PRUDENTIAL FINANCIAL INC - Quarter Report: 2019 June (Form 10-Q)

Description

Effective date and method of adoption

Effect on the financial statements or other significant matters

ASU 2017-08, Receivables -Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities

This ASU requires certain premiums on callable debt securities to be amortized to the earliest call date.

January 1, 2019 using the modified retrospective method which included cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption.

Adoption of the ASU did not have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements. The impact of the cumulative-effect adjustment to retained earnings was immaterial.

ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities

This ASU makes targeted changes to the existing hedge accounting model to better portray the economics of an entity’s risk management activities and to simplify the use of hedge accounting. The ASU eliminates separate measurement and recording of hedge ineffectiveness. It requires entities to present the earnings effect of the hedging instrument in the same income statement line item in which the hedged item is reported and also requires expanded disclosures.

January 1, 2019 using the modified retrospective method which included cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption.

Adoption of the ASU did not have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements. The impact of the cumulative-effect adjustment to retained earnings and accumulated other comprehensive income (loss) (“AOCI”) related to ineffectiveness of the hedge instruments outstanding at the date of adoption was immaterial. See Note 5 for additional required disclosures.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended June 30, 2019



☐	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, NJ 07102

(973) 802-6000

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:



Title of Each Class	Trading Symbols(s)	Name of Each Exchange on Which Registered
Common Stock, Par Value $.01	PRU	New York Stock Exchange
5.75% Junior Subordinated Notes	PJH	New York Stock Exchange
5.70% Junior Subordinated Notes	PRH	New York Stock Exchange
5.625% Junior Subordinated Notes	PRS	New York Stock Exchange

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

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

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



Large Accelerated Filer	x	Accelerated Filer	☐
Non-accelerated Filer	☐	Smaller Reporting Company	☐
		Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

As of July 31, 2019, 402 million shares of the registrant’s Common Stock (par value $0.01) were outstanding.

Table of Contents

TABLE OF CONTENTS



		Page
PART I FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Unaudited Interim Consolidated Statements of Financial Position as of June 30, 2019 and December 31, 2018	1
	Unaudited Interim Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018	2
	Unaudited Interim Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and 2018	3
	Unaudited Interim Consolidated Statements of Equity for the three and six months ended June 30, 2019 and 2018	4
	Unaudited Interim Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018	5
	Notes to Unaudited Interim Consolidated Financial Statements	6
	1. Business and Basis of Presentation	6
	2. Significant Accounting Policies and Pronouncements	6
	3. Investments	10
	4. Variable Interest Entities	25
	5. Derivative Instruments	26
	6. Fair Value of Assets and Liabilities	35
	7. Leases	50
	8. Closed Block	51
	9. Income Taxes	53
	10. Short-Term and Long-Term Debt	54
	11. Employee Benefit Plans	55
	12. Equity	56
	13. Earnings Per Share	60
	14. Segment Information	62
	15. Commitments and Contingent Liabilities	66
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	71
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	143
Item 4.	Controls and Procedures	143
PART II OTHER INFORMATION
Item 1.	Legal Proceedings	144
Item 1A.	Risk Factors	144
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	144
Item 6.	Exhibits	145
GLOSSARY		146
SIGNATURES		148

Table of Contents

Forward-Looking Statements

Certain of the statements included in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Prudential Financial, Inc. and its subsidiaries. There can be no assurance that future developments affecting Prudential Financial, Inc. and its subsidiaries will be those anticipated by management. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (1) losses on investments or financial contracts due to deterioration in credit quality or value, or counterparty default; (2) losses on insurance products due to mortality experience, morbidity experience or policyholder behavior experience that differs significantly from our expectations when we price our products; (3) changes in interest rates, equity prices and foreign currency exchange rates that may (a) adversely impact the profitability of our products, the value of separate accounts supporting these products or the value of assets we manage, (b) result in losses on derivatives we use to hedge risk or increase collateral posting requirements and (c) limit opportunities to invest at appropriate returns; (4) guarantees within certain of our products which are market sensitive and may decrease our earnings or increase the volatility of our results of operations or financial position; (5) liquidity needs resulting from (a) derivative collateral market exposure, (b) asset/liability mismatches, (c) the lack of available funding in the financial markets or (d) unexpected cash demands due to severe mortality calamity or lapse events; (6) financial or customer losses, or regulatory and legal actions, due to inadequate or failed processes or systems, external events and human error or misconduct such as (a) disruption of our systems and data, (b) an information security breach, (c) a failure to protect the privacy of sensitive data or (d) reliance on third-parties; (7) changes in the regulatory landscape, including related to (a) financial sector regulatory reform, (b) changes in tax laws, (c) fiduciary rules and other standards of care, (d) U.S. state insurance laws and developments regarding group-wide supervision, capital and reserves, (e) insurer capital standards outside the U.S. and (f) privacy and cybersecurity regulation; (8) technological changes which may adversely impact companies in our investment portfolio or cause insurance experience to deviate from our assumptions; (9) ratings downgrades; (10) market conditions that may adversely affect the sales or persistency of our products; (11) competition; (12) reputational damage; and (13) the costs, effects, timing, or success of our plans to accelerate our Financial Wellness strategy. Prudential Financial, Inc. does not undertake to update any particular forward-looking statement included in this document. See “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2018 for discussion of certain risks relating to our businesses and investment in our securities.

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Financial Position

June 30, 2019 and December 31, 2018 (in millions, except share amounts)



	June 30, 2019			December 31, 2018
ASSETS
Fixed maturities, available-for-sale, at fair value (amortized cost: 2019-$340,564; 2018-$331,745)(1)	$	383,390		$	353,656
Fixed maturities, held-to-maturity, at amortized cost (fair value: 2019-$2,410; 2018-$2,372)(1)	2,009			2,013
Fixed maturities, trading, at fair value (amortized cost: 2019-$3,807; 2018-$3,392)(1)	3,755			3,243
Assets supporting experience-rated contractholder liabilities, at fair value(1)	21,843			21,254
Equity securities, at fair value (cost: 2019-$5,205; 2018-$5,219)(1)	6,804			6,238
Commercial mortgage and other loans (includes $645 and $763 measured at fair value under the fair value option at June 30, 2019 and December 31, 2018, respectively)(1)	61,228			59,830
Policy loans	12,030			12,016
Other invested assets (includes $5,567 and $5,524 measured at fair value at June 30, 2019 and December 31, 2018, respectively)(1)	15,081			14,526
Short-term investments	5,872			6,469
Total investments	512,012			479,245
Cash and cash equivalents(1)	15,421			15,353
Accrued investment income(1)	3,355			3,318
Deferred policy acquisition costs	19,540			20,058
Value of business acquired	1,227			1,850
Other assets(1)	18,690			16,118
Separate account assets	303,580			279,136
TOTAL ASSETS	$	873,825		$	815,078
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits	$	285,527		$	273,846
Policyholders’ account balances	151,428			150,338
Policyholders’ dividends	6,558			4,110
Securities sold under agreements to repurchase	9,741			9,950
Cash collateral for loaned securities	4,235			3,929
Income taxes	11,485			7,936
Short-term debt	2,659			2,451
Long-term debt	17,841			17,378
Other liabilities(1)	17,372			16,018
Notes issued by consolidated variable interest entities (includes $816 and $595 measured at fair value under the fair value option at June 30, 2019 and December 31, 2018, respectively)(1)	1,246			955
Separate account liabilities	303,580			279,136
Total liabilities	811,672			766,047
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 15)
EQUITY
Preferred Stock ($.01 par value; 10,000,000 shares authorized; none issued)	0			0
Common Stock ($.01 par value; 1,500,000,000 shares authorized; 660,111,339 shares issued at both June 30, 2019 and December 31, 2018)	6			6
Additional paid-in capital	24,825			24,828
Common Stock held in treasury, at cost (257,129,965 and 249,398,887 shares at June 30, 2019 and December 31, 2018, respectively)	(18,416		)	(17,593		)
Accumulated other comprehensive income (loss)	23,982			10,906
Retained earnings	31,263			30,470
Total Prudential Financial, Inc. equity	61,660			48,617
Noncontrolling interests	493			414
Total equity	62,153			49,031
TOTAL LIABILITIES AND EQUITY	$	873,825		$	815,078

__________


(1)	See Note 4 for details of balances associated with variable interest entities.

See Notes to Unaudited Interim Consolidated Financial Statements

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PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Operations

Three and Six Months Ended June 30, 2019 and 2018 (in millions, except per share amounts)



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
REVENUES
Premiums	$	8,135		$	7,438		$	16,035		$	14,749
Policy charges and fee income	1,473			1,480			2,944			2,984
Net investment income	4,390			4,096			8,606			8,094
Asset management and service fees	1,083			1,010			2,099			2,036
Other income (loss)	643			(54		)	1,897			(561		)
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities	(77		)	(58		)	(112		)	(97		)
Other-than-temporary impairments on fixed maturity securities transferred to Other comprehensive income	25			0			13			0
Other realized investment gains (losses), net	(284		)	743			(1,003		)	1,207
Total realized investment gains (losses), net	(336		)	685			(1,102		)	1,110
Total revenues	15,388			14,655			30,479			28,412
BENEFITS AND EXPENSES
Policyholders’ benefits	8,877			9,512			17,315			17,187
Interest credited to policyholders’ account balances	1,278			894			2,623			1,444
Dividends to policyholders	437			540			1,014			868
Amortization of deferred policy acquisition costs	782			613			1,217			1,201
General and administrative expenses	3,138			2,846			6,294			5,769
Total benefits and expenses	14,512			14,405			28,463			26,469
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURES	876			250			2,016			1,943
Total income tax expense (benefit)	162			68			394			420
INCOME (LOSS) BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURES	714			182			1,622			1,523
Equity in earnings of operating joint ventures, net of taxes	24			18			53			41
NET INCOME (LOSS)	738			200			1,675			1,564
Less: Income (loss) attributable to noncontrolling interests	30			3			35			4
NET INCOME (LOSS) ATTRIBUTABLE TO PRUDENTIAL FINANCIAL, INC.	$	708		$	197		$	1,640		$	1,560
EARNINGS PER SHARE
Basic earnings per share-Common Stock:
Net income (loss) attributable to Prudential Financial, Inc.	$	1.73		$	0.46		$	3.98		$	3.66
Diluted earnings per share-Common Stock:
Net income (loss) attributable to Prudential Financial, Inc.	$	1.71		$	0.46		$	3.93		$	3.62

See Notes to Unaudited Interim Consolidated Financial Statements

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PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Comprehensive Income

Three and Six Months Ended June 30, 2019 and 2018 (in millions)



	Three Months Ended June 30,					Six Months Ended June 30,
	2019		2018			2019		2018
NET INCOME (LOSS)	$	738	$	200		$	1,675	$	1,564
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments for the period	213		(703		)	108		(41		)
Net unrealized investment gains (losses)	8,506		(3,326		)	16,795		(7,992		)
Defined benefit pension and postretirement unrecognized periodic benefit (cost)	17		75			81		129
Total	8,736		(3,954		)	16,984		(7,904		)
Less: Income tax expense (benefit) related to other comprehensive income (loss)	1,966		(838		)	3,910		(1,682		)
Other comprehensive income (loss), net of taxes	6,770		(3,116		)	13,074		(6,222		)
Comprehensive income (loss)	7,508		(2,916		)	14,749		(4,658		)
Less: Comprehensive income (loss) attributable to noncontrolling interests	36		(7		)	40		7
Comprehensive income (loss) attributable to Prudential Financial, Inc.	$	7,472	$	(2,909	)	$	14,709	$	(4,665	)

See Notes to Unaudited Interim Consolidated Financial Statements

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PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Equity

Three and Six Months Ended June 30, 2019 and 2018 (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, 2018	$	6	$	24,828		$	30,470		$	(17,593	)	$	10,906		$	48,617		$	414		$	49,031
Cumulative effect of adoption of accounting changes(1)						(21		)				7			(14		)				(14		)
Common Stock acquired									(500		)				(500		)				(500		)
Contributions from noncontrolling interests																		26			26
Distributions to noncontrolling interests																		(4		)	(4		)
Stock-based compensation programs			(46		)				131						85						85
Dividends declared on Common Stock						(415		)							(415		)				(415		)
Comprehensive income:
Net income (loss)						932									932			5			937
Other comprehensive income (loss), net of tax												6,305			6,305			(1		)	6,304
Total comprehensive income (loss)															7,237			4			7,241
Balance, March 31, 2019	6		24,782			30,966			(17,962		)	17,218			55,010			440			55,450
Common Stock acquired									(500		)				(500		)				(500		)
Contributions from noncontrolling interests																		25			25
Distributions to noncontrolling interests																		(16		)	(16		)
Consolidations (deconsolidations) of noncontrolling interests																		8			8
Stock-based compensation programs			43						46						89						89
Dividends declared on Common Stock						(411		)							(411		)				(411		)
Comprehensive income:
Net income (loss)						708									708			30			738
Other comprehensive income (loss), net of tax												6,764			6,764			6			6,770
Total comprehensive income (loss)															7,472			36			7,508
Balance, June 30, 2019	$	6	$	24,825		$	31,263		$	(18,416	)	$	23,982		$	61,660		$	493		$	62,153

	Prudential Financial, Inc. Equity
	Common Stock		Additional Paid-in Capital			Retained Earnings			Common Stock Held In Treasury			Accumulated Other Comprehensive Income (Loss)			Total Prudential Financial, Inc. Equity			Noncontrolling Interests			Total Equity
Balance, December 31, 2017	$	6	$	24,769		$	28,671		$	(16,284	)	$	17,074		$	54,236		$	275		$	54,511
Cumulative effect of adoption of ASU 2016-01						904						(847		)	57						57
Cumulative effect of adoption of ASU 2018-02						(1,653		)				1,653			0						0
Common Stock acquired									(375		)				(375		)				(375		)
Contributions from noncontrolling interests																		61			61
Distributions to noncontrolling interests																		(5		)	(5		)
Stock-based compensation programs			(47		)				102						55						55
Dividends declared on Common Stock						(387		)							(387		)				(387		)
Comprehensive income:
Net income (loss)						1,363									1,363			1			1,364
Other comprehensive income (loss), net of tax												(3,119		)	(3,119		)	13			(3,106		)
Total comprehensive income (loss)															(1,756		)	14			(1,742		)
Balance, March 31, 2018	6		24,722			28,898			(16,557		)	14,761			51,830			345			52,175
Common Stock acquired									(375		)				(375		)				(375		)
Contributions from noncontrolling interests																		38			38
Distributions to noncontrolling interests																		(16		)	(16		)
Stock-based compensation programs			41						27						68						68
Dividends declared on Common Stock						(382		)							(382		)				(382		)
Comprehensive income:
Net income (loss)						197									197			3			200
Other comprehensive income (loss), net of tax												(3,106		)	(3,106		)	(10		)	(3,116		)
Total comprehensive income (loss)															(2,909		)	(7		)	(2,916		)
Balance, June 30, 2018	$	6	$	24,763		$	28,713		$	(16,905	)	$	11,655		$	48,232		$	360		$	48,592

__________


(1)	Includes the impact from the adoption of ASU 2017-08 and 2017-12. See Note 2.

