the Closed Block Business as of the dates indicated by loan-to-value and debt service coverage ratios.

Commercial and Agricultural Mortgage Loans by Loan-to-Value and Debt Service Coverage Ratios—Financial Services Businesses


	September 30, 2014
	Debt Service Coverage Ratio
	Greater than 1.2x		1.0x to < 1.2x		Less than 1.0x		Total Commercial and Agricultural Mortgage Loans
Loan-to-Value Ratio	(in millions)
0%-59.99%	$	16,433	$	512	$	294	$	17,239
60%-69.99%		10,212		352		205		10,769
70%-79.99%		3,595		262		50		3,907
Greater than 80%		129		102		235		466

Total commercial and agricultural mortgage loans	$	30,369	$	1,228	$	784	$	32,381

Commercial and Agricultural Mortgage Loans by Loan-to-Value and Debt Service Coverage Ratios—Closed Block Business


	September 30, 2014
	Debt Service Coverage Ratio
	Greater than 1.2x		1.0x to < 1.2x		Less than 1.0x		Total Commercial and Agricultural Mortgage Loans
Loan-to-Value Ratio	(in millions)
0%-59.99%	$	6,368	$	203	$	32	$	6,603
60%-69.99%		2,624		104		66		2,794
70%-79.99%		704		111		0		815
Greater than 80%		3		26		20		49

Total commercial and agricultural mortgage loans	$	9,699	$	444	$	118	$	10,261

The following table sets forth the breakdown of our commercial and agricultural mortgage loans by year of origination as of September 30, 2014.


	September 30, 2014
	Financial Services Businesses					Closed Block Business
Year of Origination	Gross Carrying Value		% of Total			Gross Carrying Value		% of Total
	($ in millions)
2014	$	4,900		15.1	%	$	1,165		11.4	%
2013		8,750		27.0			1,507		14.7
2012		4,546		14.1			1,808		17.6
2011		4,517		13.9			1,382		13.5
2010		2,747		8.5			1,004		9.8
2009		745		2.3			291		2.8
2008		1,428		4.4			454		4.4
2007 & prior		4,748		14.7			2,650		25.8

Total commercial and agricultural mortgage loans	$	32,381		100.0	%	$	10,261		100.0	%

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Commercial Mortgage and Other Loan Quality

Ongoing review of the portfolio is performed and loans are placed on watch list status based on a predefined set of criteria, where they are assigned to one of the following categories. We place loans on early warning status in cases where, based on our analysis of the loan’s collateral, the financial situation of the borrower or tenants or other market factors, we believe a loss of principal or interest could occur. We classify loans as closely monitored when we determine there is a collateral deficiency or other credit events that may lead to a potential loss of principal or interest. Loans not in good standing are those loans where we have concluded that there is a high probability of loss of principal, such as when the loan is in the process of foreclosure or the borrower is in bankruptcy. In our domestic operations, our workout and special servicing professionals manage the loans on the watch list. As described below, in determining our allowance for losses, we evaluate each loan on the watch list to determine if it is probable that amounts due according to the contractual terms of the loan agreement will not be collected. In our international portfolios, we monitor delinquency in consumer loans on a pool basis and evaluate any servicing relationship and guarantees the same way we do for commercial mortgage loans.

We establish an allowance for losses to provide for the risk of credit losses inherent in the lending process. The allowance includes loan specific reserves for loans that are determined to be impaired as a result of our loan review process and a portfolio reserve for probable incurred but not specifically identified losses for loans which are not on the watch list. We define an impaired loan as a loan for which we estimate it is probable that amounts due according to the contractual terms of the loan agreement will not be collected. The loan specific portion of the loss allowance is based on our assessment as to ultimate collectability of loan principal and interest. Valuation allowances for an impaired loan are recorded based on the present value of expected future cash flows discounted at the loan’s effective interest rate or based on the fair value of the collateral if the loan is collateral dependent. The portfolio reserve for incurred but not specifically identified losses considers the current credit composition of the portfolio based on the internal quality ratings mentioned above. The portfolio reserves are determined using past loan experience, including historical credit migration, loss probability, and loss severity factors by property type. These factors are reviewed and updated as appropriate. The valuation allowance for commercial mortgage and other loans can increase or decrease from period to period based on these factors.

Our general account investments in commercial mortgage and other loans attributable to the Financial Services Businesses, based upon the recorded investment gross of allowance for credit losses, was $34,307 million and $31,297 million as of September 30, 2014 and December 31, 2013, respectively. As a percentage of recorded investment gross of allowance, more than 99% of the assets were current for both periods.

Our general account investments in commercial mortgage and other loans attributable to the Closed Block Business, based upon the recorded investment gross of allowance for credit losses, was $10,305 million and $9,721 million as of September 30, 2014 and December 31, 2013, respectively. As a percentage of recorded investment gross of allowance, more than 99% of the assets were current as of September 30, 2014 and December 31, 2013, respectively.

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The following table sets forth the change in valuation allowances for our commercial mortgage and other loan portfolio for the periods indicated:


	September 30, 2014						December 31, 2013
	Financial Services Businesses			Closed Block Business			Financial Services Businesses			Closed Block Business
	(in millions)
Allowance, beginning of year	$	164		$	48		$	186		$	58
Addition to/(release of) allowance for losses		(50	)		(30	)		10			(7	)
Charge-offs, net of recoveries		(9	)		0			(27	)		(3	)
Change in foreign exchange		0			0			(5	)		0

Allowance, end of period	$	105		$	18		$	164		$	48

Loan specific reserve	$	7		$	1		$	11		$	3
Portfolio reserve	$	98		$	17		$	153		$	45

The decrease in the allowance for losses, for the period ended September 30, 2014, was primarily driven by the impact of assumption updates.

Equity Securities

Investment Mix

The equity securities attributable to the Financial Services Businesses consist principally of investments in common and preferred stock of publicly-traded companies, as well as mutual fund shares. The following table sets forth the composition of our equity securities portfolio attributable to the Financial Services Businesses and the associated gross unrealized gains and losses as of the dates indicated.

Equity Securities—Financial Services Businesses


	September 30, 2014								December 31, 2013
	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in millions)
Non-redeemable preferred stocks	$	20	$	7	$	0	$	27	$	32	$	4	$	1	$	35
Mutual fund common stocks(1)		2,569		496		10		3,055		2,245		562		8		2,799
Other common stocks		2,219		1,086		17		3,288		2,277		920		12		3,185

Total equity securities(2)	$	4,808	$	1,589	$	27	$	6,370	$	4,554	$	1,486	$	21	$	6,019

(1)	Includes mutual fund shares representing our interest in the underlying assets of certain of our separate account investments supporting corporate-owned life insurance. These mutual funds invest primarily in high yield bonds.

(2)	Amounts presented exclude hedge funds and other alternative investments which are reported in “Other long-term investments.”

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The following table sets forth the composition of our equity securities portfolio attributable to the Closed Block Business and the associated gross unrealized gains and losses as of the dates indicated.

Equity Securities—Closed Block Business


	September 30, 2014								December 31, 2013
	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in millions)
Non-redeemable preferred stocks	$	2	$	0	$	0	$	2	$	1	$	1	$	0	$	2
Mutual fund common stocks		8		7		0		15		8		6		0		14
Other common stocks		2,274		1,245		35		3,484		2,433		1,443		8		3,868

Total equity securities	$	2,284	$	1,252	$	35	$	3,501	$	2,442	$	1,450	$	8	$	3,884

Other-Than-Temporary Impairments of Equity Securities

For those equity securities classified as available-for-sale, we record unrealized gains and losses to the extent cost is different from estimated fair value. All securities with unrealized losses are subject to our review to identify other-than-temporary impairments in value. For additional information regarding our policies regarding other-than-temporary impairments for equity securities, 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, 2013.

Impairments of equity securities attributable to the Financial Services Businesses were $9 million and $1 million for the three months ended September 30, 2014, and 2013, respectively, and $23 million and $9 million for the nine months ended September 30, 2014, and 2013, respectively. Impairments of equity securities attributable to the Closed Block Business were $0 million and $2 million for the three months ended September 30, 2014, and 2013, respectively, and $3 million and $2 million for the nine months ended September 30, 2014, and 2013, respectively. For a further discussion of impairments, see “—Realized Investment Gains and Losses” above.

Other Long-Term Investments

The following table sets forth the composition of “Other long-term investments,” which primarily consists of investments in joint ventures and limited partnerships, other than operating joint ventures, as well as wholly-owned investment real estate and other investments, as of the dates indicated.


	September 30, 2014				December 31, 2013
	Financial Services Businesses		Closed Block Business		Financial Services Businesses		Closed Block Business
	(in millions)
Joint ventures and limited partnerships:
Real estate-related	$	240	$	488	$	277	$	481
Non-real estate-related(1)		4,275		2,053		4,141		1,863
Real estate held through direct ownership		1,860		0		1,559		0
Other(2)		906		4		1,195		(320	)

Total other long-term investments	$	7,281	$	2,545	$	7,172	$	2,024

(1)	Primarily includes investments in private equity and hedge funds.