See Notes to Unaudited Interim Consolidated Financial Statements

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PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Cash Flows

Six Months Ended June 30, 2019 and 2018 (in millions)



	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	1,675		$	1,564
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment (gains) losses, net	1,102			(1,110		)
Policy charges and fee income	(1,483		)	(1,058		)
Interest credited to policyholders’ account balances	2,623			1,444
Depreciation and amortization	(89		)	48
(Gains) losses on assets supporting experience-rated contractholder liabilities, net	(741		)	596
Change in:
Deferred policy acquisition costs	(258		)	(203		)
Future policy benefits and other insurance liabilities	5,603			5,762
Income taxes	(382		)	(96		)
Derivatives, net	2,010			(1,041		)
Other, net	(1,736		)	769
Cash flows from (used in) operating activities	8,324			6,675
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale	25,681			30,599
Fixed maturities, held-to-maturity	35			56
Fixed maturities, trading	187			410
Assets supporting experience-rated contractholder liabilities	9,014			9,650
Equity securities	1,377			1,965
Commercial mortgage and other loans	2,885			2,572
Policy loans	1,154			1,176
Other invested assets	724			908
Short-term investments	16,682			18,190
Payments for the purchase/origination of:
Fixed maturities, available-for-sale	(32,847		)	(34,922		)
Fixed maturities, trading	(570		)	(483		)
Assets supporting experience-rated contractholder liabilities	(8,813		)	(9,560		)
Equity securities	(1,376		)	(1,826		)
Commercial mortgage and other loans	(4,352		)	(5,525		)
Policy loans	(945		)	(1,002		)
Other invested assets	(1,011		)	(1,154		)
Short-term investments	(16,278		)	(17,138		)
Derivatives, net	638			(271		)
Other, net	(222		)	(134		)
Cash flows from (used in) investing activities	(8,037		)	(6,489		)
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholders’ account deposits	13,280			14,826
Policyholders’ account withdrawals	(13,045		)	(14,076		)
Net change in securities sold under agreements to repurchase and cash collateral for loaned securities	97			1,094
Cash dividends paid on Common Stock	(827		)	(769		)
Net change in financing arrangements (maturities 90 days or less)	166			(103		)
Common Stock acquired	(983		)	(739		)
Common Stock reissued for exercise of stock options	75			74
Proceeds from the issuance of debt (maturities longer than 90 days)	1,439			1,194
Repayments of debt (maturities longer than 90 days)	(924		)	(848		)
Proceeds from notes issued by consolidated VIEs	925			0
Repayments of notes issued by consolidated VIEs	(638		)	0
Other, net	196			(244		)
Cash flows from (used in) financing activities	(239		)	409
Effect of foreign exchange rate changes on cash balances	27			(71		)
NET INCREASE IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS	75			524
CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS, BEGINNING OF YEAR	15,495			14,536
CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS, END OF PERIOD	$	15,570		$	15,060
NON-CASH TRANSACTIONS DURING THE PERIOD
Treasury Stock shares issued for stock-based compensation programs	$	168		$	132
Significant Pension Risk Transfer transactions:
Assets received, excluding cash and cash equivalents	$	445		$	0
Liabilities assumed	447			977
Net cash received	$	2		$	977
RECONCILIATION TO THE UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Cash and cash equivalents	$	15,421		$	14,918
Restricted cash and restricted cash equivalents (included in “Other assets”)	149			142
Total cash, cash equivalents, restricted cash and restricted cash equivalents	$	15,570		$	15,060

See Notes to Unaudited Interim Consolidated Financial Statements

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements

1. BUSINESS AND BASIS OF PRESENTATION

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

The Company’s principal operations are comprised of five divisions, which together encompass seven segments, and its Corporate and Other operations. The PGIM division is comprised of the PGIM segment, the global investment management businesses of the Company. The U.S. Workplace Solutions division consists of the Retirement and Group Insurance segments. The U.S. Individual Solutions division consists of the Individual Annuities and Individual Life segments. The Company also collectively refers to the U.S. Workplace Solutions division and the U.S. Individual Solutions division as the U.S. Financial Wellness businesses. The International Insurance division is comprised of the International Insurance segment, and the Closed Block division is comprised of the Closed Block segment. The Closed Block division is accounted for as a divested business that is reported separately from the Divested and Run-off Businesses that are included in the Company’s Corporate and Other operations. Divested and Run-off Businesses are comprised of businesses that have been, or will be, sold or exited, including businesses that have been placed in wind down status that do not qualify for “discontinued operations” accounting treatment under generally accepted accounting principles in the United States of America (“U.S. GAAP”). The Company’s Corporate and Other operations include corporate items and initiatives that are not allocated to business segments and businesses that have been or will be divested or placed in run-off, excluding the Closed Block division.

Basis of Presentation

The Unaudited Interim Consolidated Financial Statements have been prepared in accordance with U.S. GAAP on a basis consistent with reporting interim financial information in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Intercompany balances and transactions have been eliminated. The Unaudited Interim Consolidated Financial Statements include the accounts of Prudential Financial, entities over which the Company exercises control, including majority-owned subsidiaries and variable interest entities (“VIEs”) in which the Company is considered the primary beneficiary. See Note 4 for more information on the Company’s consolidated variable interest entities.

In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations have been made. All such adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Use of Estimates

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

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

Reclassifications

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

2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS

Recent Accounting Pronouncements

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASU”) to the FASB Accounting Standards Codification. The Company considers the applicability and impact of all ASU. ASU listed below include those that have been adopted during the current fiscal year and/or those that have been issued but not yet adopted as of the date of this filing. ASU not listed below were assessed and determined to be either not applicable or not material.

Adoption of ASU 2016-02

Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), using the optional transition method with a cumulative-effect adjustment recorded as of the beginning of the period of adoption. This ASU substantially changes a lessee’s accounting for leases and requires the recording, on balance sheet, using a dual lease accounting model, of a “right-of-use” asset and lease liability. Leases are to be classified as either operating or finance leases. Under the standard, for operating leases, lessees recognize total lease expenses using a straight-line method and finance leases are treated as the purchase of an asset on a financing basis. For lessors, the standard modifies classification criteria and accounting for sales-type and direct financing leases and requires a lessor to derecognize the carrying value of the leased asset that is considered to have been transferred to a lessee and record a lease receivable and residual asset (“receivable and residual” approach). The standard also eliminates the leveraged lease accounting model for lessors and real estate specific provisions (i.e., those related to sale-leaseback transactions); it does allow, however, a grandfathering of the leveraged lease accounting model for those existing leases that are being accounted for using such model.

In addition, the Company elected the package of practical expedients permitted under the transition guidance within the standard which eliminated the need to reassess: (a) whether any existing contracts are, or contain, leases; (b) the lease classification for any existing leases (i.e., all existing lessee arrangements that were classified as operating leases before are now classified as operating leases, and all existing lessee arrangements that were classified as capital leases before are now classified as finance leases); and (c) initial direct costs for any existing leases. The Company did not elect the practical expedient, which may be applied separately, to use hindsight in determining the lease term and in assessing impairment of the Company’s right-of-use assets.

Adoption of the standard resulted in the recording of right-of-use assets and lease liabilities related to existing operating leases of approximately $600 million as of January 1, 2019. Adoption of the standard also resulted in additional required disclosures. See Note 7 for additional information.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Other ASU adopted during the six months ended June 30, 2019

ASU issued but not yet adopted as of June 30, 2019 — ASU 2018-12

ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the FASB on August 15, 2018 and is expected to have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements. In July 2019, the FASB made a tentative decision to defer the effective date of this ASU to January 1, 2022 (with early adoption permitted), representing a one year extension from the original effective date of January 1, 2021. A final decision regarding the effective date is expected in the third quarter of 2019. This ASU will impact, at least to some extent, the accounting and disclosure requirements for all long-duration insurance and investment contracts issued by the Company. Outlined below are four key areas of change, although there are other less significant changes not noted below. In addition to the impacts to the balance sheet upon adoption, the Company also expects an impact to how earnings emerge thereafter.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



ASU 2018-12 Amended Topic	Description	Method of adoption	Effect on the financial statements or other significant matters

Cash flow assumptions used to measure the liability for future policy benefits for non-participating traditional and limited-pay insurance products	Requires an entity to review, and if necessary, update the cash flow assumptions used to measure the liability for future policy benefits, for both changes in future assumptions and actual experience, at least annually using a retrospective update method with a cumulative catch-up adjustment recorded in a separate line item in the Consolidated Statements of Operations.	An entity may choose one of two adoption methods for the liability for future policy benefits: (1) a modified retrospective transition method whereby the entity will apply the amendments to contracts in force as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or (2) a full retrospective transition method.	The options for method of adoption and the impacts of such methods are under assessment.
Discount rate assumption used to measure the liability for future policy benefits for non-participating traditional and limited-pay insurance products	Requires discount rate assumptions to be based on an upper-medium grade fixed income instrument yield and will be required to be updated each quarter with the impact recorded through Other Comprehensive Income (“OCI”).	As noted above, an entity may choose either a modified retrospective transition method or full retrospective transition method for the liability for future policy benefits. Under either method, for balance sheet remeasurement purposes, the liability for future policy benefits will be remeasured using current discount rates as of the beginning of the earliest period presented with the impact recorded as a cumulative effect adjustment to AOCI.	Upon adoption, under either transition method, there will be an adjustment to AOCI as a result of remeasuring in-force contract liabilities using current upper-medium grade fixed income instrument yields. The adjustment upon adoption will largely reflect the difference between the discount rate locked-in at contract inception versus current discount rates at transition. The magnitude of such adjustment is currently being assessed.
Amortization of deferred acquisition costs (DAC) and other balances	Requires DAC and other balances, such as unearned revenue reserves and deferred sales inducements, to be amortized on a constant level basis over the expected term of the related contract, independent of expected profitability.	An entity may apply one of two adoption methods: (1) a modified retrospective transition method whereby the entity will apply the amendments to contracts in force as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or (2) if an entity chooses a full retrospective transition method for its future policy benefits, as described above, it is required to also use a retrospective transition method for DAC and other balances.	The options for method of adoption and the impacts of such methods are under assessment. Under the modified retrospective transition method, the Company would not expect a significant impact to the balance sheet, other than the impact of the removal of any related amounts in AOCI.
Market Risk Benefits	Requires an entity to measure all market risk benefits (e.g., living benefit and death benefit guarantees associated with variable annuities) at fair value with changes in value attributable to changes in an entity’s non-performance risk (“NPR”) recognized in OCI.	An entity will apply a retrospective transition method which will include a cumulative-effect adjustment on the balance sheet as of the earliest period presented.	Upon adoption, the Company expects an impact to retained earnings for the difference between the fair value and carrying value of benefits not currently measured at fair value (e.g., guaranteed minimum death benefits on variable annuities) and an impact from reclassifying the cumulative effect of changes in NPR from retained earnings to AOCI. The magnitude of such adjustments is currently being assessed.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Other ASU issued but not yet adopted as of June 30, 2019

3. INVESTMENTS

Fixed Maturity Securities

The following tables set forth the composition of fixed maturity securities (excluding investments classified as trading), as of the dates indicated:

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	June 30, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI(4)
	(in millions)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	29,571	$	4,973	$	89	$	34,455	$	0
Obligations of U.S. states and their political subdivisions	9,889		1,314		1		11,202		0
Foreign government bonds	98,745		22,407		70		121,082		0
U.S. public corporate securities	85,282		8,653		417		93,518		0
U.S. private corporate securities(1)	33,043		2,121		186		34,978		0
Foreign public corporate securities	27,450		2,980		119		30,311		(3		)
Foreign private corporate securities	26,383		1,057		672		26,768		0
Asset-backed securities(2)	12,602		174		41		12,735		(90		)
Commercial mortgage-backed securities	14,556		607		9		15,154		0
Residential mortgage-backed securities(3)	3,043		148		4		3,187		(1		)
Total fixed maturities, available-for-sale(1)	$	340,564	$	44,434	$	1,608	$	383,390	$	(94	)



	June 30, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in millions)
Fixed maturities, held-to-maturity:
Foreign government bonds	$	900	$	303	$	0	$	1,203
Foreign public corporate securities	671		70		0		741
Foreign private corporate securities(5)	96		3		0		99
Residential mortgage-backed securities(3)	342		25		0		367
Total fixed maturities, held-to-maturity(5)	$	2,009	$	401	$	0	$	2,410

__________


(1)	Excludes notes with amortized cost of $4,356 million (fair value, $4,356 million), which have been offset with the associated payables under a netting agreement.