(2)	Primarily includes derivatives and member and activity stock held in the Federal Home Loan Banks of New York and Boston. For additional information regarding our holdings in the Federal Home Loan Banks of New York and Boston, see Note 9 to the Unaudited Interim Consolidated Financial Statements.

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Invested Assets of Other Entities and Operations

“Invested Assets of Other Entities and Operations” includes investments held outside the general account and primarily represents investments associated with our asset management operations and derivative operations. Our derivative operations act on behalf of affiliates primarily to manage interest rates, foreign currency, credit and equity exposures. Assets within our asset management operations that are managed for third parties and those assets classified as “Separate account assets” on our balance sheet are not included.


	September 30, 2014		December 31, 2013
	(in millions)
Fixed Maturities:
Public, available-for-sale, at fair value	$	220	$	242
Private, available-for-sale, at fair value		56		73
Other trading account assets, at fair value		7,542		4,770
Equity securities, available-for-sale, at fair value		7		7
Commercial mortgage and other loans, at book value(1)		347		202
Other long-term investments		1,034		1,132
Short-term investments		255		392

Total investments	$	9,461	$	6,818

(1)	Book value is generally based on unpaid principal balance net of any allowance for losses, the lower of cost or fair value, or fair value, depending on the loan.

Other Trading Account Assets

Other trading account assets are primarily related to assets associated with consolidated variable interest entities, for which the Company is the investment manager, as well as our derivative operations used to manage interest rate, foreign currency, credit and equity exposures. The assets of the consolidated variable interest entities are generally offset by liabilities for which the fair value option has been elected. For further information on these consolidated variable interest entities, see Note 5 to the Unaudited Interim Consolidated Financial Statements.

Commercial Mortgage and Other Loans

Our asset management operations include our commercial mortgage operations, which provide mortgage origination, asset management and servicing for our general account, institutional clients, and government sponsored entities such as Fannie Mae, the Federal Housing Administration, and Freddie Mac.

We also carry shorter-term interim loans for spread lending that are collateralized by assets generally under renovation or lease up. All else being equal, these interim loans are inherently more risky than those collateralized by properties that have already stabilized. Our interim loans are generally paid off through refinancing or the sale of the underlying collateral by the borrower.

As of September 30, 2014, we hold no commercial real estate held-for-sale related to foreclosed interim loans. The mortgage loans of our commercial mortgage operations are included in “Commercial mortgage and other loans,” with related derivatives and other hedging instruments primarily included in “Other trading account assets” and “Other long-term investments.”

Other Long-Term Investments

Other long-term investments primarily include strategic investments made as part of our asset management operations. We make these strategic investments in real estate, as well as fixed income, public equity and real estate securities, including controlling interests. Certain of these investments are made primarily for purposes of

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co-investment in our managed funds and structured products. Other strategic investments are made with the intention to sell or syndicate to investors, including our general account, or for placement in funds and structured products that we offer and manage (seed investments). As part of our asset management operations, we also make loans to our managed funds that are secured by equity commitments from investors or assets of the funds. Other long-term investments also include certain assets in consolidated investment funds where the company is deemed to exercise control over the funds.

Liquidity and Capital Resources

This section supplements and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” included in our Annual Report on Form 10-K for the year ended December 31, 2013.

Overview

Liquidity refers to the ability to generate sufficient cash resources to meet the payment obligations of the Company. Capital refers to the long term financial resources available to support the operations of our businesses, fund business growth, and provide a cushion to withstand adverse circumstances. Our ability to generate and maintain sufficient liquidity and capital depends on the profitability of our businesses, general economic conditions and our access to the capital markets and the alternate sources of liquidity and capital described herein.

Effective and prudent liquidity and capital management is a priority across the organization. Management monitors the liquidity of Prudential Financial and its subsidiaries on a daily basis and projects borrowing and capital needs over a multi-year time horizon through our quarterly planning process. We believe that cash flows from the sources of funds available to us are sufficient to satisfy the current liquidity requirements of Prudential Financial and its subsidiaries, including under reasonably foreseeable stress scenarios. We have a capital management framework in place that governs the allocation of capital and approval of capital uses, and we forecast capital sources and uses on a quarterly basis. We also employ a “Capital Protection Framework” to ensure the availability of capital resources to maintain adequate capitalization on a consolidated basis and competitive risk-based capital ratios and solvency margins for our insurance subsidiaries under various stress scenarios.

Prudential Financial is a “Designated Financial Company” under the Dodd-Frank Act. As a Designated Financial Company, Prudential Financial is subject to supervision and examination by the Federal Reserve Bank of Boston and to prudential regulatory standards, which include or will include requirements and limitations (some of which are the subject of ongoing rule-making) relating to risk-based capital, leverage, liquidity, stress-testing, overall risk management, resolution plans, early remediation; and may also include additional standards regarding capital, public disclosure, short-term debt limits, and other related subjects. In addition, the FSB, consisting of representatives of national financial authorities of the G20 nations, has identified the Company as a global systemically important insurer. For information on these recent actions and their potential impact on us, see “—Executive Summary—Regulatory Developments” above, as well as “Business—Regulation” and “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2013.

During the nine months ended September 30, 2014, we took the following significant actions that impacted our liquidity and capital position:

•

We repurchased $750 million of shares of our Common Stock and declared aggregate Common Stock dividends of $738 million;

•

We issued $1.8 billion of medium-term notes in order to refinance upcoming debt maturities and for operating needs;

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•

We increased the available capacity under our Guideline AXXX captive external financing facility from $2.0 billion to $3.5 billion, increased the amount outstanding under the facility to $1.8 billion and increased the maximum potential size of the facility to $4.0 billion;

•

We executed additional captive financings of $650 million for Guideline AXXX reserves and reduced captive financings for Regulation XXX reserves by $200 million; and

•

We entered into a financing transaction pursuant to which we issued a $245 million limited recourse note and, in return, obtained a $245 million asset-backed note. The asset-backed note is held by an insurance subsidiary of Prudential Insurance to finance statutory surplus.

Capital

The primary components of capitalization for the Financial Services Businesses consist of the equity we attribute to the Financial Services Businesses and its outstanding capital debt, including junior subordinated debt. As shown in the table below, as of September 30, 2014, the Financial Services Businesses had $38.9 billion in capital, all of which was available to support the aggregate capital requirements of its three divisions and its Corporate and Other operations. Based on our assessment of these businesses and operations, we believe this level of capital is consistent with our ratings targets.


	September 30, 2014		December 31, 2013
	(in millions)
Attributed Equity(1)	$	26,875	$	25,299
Junior subordinated debt (i.e. hybrid securities)		4,884		4,884
Other capital debt		7,107		5,345

Total capital	$	38,866	$	35,528

(1)

Excludes AOCI. This amount may be subject to volatility due to, among other things, the impact of foreign currency exchange rate movements on certain non-yen denominated assets and liabilities within our Japanese insurance operations, for which the foreign currency exposure is economically matched and offset in AOCI (see “—Results of Operations for Financial Services Businesses by Segment—International Insurance Division—Impact of foreign currency exchange rate movements on earnings—U.S. GAAP earnings impact of products denominated in non-local currencies” for additional information).

The increase in other capital debt from December 31, 2013 primarily reflects additional capital required as a result of the impact of our annual reviews and updates of assumptions on living benefit guarantees for certain variable annuity products, as well as the impact of lower interest rates, reflecting our management of interest rate risk through our Capital Protection Framework.

We manage Prudential Insurance, Prudential of Japan, Gibraltar Life, and our other domestic and international insurance subsidiaries to regulatory capital levels consistent with our “AA” ratings targets. We utilize the Risk-Based Capital (“RBC”) ratio as a primary measure of the capital adequacy of our domestic insurance subsidiaries and the Solvency Margin ratio as a primary measure of the capital adequacy of our Japanese insurance subsidiaries.

The table below presents the RBC ratios of our most significant domestic insurance subsidiaries as of December 31, 2013⁽¹⁾, the most recent statutory fiscal year-end and RBC reporting date for these subsidiaries:


Prudential Insurance(2)	456	%
Prudential Annuities Life Assurance Corporation (“PALAC”)	502	%

(1)

The RBC ratio calculations are intended to assist insurance regulators in measuring an insurer’s solvency and ability to pay future claims. The reporting of RBC measures is not intended for the purpose of ranking any insurance company or for use in connection with any marketing, advertising or promotional activities, but is available to the public.

(2)	Includes PRIAC, Pruco Life Insurance Company (“Pruco Life”) and Pruco Life Insurance Company of New Jersey (“PLNJ”), a subsidiary of Pruco Life.

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The table below presents the Solvency Margin ratios of our most significant international insurance subsidiaries as of June 30, 2014, the most recent Solvency Margin reporting date for these subsidiaries:


	As of June 30, 2014
Prudential of Japan		835	%
Gibraltar Life consolidated(1)		967	%

(1)	Includes Prudential Gibraltar Financial Life, a wholly-owned subsidiary of Gibraltar Life.

All of our domestic and international insurance subsidiaries have capital levels that exceed the minimum level required by applicable insurance regulations.

The regulatory capital levels of our domestic and international insurance subsidiaries can be materially impacted by interest rates, equity market and real estate market fluctuations, changes in the values of derivatives, the level of impairments recorded, credit quality migration of our investment portfolio, foreign exchange rate movements and business growth, among other items. In addition, particularly for our domestic insurance subsidiaries, the recapture of business subject to third-party reinsurance arrangements due to, for example, defaults by, or credit quality migration affecting, the third-party reinsurers could negatively impact regulatory capital.

Our regulatory capital levels are also affected by statutory accounting rules, which are subject to change by each applicable insurance regulator. As discussed above in “—Executive Summary—Regulatory Developments,” the NY DFS has notified us that it does not agree with our calculation of statutory reserves (including the applicable credit for reinsurance) for New York purposes in respect of certain variable annuity products. If we are ultimately required to establish material additional reserves on a New York statutory accounting basis or post material amounts of additional collateral with respect to such variable annuity products or other products, our ability to deploy capital held within our domestic insurance subsidiaries for other purposes could be affected.

In addition, the NAIC recently issued new guidance regarding the calculation of Total Adjusted Capital (“TAC”) that will directly affect the calculation of the RBC ratio. The new guidance, which is effective for December 31, 2014, will limit the portion of an insurer’s asset valuation reserve that can be counted as TAC to the amount not utilized in asset adequacy testing. We are currently assessing the impact of this guidance on the RBC ratios of our domestic insurance subsidiaries.

We employ a “Capital Protection Framework” to ensure that sufficient capital resources are available to maintain adequate capitalization on a consolidated basis and competitive RBC ratios and solvency margins for our insurance subsidiaries under various stress scenarios. The Capital Protection Framework incorporates the potential impacts from market related stresses, including equity markets, real estate, interest rates, credit losses, and foreign currency exchange rates. Potential sources of capital include on-balance sheet capital, derivatives, reinsurance and contingent sources of capital. Although we continue to enhance our approach, we believe we currently have access to sufficient resources to maintain adequate capitalization and competitive RBC ratios and solvency margins under a range of potential stress scenarios.

Captive Reinsurance Companies

We use captive reinsurance companies in our domestic insurance operations to more effectively manage our reserves and capital on an economic basis and to enable the aggregation and transfer of risks. Our captive reinsurance companies assume business from affiliates only. To support the risks they assume, our captives are capitalized to a level we believe is consistent with the “AA” financial strength rating targets of our insurance subsidiaries. All of our captive reinsurance companies are wholly-owned subsidiaries and are located domestically, typically in the state of domicile of the direct writing insurance subsidiary that cedes the majority of business to the captive. In addition to state insurance regulation, our captives are subject to internal policies

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governing their activities. Prudential Financial provides support to these captives, typically through net worth maintenance agreements, and in the normal course of business will contribute capital to the captives to support business growth and other needs. In addition, in connection with financing arrangements, Prudential Financial may guarantee certain of the captives’ obligations.

The NAIC, the NY DFS and other regulators continue to review life insurers’ use of captive reinsurance companies. On June 4, 2014, Rector & Associates, Inc., a consulting firm commissioned by the NAIC, presented a revised report to the NAIC’s Principle-Based Reserving Implementation Task Force that recommended, among other things, placing limitations on the types of assets that may be used to finance reserves associated with certain term and universal life insurance policies and making adoption of new regulations contemplated by the Rector Report by individual states an NAIC accreditation standard. On August 17, 2014, the NAIC’s Executive Committee adopted the regulatory framework proposed by Rector & Associates, including recommendations to have various technical working groups of the NAIC propose regulations and guidelines to implement the new framework. These technical working groups are in various stages of developing and proposing regulations and guidelines. The NAIC’s Principle-Based Reserving Implementation Task Force has voted to expose for comment a new Actuarial Guideline (AG48) designed to implement many of the recommendations in the Rector Report related to the determination of the portion of the reserves that may be supported by specified asset classes in connection with certain transactions involving captive reinsurance companies. In addition, another committee of the NAIC continues to consider changes to the NAIC accreditation standards that would regulate captive reinsurance companies that assume business directly written in more than one state as “multi-state reinsurers” and apply accreditation standards to those captives that historically were applicable only to traditional insurers. We cannot predict what changes may result from these initiatives, and what the ultimate impact may be to our business. We are evaluating, and will continue to monitor, the development of rules and regulations regarding captive reinsurance companies. If insurance laws are changed in a way that restricts our use of captive reinsurance companies in the future, our ability to write certain products and efficiently manage their associated risks could be adversely affected and we may need to increase prices on certain products, modify certain products or find alternate financing sources, any of which could adversely affect our competitiveness, capital and financial position and results of operations. Given the uncertainty of the ultimate outcome of these initiatives, at this time we are unable to estimate their expected effects on our future capital and financial position and results of operations.

Our domestic life insurance subsidiaries are subject to Regulation XXX and Guideline AXXX. The regulation and supporting guideline require insurers to establish statutory reserves for term and universal life insurance policies with long-term premium guarantees that are consistent with the statutory reserves required for other individual life insurance policies with similar guarantees. Many market participants believe that these levels of reserves are non-economic. We use captive reinsurance companies to implement reinsurance and capital management actions to satisfy these reserve requirements by financing the non-economic reserves through the issuance of surplus notes by the captives, which are treated as capital for statutory purposes. For more information about our financing of non-economic reserves, see “Financing Activities” below.

We reinsure living benefit guarantees on certain variable annuity and retirement products from our domestic life insurance companies to a captive reinsurance company, Pruco Reinsurance, Ltd. (“Pruco Re”). This enables us to aggregate these risks within Pruco Re and manage them more efficiently through a hedging program. We believe Pruco Re currently maintains an adequate level of capital and access to liquidity to support this hedging program. However, as discussed below under “Liquidity associated with other activities—Hedging activities associated with living benefit guarantees,” Pruco Re’s capital and liquidity needs can vary significantly due to, among other things, changes in equity markets, interest rates, mortality and policyholder behavior. Through our Capital Protection Framework, we hold on-balance sheet capital and maintain access to committed sources of capital that are available to meet these needs as they arise.

We reinsure 90% of the short-term risks of Prudential Insurance’s Closed Block Business to a captive reinsurance company domiciled in New Jersey. These short-term risks represent the impact of variations in

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experience of the Closed Block that are expected to be recovered over time as a result of corresponding adjustments to policyholder dividends. The reinsurance arrangement is intended to alleviate the short-term statutory surplus volatility within Prudential Insurance resulting from the Closed Block Business, including volatility caused by the impact of any unrealized mark-to-market losses and realized credit losses within its investment portfolio. To support the captive’s funding obligations under the reinsurance arrangement, we maintain a $2.0 billion letter of credit facility with unaffiliated financial institutions through which the captive can obtain a letter of credit during an availability period expiring in October 2015. Prudential Financial guarantees all obligations of the New Jersey captive under the facility, including its obligation to reimburse any draws made under the letter of credit. Because the experience of the Closed Block is ultimately passed along to policyholders over time through the annual policyholder dividend, we believe that a draw under the letter of credit is unlikely. Our ability to obtain a letter of credit under the facility is subject to the continued satisfaction of customary conditions similar to those contained in our credit facilities described in Note 9 to our Unaudited Interim Consolidated Financial Statements.

Shareholder Distributions

In June 2014, our Board of Directors authorized the Company to repurchase at management’s discretion up to $1.0 billion of its outstanding Common Stock during the period from July 1, 2014 through June 30, 2015. This authorization supersedes the Board’s previous $1.0 billion repurchase authority, which covered the prior twelve month period. The timing and amount of share repurchases will be determined by management based on market conditions and other considerations, including any increased capital needs of our businesses due to changes in regulatory capital requirements and opportunities for growth and acquisitions. Repurchases may be effected in the open market, through derivative, accelerated repurchase and other negotiated transactions and through plans designed to comply with Rule 10b5-1(c) under the Exchange Act. The following table sets forth information about declarations of Common Stock dividends, as well as repurchases of shares of Common Stock, for the three months ended March 31, June 30 and September 30, 2014:


	Dividend Amount				Shares Repurchased
Three months ended:	Per Share		Aggregate		Shares		Total Cost
	(in millions, except per share data)
March 31, 2014	$	0.53	$	247		2.9	$	250
June 30, 2014	$	0.53	$	246		3.0	$	250
September 30, 2014	$	0.53	$	245		2.8	$	250

As a Designated Financial Company under Dodd-Frank, Prudential Financial expects to be subject to minimum risk-based capital and leverage requirements and to the submission of annual capital plans to the Federal Reserve System. Our compliance with these and other requirements under Dodd-Frank could limit our ability to pay Common Stock dividends and repurchase shares in the future.