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


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


(4)	Represents the amount of unrealized losses remaining in AOCI, from the impairment measurement date. Amount excludes $372 million of net unrealized gains on impaired available-for-sale securities and $1 million of net unrealized gains on impaired held-to-maturity securities relating to changes in the value of such securities subsequent to the impairment measurement date.


(5)	Excludes notes with amortized cost of $4,879 million (fair value, $5,190 million), which have been offset with the associated payables under a netting agreement.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI(4)
	(in millions)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	28,242	$	2,994	$	642	$	30,594	$	0
Obligations of U.S. states and their political subdivisions	9,880		676		63		10,493		0
Foreign government bonds	96,710		16,714		314		113,110		0
U.S. public corporate securities	82,257		3,912		2,754		83,415		(2		)
U.S. private corporate securities(1)	32,450		1,151		581		33,020		0
Foreign public corporate securities	27,671		2,061		531		29,201		(3		)
Foreign private corporate securities	25,314		434		1,217		24,531		0
Asset-backed securities(2)	12,888		162		77		12,973		(160		)
Commercial mortgage-backed securities	13,396		99		180		13,315		0
Residential mortgage-backed securities(3)	2,937		99		32		3,004		(1		)
Total fixed maturities, available-for-sale(1)	$	331,745	$	28,302	$	6,391	$	353,656	$	(166	)



	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in millions)
Fixed maturities, held-to-maturity:
Foreign government bonds	$	885	$	269	$	0	$	1,154
Foreign public corporate securities	668		64		0		732
Foreign private corporate securities(5)	95		3		0		98
Residential mortgage-backed securities(3)	365		23		0		388
Total fixed maturities, held-to-maturity(5)	$	2,013	$	359	$	0	$	2,372

__________


(1)	Excludes notes with amortized cost of $4,216 million (fair value, $4,216 million), which have been offset with the associated payables under a netting agreement.


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


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


(4)	Represents the amount of unrealized losses remaining in AOCI, from the impairment measurement date. Amount excludes $356 million of net unrealized gains on impaired available-for-sale securities and $1 million of net unrealized gains on impaired held-to-maturity securities relating to changes in the value of such securities subsequent to the impairment measurement date.


(5)	Excludes notes with amortized cost of $4,879 million (fair value, $4,879 million), which have been offset with the associated payables under a netting agreement.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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



	June 30, 2019
	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	$	370	$	0	$	2,153	$	89	$	2,523	$	89
Obligations of U.S. states and their political subdivisions	2		0		49		1		51		1
Foreign government bonds	393		56		503		14		896		70
U.S. public corporate securities	2,895		88		6,607		329		9,502		417
U.S. private corporate securities	1,124		67		2,816		119		3,940		186
Foreign public corporate securities	595		32		1,124		87		1,719		119
Foreign private corporate securities	1,663		28		7,243		644		8,906		672
Asset-backed securities	2,768		18		4,035		23		6,803		41
Commercial mortgage-backed securities	20		0		852		9		872		9
Residential mortgage-backed securities	137		0		336		4		473		4
Total	$	9,967	$	289	$	25,718	$	1,319	$	35,685	$	1,608

__________


(1)	As of June 30, 2019, there were no securities classified as held-to-maturity in a gross unrealized loss position.



	December 31, 2018
	Less Than Twelve Months				Twelve Months or More				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(in millions)
Fixed maturities(1):
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	3,007	$	67	$	6,986	$	575	$	9,993	$	642
Obligations of U.S. states and their political subdivisions	1,725		25		999		38		2,724		63
Foreign government bonds	2,369		136		3,515		178		5,884		314
U.S. public corporate securities	34,064		1,570		13,245		1,184		47,309		2,754
U.S. private corporate securities	8,923		225		7,985		356		16,908		581
Foreign public corporate securities	7,363		308		2,928		223		10,291		531
Foreign private corporate securities	12,218		692		4,468		525		16,686		1,217
Asset-backed securities	8,255		70		669		7		8,924		77
Commercial mortgage-backed securities	1,781		14		4,733		166		6,514		180
Residential mortgage-backed securities	194		1		1,042		31		1,236		32
Total	$	79,899	$	3,108	$	46,570	$	3,283	$	126,469	$	6,391

__________


(1)	As of December 31, 2018, there was $13 million of fair value and less than $1 million of gross unrealized losses, which are not reflected in AOCI, on securities classified as held-to-maturity.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

As of June 30, 2019 and December 31, 2018, the gross unrealized losses on fixed maturity securities were composed of $1,096 million and $5,391 million, respectively, related to “1” highest quality or “2” high quality securities based on the National Association of Insurance Commissioners (“NAIC”) or equivalent rating and $512 million and $1,000 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. As of June 30, 2019, the $1,319 million of gross unrealized losses of twelve months or more were concentrated in the Company’s corporate securities within the consumer non-cyclical, energy and utility sectors. As of December 31, 2018, the $3,283 million of gross unrealized losses of twelve months or more were concentrated in U.S. government bonds and in the Company’s corporate securities within the utility, consumer non-cyclical and finance sectors. In accordance with its policy described in Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, the Company concluded that an adjustment to earnings for OTTI for these fixed maturity securities was not warranted at either June 30, 2019 or December 31, 2018. These conclusions were based on a detailed analysis of the underlying credit and cash flows on each security. Gross unrealized losses are primarily attributable to general credit spread widening, increases in interest rates and foreign currency exchange rate movements. As of June 30, 2019, the Company did not intend to sell these securities, and it was not more likely than not that the Company would be required to sell these securities before the anticipated recovery of the remaining amortized cost basis.

The following table sets forth the amortized cost and fair value of fixed maturities by contractual maturities, as of the date indicated:



	June 30, 2019
	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Fixed maturities:
Due in one year or less	$	16,207	$	16,756	$	60	$	61
Due after one year through five years	50,780		54,131		114		117
Due after five years through ten years	66,712		72,924		596		666
Due after ten years(1)	176,664		208,503		897		1,199
Asset-backed securities	12,602		12,735		0		0
Commercial mortgage-backed securities	14,556		15,154		0		0
Residential mortgage-backed securities	3,043		3,187		342		367
Total	$	340,564	$	383,390	$	2,009	$	2,410

__________


(1)	Excludes available-for-sale notes with amortized cost of $4,356 million (fair value, $4,356 million) and held-to-maturity notes with amortized cost of $4,879 million (fair value, $5,190 million), which have been offset with the associated payables under a netting agreement.

Actual maturities may differ from contractual maturities, because issuers may have the right to call or prepay obligations. Asset-backed, commercial mortgage-backed and residential mortgage-backed securities are shown separately in the table above, as they do not have a single maturity date.

The following table sets forth the sources of fixed maturity proceeds and related investment gains (losses), as well as losses on impairments of fixed maturities, for the periods indicated:



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in millions)
Fixed maturities, available-for-sale:
Proceeds from sales(1)	$	6,659		$	9,489		$	16,821		$	19,074
Proceeds from maturities/prepayments	4,704			6,553			9,192			11,779
Gross investment gains from sales and maturities	228			410			711			784
Gross investment losses from sales and maturities	(95		)	(187		)	(283		)	(444		)
OTTI recognized in earnings(2)	(64		)	(58		)	(99		)	(97		)
Fixed maturities, held-to-maturity:
Proceeds from maturities/prepayments(3)	$	23		$	23		$	37		$	59

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

__________


(1)	Includes $332 million and $254 million of non-cash related proceeds due to the timing of trade settlements for the six months ended June 30, 2019 and 2018, respectively.


(2)	Excludes the portion of OTTI amounts remaining in OCI, representing any difference between the fair value of the impaired debt security and the net present value of its projected future cash flows at the time of impairment.


(3)	Includes $2 million and $3 million of non-cash related proceeds due to the timing of trade settlements for the six months ended June 30, 2019 and 2018, respectively.

The following table sets forth a rollforward of pre-tax amounts remaining in OCI related to fixed maturity securities with credit loss impairments recognized in earnings, for the periods indicated:



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in millions)
Credit loss impairments:
Balance, beginning of period	$	149		$	203		$	140		$	319
New credit loss impairments	4			0			20			0
Additional credit loss impairments on securities previously impaired	8			0			8			0
Increases due to the passage of time on previously recorded credit losses	2			4			3			6
Reductions for securities which matured, paid down, prepaid or were sold during the period	(20		)	(42		)	(27		)	(155		)
Reductions for securities impaired to fair value during the period(1)	0			0			0			(4		)
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected	(1		)	(2		)	(2		)	(3		)
Balance, end of period	$	142		$	163		$	142		$	163

__________


(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.

Assets Supporting Experience-Rated Contractholder Liabilities

The following table sets forth the composition of “Assets supporting experience-rated contractholder liabilities,” as of the dates indicated:



	June 30, 2019				December 31, 2018
	Amortized Cost or Cost		Fair Value		Amortized Cost or Cost		Fair Value
	(in millions)
Short-term investments and cash equivalents	$	371	$	371	$	215	$	215
Fixed maturities:
Corporate securities	13,257		13,630		13,258		13,119
Commercial mortgage-backed securities	2,239		2,297		2,346		2,324
Residential mortgage-backed securities(1)	1,002		1,014		828		811
Asset-backed securities(2)	1,595		1,626		1,649		1,665
Foreign government bonds	852		870		1,087		1,083
U.S. government authorities and agencies and obligations of U.S. states	351		402		538		577
Total fixed maturities(3)	19,296		19,839		19,706		19,579
Equity securities	1,452		1,633		1,378		1,460
Total assets supporting experience-rated contractholder liabilities(4)	$	21,119	$	21,843	$	21,299	$	21,254

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

__________


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


(2)	Includes collateralized loan obligations, auto loans, education loans, credit-tranched securities collateralized by sub-prime mortgages and other asset types. Collateralized loan obligations at fair value were $1,025 million and $1,028 million as of June 30, 2019 and December 31, 2018, respectively, all of which were rated AAA.


(3)	As a percentage of amortized cost, 93% of the portfolio was considered high or highest quality based on NAIC or equivalent ratings, as of both June 30, 2019 and December 31, 2018.


(4)	As a percentage of amortized cost, 78% of the portfolio consisted of public securities as of both June 30, 2019 and December 31, 2018.

The net change in unrealized gains (losses) from assets supporting experience-rated contractholder liabilities still held at period end, recorded within “Other income (loss),” was $300 million and $(198) million during the three months ended June 30, 2019 and 2018, respectively, and $769 million and $(596) million during the six months ended June 30, 2019 and 2018, respectively.

Equity Securities

The net change in unrealized gains (losses) from equity securities still held at period end, recorded within “Other income (loss),” was $51 million and $(80) million during the three months ended June 30, 2019 and 2018, respectively, and $581 million and $(271) million during the six months ended June 30, 2019 and 2018, respectively.

Concentrations of Financial Instruments

The Company monitors its concentrations of financial instruments and mitigates credit risk by maintaining a diversified investment portfolio which limits exposure to any single issuer.

As of the dates indicated, the Company’s exposure to concentrations of credit risk of single issuers greater than 10% of the Company’s equity included securities of the U.S. government and certain U.S. government agencies and securities guaranteed by the U.S. government, as well as the securities disclosed below:



	June 30, 2019				December 31, 2018
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Investments in Japanese government and government agency securities:
Fixed maturities, available-for-sale	$	73,570	$	90,438	$	71,952	$	84,461
Fixed maturities, held-to-maturity	878		1,173		864		1,127
Fixed maturities, trading	23		23		22		22
Assets supporting experience-rated contractholder liabilities	664		682		691		697
Total	$	75,135	$	92,316	$	73,529	$	86,307



	June 30, 2019				December 31, 2018
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Investments in South Korean government and government agency securities:
Fixed maturities, available-for-sale	$	10,364	$	13,098	$	10,339	$	12,586
Fixed maturities, held-to-maturity	0		0		0		0
Fixed maturities, trading	0		0		0		0
Assets supporting experience-rated contractholder liabilities	15		16		15		15
Total	$	10,379	$	13,114	$	10,354	$	12,601

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Commercial Mortgage and Other Loans

The following table sets forth the composition of “Commercial mortgage and other loans,” as of the dates indicated:



	June 30, 2019					December 31, 2018
	Amount (in millions)			% of Total		Amount (in millions)			% of Total
Commercial mortgage and agricultural property loans by property type:
Office	$	12,984		21.4	%	$	13,280		22.4	%
Retail	8,411			13.9		8,639			14.6
Apartments/Multi-Family	16,752			27.7		16,538			28.0
Industrial	12,866			21.2		11,574			19.6
Hospitality	2,168			3.6		1,931			3.3
Other	3,913			6.5		3,846			6.5
Total commercial mortgage loans	57,094			94.3		55,808			94.4
Agricultural property loans	3,420			5.7		3,316			5.6
Total commercial mortgage and agricultural property loans by property type	60,514			100.0	%	59,124			100.0	%
Allowance for credit losses	(115		)			(123		)
Total net commercial mortgage and agricultural property loans by property type	60,399					59,001
Other loans:
Uncollateralized loans	664					660
Residential property loans	143					157
Other collateralized loans	27					17
Total other loans	834					834
Allowance for credit losses	(5		)			(5		)
Total net other loans	829					829
Total commercial mortgage and other loans(1)	$	61,228				$	59,830

__________


(1)	Includes loans held for sale which are carried at fair value and are collateralized primarily by apartment complexes. As of June 30, 2019 and December 31, 2018, the net carrying value of these loans was $645 million and $763 million, respectively.