Liquidity

Liquidity management and stress testing are performed on a legal entity basis as the ability to transfer funds between subsidiaries is limited due in part to regulatory restrictions. Liquidity needs are determined through daily and quarterly cash flow forecasting at the holding company and within our operating subsidiaries. A minimum cash balance of $1.3 billion is targeted to ensure that adequate liquidity is available at Prudential Financial to cover fixed expenses in the event that we experience reduced cash flows from our operating subsidiaries. This targeted minimum balance is reviewed and approved annually by the Finance Committee of the Board of Directors.

We seek to mitigate the risk of having limited or no access to financing due to stressed market conditions by generally pre-funding capital debt in advance of maturity. We mitigate the refinancing risk associated with our debt that is used to fund operating needs by matching the term of debt with the assets financed. To ensure

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adequate liquidity in stress scenarios, stress testing is performed on a quarterly basis for our major operating subsidiaries. We seek to further mitigate liquidity risk by maintaining our access to the alternative sources of liquidity discussed below.

Liquidity of Prudential Financial

The principal sources of funds available to Prudential Financial, the parent holding company, are dividends and returns of capital from subsidiaries, repayments of operating loans from subsidiaries and cash and short-term investments. These sources of funds may be supplemented by Prudential Financial’s access to the capital markets as well as the “—Alternative Sources of Liquidity” described below.

The primary uses of funds at Prudential Financial include servicing debt, paying operating expenses, making capital contributions and loans to subsidiaries, paying declared shareholder dividends, and repurchasing outstanding shares of Common Stock executed under Board authority.

As of September 30, 2014, Prudential Financial had cash and short-term investments of $7,492 million, an increase of $1,937 million from December 31, 2013. We maintain an intercompany liquidity account that is designed to optimize the use of cash by facilitating the lending and borrowing of funds between Prudential Financial and its subsidiaries on a daily basis. Excluding net borrowings from this intercompany liquidity account, Prudential Financial had cash and short-term investments of $4,223 million as of September 30, 2014, a decrease of $131 million from December 31, 2013.

The following table sets forth Prudential Financial’s principal sources and uses of cash and short-term investments, excluding net borrowings from our intercompany liquidity account, for the period indicated.


	Nine Months Ended September 30, 2014
	(in millions)
Sources:
Proceeds from the issuance of long-term senior debt	$	1,794
Dividends and/or returns of capital from subsidiaries(1)		1,114
Net receipts under intercompany loan agreements(2)		664
Proceeds from stock-based compensation and exercise of stock options		353
Interest income from subsidiaries on intercompany agreements, net of interest paid		140
Net income tax receipts		126
Proceeds from short-term debt, net of repayments		37
Proceeds from the issuance of retail medium-term notes		23

Total sources		4,251

Uses:
Maturities of long-term senior debt, excluding retail medium-term notes		1,473
Share repurchases(3)		750
Common Stock dividends(4)		741
Capital contributions to subsidiaries(5)		678
Interest paid on external debt		661
Repayment of retail medium-term notes		46
Class B Stock dividends		14
Other, net		19

Total uses		4,382

Net increase (decrease) in cash and short-term investments	$	(131	)

(1)	Includes dividends and/or returns of capital of $507 million from international subsidiaries, $314 million from Prudential Annuities Holding Company, of which $267 million was from PALAC, $244 million from asset management subsidiaries, and $49 million from other subsidiaries.

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(2)

Includes net receipts from subsidiaries of $700 million by Prudential Arizona Reinsurance Captive Company and $261 million by Pruco Life Insurance Company, offset by net borrowings by subsidiaries of $250 million by Prudential Term Reinsurance Company, and net repayments of $27 million to Gibraltar Life and $20 million to Prudential Holdings, LLC.

(3)	Excludes $12 million related to trades that settled in October 2014.

(4)	Includes cash payments made on dividends declared in prior periods.

(5)	Includes capital contributions of $320 million to asset management subsidiaries, $247 million to Pruco Re, $110 million to international subsidiaries, and $1 million to other subsidiaries.

Restrictions on Dividends and Returns of Capital from Subsidiaries

Our insurance companies are subject to limitations on the payment of dividends and other transfers of funds to Prudential Financial and other affiliates under applicable insurance law and regulation. Also, more generally, the payment of dividends by any of our subsidiaries is subject to declaration by their Board of Directors and can be affected by market conditions and other factors. See Note 15 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013 for details on specific dividend restrictions.

Domestic insurance subsidiaries. Prudential Insurance is permitted to pay ordinary dividends based on calculations specified under New Jersey insurance law, subject to prior notification to the New Jersey Department of Banking and Insurance (“NJDOBI”). Any distributions above this amount in any 12-month period are considered to be “extraordinary” dividends, and the approval of NJDOBI is required prior to payment. The laws regulating dividends of the states where our other domestic insurance companies are domiciled are similar, but not identical, to New Jersey’s. During the first nine months of 2014, PALAC paid a dividend of $267 million to Prudential Financial, of which $9 million was considered to be an extraordinary dividend under Arizona insurance law.

International insurance subsidiaries. Our international insurance subsidiaries are subject to dividend restrictions from the regulatory authorities in the jurisdictions in which they operate. During the first nine months of 2014, Prudential of Korea paid dividends totaling (Won)70.0 billion, or approximately $62 million, to its parent, Prudential International Insurance Holdings Ltd., of which $59 million was ultimately sent to Prudential Financial.

Other subsidiaries. The ability of our asset management subsidiaries and the majority of our other operating subsidiaries to pay dividends is largely unrestricted from a regulatory standpoint.

Liquidity of Insurance Subsidiaries

There have been no material changes to the liquidity position of our domestic and international insurance subsidiaries since December 31, 2013. We continue to believe that cash generated by ongoing operations and the liquidity profile of our assets provide sufficient liquidity under reasonably foreseeable stress scenarios for each of our insurance subsidiaries.

The principal sources of liquidity for our insurance subsidiaries are premiums and certain annuity considerations, investment and fee income, and investment maturities and sales associated with our insurance and annuity operations, as well as internal and external borrowings. The principal uses of that liquidity include benefits, claims, dividends paid to policyholders, and payments to policyholders and contractholders in connection with surrenders, withdrawals and net policy loan activity. Other uses of liquidity include commissions, general and administrative expenses, purchases of investments, hedging activity and payments in connection with financing activities. We use a projection process for cash flows from operations to ensure sufficient liquidity is available to meet projected cash outflows, including claims.

We manage the liquidity of our insurance operations to ensure stable, reliable and cost-effective sources of cash flows to meet all of our obligations. Liquidity within each of our insurance subsidiaries is provided by a variety of sources, including portfolios of liquid assets. The investment portfolios of our subsidiaries are integral

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to the overall liquidity of our insurance operations. We segment our investment portfolios and employ an asset/liability management approach specific to the requirements of each of our product lines. This enhances the discipline applied in managing the liquidity, as well as the interest rate and credit risk profiles, of each portfolio in a manner consistent with the unique characteristics of the product liabilities.

The following table sets forth the fair value of certain of our domestic insurance operations’ portfolio of liquid assets, including cash and short-term investments, fixed maturity investments other than those designated as held-to-maturity, classified by NAIC or equivalent rating, and public equity securities, as of the dates indicated.


	September 30, 2014
	Prudential Insurance		PRIAC		Other(1)		Total		December 31, 2013
	(in billions)
Cash and short-term investments	$	5.7	$	0.4	$	0.9	$	7.0	$	8.3
Fixed maturity investments:
High or highest quality		126.0		18.9		8.3		153.2		149.2
Other than high or highest quality		9.5		1.4		0.6		11.5		10.5

Subtotal		135.5		20.3		8.9		164.7		159.7
Public equity securities		3.9		0.0		0.0		3.9		4.3

Total	$	145.1	$	20.7	$	9.8	$	175.6	$	172.3

(1)	Includes PALAC and Pruco Life.

The following table sets forth the fair value of our international insurance operations’ portfolio of liquid assets, including cash and short-term investments, fixed maturity investments other than those designated as held-to-maturity, classified by NAIC or equivalent rating, and public equity securities, as of the dates indicated.


	September 30, 2014
	Prudential of Japan		Gibraltar Life(1)		All Other(2)		Total		December 31, 2013
	(in billions)
Cash and short-term investments	$	1.3	$	2.5	$	1.3	$	5.1	$	3.3
Fixed maturity investments:
High or highest quality(3)		27.6		89.5		14.0		131.1		123.5
Other than high or highest quality		0.4		2.2		0.2		2.8		2.8

Subtotal		28.0		91.7		14.2		133.9		126.3
Public equity securities		1.7		2.4		0.4		4.5		4.4

Total(4)	$	31.0	$	96.6	$	15.9	$	143.5	$	134.0

(1)	Includes Prudential Gibraltar.