As of June 30, 2019, the commercial mortgage and agricultural property loans were secured by properties geographically dispersed throughout the United States (with the largest concentrations in California (27%), Texas (10%) and New York (7%)) and included loans secured by properties in Europe (6%), Australia (1%) and Asia (1%).

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The following table sets forth the activity in the allowance for credit losses for commercial mortgage and other loans, as of the dates indicated:



	Commercial Mortgage Loans			Agricultural Property Loans		Residential Property Loans			Other Collateralized Loans		Uncollateralized Loans		Total
	(in millions)
Balance at December 31, 2017	$	97		$	3	$	1		$	0	$	5	$	106
Addition to (release of) allowance for credit losses	23			0		(1		)	0		0		22
Charge-offs, net of recoveries	0			0		0			0		0		0
Change in foreign exchange	0			0		0			0		0		0
Balance at December 31, 2018	120			3		0			0		5		128
Addition to (release of) allowance for credit losses	(8		)	0		0			0		0		(8		)
Charge-offs, net of recoveries	0			0		0			0		0		0
Change in foreign exchange	0			0		0			0		0		0
Balance at June 30, 2019	$	112		$	3	$	0		$	0	$	5	$	120

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:



	June 30, 2019
	Commercial Mortgage Loans		Agricultural Property Loans		Residential Property Loans		Other Collateralized Loans		Uncollateralized Loans		Total
	(in millions)
Allowance for credit losses:
Individually evaluated for impairment	$	8	$	0	$	0	$	0	$	0	$	8
Collectively evaluated for impairment	104		3		0		0		5		112
Total ending balance(1)	$	112	$	3	$	0	$	0	$	5	$	120

Recorded investment(2):
Individually evaluated for impairment	$	42	$	19	$	0	$	0	$	0	$	61
Collectively evaluated for impairment	57,052		3,401		143		27		664		61,287
Total ending balance(1)	$	57,094	$	3,420	$	143	$	27	$	664	$	61,348

__________


(1)	As of June 30, 2019, there were no loans acquired with deteriorated credit quality.


(2)	Recorded investment reflects the carrying value gross of related allowance.



	December 31, 2018
	Commercial Mortgage Loans		Agricultural Property Loans		Residential Property Loans		Other Collateralized Loans		Uncollateralized Loans		Total
	(in millions)
Allowance for credit losses:
Individually evaluated for impairment	$	19	$	0	$	0	$	0	$	0	$	19
Collectively evaluated for impairment	101		3		0		0		5		109
Total ending balance(1)	$	120	$	3	$	0	$	0	$	5	$	128

Recorded investment(2):
Individually evaluated for impairment	$	67	$	35	$	0	$	0	$	2	$	104
Collectively evaluated for impairment	55,741		3,281		157		17		658		59,854
Total ending balance(1)	$	55,808	$	3,316	$	157	$	17	$	660	$	59,958

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

__________


(1)	As of December 31, 2018, there were no loans acquired with deteriorated credit quality.


(2)	Recorded investment reflects the carrying value gross of related allowance.

The following tables set forth certain key credit quality indicators based upon the recorded investment gross of allowance for credit losses, as of the date indicated:

Commercial mortgage loans



	June 30, 2019
	Debt Service Coverage Ratio
	>1.2X		1.0X to <1.2X		< 1.0X		Total
	(in millions)
Loan-to-Value Ratio:
0%-59.99%	$	30,536	$	653	$	81	$	31,270
60%-69.99%	17,370		596		0		17,966
70%-79.99%	6,638		690		9		7,337
80% or greater	309		92		120		521
Total commercial mortgage loans	$	54,853	$	2,031	$	210	$	57,094

Agricultural property loans



	June 30, 2019
	Debt Service Coverage Ratio
	>1.2X		1.0X to <1.2X		< 1.0X		Total
	(in millions)
Loan-to-Value Ratio:
0%-59.99%	$	3,152	$	168	$	17	$	3,337
60%-69.99%	83		0		0		83
70%-79.99%	0		0		0		0
80% or greater	0		0		0		0
Total agricultural property loans	$	3,235	$	168	$	17	$	3,420

Total commercial mortgage and agricultural property loans



	June 30, 2019
	Debt Service Coverage Ratio
	>1.2X		1.0X to <1.2X		< 1.0X		Total
	(in millions)
Loan-to-Value Ratio:
0%-59.99%	$	33,688	$	821	$	98	$	34,607
60%-69.99%	17,453		596		0		18,049
70%-79.99%	6,638		690		9		7,337
80% or greater	309		92		120		521
Total commercial mortgage and agricultural property loans	$	58,088	$	2,199	$	227	$	60,514

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The following tables set forth certain key credit quality indicators based upon the recorded investment gross of allowance for credit losses, as of the date indicated:

Commercial mortgage loans



	December 31, 2018
	Debt Service Coverage Ratio
	>1.2X		1.0X to <1.2X		< 1.0X		Total
	(in millions)
Loan-to-Value Ratio:
0%-59.99%	$	30,325	$	538	$	161	$	31,024
60%-69.99%	16,538		621		0		17,159
70%-79.99%	6,324		754		41		7,119
80% or greater	332		142		32		506
Total commercial mortgage loans	$	53,519	$	2,055	$	234	$	55,808

Agricultural property loans



	December 31, 2018
	Debt Service Coverage Ratio
	>1.2X		1.0X to <1.2X		< 1.0X		Total
	(in millions)
Loan-to-Value Ratio:
0%-59.99%	$	2,997	$	198	$	57	$	3,252
60%-69.99%	64		0		0		64
70%-79.99%	0		0		0		0
80% or greater	0		0		0		0
Total agricultural property loans	$	3,061	$	198	$	57	$	3,316

Total commercial mortgage and agricultural property loans



	December 31, 2018
	Debt Service Coverage Ratio
	>1.2X		1.0X to <1.2X		< 1.0X		Total
	(in millions)
Loan-to-Value Ratio:
0%-59.99%	$	33,322	$	736	$	218	$	34,276
60%-69.99%	16,602		621		0		17,223
70%-79.99%	6,324		754		41		7,119
80% or greater	332		142		32		506
Total commercial mortgage and agricultural property loans	$	56,580	$	2,253	$	291	$	59,124

The following tables set forth an aging of past due commercial mortgage and other loans based upon the recorded investment gross of allowance for credit losses, as well as the amount of commercial mortgage and other loans on non-accrual status, as of the dates indicated:

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	June 30, 2019
	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due(1)		Total Past Due		Total Loans		Non-Accrual Status(2)
	(in millions)
Commercial mortgage loans	$	57,088	$	6	$	0	$	0	$	6	$	57,094	$	21
Agricultural property loans	3,402		0		0		18		18		3,420		22
Residential property loans	140		1		0		2		3		143		2
Other collateralized loans	27		0		0		0		0		27		0
Uncollateralized loans	664		0		0		0		0		664		0
Total	$	61,321	$	7	$	0	$	20	$	27	$	61,348	$	45

__________


(1)	As of June 30, 2019, there were no loans in this category accruing interest.


(2)	For additional information regarding the Company’s policies for accruing interest on loans, see Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.



	December 31, 2018
	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due(1)		Total Past Due		Total Loans		Non-Accrual Status(2)
	(in millions)
Commercial mortgage loans	$	55,808	$	0	$	0	$	0	$	0	$	55,808	$	66
Agricultural property loans	3,301		0		0		15		15		3,316		18
Residential property loans	154		1		0		2		3		157		3
Other collateralized loans	17		0		0		0		0		17		0
Uncollateralized loans	660		0		0		0		0		660		0
Total	$	59,940	$	1	$	0	$	17	$	18	$	59,958	$	87

__________


(1)	As of December 31, 2018, there were no loans in this category accruing interest.


(2)	For additional information regarding the Company’s policies for accruing interest on loans, see Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Other Invested Assets

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



	June 30, 2019		December 31, 2018
	(in millions)
LPs/LLCs:
Equity method:
Private equity	$	3,305	$	3,182
Hedge funds	1,548		1,337
Real estate-related	1,240		1,207
Subtotal equity method	6,093		5,726
Fair value:
Private equity	1,637		1,684
Hedge funds	2,128		2,135
Real estate-related	324		296
Subtotal fair value	4,089		4,115
Total LPs/LLCs	10,182		9,841
Real estate held through direct ownership(1)	2,730		2,466
Derivative instruments	1,053		1,155
Other(2)	1,116		1,064
Total other invested assets	$	15,081	$	14,526

_________


(1)	As of June 30, 2019 and December 31, 2018, real estate held through direct ownership had mortgage debt of $799 million and $776 million, respectively.

(2)

Primarily includes strategic investments made by investment management operations, leveraged leases and member and activity stock held in the Federal Home Loan Banks of New York and Boston. For additional information regarding the Company’s holdings in the Federal Home Loan Banks of New York and Boston, see Note 16 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Net Investment Income

The following table sets forth “Net investment income” by investment type, for the periods indicated:



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in millions)
Fixed maturities, available-for-sale(1)	$	3,150		$	3,001		$	6,238		$	5,955
Fixed maturities, held-to-maturity(1)	58			57			115			112
Fixed maturities, trading	38			30			72			61
Assets supporting experience-rated contractholder liabilities, at fair value	182			181			367			372
Equity securities, at fair value	51			59			81			94
Commercial mortgage and other loans	627			594			1,227			1,163
Policy loans	152			156			303			308
Other invested assets	271			163			476			304
Short-term investments and cash equivalents	115			82			233			154
Gross investment income	4,644			4,323			9,112			8,523
Less: investment expenses	(254		)	(227		)	(506		)	(429		)
Net investment income	$	4,390		$	4,096		$	8,606		$	8,094

__________


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

Realized Investment Gains (Losses), Net

The following table sets forth “Realized investment gains (losses), net” by investment type, for the periods indicated:



	Three Months Ended June 30,					Six Months Ended June 30,
	2019			2018		2019			2018
	(in millions)
Fixed maturities(1)	$	69		$	165	$	329		$	243
Commercial mortgage and other loans	4			5		14			17
Investment real estate	0			60		0			62
LPs/LLCs	2			10		(3		)	16
Derivatives(2)	(411		)	445		(1,443		)	773
Other	0			0		1			(1		)
Realized investment gains (losses), net	$	(336	)	$	685	$	(1,102	)	$	1,110

__________


(1)	Includes fixed maturity securities classified as available-for-sale and held-to-maturity and excludes fixed maturity securities classified as trading.


(2)	Includes the hedged items offset in qualifying fair value hedge accounting relationships.

Net Unrealized Gains (Losses) on Investments within AOCI

The following table sets forth net unrealized gains (losses) on investments, as of the dates indicated:

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	June 30, 2019			December 31, 2018
	(in millions)
Fixed maturity securities, available-for-sale—with OTTI	$	278		$	190
Fixed maturity securities, available-for-sale—all other	42,548			21,721
Derivatives designated as cash flow hedges(1)	1,017			811
Other investments(2)	(23		)	(2		)
Net unrealized gains (losses) on investments	$	43,820		$	22,720

__________


(1)	For more information on cash flow hedges, see Note 5.


(2)	As of June 30, 2019, there were no net unrealized losses on held-to-maturity securities that were previously transferred from available-for-sale. Includes net unrealized gains on certain joint ventures that are strategic in nature and are included in “Other assets.”

Repurchase Agreements and Securities Lending

In the normal course of business, the Company sells securities under agreements to repurchase and enters into securities lending transactions. The following table sets forth the composition of “Securities sold under agreements to repurchase,” as of the dates indicated:



	June 30, 2019						December 31, 2018
	Remaining Contractual Maturities of the Agreements						Remaining Contractual Maturities of the Agreements
	Overnight & Continuous		Up to 30 Days		Total		Overnight & Continuous		Up to 30 Days		Total
	(in millions)
U.S. Treasury securities and obligations of U.S. government authorities and agencies(1)	$	9,412	$	20	$	9,432	$	9,418	$	171	$	9,589
U.S. public corporate securities	0		0		0		19		0		19
Residential mortgage-backed securities(1)	309		0		309		342		0		342
Total securities sold under agreements to repurchase(1)(2)	$	9,721	$	20	$	9,741	$	9,779	$	171	$	9,950

__________


(1)	Prior period amounts have been updated to conform to current period presentation.


(2)	The Company did not have any agreements with remaining contractual maturities of thirty days or greater, as of the dates indicated.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The following table sets forth the composition of “Cash collateral for loaned securities,” which represents the liability to return cash collateral received for the following types of securities loaned, as of the dates indicated:



	June 30, 2019						December 31, 2018
	Remaining Contractual Maturities of the Agreements						Remaining Contractual Maturities of the Agreements
	Overnight & Continuous		Up to 30 Days		Total		Overnight & Continuous		Up to 30 Days		Total
	(in millions)
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	80	$	0	$	80	$	105	$	0	$	105
Obligations of U.S. states and their political subdivisions	58		0		58		88		0		88
Foreign government bonds	499		0		499		325		0		325
U.S. public corporate securities	2,615		0		2,615		2,563		0		2,563
Foreign public corporate securities	773		0		773		693		0		693
Equity securities	210		0		210		155		0		155
Total cash collateral for loaned securities(1)	$	4,235	$	0	$	4,235	$	3,929	$	0	$	3,929

__________


(1)	The Company did not have any agreements with remaining contractual maturities of thirty days or greater, as of the dates indicated.

4. 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”). For additional information, see Note 4 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Consolidated Variable Interest Entities

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. The creditors of these VIEs do not have recourse to the Company in excess of the assets contained within the VIEs.



	Consolidated VIEs for which the Company is the Investment Manager(1)				Other Consolidated VIEs(1)
	June 30, 2019		December 31, 2018		June 30, 2019		December 31, 2018
	(in millions)
Fixed maturities, available-for-sale	$	100	$	73	$	291	$	282
Fixed maturities, held-to-maturity	97		95		846		831
Fixed maturities, trading	1,126		1,076		0		0
Assets supporting experience-rated contractholder liabilities	0		0		5		8
Equity securities	45		41		0		0
Commercial mortgage and other loans	763		730		0		0
Other invested assets	1,866		1,526		84		77
Cash and cash equivalents	166		131		0		0
Accrued investment income	5		5		4		4
Other assets	451		463		748		721
Total assets of consolidated VIEs	$	4,619	$	4,140	$	1,978	$	1,923
Other liabilities	$	290	$	295	$	14	$	17
Notes issued by consolidated VIEs(2)	1,246		955		0		0
Total liabilities of consolidated VIEs	$	1,536	$	1,250	$	14	$	17

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

__________


(1)	Total assets of consolidated VIEs reflect $2,323 million and $2,013 million as of June 30, 2019 and December 31, 2018, respectively, related to VIEs whose beneficial interests are wholly-owned by consolidated subsidiaries.


(2)	Recourse is limited to the assets of the respective VIE and does not extend to the general credit of the Company. As of June 30, 2019 and December 31, 2018, the maturities of these obligations were greater than five years.

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. 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 $929 million and $836 million at June 30, 2019 and December 31, 2018, respectively. These investments are reflected in “Fixed maturities, available-for-sale,” “Fixed maturities, trading,” “Equity securities” and “Other invested assets.” There are no liabilities associated with these unconsolidated VIEs on the Company’s Unaudited Interim Consolidated Statements of Financial Position.

In the normal course of its activities, the Company will invest in limited partnerships and limited liability companies (“LPs/LLCs”), which 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 classifies these investments as “Other invested assets” and its maximum exposure to loss associated with these entities was $10,182 million and $9,841 million as of June 30, 2019 and December 31, 2018, 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 3 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.

5. DERIVATIVE INSTRUMENTS

Types of Derivative Instruments and Derivative Strategies

The Company utilizes various derivatives instruments and strategies to manage its risk. Commonly used derivative instruments include, but are not necessarily limited to:

•Interest rate contracts: futures, swaps, forwards, options, swaptions, caps and floors

•Equity contracts: futures, options and total return swaps

•Foreign exchange contracts: futures, options, forwards and swaps

•Credit contracts: single and index reference credit default swaps

Other types of financial contracts that the Company accounts for as derivatives are:


•	To-be-announced (“TBA”) forward contracts, loan commitments, embedded derivatives and synthetic guaranteed investment contracts (“GICs”).

For detailed information on these contracts and the related strategies, see Note 5 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Primary Risks Managed by Derivatives

The table below provides a summary of the gross notional amount and fair value of derivatives contracts by the primary underlying risks, excluding embedded derivatives and associated reinsurance recoverables. Many derivative instruments contain multiple underlying risks. The fair value amounts below represent the value of derivative contracts prior to taking into account the netting effects of master netting agreements, cash collateral and non-performance risk (“NPR”). This netting impact results in total derivative assets of $1,043 million and $1,148 million as of June 30, 2019 and December 31, 2018, respectively, and total derivative liabilities of $557 million and $127 million as of June 30, 2019 and December 31, 2018, respectively, reflected in the Unaudited Interim Consolidated Statements of Financial Position.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



Primary Underlying Risk /Instrument Type	June 30, 2019							December 31, 2018
			Fair Value							Fair Value
	Gross Notional		Assets		Liabilities			Gross Notional		Assets		Liabilities
	(in millions)
Derivatives Designated as Hedge Accounting Instruments:
Interest Rate
Interest Rate Swaps	$	3,315	$	596	$	(78	)	$	3,885	$	305	$	(67	)
Interest Rate Forwards	53		1		0			600		26		0
Foreign Currency
Foreign Currency Forwards	858		34		(2		)	722		26		(2		)
Currency/Interest Rate
Foreign Currency Swaps	21,245		1,670		(336		)	20,724		1,520		(358		)
Total Derivatives Designated as Hedge Accounting Instruments	$	25,471	$	2,301	$	(416	)	$	25,931	$	1,877	$	(427	)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Swaps	$	138,186	$	9,604	$	(4,641	)	$	140,963	$	5,792	$	(3,435	)
Interest Rate Futures	17,213		3		(7		)	13,991		23		(2		)
Interest Rate Options	20,798		327		(220		)	24,002		147		(314		)
Interest Rate Forwards	2,353		21		0			5,049		72		0
Foreign Currency
Foreign Currency Forwards	24,444		312		(120		)	19,849		246		(138		)
Foreign Currency Options	1		0		0			2		0		0
Currency/Interest Rate
Foreign Currency Swaps	14,066		827		(420		)	13,784		773		(421		)
Credit
Credit Default Swaps	3,165		103		(2		)	5,207		33		(23		)
Equity
Equity Futures	1,329		0		(5		)	1,141		0		(8		)
Equity Options	68,244		570		(792		)	58,693		384		(554		)
Total Return Swaps	17,945		38		(302		)	17,309		1,131		(86		)
Other
Other(1)	1,258		0		0			508		0		0
Synthetic GICs	80,337		1		0			79,215		2		0
Total Derivatives Not Qualifying as Hedge Accounting Instruments	$	389,339	$	11,806	$	(6,509	)	$	379,713	$	8,603	$	(4,981	)
Total Derivatives(2)(3)	$	414,810	$	14,107	$	(6,925	)	$	405,644	$	10,480	$	(5,408	)

__________


(1)	“Other” primarily includes derivative contracts used to improve the balance of the Company’s tail longevity and mortality risk. Under these contracts, the Company’s gains (losses) are capped at the notional amount.


(2)	Excludes embedded derivatives and associated reinsurance recoverables which contain multiple underlying risks. The fair value of these embedded derivatives was a net liability of $13,672 million and $8,959 million as of June 30, 2019 and December 31, 2018, respectively, primarily included in “Future policy benefits.”


(3)	Recorded in “Other invested assets” and “Other liabilities” on the Unaudited Interim Consolidated Statements of Financial Position.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

As of June 30, 2019, the following amounts were recorded on the Unaudited Interim Consolidated Statements of Financial Position related to the carrying amount of the hedged assets (liabilities) and cumulative basis adjustments included in the carrying amount for fair value hedges.



Balance Sheet Line Item in which Hedged Item is Recorded	Carrying Amount of the Hedged Assets (Liabilities)			Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets (Liabilities)(1)
	(in millions)
Fixed maturities, available-for-sale, at fair value	$	441		$	62
Commercial mortgage and other loans	$	24		$	2
Policyholders’ account balances	$	(1,327	)	$	(85	)
Future policy benefits	$	(642	)	$	(150	)

________


(1)	There are no fair value hedging adjustments for hedged assets and liabilities for which hedge accounting has been discontinued.

Most of the Company’s derivatives do not qualify for hedge accounting for various reasons. For example: (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 GICs, which are product standalone derivatives, do not qualify as hedging instruments under hedge accounting rules.

Offsetting Assets and Liabilities

The following table presents recognized derivative instruments (excluding embedded derivatives and associated reinsurance recoverables), and repurchase and reverse repurchase agreements that are offset in the Unaudited Interim Consolidated Statements of Financial Position, and/or are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in the Unaudited Interim Consolidated Statements of Financial Position.



	June 30, 2019
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statements of Financial Position			Net Amounts Presented in the Statements of Financial Position		Financial Instruments/ Collateral(1)			Net Amount
	(in millions)
Offsetting of Financial Assets:
Derivatives(1)	$	14,033	$	(13,063	)	$	970	$	(633	)	$	337
Securities purchased under agreement to resell	1,257		0			1,257		(1,257		)	0
Total assets	$	15,290	$	(13,063	)	$	2,227	$	(1,890	)	$	337
Offsetting of Financial Liabilities:
Derivatives(1)	$	6,913	$	(6,368	)	$	545	$	(191	)	$	354
Securities sold under agreement to repurchase	9,741		0			9,741		(9,741		)	0
Total liabilities	$	16,654	$	(6,368	)	$	10,286	$	(9,932	)	$	354

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	December 31, 2018
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statements of Financial Position			Net Amounts Presented in the Statements of Financial Position		Financial Instruments/ Collateral(1)			Net Amount
	(in millions)
Offsetting of Financial Assets:
Derivatives(1)	$	10,407	$	(9,331	)	$	1,076	$	(614	)	$	462
Securities purchased under agreement to resell	986		0			986		(986		)	0
Total assets	$	11,393	$	(9,331	)	$	2,062	$	(1,600	)	$	462
Offsetting of Financial Liabilities:
Derivatives(1)	$	5,387	$	(5,281	)	$	106	$	(45	)	$	61
Securities sold under agreement to repurchase	9,950		0			9,950		(9,950		)	0
Total liabilities	$	15,337	$	(5,281	)	$	10,056	$	(9,995	)	$	61

__________


(1)	Amounts exclude the excess of collateral received/pledged from/to the counterparty.

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, 2018.

Fair Value, Cash Flow 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, including the offset of the hedged item in fair value hedge relationships.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2019
	Realized Investment Gains (Losses)			Net Investment Income			Other Income (Loss)			Interest Expense		Interest Credited to Policyholders’ Account Balances			Policyholders’ Benefits			AOCI(1)
	(in millions)
Derivatives Designated as Hedge Accounting Instruments:
Fair value hedges
Gains (losses) on derivatives designated as hedge instruments:
Interest Rate	$	(9	)	$	(2	)	$	0		$	0	$	101		$	80		$	0
Currency	2			0			0			0		0			0			0
Total gains (losses) on derivatives designated as hedge instruments	(7		)	(2		)	0			0		101			80			0
Gains (losses) on the hedged item:
Interest Rate	9			5			0			0		(98		)	(73		)	0
Currency	(1		)	1			0			0		0			0			0
Total gains (losses) on hedged item	8			6			0			0		(98		)	(73		)	0
Total gains (losses) on fair value hedges net of hedged item	1			4			0			0		3			7			0
Cash flow hedges
Interest Rate	0			0			0			0		0			0			(1		)
Currency	1			0			0			0		0			0			14
Currency/Interest Rate	47			69			40			0		0			0			229
Total gains (losses) on cash flow hedges	48			69			40			0		0			0			242
Net investment hedges
Currency	0			0			0			0		0			0			1
Currency/Interest Rate	0			0			0			0		0			0			0
Total gains (losses) on net investment hedges	0			0			0			0		0			0			1
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	2,346			0			0			0		0			0			0
Currency	122			0			(5		)	0		0			0			0
Currency/Interest Rate	20			0			0			0		0			0			0
Credit	36			0			0			0		0			0			0
Equity	(617		)	0			0			0		0			0			0
Other	0			0			0			0		0			0			0
Embedded Derivatives	(2,368		)	0			0			0		0			0			0
Total gains (losses) on derivatives not qualifying as hedge accounting instruments	(461		)	0			(5		)	0		0			0			0
Total	$	(412	)	$	73		$	35		$	0	$	3		$	7		$	243

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30, 2019
	Realized Investment Gains (Losses)			Net Investment Income			Other Income (Loss)			Interest Expense		Interest Credited to Policyholders’ Account Balances			Policyholders’ Benefits			AOCI(1)
	(in millions)
Derivatives Designated as Hedge Accounting Instruments:
Fair value hedges
Gains (losses) on derivatives designated as hedge instruments:
Interest Rate	$	(15	)	$	(4	)	$	0		$	0	$	168		$	131		$	0
Currency	1			0			0			0		0			0			0
Total gains (losses) on derivatives designated as hedge instruments	(14		)	(4		)	0			0		168			131			0
Gains (losses) on the hedged item:
Interest Rate	11			11			0			0		(164		)	(119		)	0
Currency	0			2			0			0		0			0			0
Total gains (losses) on hedged item	11			13			0			0		(164		)	(119		)	0
Total gains (losses) on fair value hedges net of hedged item	(3		)	9			0			0		4			12			0
Cash flow hedges
Interest Rate	(1		)	0			0			0		0			0			22
Currency	2			0			0			0		0			0			5
Currency/Interest Rate	40			137			(6		)	0		0			0			170
Total gains (losses) on cash flow hedges	41			137			(6		)	0		0			0			197
Net investment hedges
Currency	0			0			0			0		0			0			2
Currency/Interest Rate	0			0			0			0		0			0			0
Total gains (losses) on net investment hedges	0			0			0			0		0			0			2
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	3,734			0			0			0		0			0			0
Currency	84			0			0			0		0			0			0
Currency/Interest Rate	204			0			0			0		0			0			0
Credit	104			0			0			0		0			0			0
Equity	(2,427		)	0			0			0		0			0			0
Other	0			0			0			0		0			0			0
Embedded Derivatives	(3,180		)	0			0			0		0			0			0
Total gains (losses) on derivatives not qualifying as hedge accounting instruments	(1,481		)	0			0			0		0			0			0
Total	$	(1,443	)	$	146		$	(6	)	$	0	$	4		$	12		$	199

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2018(2)
	Realized Investment Gains (Losses)			Net Investment Income			Other Income (Loss)			Interest Expense		Interest Credited to Policyholders’ Account Balances			AOCI(1)
	(in millions)
Derivatives Designated as Hedge Accounting Instruments:
Fair value hedges
Gains (losses) on derivatives designated as hedge instruments:
Interest Rate	$	5		$	(2	)	$	0		$	0	$	(28	)	$	0
Currency	1			0			0			0		0			0
Total gains (losses) on derivatives designated as hedge instruments	6			(2		)	0			0		(28		)	0
Gains (losses) on the hedged item:
Interest Rate	(5		)	5			0			0		29			0
Currency	(1		)	1			0			0		0			0
Total gains (losses) on hedged item	(6		)	6			0			0		29			0
Total gains (losses) on fair value hedges net of hedged item	0			4			0			0		1			0
Cash flow hedges
Interest Rate	2			0			0			0		0			(1		)
Currency	3			0			0			0		0			18
Currency/Interest Rate	33			52			209			0		0			704
Total gains (losses) on cash flow hedges	38			52			209			0		0			721
Net investment hedges
Currency	2			0			0			0		0			5
Currency/Interest Rate	0			0			0			0		0			0
Total gains (losses) on net investment hedges	2			0			0			0		0			5
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	(434		)	0			0			0		0			0
Currency	(133		)	0			(1		)	0		0			0
Currency/Interest Rate	573			0			2			0		0			0
Credit	(1		)	0			0			0		0			0
Equity	(258		)	0			0			0		0			0
Other	(1		)	0			0			0		0			0
Embedded Derivatives	658			0			0			0		0			0
Total gains (losses) on derivatives not qualifying as hedge accounting instruments	404			0			1			0		0			0
Total	$	444		$	56		$	210		$	0	$	1		$	726