(2)	Represents our international insurance operations, excluding Japan.

(3)	Of the $131.1 billion of fixed maturity investments that are not designated as held–to-maturity and considered high or highest quality as of September 30, 2014, $90.6 billion, or 69%, were invested in government or government agency bonds.

(4)	The increase in liquid assets from December 31, 2013 was driven by business growth, partially offset by depreciation of the yen relative to the U.S. dollar.

Liquidity associated with other activities

Hedging activities associated with living benefit guarantees

As discussed in “Captive Reinsurance Companies” above, we reinsure living benefit guarantees on certain variable annuity and retirement products from our domestic life insurance companies to Pruco Re. This enables us to execute our living benefit hedging program primarily within a single legal entity. As part of the living

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benefit hedging program, we enter into a range of exchange-traded, cleared and other over the counter equity and interest rate derivatives to hedge certain optional living benefit features accounted for as embedded derivatives against changes in certain capital market conditions such as interest rates and equity index levels. For a full discussion of our living benefits hedging program, see “—Results of Operations for Financial Services Businesses by Segment—U.S. Retirement Solutions and Investment Management Division—Individual Annuities.” Pruco Re requires access to liquidity to meet its payment obligations under this program, such as payments for periodic settlements, purchases, maturities, terminations and breakage. Pruco Re’s liquidity needs can vary materially due to, among other items, changes in interest rates, equity markets, mortality and policyholder behavior. Currently, we fund these liquidity needs with a combination of capital contributions and loans from Prudential Financial and other affiliates.

The living benefits hedging activity in Pruco Re may also result in collateral postings on derivatives to or from counterparties. The net collateral position depends on changes in interest rates and equity markets related to the amount of the exposures hedged. Depending on market conditions, the collateral posting requirements can result in material liquidity needs. In addition, certain derivatives entered into on or after June 10, 2013 are subject to mandatory clearing requirements under the Dodd-Frank Act. These cleared derivatives typically have additional collateral requirements. As of September 30, 2014, the living benefit hedging derivatives were in a net receive position of $2.6 billion compared to a net posting position of $0.4 billion as of December 31, 2013. This change in collateral position was driven primarily by a decline in interest rates.

Additionally, in certain cases, state insurance law requires reinsurers, such as Pruco Re, to collateralize their obligations under a reinsurance agreement to permit the ceding company to claim statutory reinsurance reserve credit for the business ceded. Because our subsidiaries Pruco Life and PALAC are domiciled in the State of Arizona (as is Pruco Re), they are able to claim reinsurance reserve credit for business ceded to Pruco Re without the need for Pruco Re to post collateral. However, Pruco Re must post collateral with respect to business ceded to it by our subsidiaries PLNJ and PRIAC. We satisfy collateral posting requirements by depositing assets into statutory reserve credit trusts. Funding needs for the statutory reserve credit trusts are separate and distinct from capital needs of Pruco Re. However, assets pledged to the statutory reserve credit trusts may include assets supporting the capital of Pruco Re provided that they meet eligibility requirements prescribed by the Arizona Department of Insurance. Reinsurance reserve credit requirements and the amount of assets required to be pledged can vary substantially due to changes in equity markets, interest rates, actuarial assumptions and other factors. The statutory reserve credit trust for PLNJ required collateral of $51 million and $7 million as of September 30, 2014 and December 31, 2013, respectively. The statutory reserve credit trust for PRIAC required collateral of $5 million and $2 million as of September 30, 2014 and December 31, 2013, respectively.

Foreign exchange hedging activities

We employ various hedging strategies to manage potential exposure to foreign currency exchange rate movements, particularly those associated with the Japanese yen. Our overall yen hedging strategy calibrates the hedge level to preserve the relative contribution of our yen-based business to the Company’s overall return on equity on a leverage neutral basis. For further information on our hedging strategies, see “—Results of Operations for Financial Services Businesses by Segment—International Insurance Division.” Our hedging strategies, which include both internal and external hedging programs, may impact the liquidity positions of both Prudential Financial and our international insurance subsidiaries.

The internal-only hedges are between Prudential Financial (through a subsidiary) and certain of our yen-based entities and serve to hedge changes in the market value of U.S. dollar-denominated investments held on the books of these yen-based entities attributable to changes in the yen-dollar exchange rate. These U.S. dollar-denominated investments are part of our hedging strategy to mitigate the impact of foreign currency exchange rate movements on our U.S. dollar-equivalent equity. Absent an internal hedge, changes in the market value of these U.S. dollar-denominated investments attributable to changes in the yen-dollar exchange rate would create volatility in the solvency margins of these subsidiaries. To minimize this volatility, we enter into inter-company

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hedges. Cash settlements from these hedging activities result in cash flows between Prudential Financial and these yen-based subsidiaries. The cash flows are dependent on changes in foreign currency exchange rates and the notional amount of the exposures hedged. During the first nine months of 2014, Prudential Financial received $362 million of net cash settlements related to the internal hedge program, which were paid by the yen-based subsidiaries. As of September 30, 2014, the market value of the internal hedges was an asset of $1,129 million due from the yen-based subsidiaries. A significant yen depreciation over an extended period of time could result in additional net cash inflows to Prudential Financial. Conversely, a significant yen appreciation could result in net cash outflows from Prudential Financial.

Our external hedges primarily serve to hedge a portion of our prospective non-U.S. dollar-denominated earnings streams and, to a lesser extent, our U.S. dollar-equivalent equity. The external hedges are between a subsidiary of Prudential Financial and external parties. Cash settlements on these activities result in cash flows between the Company and the external parties and are dependent on changes in foreign currency exchange rates and the notional amount of the exposures hedged. During the first nine months of 2014, the Company received $255 million of net cash settlements related to these external hedges. As of September 30, 2014, the net asset related to these external foreign currency hedges was $700 million. A significant depreciation in the yen and other foreign currencies over an extended period of time could result in additional net cash inflows to the Company, while a significant appreciation in the yen and other foreign currencies over an extended period of time could result in additional net cash outflows from the Company.

Asset Management operations

The principal sources of liquidity for our fee-based asset management businesses include asset management fees and commercial mortgage origination and servicing fees. The principal uses of liquidity include general and administrative expenses and distributions of dividends and returns of capital to Prudential Financial. The primary liquidity risks for our fee-based asset management businesses relate to their profitability, which is impacted by market conditions and our investment management performance. We believe the cash flows from our fee-based asset management businesses are adequate to satisfy the current liquidity requirements of these operations, as well as requirements that could arise under reasonably foreseeable stress scenarios, which are monitored through the use of internal measures.

The principal sources of liquidity for our strategic investments held in our asset management businesses are cash flows from investments, the ability to liquidate investments, and available borrowing lines from internal sources, including Prudential Funding, LLC (“Prudential Funding”), a wholly-owned subsidiary of Prudential Insurance, and Prudential Financial. The primary liquidity risks include the inability to sell assets in a timely manner, declines in the value of assets and credit defaults. There have been no material changes to the liquidity position of our asset management operations since December 31, 2013.

Alternative Sources of Liquidity

In addition to the sources of liquidity discussed throughout this section, Prudential Financial and certain subsidiaries have access to the following alternative sources of liquidity:

•

Asset-based financing, as discussed further below.

•

Membership in the Federal Home Loan Banks, which provides Prudential Insurance and PRIAC the ability to obtain loans and to issue funding agreements up to specified regulatory limits that are collateralized by qualifying mortgage-related assets or U.S. Treasury securities. As of September 30, 2014, Prudential Insurance had an estimated maximum borrowing capacity of $7.1 billion, of which $2.2 billion was outstanding, and PRIAC had an estimated maximum borrowing capacity of $0.2 billion with no advances outstanding. As of September 30, 2014, Prudential Insurance and PRIAC had qualifying assets available but not pledged with fair value of $3.4 billion and $2.1 billion, respectively.

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•

Commercial paper programs maintained by Prudential Financial and Prudential Funding, with authorized issuance capacity of $3.0 billion and $7.0 billion, respectively, of which $228 million and $752 million, respectively, were outstanding as of September 30, 2014.

•

Credit facilities in an aggregate amount of $3.75 billion, which includes a $2.0 billion facility expiring in November 2018 that has Prudential Financial as borrower and a $1.75 billion facility expiring in November 2016 that has both Prudential Financial and Prudential Funding as borrowers. There were no outstanding borrowings under these credit facilities as of September 30, 2014 or as of the date of this filing.

•

A put option agreement giving Prudential Financial the right to issue up to $1.5 billion in senior notes due November 2023 to a trust entity at any time in return for principal and interest strips of U.S. Treasury securities.