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30, 2018(2)
	Realized Investment Gains (Losses)			Net Investment Income			Other Income (Loss)		Interest Expense			Interest Credited to Policyholders’ Account Balances			AOCI(1)
	(in millions)
Derivatives Designated as Hedge Accounting Instruments:
Fair value hedges
Gains (losses) on derivatives designated as hedge instruments:
Interest Rate	$	22		$	(6	)	$	0	$	0		$	(111	)	$	0
Currency	3			0			0		0			0			0
Total gains (losses) on derivatives designated as hedge instruments	25			(6		)	0		0			(111		)	0
Gains (losses) on the hedged item:
Interest Rate	(24		)	19			0		0			115			0
Currency	(3		)	2			0		0			0			0
Total gains (losses) on hedged item	(27		)	21			0		0			115			0
Total gains (losses) on fair value hedges net of hedged item	(2		)	15			0		0			4			0
Cash flow hedges
Interest Rate	2			0			0		(1		)	0			6
Currency	0			0			0		0			0			9
Currency/Interest Rate	27			100			118		0			0			123
Total gains (losses) on cash flow hedges	29			100			118		(1		)	0			138
Net investment hedges
Currency	0			0			0		0			0			3
Currency/Interest Rate	0			0			0		0			0			0
Total gains (losses) on net investment hedges	0			0			0		0			0			3
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	(1,949		)	0			0		0			0			0
Currency	279			0			0		0			0			0
Currency/Interest Rate	25			0			1		0			0			0
Credit	(5		)	0			0		0			0			0
Equity	(248		)	0			0		0			0			0
Other	(1		)	0			0		0			0			0
Embedded Derivatives	2,637			0			0		0			0			0
Total gains (losses) on derivatives not qualifying as hedge accounting instruments	738			0			1		0			0			0
Total	$	765		$	115		$	119	$	(1	)	$	4		$	141

_________


(1)	Net change in AOCI.


(2)	Prior period amounts have been updated to conform to current period presentation.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Presented below is a rollforward of current period cash flow hedges in AOCI before taxes:



	(in millions)
Balance, December 31, 2018	$	811
Cumulative-effect adjustment from the adoption of ASU 2017-12(1)	9
Amount recorded in AOCI
Interest Rate	21
Currency	7
Currency/Interest Rate	341
Total amount recorded in AOCI	369
Amount reclassified from AOCI to income
Interest Rate	1
Currency	(2		)
Currency/Interest Rate	(171		)
Total amount reclassified from AOCI to income	(172		)
Balance, June 30, 2019	$	1,017

_________


(1)	See Note 2 for details.

The changes in fair value of cash flow hedges are deferred in AOCI and are included in “Net unrealized investment gains (losses)” in the Unaudited Interim Consolidated Statements of Comprehensive Income; these amounts are then reclassified to earnings when the hedged item affects earnings. Using June 30, 2019 values, it is estimated that a pre-tax gain of approximately $251 million is expected to be reclassified from AOCI to earnings during the subsequent twelve months ending June 30, 2020, offset by amounts pertaining to the hedged items.

The exposures the Company is hedging with these qualifying cash flow hedges include the variability of future cash flows from forecasted transactions denominated in foreign currencies, the purchases of invested assets, and the receipt or payment of variable interest on existing financial instruments. The maximum length of time over which the Company is hedging its exposure to the variability in future cash flows for forecasted transactions is 5 years.

There were no material amounts reclassified from AOCI 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.

For effective net investment hedges, the amounts, before applicable taxes, recorded in the cumulative translation adjustment within AOCI were $534 million and $532 million as of June 30, 2019 and December 31, 2018, respectively.

Credit Derivatives

Credit derivatives, where the Company has written credit protection on a single name reference, had outstanding notional amounts of $100 million and $110 million as of June 30, 2019 and December 31, 2018, respectively. These credit derivatives are reported at fair value as an asset of $1 million as of both June 30, 2019 and December 31, 2018. As of June 30, 2019, the notional amount of these credit derivatives had the following NAIC ratings: $36 million in NAIC 1; $60 million in NAIC 2; and $4 million in NAIC 3. The Company has also written credit protection on certain index references with notional amounts of $2,984 million and $4,953 million as of June 30, 2019 and December 31, 2018, respectively. These credit derivatives are reported at fair value as an asset of $100 million and $10 million as of June 30, 2019 and December 31, 2018, respectively. As of June 30, 2019, the notional amount of these credit derivatives had the following NAIC ratings: $51 million in NAIC 1; $1,908 million in NAIC 3; and $1,025 million NAIC 6. NAIC designations are based on the lowest rated single name reference included in the index.

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. The single name credit derivatives have maturities of less than 2 years, while the index references have maturities of less than 43 years.

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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 June 30, 2019 and December 31, 2018, the Company had $82 million and $145 million of outstanding notional amounts and reported at fair value as a liability of $0 million and $1 million, respectively.

Counterparty Credit Risk

The Company is exposed to credit-related losses in the event of non-performance by counterparties to financial derivative transactions with a positive fair value. The Company manages credit risk by: (i) entering into derivative transactions with highly rated major international financial institutions and other creditworthy counterparties governed by master netting agreements, as applicable; (ii) trading through central clearing and over-the-counter (“OTC”) parties; (iii) obtaining collateral, such as cash and securities, when appropriate; and (iv) setting limits on single party credit exposures which are subject to periodic management review.

Substantially all of the Company’s derivative agreements have zero thresholds which require daily full collateralization by the party in a liability position. In addition, certain of the Company’s derivative agreements contain credit-risk related contingent features; if the credit rating of one of the parties to the derivative agreement is to fall below a certain level, the party with positive fair value could request termination at the then fair value or demand immediate full collateralization from the party whose credit rating fell and is in a net liability position.

As of June 30, 2019, there were no net liability derivative positions with counterparties with credit risk-related contingent features; as such, all derivatives have been appropriately collateralized by the Company or the counterparty in accordance with the terms of the derivative agreements.

6. 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.

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.

Level 3—Fair value is based on at least one significant unobservable input for the asset or liability. The assets and liabilities in this category may require significant judgment or estimation in determining the fair value.

For a discussion of Company’s valuation methodologies for assets and liabilities measured at fair value and the fair value hierarchy, see Note 6 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

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.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	As of June 30, 2019
	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	$	34,361	$	94	$			$	34,455
Obligations of U.S. states and their political subdivisions	0		11,198		4					11,202
Foreign government bonds	0		121,058		24					121,082
U.S. corporate public securities	0		93,402		116					93,518
U.S. corporate private securities(2)	0		33,213		1,765					34,978
Foreign corporate public securities	0		30,240		71					30,311
Foreign corporate private securities	0		25,928		840					26,768
Asset-backed securities(3)	0		11,937		798					12,735
Commercial mortgage-backed securities	0		15,109		45					15,154
Residential mortgage-backed securities	0		3,169		18					3,187
Subtotal	0		379,615		3,775					383,390
Assets supporting experience-rated contractholder liabilities:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	0		192		0					192
Obligations of U.S. states and their political subdivisions	0		210		0					210
Foreign government bonds	0		844		26					870
Corporate securities	0		13,077		553					13,630
Asset-backed securities(3)	0		1,569		57					1,626
Commercial mortgage-backed securities	0		2,297		0					2,297
Residential mortgage-backed securities	0		1,014		0					1,014
Equity securities	1,360		272		1					1,633
All other(4)	0		365		1					366
Subtotal	1,360		19,840		638					21,838
Fixed maturities, trading	0		3,459		296					3,755
Equity securities	5,212		831		624					6,667
Commercial mortgage and other loans	0		645		0					645
Other invested assets(5)	4		14,101		436		(13,063		)	1,478
Short-term investments	1,888		2,450		288					4,626
Cash equivalents	778		7,138		1					7,917
Other assets	0		0		98					98
Separate account assets(6)(7)	44,622		232,742		1,708					279,072
Total assets	$	53,864	$	660,821	$	7,864	$	(13,063	)	$	709,486
Future policy benefits(8)	$	0	$	0	$	12,723	$			$	12,723
Policyholders’ account balances	0		0		1,047					1,047
Other liabilities	13		6,912		0		(6,368		)	557
Notes issued by consolidated VIEs	0		0		816					816
Total liabilities	$	13	$	6,912	$	14,586	$	(6,368	)	$	15,143

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	As of December 31, 2018
	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	$	30,513	$	81	$			$	30,594
Obligations of U.S. states and their political subdivisions	0		10,488		5					10,493
Foreign government bonds	0		112,985		125					113,110
U.S. corporate public securities	0		83,282		133					83,415
U.S. corporate private securities(2)	0		31,265		1,755					33,020
Foreign corporate public securities	0		29,148		53					29,201
Foreign corporate private securities	0		23,787		744					24,531
Asset-backed securities(3)	0		11,726		1,247					12,973
Commercial mortgage-backed securities	0		13,302		13					13,315
Residential mortgage-backed securities	0		2,925		79					3,004
Subtotal	0		349,421		4,235					353,656
Assets supporting experience-rated contractholder liabilities:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	0		381		0					381
Obligations of U.S. states and their political subdivisions	0		196		0					196
Foreign government bonds	0		858		225					1,083
Corporate securities	0		12,675		444					13,119
Asset-backed securities(3)	0		1,516		149					1,665
Commercial mortgage-backed securities	0		2,324		0					2,324
Residential mortgage-backed securities	0		811		0					811
Equity securities	1,222		237		1					1,460
All other(4)	0		215		0					215
Subtotal	1,222		19,213		819					21,254
Fixed maturities, trading	0		3,037		206					3,243
Equity securities	4,819		610		671					6,100
Commercial mortgage and other loans	0		763		0					763
Other invested assets(5)	23		10,454		263		(9,331		)	1,409
Short-term investments	2,713		2,691		89					5,493
Cash equivalents	2,848		6,553		77					9,478
Other assets	0		0		25					25
Separate account assets(6)(7)	39,534		212,998		1,534					254,066
Total assets	$	51,159	$	605,740	$	7,919	$	(9,331	)	$	655,487
Future policy benefits(8)	$	0	$	0	$	8,926	$			$	8,926
Policyholders’ account balances	0		0		56					56
Other liabilities	18		5,398		0		(5,281		)	135
Notes issued by consolidated VIEs	0		0		595					595
Total liabilities	$	18	$	5,398	$	9,577	$	(5,281	)	$	9,712

__________


(1)	“Netting” amounts represent cash collateral of $6,695 million and $4,050 million as of June 30, 2019 and December 31, 2018, respectively, and the impact of offsetting asset and liability positions held with the same counterparty, subject to master netting arrangements.


(2)	Excludes notes with fair value of $4,356 million (carrying amount of $4,356 million) and $4,216 million (carrying amount of $4,216 million) as of June 30, 2019 and December 31, 2018, respectively, which have been offset with the associated payables under a netting agreement.


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


(4)	All other represents cash equivalents and short-term investments.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


(5)	Other invested assets excluded from the fair value hierarchy include certain hedge funds, private equity funds and other funds for which fair value is measured at net asset value (“NAV”) per share (or its equivalent) as a practical expedient. As of June 30, 2019 and December 31, 2018, the fair values of such investments were $4,089 million and $4,115 million respectively.

(6)

Separate account assets included in the fair value hierarchy exclude investments in entities that calculate NAV per share (or its equivalent) as a practical expedient. Such investments excluded from the fair value hierarchy include investments in real estate, hedge funds and other invested assets. As of June 30, 2019 and December 31, 2018, the fair value of such investments was $24,508 million and $25,070 million, respectively.

(7)

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 Statements of Financial Position.

(8)

As of June 30, 2019, the net embedded derivative liability position of $12.7 billion includes $0.6 billion of embedded derivatives in an asset position and $13.3 billion of embedded derivatives in a liability position. As of December 31, 2018, the net embedded derivative liability position of $8.9 billion includes $0.7 billion of embedded derivatives in an asset position and $9.6 billion of embedded derivatives in a liability position.

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.



	As of June 30, 2019
	Fair Value		Valuation Techniques	Unobservable Inputs	Minimum		Maximum	Weighted Average	Impact of Increase in Input on Fair Value(1)
	(in millions)
Assets:
Corporate securities(2)	$	1,441	Discounted cash flow	Discount rate	0.36%	-	20%	8.37%	Decrease
			Market comparables	EBITDA multiples(3)	4.5X	-	9.2X	7.0X	Increase
			Liquidation	Liquidation value	3.98%	-	100%	58.42%	Increase
Separate account assets-commercial mortgage loans(4)	$	860	Discounted cash flow	Spread	1.06%	-	2.44%	1.21%	Decrease
Liabilities:
Future policy benefits(5)	$	12,723	Discounted cash flow	Lapse rate(7)	1%	-	18%		Decrease
				Spread over LIBOR(8)	0.16%	-	1.24%		Decrease
				Utilization rate(9)	43%	-	97%		Increase
				Withdrawal rate	See table footnote (10) below.
				Mortality rate(11)	0%	-	15%		Decrease
				Equity volatility curve	13%	-	23%		Increase
Policyholders’ account balances(6)	$	1,047	Discounted cash flow	Lapse rate(7)	1%	-	42%		Decrease
				Spread over LIBOR(8)	0.16%	-	1.24%		Decrease
				Mortality rate(11)	0%	-	24%		Decrease
				Equity volatility curve	10%	-	23%		Increase

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	As of December 31, 2018
	Fair Value		Valuation Techniques	Unobservable Inputs	Minimum		Maximum	Weighted Average	Impact of Increase in Input on Fair Value(1)
	(in millions)
Assets:
Corporate securities(2)	$	1,392	Discounted cash flow	Discount rate	0.57%	-	20%	8.58%	Decrease
			Market comparables	EBITDA multiples(3)	4.5X	-	8.5X	8.1X	Increase
			Liquidation	Liquidation value	11.77%	-	94%	32.16%	Increase
Separate account assets-commercial mortgage loans(4)	$	785	Discounted cash flow	Spread	1.12%	-	2.55%	1.29%	Decrease
Liabilities:
Future policy benefits(5)	$	8,926	Discounted cash flow	Lapse rate(7)	1%	-	13%		Decrease
				Spread over LIBOR(8)	0.36%	-	1.60%		Decrease
				Utilization rate(9)	50%	-	97%		Increase
				Withdrawal rate	See table footnote (10) below.
				Mortality rate(11)	0%	-	15%		Decrease
				Equity volatility curve	18%	-	22%		Increase

__________


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


(2)	Includes assets classified as fixed maturities available-for-sale, assets supporting experience-rated contractholder liabilities and fixed maturities trading.


(3)	Represents multiples of earnings before interest, taxes, depreciation and amortization (“EBITDA”), and are amounts used when the Company has determined that market participants would use such multiples when valuing the investments.


(4)	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 Unaudited Interim Consolidated Statements of Financial Position. As a result, changes in value associated with these investments are not reflected in the Company’s Unaudited Interim Consolidated Statements of Operations.

(5)

Future policy benefits primarily represent general account liabilities for the 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.

(6)

Policyholders’ account balances primarily represent general account liabilities for the index-linked interest credited on certain of the Company’s life and annuity products that 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.

(7)

Lapse rates for contracts with living benefit guarantees 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 for contracts with index-linked crediting guarantees may be adjusted at the contract level based on the applicability of any surrender charges, product type, and market related factors such as interest rates. Lapse rates are also generally assumed to be lower for the period where surrender charges apply. For any given contract, lapse rates vary throughout the period over which cash flows are projected for the purposes of valuing these embedded derivatives.

(8)

The spread over the London Inter-Bank Offered Rate (“LIBOR”) swap curve represents the premium added to the proxy for the risk-free rate (LIBOR) to reflect the Company’s estimates of rates that a market participant would use to value the living benefits in both the accumulation and payout phases and index-linked interest crediting guarantees. This spread includes an estimate of NPR, which is the risk that the obligation will not be fulfilled by the Company. NPR is primarily estimated by utilizing the credit spreads associated with issuing funding agreements, adjusted for any illiquidity risk premium. In order to reflect the financial strength ratings of the Company, credit spreads associated with funding agreements, as opposed to credit spread associated with debt, are utilized in developing this estimate because funding agreements, living benefit guarantees, and index-linked interest crediting guarantees are insurance liabilities and are therefore senior to debt.

(9)

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. Range reflects the utilization rate for the vast majority of business with living benefits.

(10)

The withdrawal rate assumption estimates the magnitude of annual contractholder withdrawals relative to the maximum allowable amount under the contract. These assumptions vary based on the age of the contractholder, the tax status of the contract and the duration since the contractholder began lifetime withdrawals. As of June 30, 2019 and December 31, 2018, the minimum withdrawal rate assumption is 78% and the maximum withdrawal rate assumption may be greater than 100%. The fair value of the liability will generally increase the closer the withdrawal rate is to 100% and decrease as the withdrawal rate moves further away from 100%.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

(11)

The range reflects the mortality rates for the vast majority of business with living benefits and other contracts, with policyholders ranging from 45 to 90 years old. While the majority of living benefits have a minimum age requirement, certain other contracts do not have an age restriction. This results in contractholders with mortality rates approaching 0% for certain benefits. Mortality rates may vary by product, age, and duration. 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. For the discussion of the relationships between unobservable inputs as well as market factors that may affect the range of inputs used in the valuation of Level 3 assets and liabilities, see Note 6 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Changes in Level 3 Assets and Liabilities—The following tables describe 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. When a determination is made to classify assets and liabilities within Level 3, the determination is based on significance of the unobservable inputs in the overall fair value measurement. All transfers are based on changes in the observability of the valuation inputs, including the availability of pricing service information that the Company can validate. All transfers are generally reported at the value as of the beginning of the quarter in which transfers occur for any such assets still held at the end of the quarter.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2019
	Fair Value, beginning of period			Total realized and unrealized gains (losses)			Purchases		Sales			Issuances			Settlements			Other(1)			Transfers into Level 3		Transfers out of Level 3			Fair Value, end of period			Unrealized gains (losses) for assets still held(2)
	(in millions)
Fixed maturities, available-for-sale:
U.S. government	$	88		$	0		$	6	$	0		$	0		$	0		$	0		$	0	$	0		$	94		$	0
U.S. states	4			0			0		0			0			0			0			0		0			4			0
Foreign government	138			(1		)	0		0			0			0			(2		)	0		(111		)	24			0
Corporate securities(3)	2,757			6			288		(17		)	0			(225		)	1			19		(37		)	2,792			(5		)
Structured securities(4)	1,915			8			113		(47		)	0			(101		)	9			17		(1,053		)	861			0
Assets supporting experience-rated contractholder liabilities:
Foreign government	29			0			0		0			0			(3		)	0			0		0			26			0
Corporate securities(3)	592			5			14		0			0			(67		)	0			10		(1		)	553			11
Structured securities(4)	60			1			0		0			0			(4		)	0			0		0			57			1
Equity securities	1			1			0		(1		)	0			0			0			0		0			1			0
All other activity	0			0			3		0			0			(2		)	0			0		0			1			0
Other assets:
Fixed maturities, trading	240			(7		)	36		(13		)	0			0			1			39		0			296			(7		)
Equity securities	674			16			23		(13		)	0			(59		)	6			1		(24		)	624			15
Other invested assets	373			0			61		0			0			0			2			0		0			436			0
Short-term investments	168			0			273		0			0			(153		)	0			0		0			288			0
Cash equivalents	1			0			0		0			0			0			0			0		0			1			0
Other assets	48			42			8		0			0			0			0			0		0			98			41
Separate account assets(5)	1,635			44			139		(6		)	0			(27		)	0			0		(77		)	1,708			41
Liabilities:
Future policy benefits	(10,025		)	(2,400		)	0		0			(298		)	0			0			0		0			(12,723		)	(2,503		)
Policyholders’ account balances(6)	(146		)	(828		)	0		0			(73		)	0			0			0		0			(1,047		)	(821		)
Other liabilities	0			0			0		0			0			0			0			0		0			0			0
Notes issued by consolidated VIEs	(817		)	1			0		0			0			0			0			0		0			(816		)	1



	Three Months Ended June 30, 2019
	Total realized and unrealized gains (losses)												Unrealized gains (losses) for assets still held(2)
	Realized investment gains (losses), net			Other income			Interest credited to policyholders’ account balances		Included in other comprehensive income (losses)		Net investment income		Realized investment gains (losses), net			Other income			Interest credited to policyholders’ account balances
	(in millions)
Fixed maturities, available-for-sale	$	(11	)	$	0		$	0	$	18	$	6	$	(5	)	$	0		$	0
Assets supporting experience-rated contractholder liabilities	0			6			0		0		1		0			12			0
Other assets:
Fixed maturities, trading	0			(8		)	0		0		1		0			(7		)	0
Equity securities	0			16			0		0		0		0			15			0
Other invested assets	0			0			0		0		0		0			0			0
Short-term investments	0			0			0		0		0		0			0			0
Cash equivalents	0			0			0		0		0		0			0			0
Other assets	42			0			0		0		0		41			0			0
Separate account assets(5)	0			0			43		0		1		0			0			41
Liabilities:
Future policy benefits	(2,400		)	0			0		0		0		(2,503		)	0			0
Policyholders’ account balances	(828		)	0			0		0		0		(821		)	0			0
Other liabilities	0			0			0		0		0		0			0			0
Notes issued by consolidated VIEs	1			0			0		0		0		1			0			0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30, 2019
	Fair Value, beginning of period			Total realized and unrealized gains (losses)			Purchases		Sales			Issuances			Settlements			Other(1)			Transfers into Level 3		Transfers out of Level 3			Fair Value, end of period			Unrealized gains (losses) for assets still held(2)
	(in millions)
Fixed maturities, available-for-sale:
U.S. government	$	81		$	0		$	13	$	0		$	0		$	0		$	0		$	0	$	0		$	94		$	0
U.S. states	5			0			0		0			0			(1		)	0			0		0			4			0
Foreign government	125			2			0		0			0			0			(1		)	9		(111		)	24			0
Corporate securities(3)	2,685			10			607		(29		)	0			(604		)	(1		)	183		(59		)	2,792			(26		)
Structured securities(4)	1,339			25			431		(47		)	0			(332		)	7			750		(1,312		)	861			0
Assets supporting experience-rated contractholder liabilities:
Foreign government	225			0			0		0			0			(3		)	(196		)	0		0			26			0
Corporate securities(3)	444			10			41		0			0			(143		)	196			10		(5		)	553			6
Structured securities(4)	149			1			6		0			0			(25		)	0			0		(74		)	57			1
Equity securities	1			1			0		(1		)	0			0			0			0		0			1			1
All other activity	0			0			3		0			0			(2		)	0			0		0			1			0
Other assets:
Fixed maturities, trading	206			(11		)	74		(14		)	0			0			3			39		(1		)	296			(7		)
Equity securities	671			24			46		(24		)	0			(74		)	4			1		(24		)	624			22
Other invested assets	263			(1		)	218		0			0			(42		)	(2		)	0		0			436			(1		)
Short-term investments	89			0			426		0			0			(227		)	0			0		0			288			0
Cash equivalents	77			0			1		0			0			(77		)	0			0		0			1			0
Other assets	25			56			17		0			0			0			0			0		0			98			55
Separate account assets(5)	1,534			125			228		(17		)	0			(50		)	0			0		(112		)	1,708			115
Liabilities:
Future policy benefits	(8,926		)	(3,210		)	0		0			(588		)	0			1			0		0			(12,723		)	(3,364		)
Policyholders’ account balances(6)	(56		)	(879		)	0		0			(109		)	0			(3		)	0		0			(1,047		)	(872		)
Other liabilities	0			0			0		0			0			0			0			0		0			0			0
Notes issued by consolidated VIEs	(595		)	(1		)	0		0			(858		)	638			0			0		0			(816		)	(1		)



	Six Months Ended June 30, 2019
	Total realized and unrealized gains (losses)												Unrealized gains (losses) for assets still held(2)
	Realized investment gains (losses), net			Other income (loss)			Interest credited to policyholders’ account balances		Included in other comprehensive income (losses)		Net investment income		Realized investment gains (losses), net			Other income (loss)			Interest credited to policyholders’ account balances
	(in millions)
Fixed maturities, available-for-sale	$	(13	)	$	0		$	0	$	40	$	10	$	(26	)	$	0		$	0
Assets supporting experience-rated contractholder liabilities	0			9			0		0		3		0			8			0
Other assets:
Fixed maturities, trading	0			(12		)	0		0		1		0			(7		)	0
Equity securities	0			24			0		0		0		0			22			0
Other invested assets	(1		)	0			0		0		0		(1		)	0			0
Short-term investments	0			0			0		0		0		0			0			0
Cash equivalents	0			0			0		0		0		0			0			0
Other assets	56			0			0		0		0		55			0			0
Separate account assets(5)	0			0			123		0		2		0			0			115
Liabilities:
Future policy benefits	(3,210		)	0			0		0		0		(3,364		)	0			0
Policyholders’ account balances	(879		)	0			0		0		0		(872		)	0			0
Other liabilities	0			0			0		0		0		0			0			0
Notes issued by consolidated VIEs	(1		)	0			0		0		0		(1		)	0			0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2018
	Fair Value, beginning of period			Total realized and unrealized gains (losses)			Purchases		Sales			Issuances			Settlements			Other(1)			Transfers into Level 3		Transfers out of Level 3			Fair Value, end of period			Unrealized gains (losses) for assets still held(2)
	(in millions)
Fixed maturities, available-for-sale:
U.S. government	$	59		$	0		$	8	$	0		$	0		$	0		$	0		$	0	$	0		$	67		$	0
U.S. states	5			0			0		0			0			0			0			0		0			5			0
Foreign government	128			(2		)	0		0			0			0			(4		)	15		0			137			0
Corporate securities(3)	2,735			(29		)	257		(3		)	0			(286		)	(31		)	69		(21		)	2,691			(21		)
Structured securities(4)	6,899			(9		)	441		(278		)	0			(668		)	(24		)	62		(4,759		)	1,664			0
Assets supporting experience-rated contractholder liabilities:
Foreign government	220			4			0		0			0			(3		)	0			0		0			221			2
Corporate securities(3)	468			(10		)	41		0			0			(51		)	0			40		0			488			(10		)
Structured securities(4)	664			(2		)	16		0			0			(129		)	0			5		(447		)	107			(1		)
Equity securities	5			0			0		(1		)	0			0			0			0		0			4			0
All other activity	7			0			24		0			0			(26		)	0			0		0			5			0
Other assets:
Fixed maturities, trading	204			5			9		(38		)	0			(3		)	(2		)	1		(3		)	173			0
Equity securities	785			(12		)	35		(15		)	0			(2		)	(11		)	3		0			783			(15		)
Other invested assets	144			(4		)	0		(12		)	0			0			(6		)	0		0			122			(3		)
Short-term investments	10			0			8		0			0			(14		)	(3		)	0		0			1			0
Cash equivalents	0			0			9		0			0			(7		)	0			0		0			2			0
Other assets	0			0			0		0			0			0			0			0		0			0			0
Separate account assets(5)	2,360			22			253		(14		)	0			(140		)	0			29		(694		)	1,816			21
Liabilities:
Future policy benefits	(6,981		)	683			0		0			(287		)	0			0			0		0			(6,585		)	612
Policyholders’ account balances(6)	(40		)	(8		)	0		0			0			6			0			0		0			(42		)	(8		)
Other liabilities	(16		)	(10		)	8		0			0			0			0			0		0			(18		)	(10		)
Notes issued by consolidated VIEs	(612		)	3			0		0			0			0			0			0		0			(609		)	3