For further information on our Federal Home Loan Bank memberships, commercial paper programs, credit facilities and the put option agreement, see Note 9 to our Unaudited Interim Consolidated Financial Statements.

Asset-based Financing

We conduct asset-based or secured financing within our insurance and other subsidiaries, including transactions such as securities lending, repurchase agreements and mortgage dollar rolls to earn spread income, to borrow funds, or to facilitate trading activity. These programs are primarily driven by portfolio holdings of securities that are lendable based on counterparty demand for these securities in the marketplace. The collateral received in connection with these programs is primarily used to purchase securities in the short-term spread portfolios of our insurance entities. Investments held in the short-term spread portfolios include cash and cash equivalents, short-term investments, mortgage loans and fixed maturities, including mortgage- and asset-backed securities, with a weighted average life at time of purchase by the short-term portfolios of four years or less. Floating rate assets comprise the majority of our short-term spread portfolio. These short-term portfolios are subject to specific investment policy statements, which among other things, do not allow for significant asset/liability interest rate duration mismatch.

The following table sets forth our liabilities under asset-based or secured financing programs attributable to the Financial Services Businesses and Closed Block Business as of the dates indicated.


	September 30, 2014						December 31, 2013
	Financial Services Businesses		Closed Block Business		Consolidated		Financial Services Businesses		Closed Block Business		Consolidated
	(in millions)
Securities sold under agreements to repurchase	$	4,979	$	4,060	$	9,039	$	4,128	$	3,770	$	7,898
Cash collateral for loaned securities		3,270		1,299		4,569		4,230		810		5,040
Securities sold but not yet purchased		153		0		153		56		0		56

Total(1)	$	8,402	$	5,359	$	13,761	$	8,414	$	4,580	$	12,994

Portion of above securities that may be returned to the Company overnight requiring immediate return of the cash collateral	$	5,765	$	2,498	$	8,263	$	6,503	$	2,273	$	8,776
Weighted average maturity, in days(2)		22		51				39		71

(1)	The daily weighted average outstanding for the three and nine months ended September 30, 2014 was $8,175 million and $8,258 million, respectively, for the Financial Services Businesses and $5,373 million and $5,105 million, respectively, for the Closed Block Business.

(2)	Excludes securities that may be returned to the Company overnight.

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Outstanding liabilities under these programs increased $0.8 billion due primarily to attractive cash collateral reinvestment opportunities.

As of September 30, 2014, our insurance entities had assets eligible for the asset-based or secured financing programs of $102.3 billion, of which $13.4 billion were on loan. Taking into account market conditions and outstanding loan balances as of September 30, 2014, we believe approximately $18.3 billion of the remaining eligible assets are readily lendable, including approximately $13.5 billion related to the Financial Services Businesses, of which $2.5 billion relates to certain separate accounts and may only be used for financing activities related to those accounts.

In addition, as of September 30, 2014, our Closed Block Business had outstanding mortgage dollar rolls, under which we are committed to repurchase $0.7 billion of mortgage-backed securities, or TBA forward contracts. These repurchase agreements do not qualify as secured borrowings and are accounted for as derivatives. These mortgage-backed securities are considered high or highest quality based on NAIC or equivalent rating.

Financing Activities

As of September 30, 2014, total short- and long-term debt of the Company on a consolidated basis was $27.0 billion, an increase of $0.8 billion from December 31, 2013. The following table sets forth total consolidated borrowings of the Company as of the dates indicated. We may, from time to time, seek to redeem or repurchase our outstanding debt securities through open market purchases, individually negotiated transactions or otherwise. Any such repurchases will depend on prevailing market conditions, our liquidity position and other factors.


	September 30, 2014						December 31, 2013
	Prudential Financial		Other Subsidiaries		Consolidated		Prudential Financial		Other Subsidiaries		Consolidated
	(in millions)
General obligation short-term debt:
Commercial paper	$	228	$	752	$	980	$	190	$	460	$	650
Current portion of long-term debt and other(1)		2,223		1,151		3,374		1,531		413		1,944

Subtotal		2,451		1,903		4,354		1,721		873		2,594

General obligation long-term debt:
Senior debt(1)(2)		11,070		515		11,585		11,462		1,466		12,928
Junior subordinated debt		4,884		0		4,884		4,884		0		4,884
Surplus notes(3)		0		4,041		4,041		0		4,141		4,141

Subtotal		15,954		4,556		20,510		16,346		5,607		21,953

Total general obligations		18,405		6,459		24,864		18,067		6,480		24,547

Limited recourse borrowing(4):
Current portion of long-term debt		0		75		75		0		75		75
Long-term debt		0		2,087		2,087		0		1,600		1,600

Total limited recourse borrowings		0		2,162		2,162		0		1,675		1,675

Total borrowings	$	18,405	$	8,621	$	27,026	$	18,067	$	8,155	$	26,222

(1)

Does not include $2,710 million and $2,381 million of medium-term notes of consolidated trust entities secured by funding agreements purchased with the proceeds of such notes at September 30, 2014 and December 31, 2013, respectively, or $1,947 million of collateralized funding agreements issued to the Federal Home Loan Bank of New York as of both September 30, 2014 and December 31,

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2013. These notes and funding agreements are included in “Policyholders’ account balances.” For additional information on these obligations, see Note 9 to our Unaudited Interim Consolidated Financial Statements and Note 10 to the Consolidated Financial Statements included in our 2013 Annual Report on Form-10K.

(2)	Includes collateralized borrowings from the Federal Home Loan Bank of New York of $280 million at both September 30, 2014 and December 31, 2013. For additional information on these borrowings, see Note 9 to our Unaudited Interim Consolidated Financial Statements.

(3)	Amounts are net of assets under set-off arrangements of $3,588 million and $2,400 million, as of September 30, 2014 and December 31, 2013, respectively.

(4)

Limited and non-recourse borrowing represents outstanding debt of Prudential Holdings, LLC that is attributable to the Closed Block Business. See “Prudential Holdings, LLC Notes” within Note 14 to the Consolidated Financial Statements included our 2013 Annual Report on Form 10-K for additional information. It also represents mortgage debt of our insurance subsidiaries that has recourse only to real estate investment property.

The outstanding amount of Prudential Financial’s borrowings of $18,405 million increased $338 million from December 31, 2013, driven primarily by the issuance of $1,794 million of medium-term notes, partially offset by maturities of $1,473 million of medium-term notes. Borrowings of our subsidiaries of $8,621 million increased $466 million from December 31, 2013, primarily due to an increase of $292 million in commercial paper issued by Prudential Funding and an increase of $290 million in mortgage debt of our insurance subsidiaries that has recourse only to real estate investment property, partially offset by scheduled principal payments of $100 million.

As we continue to underwrite term and universal life insurance business, we expect to have additional financing needs for the funding of non-economic reserves required under Guideline AXXX and Regulation XXX. We believe we have sufficient financing resources in place to meet our financing needs under Guideline AXXX through 2015, assuming that the volume of new business remains consistent with current sales levels. In June 2014, we amended the twenty-year captive financing facility that we entered into in December 2013 to finance Guideline AXXX reserves. The amendment increased the current financing capacity available under the facility from $2.0 billion to $3.5 billion, increased the maximum potential size of the facility to $4.0 billion and added additional external counterparties. The amendment also resulted in an increase in the outstanding amount of the surplus note currently issued by the captive from approximately $900 million to $1.8 billion and allows for the financing of Guideline AXXX reserves resulting from the sale of universal life business in 2015. Because valid rights of set-off exist for this facility, interest and principal payments on the surplus note and credit-linked notes issued through the facility are settled on a net basis, and the surplus note is reflected in the Company’s total consolidated borrowings on a net basis. Also, in June 2014, another captive reinsurance company issued a $650 million surplus note to an affiliate for the purpose of financing Guideline AXXX reserves.

In April 2014, one of our captives issued an additional $250 million of surplus notes in return for an equal amount of credit-linked notes under our $2.0 billion facility for the third-party financing of Regulation XXX reserves associated with term life business written from 2010 to 2013. Following that issuance, an aggregate of $1.75 billion of surplus notes were outstanding under that facility. Because valid rights of set-off exist for this facility, interest and principal payments on the surplus notes and credit-linked notes issued through the facility are settled on a net basis, and the surplus notes are reflected in the Company’s total consolidated borrowings on a net basis. In March 2014, a newly-formed captive reinsurance subsidiary issued a $250 million surplus note to an affiliate to finance Regulation XXX reserves associated with term life sales in 2014. In September 2014, we reduced the amount of outstanding surplus notes held by an affiliate by $700 million, as a result of $900 million of maturities and $200 million in additional issuances, relating to the financing of Regulation XXX reserves associated with term life business issued prior to 2010. We are continuing to pursue solutions to address Regulation XXX financing needs generated by our expected sale of term life business during the remainder of 2014 and subsequent years. If we are unsuccessful in executing these solutions by the end of 2014, we may need to obtain financing from other sources, including through additional borrowings.

In September 2014, Prudential Financial entered into a financing transaction pursuant to which it issued a $245 million limited recourse note and, in return, obtained a $245 million asset-backed note issued by a designated series of a Delaware master trust. The asset-backed note bears interest at a rate of 0.20% per annum

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and matures in September 2021; however, the maturity date may be extended by us for three additional one-year periods, subject to conditions. Upon completion of the transaction, we ultimately contributed the asset-backed note to PRIAC, an insurance subsidiary, to finance statutory surplus. PRIAC, in turn, paid a cash dividend of $245 million to its parent, Prudential Insurance.

The master trust’s payment obligations under the asset-backed note are secured by corresponding payment obligations of a third party financial institution and a portfolio of specified assets that have an aggregate value at least equal to the principal amount of the asset-backed note. The principal amount of the asset-backed note is payable to PRIAC in cash at any time upon demand by PRIAC or, if not earlier paid, at maturity. The limited recourse note obligates Prudential Financial to reimburse the third party financial institution for any principal payments received on the asset-backed note, but there is no obligation to reimburse any portion of a principal payment that is needed by PRIAC to pay then current claims to its policyholders. The limited recourse note bears interest at a rate of 0.20% per annum plus fees payable to the third party financial institution. As of September 30, 2014, no principal payments have been received or are currently due on the asset-backed note and, as a result, there was no payment obligation under the limited recourse note. Accordingly, neither of the notes is reflected in the Company’s Unaudited Interim Consolidated Financial Statements as of that date.

As of September 30, 2014 and December 31, 2013, we were in compliance with all debt covenants related to the borrowings in the table above. For further information on our short- and long-term debt obligations, see Note 9 to our Unaudited Interim Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Ratings

Financial strength ratings (which are sometimes referred to as “claims-paying” ratings) and credit ratings are important factors affecting public confidence in an insurer and its competitive position in marketing products. Nationally Recognized Statistical Ratings Organizations continually review the financial performance and financial condition of the entities they rate, including Prudential Financial and its rated subsidiaries. Our credit ratings are also important for our ability to raise capital through the issuance of debt and for the cost of such financing.

A downgrade in the credit or financial strength ratings of Prudential Financial or its rated subsidiaries could potentially, among other things, limit our ability to market products, reduce our competitiveness, increase the number or value of policy surrenders and withdrawals, increase our borrowing costs and potentially make it more difficult to borrow funds, adversely affect the availability of financial guarantees, such as letters of credit, cause additional collateral requirements or other required payments under certain agreements, allow counterparties to terminate derivative agreements and/or hurt our relationships with creditors, distributors, or trading counterparties thereby potentially negatively affecting our profitability, liquidity, and/or capital. In addition, we consider our own risk of non-performance in determining the fair value of our liabilities. Therefore, changes in our credit or financial strength ratings may affect the fair value of our liabilities.

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Financial strength ratings represent the opinions of rating agencies regarding the financial ability of an insurance company to meet its obligations under an insurance policy. Credit ratings represent the opinions of rating agencies regarding an entity’s ability to repay its indebtedness. The following table summarizes the ratings for Prudential Financial and certain of its subsidiaries as of the date of this filing.

A.M.
Best(1)

S&P(2)

Moody’s(3)

Fitch(4)

Last review date

5/7/2014

12/11/2013

7/11/2013

7/10/2014

Current outlook

Stable

(5)

Stable

Positive

Financial Strength Ratings:

The Prudential Insurance Company of America

A+

AA-

A+

Pruco Life Insurance Company

A+

AA-

A+

Pruco Life Insurance Company of New Jersey

A+

AA-

A+

Prudential Annuities Life Assurance Corporation

A+

AA-

A+

Prudential Retirement Insurance and Annuity Company

A+

AA-

A+

The Prudential Life Insurance Company Ltd. (Prudential of Japan)

AA-

Gibraltar Life Insurance Company, Ltd.

AA-

The Prudential Gibraltar Financial Life Insurance Co. Ltd.

AA-

Prudential Life Insurance Co. of Taiwan, Inc.(6)

twAA+

Credit Ratings:

Prudential Financial, Inc.:

Short-term borrowings

AMB-1

A-1

P-2

Long-term senior debt

Baa1

BBB+

Junior subordinated long-term debt

bbb

BBB+

Baa2

BBB-

The Prudential Insurance Company of America:

Capital and surplus notes

A-

Prudential Funding, LLC:

Short-term debt

AMB-1

A-1+

P-1

Long-term senior debt

AA-

PRICOA Global Funding I:

Long-term senior debt

aa-

AA-

A+

*	“NR” indicates not rated.

(1)

A.M. Best Company, which we refer to as A.M. Best, financial strength ratings for insurance companies range from “A++ (superior)” to “S (Suspended).” A rating of A+ is the second highest of sixteen rating categories. A.M. Best long-term credit ratings range from “aaa (exceptional)” to “d (default),” with ratings from “aaa” to “bbb” considered as investment grade. A.M. Best short-term credit ratings range from “AMB-1+,” which represents an exceptional ability to repay short-term debt obligations, to “AMB-4,” which correlates with a speculative (“bb”) long-term rating.

(2)

Standard & Poor’s Rating Services, which we refer to as S&P, financial strength ratings for insurance companies range from “AAA (extremely strong)” to “R (regulatory supervision).” A rating of AA- is the fourth highest of twenty-three rating categories. S&P’s long-term issue credit ratings range from “AAA (extremely strong)” to “D (default).” S&P short-term ratings range from “A-1 (highest category)” to “D (default).”

(3)

Moody’s Investors Service, Inc., which we refer to as Moody’s, insurance financial strength ratings range from “Aaa (exceptional)” to “C (lowest).” A rating of A1 is the fifth highest of twenty-one rating categories. Numeric modifiers are used to refer to the ranking within the group—with 1 being the highest and 3 being the lowest. These modifiers are used to indicate relative strength within a category. Moody’s credit ratings range from “Aaa (highest)” to “C (default).” Moody’s short-term ratings range from “Prime-1 (P-1),” which represents a superior ability for repayment of senior short-term debt obligations, to “Prime-3 (P-3),” which represents an acceptable ability for repayment of such obligations. Issuers rated “Not Prime” do not fall within any of the Prime rating categories.

(4)

Fitch Ratings Ltd., which we refer to as Fitch, financial strength ratings range from “AAA (exceptionally strong)” to “C (distressed).” A rating of A+ is the fifth highest of nineteen rating categories. Fitch long-term credit ratings range from “AAA (highest credit quality),” which denotes exceptionally strong capacity for timely payment of financial commitments, to “D (default).” Investment grade ratings range between “AAA” and “BBB.” Short-term ratings range from “F1 (highest credit quality)” to “C (high default risk).”

(5)	S&P has the ratings of our U.S.-domiciled entities on stable outlook and the ratings of our Japanese insurance entities on negative outlook as part of S&P’s decision to put the sovereign debt ratings of Japan on negative outlook.

(6)	This rating for Prudential Life Insurance Company of Taiwan, Inc. was issued on December 18, 2013 by Taiwan Ratings Corporation, a partner of S&P.

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The ratings set forth above reflect current opinions of each rating agency. Each rating should be evaluated independently of any other rating. These ratings are not directed toward shareholders and do not in any way reflect evaluations of the safety and security of the Common Stock. These ratings are reviewed periodically and may be changed at any time by the rating agencies. As a result, we cannot assure stakeholders that we will maintain our current ratings in the future.

Rating agencies use an “outlook” statement for both industry sectors and individual companies. For an industry sector, a stable outlook generally implies that over the next 12-18 months the rating agency expects ratings to remain unchanged among companies in the sector. Currently, A.M. Best, S&P, Moody’s and Fitch all have the U.S. life insurance industry on stable outlook. For a particular company, an outlook generally indicates a medium- or long-term trend (generally six months to two years) in credit fundamentals, which if continued, may lead to a rating change. These indicators are not necessarily a precursor of a rating change nor do they preclude a rating agency from changing a rating at any time without notice. Currently, Fitch has all of the Company’s ratings on positive outlook; Moody’s and A.M. Best have all of the Company’s ratings on stable outlook; and S&P has the ratings of our U.S.-domiciled entities on stable outlook and the ratings of our Japanese insurance entities on negative outlook as part of S&P’s decision to put the sovereign debt ratings of Japan on negative outlook.

Requirements to post collateral or make other payments as a result of ratings downgrades under certain agreements, including derivative agreements, can be satisfied in cash or by posting permissible securities held by the subsidiaries subject to the agreements. A ratings downgrade of three ratings levels from the ratings levels as of September 30, 2014 (relating to financial strength ratings in certain cases and credit ratings in other cases) would result in estimated additional collateral posting requirements or payments under such agreements of approximately $8 million. The amount of collateral required to be posted for derivative agreements is also dependent on the fair value of the derivative positions as of the balance sheet date. For additional information regarding the potential impacts of a ratings downgrade on our derivative agreements see Note 14 to our Unaudited Interim Consolidated Financial Statements. In addition, a ratings downgrade by A.M. Best to “A-” for our domestic life insurance companies would require Prudential Insurance to either post collateral or a letter of credit in the amount of $1.5 billion related to the variable annuity business acquired from Allstate. We believe that the posting of such collateral would not be a material liquidity event for Prudential Insurance.

In view of the difficulties experienced in recent years by many financial institutions, the rating agencies have heightened the level of scrutiny that they apply to such institutions, have increased the frequency and scope of their credit reviews, have requested additional information from the companies that they rate, and may adjust upward the capital and other requirements employed in the rating agency models for maintenance of certain ratings levels, such as the financial strength ratings currently held by our life insurance subsidiaries. In addition, actions we might take to access third party financing or to realign our capital structure may in turn cause rating agencies to reevaluate our ratings.

The following is a summary of the significant changes or actions in our ratings and rating outlooks that have occurred from January 1, 2014 through the date of this filing.

On May 7, 2014, A.M. Best affirmed Prudential Financial’s long-term senior debt rating at “a-” and short-term debt rating at “AMB-1”. A.M. Best also affirmed the “A+” financial strength ratings of Prudential Financial’s core subsidiaries, including Prudential Insurance, Prudential Annuities Life Assurance Corporation, and Prudential Retirement Insurance and Annuity Company, with stable outlooks.

On July 10, 2014, Fitch affirmed Prudential Financial’s long-term senior debt rating at “A-” and the financial strength ratings of our U.S. operating entities at “A+”. Fitch also revised the outlook on these ratings from stable to positive.

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Off-Balance Sheet Arrangements

Guarantees and Other Contingencies

In the course of our business, we provide certain guarantees and indemnities to third parties pursuant to which we may be contingently required to make payments in the future. See “Commitments and Guarantees” within Note 15 to the Unaudited Interim Consolidated Financial Statements for additional information.

Other Contingent Commitments

We also have other commitments, some of which are contingent upon events or circumstances not under our control, including those at the discretion of our counterparties. See “Commitments and Guarantees” within Note 15 to the Unaudited Interim Consolidated Financial Statements for additional information regarding these commitments. For further discussion of certain of these commitments that relate to our separate accounts, also see “—Liquidity—Liquidity associated with other activities—Asset Management operations.”

Other Off-Balance Sheet Arrangements

In November 2013, we entered into a put option agreement with a Delaware trust that gives Prudential Financial the right, at any time over a ten-year period, to issue up to $1.5 billion of senior notes to the trust in return for principal and interest strips of U.S. Treasury securities that are held by the trust. See Note 9 to our Unaudited Interim Consolidated Financial Statements for more information on this put option agreement. In September 2014, Prudential Financial entered into a financing transaction, pursuant to which it issued a $245 million limited recourse note and, in return, obtained a $245 million asset-backed note from a Delaware master trust and ultimately contributed the asset-backed note to its subsidiary, PRIAC. As of September 30, 2014, no principal payments have been received or are currently due on the asset-backed note and, as a result, there was no payment obligation under the limited recourse note. Accordingly, neither of the notes is reflected in the Company’s Unaudited Interim Consolidated Financial Statements as of that date. For further discussion see “—Liquidity—Financing Activities.”

Other than as described above, we do not have retained or contingent interests in assets transferred to unconsolidated entities, or variable interests in unconsolidated entities or other similar transactions, arrangements or relationships that serve as credit, liquidity or market risk support, that we believe are reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or our access to or requirements for capital resources. In addition, other than the agreements referred to above, we do not have relationships with any unconsolidated entities that are contractually limited to narrow activities that facilitate our transfer of or access to associated assets.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of fluctuations in the value of financial instruments as a result of absolute or relative changes in interest rates, foreign currency exchange rates, equity prices or commodity prices. To varying degrees, our products and services, and the investment activities supporting them, generate exposure to market risk. The market risk incurred and our strategies for managing this risk vary by product. A description of our market risk exposures may be found in our Annual Report on Form 10-K, for the year ended December 31, 2013, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk”, filed with the Securities and Exchange Commission. See Item 1A, “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2013, for a discussion of how difficult conditions in the financial markets and the economy generally may materially adversely affect our business and results of our operations.

There have been no material changes in our market risk exposures from December 31, 2013; however, as disclosed in Note 14 to the Unaudited Interim Consolidated Financial Statements, the notional amount of Synthetic GICs, as of December 31, 2013, has been revised to correct a previously reported amount. There was

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no impact to the disclosed fair value or hypothetical change in fair value resulting from a 100 basis point change in interest rates as reported in our Annual Report on Form 10-K, for the year ended December 31, 2013, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk—Market Risk Related to Interest Rates.”

ITEM 4.

CONTROLS AND PROCEDURES

In order to ensure that the information we must disclose in our filings with the SEC is recorded, processed, summarized, and reported on a timely basis, the Company’s management, including our Chief Executive Officer and Chief Financial Officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of September 30, 2014. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2014, our disclosure controls and procedures were effective. No change in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), occurred during the quarter ended September 30, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

See Note 15 to the Unaudited Interim Consolidated Financial Statements under “—Litigation and Regulatory Matters” for a description of material pending litigation and regulatory matters affecting us, and certain risks to our businesses presented by such matters, which is incorporated herein by reference.

ITEM 1A. RISK

FACTORS

You should carefully consider the risks described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013. These risks could materially affect our business, results of operations or financial condition, cause the trading price of our Common Stock to decline materially or cause our actual results to differ materially from those expected or those expressed in any forward looking statements made by or on behalf of the Company. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” above and the risks of our businesses described elsewhere in this Quarterly Report on Form 10-Q.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c) The following table provides information about purchases by the Company during the quarter ended September 30, 2014, of its Common Stock:


Period	Total Number of Shares Purchased(1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program(2)		Approximate Dollar Value of Shares that May Yet be Purchased under the Program(2)
July 1, 2014 through July 31, 2014		931,273	$	89.79		928,151
August 1, 2014 through August 31, 2014		945,292	$	88.20		944,796
September 1, 2014 through September 30, 2014		924,546	$	90.28		923,102

Total		2,801,111	$	89.41		2,796,049	$	750,000,182

(1)

Includes shares of Common Stock withheld from participants for income tax withholding purposes whose shares of restricted stock units vested during the period. Such restricted stock units were originally issued to participants pursuant to the Prudential Financial, Inc. Omnibus Incentive Plan that was adopted by the Company’s Board of Directors in March 2003 (as subsequently amended and restated).

(2)	In June 2014, the Board authorized the Company to repurchase up to $1.0 billion of its outstanding Common Stock during the twelve month period from July 1, 2014 through June 30, 2015.

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ITEM 6.

EXHIBITS


	12.1			Statement of Ratio of Earnings to Fixed Charges.

	31.1			Section 302 Certification of the Chief Executive Officer.

	31.2			Section 302 Certification of the Chief Financial Officer.

	32.1			Section 906 Certification of the Chief Executive Officer.

	32.2			Section 906 Certification of the Chief Financial Officer.


101.INS - XBRL		Instance Document.

101.SCH - XBRL		Taxonomy Extension Schema Document.

101.CAL - XBRL		Taxonomy Extension Calculation Linkbase Document.

101.LAB - XBRL		Taxonomy Extension Label Linkbase Document.

101.PRE - XBRL		Taxonomy Extension Presentation Linkbase Document.

101.DEF - XBRL		Taxonomy Extension Definition Linkbase Document.

Prudential Financial, Inc. will furnish upon request a copy of any exhibit listed above upon the payment of a reasonable fee covering the expense of furnishing the copy. Requests should be directed to:

Shareholder Services

Prudential Financial, Inc.

751 Broad Street, 21st Floor

Newark, New Jersey 07102

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Prudential Financial, Inc.

By:		/S/ ROBERT M. FALZON
		Robert M. Falzon Executive Vice President and Chief Financial Officer (Authorized signatory and principal financial officer)

Date: November 6, 2014

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EXHIBIT INDEX



	12.1			Statement of Ratio of Earnings to Fixed Charges.

	31.1			Section 302 Certification of the Chief Executive Officer.

	31.2			Section 302 Certification of the Chief Financial Officer.

	32.1			Section 906 Certification of the Chief Executive Officer.

	32.2			Section 906 Certification of the Chief Financial Officer.


101.INS - XBRL		Instance Document.

101.SCH - XBRL		Taxonomy Extension Schema Document.

101.CAL - XBRL		Taxonomy Extension Calculation Linkbase Document.

101.LAB - XBRL		Taxonomy Extension Label Linkbase Document.

101.PRE - XBRL		Taxonomy Extension Presentation Linkbase Document.

101.DEF - XBRL		Taxonomy Extension Definition Linkbase Document.

229