	Three Months Ended June 30, 2018
	Total realized and unrealized gains (losses)													Unrealized gains (losses) for assets still held(2)
	Realized investment gains (losses), net			Other income (loss)			Interest credited to policyholders’ account balances		Included in other comprehensive income (losses)			Net investment income		Realized investment gains (losses), net			Other income (loss)			Interest credited to policyholders’ account balances
	(in millions)
Fixed maturities, available-for-sale	$	(19	)	$	0		$	0	$	(25	)	$	4	$	(21	)	$	0		$	0
Assets supporting experience-rated contractholder liabilities	0			(11		)	0		0			3		0			(9		)	0
Other assets:
Fixed maturities, trading	1			4			0		0			0		0			0			0
Equity securities	0			(12		)	0		0			0		0			(15		)	0
Other invested assets	(4		)	0			0		0			0		(3		)	0			0
Short-term investments	0			0			0		0			0		0			0			0
Cash equivalents	0			0			0		0			0		0			0			0
Other assets	0			0			0		0			0		0			0			0
Separate account assets(5)	0			0			22		0			0		0			0			21
Liabilities:
Future policy benefits	683			0			0		0			0		612			0			0
Policyholders’ account balances	(8		)	0			0		0			0		(8		)	0			0
Other liabilities	(10		)	0			0		0			0		(10		)	0			0
Notes issued by consolidated VIEs	3			0			0		0			0		3			0			0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30, 2018
	Fair Value, beginning of period			Total realized and unrealized gains (losses)			Purchases		Sales			Issuances			Settlements			Other(1)			Transfers into Level 3		Transfers out of Level 3			Fair Value, end of period			Unrealized gains (losses) for assets still held(2)
	(in millions)
Fixed maturities, available-for-sale:
U.S. government	$	52		$	0		$	15	$	0		$	0		$	0		$	0		$	0	$	0		$	67		$	0
U.S. states	5			0			0		0			0			0			0			0		0			5			0
Foreign government	148			(2		)	0		0			0			0			(3		)	20		(26		)	137			0
Corporate securities(3)	2,776			(18		)	375		(4		)	0			(455		)	(19		)	129		(93		)	2,691			(30		)
Structured securities(4)	6,715			(24		)	1,989		(344		)	0			(1,317		)	6			1,133		(6,494		)	1,664			0
Assets supporting experience-rated contractholder liabilities:
Foreign government	223			1			0		0			0			(3		)	0			0		0			221			(2		)
Corporate securities(3)	462			(9		)	65		0			0			(69		)	0			40		(1		)	488			(9		)
Structured securities(4)	722			(2		)	19		0			0			(142		)	0			33		(523		)	107			(1		)
Equity securities	4			1			0		(1		)	0			0			0			0		0			4			1
All other activity	7			0			43		0			0			(45		)	0			0		0			5			0
Other assets:
Fixed maturities, trading	156			3			49		(42		)	0			(3		)	3			12		(5		)	173			4
Equity securities	795			2			42		(32		)	0			(39		)	15			3		(3		)	783			(1		)
Other invested assets	137			4			1		(12		)	0			0			(8		)	0		0			122			2
Short-term investments	8			(1		)	22		0			0			(26		)	(2		)	0		0			1			(1		)
Cash equivalents	0			0			9		0			0			(7		)	0			0		0			2			0
Other assets	13			(13		)	0		0			0			0			0			0		0			0			(13		)
Separate account assets(5)	2,122			(11		)	490		(22		)	0			(261		)	0			224		(726		)	1,816			(5		)
Liabilities:
Future policy benefits	(8,720		)	2,709			0		0			(574		)	0			0			0		0			(6,585		)	2,529
Policyholders’ account balances(6)	(47		)	(3		)	0		0			0			8			0			0		0			(42		)	(3		)
Other liabilities	(3		)	(34		)	18		0			0			0			1			0		0			(18		)	(33		)
Notes issued by consolidated VIEs	(1,196		)	0			0		0			0			0			587			0		0			(609		)	0



	Six Months Ended June 30, 2018
	Total realized and unrealized gains (losses)														Unrealized gains (losses) for assets still held(2)
	Realized investment gains (losses), net			Other income (loss)			Interest credited to policyholders’ account balances			Included in other comprehensive income (losses)			Net investment income		Realized investment gains (losses), net			Other income (loss)			Interest credited to policyholders’ account balances
	(in millions)
Fixed maturities, available-for-sale	$	(13	)	$	0		$	0		$	(39	)	$	8	$	(30	)	$	0		$	0
Assets supporting experience-rated contractholder liabilities	0			(13		)	0			0			4		0			(11		)	0
Other assets:
Fixed maturities, trading	1			2			0			0			0		0			4			0
Equity securities	0			2			0			0			0		0			(1		)	0
Other invested assets	4			0			0			0			0		2			0			0
Short-term investments	(1		)	0			0			0			0		(1		)	0			0
Cash equivalents	0			0			0			0			0		0			0			0
Other assets	(13		)	0			0			0			0		(13		)	0			0
Separate account assets(5)	0			0			(11		)	0			0		0			0			(5		)
Liabilities:
Future policy benefits	2,709			0			0			0			0		2,529			0			0
Policyholders’ account balances	(3		)	0			0			0			0		(3		)	0			0
Other liabilities	(34		)	0			0			0			0		(33		)	0			0
Notes issued by consolidated VIEs	0			0			0			0			0		0			0			0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

__________


(1)	“Other,” for the periods ended June 30, 2019 and June 30, 2018, primarily represent deconsolidation of VIE, reclassifications of certain assets between reporting categories and foreign currency translation.


(2)	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.


(3)	Includes U.S. corporate public, U.S. corporate private, foreign corporate public and foreign corporate private securities.


(4)	Includes asset-backed, commercial mortgage-backed and residential mortgage-backed securities.

(5)


(6)	Issuances and settlements for Policyholders’ account balances are presented net in the rollforward. Prior year amounts are restated to conform to current year presentation.

Derivative Fair Value Information

The following tables present the balances of derivative assets and liabilities measured at fair value on a recurring basis, as of the date indicated, by primary underlying risk. These tables include NPR and exclude embedded derivatives and associated reinsurance recoverables. The derivative assets and liabilities shown below are included in “Other invested assets” or “Other liabilities” in the tables contained within the sections “—Assets and Liabilities by Hierarchy Level” and “—Changes in Level 3 Assets and Liabilities,” above.



	As of June 30, 2019
	Level 1		Level 2		Level 3		Netting(1)			Total
	(in millions)
Derivative Assets:
Interest Rate	$	3	$	10,548	$	1	$			$	10,552
Currency	0		346		0					346
Credit	0		103		0					103
Currency/Interest Rate	0		2,497		0					2,497
Equity	1		607		0					608
Other	0		0		0					0
Netting(1)							(13,063		)	(13,063		)
Total derivative assets	$	4	$	14,101	$	1	$	(13,063	)	$	1,043
Derivative Liabilities:
Interest Rate	$	8	$	4,938	$	0	$			$	4,946
Currency	0		122		0					122
Credit	0		2		0					2
Currency/Interest Rate	0		756		0					756
Equity	5		1,094		0					1,099
Other	0		0		0					0
Netting(1)							(6,368		)	(6,368		)
Total derivative liabilities	$	13	$	6,912	$	0	$	(6,368	)	$	557

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	As of December 31, 2018
	Level 1		Level 2		Level 3		Netting(1)			Total
	(in millions)
Derivative Assets:
Interest Rate	$	23	$	6,341	$	2	$			$	6,366
Currency	0		273		0					273
Credit	0		33		0					33
Currency/Interest Rate	0		2,292		0					2,292
Equity	0		1,515		0					1,515
Other	0		0		0					0
Netting(1)							(9,331		)	(9,331		)
Total derivative assets	$	23	$	10,454	$	2	$	(9,331	)	$	1,148
Derivative Liabilities:
Interest Rate	$	2	$	3,818	$	0	$			$	3,820
Currency	0		140		0					140
Credit	0		23		0					23
Currency/Interest Rate	0		778		0					778
Equity	7		640		0					647
Other	0		0		0					0
Netting(1)							(5,281		)	(5,281		)
Total derivative liabilities	$	9	$	5,399	$	0	$	(5,281	)	$	127

__________


(1)	“Netting” amounts represent cash collateral and the impact of offsetting asset and liability positions held with the same counterparty, subject to master netting agreement.

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 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 June 30, 2019
	Fair Value, beginning of period		Total realized and unrealized gains (losses)(1)		Purchases		Sales		Issuances		Settlements		Other		Transfers into Level 3(2)		Transfers out of Level 3(2)		Fair Value, end of period		Unrealized gains (losses) for assets still held(1)
	(in millions)
Net Derivative - Equity	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Net Derivative - Interest Rate	1		0		0		0		0		0		0		0		0		1		0



	Six Months Ended June 30, 2019
	Fair Value, beginning of period		Total realized and unrealized gains (losses)(1)			Purchases		Sales		Issuances		Settlements		Other(3)		Transfers into Level 3(2)		Transfers out of Level 3(2)		Fair Value, end of period		Unrealized gains (losses) for assets still held(1)
	(in millions)
Net Derivative - Equity	$	0	$	0		$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Net Derivative - Interest Rate	2		(1		)	0		0		0		0		0		0		0		1		(1		)

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2018
	Fair Value, beginning of period		Total realized and unrealized gains (losses)(1)			Purchases		Sales		Issuances		Settlements		Other			Transfers into Level 3(2)		Transfers out of Level 3(2)		Fair Value, end of period		Unrealized gains (losses) for assets still held(1)
	(in millions)
Net Derivative - Equity	$	6	$	0		$	0	$	0	$	0	$	0	$	(4	)	$	0	$	0	$	2	$	0
Net Derivative - Interest Rate	6		(4		)	0		0		0		0		0			0		0		2		4



	Six Months Ended June 30, 2018
	Fair Value, beginning of period			Total realized and unrealized gains (losses)(1)		Purchases		Sales		Issuances		Settlements		Other(3)			Transfers into Level 3(2)		Transfers out of Level 3(2)		Fair Value, end of period		Unrealized gains (losses) for assets still held(1)
	(in millions)
Net Derivative - Equity	$	10		$	1	$	0	$	0	$	0	$	0	$	(9	)	$	0	$	0	$	2	$	0
Net Derivative - Interest Rate	(3		)	5		0		0		0		0		0			0		0		2		5

______


(1)	Total realized and unrealized gains (losses) as well as unrealized gains (losses) for assets still held at the end of the period are recorded in “Realized investment gains (losses), net.”


(2)	Transfers into or out of Level 3 are generally reported at the value as of the beginning of the quarter in which the transfers occur for any such positions still held at the end of the quarter.


(3)	Represents conversion of warrants to equity shares.

Nonrecurring Fair Value Measurements—The following tables represent information for assets measured at fair value on a nonrecurring basis. The fair value measurement is nonrecurring as these assets are measured at fair value only when there is a triggering event (e.g., an evidence of impairment). Assets included in the table are those that were impaired during the respective reporting periods and that are still held as of the reporting date. The estimated fair values for these amounts were determined using significant unobservable inputs (Level 3).



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in millions)
Realized investment gains (losses) net:
Commercial mortgage loans(1)	$	0		$	(13	)	$	0		$	(13	)
Mortgage servicing rights(2)	$	(1	)	$	2		$	(2	)	$	4



	June 30, 2019		December 31, 2018
	(in millions)
Carrying value after measurement as of period end:
Commercial mortgage loans(1)	$	14	$	47
Mortgage servicing rights(2)	$	66	$	73

__________


(1)	Commercial mortgage loans are valued based on discounted cash flows utilizing market rates or the fair value of the underlying real estate collateral.

(2)

Mortgage servicing rights are valued using a discounted cash flow model. The model incorporates assumptions for servicing revenues, which are adjusted for expected prepayments, delinquency rates, escrow deposit income and estimated loan servicing expenses. The discount rates incorporated into the model are determined based on the estimated returns a market participant would require for this business including a liquidity and risk premium. This estimate includes available relevant data from any active market sales of mortgage servicing rights.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Fair Value Option

The fair value option allows the Company 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 result from different measurement attributes. Electing the fair value option also allows the Company to achieve consistent accounting for certain assets and liabilities. Changes in fair value are reflected in “Realized investment gains (losses), net” for commercial mortgage and other loans and “Other income (loss)” for other assets and notes issued by consolidated VIEs. Changes in fair value due to instrument-specific credit risk are estimated using 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.” Interest income on these loans is recorded based on the effective interest rates as determined at the closing of the loan.

The following tables present information regarding assets and liabilities where the fair value option has been elected.



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019		2018
	(in millions)
Liabilities:
Notes issued by consolidated VIEs:
Changes in fair value	$	(1	)	$	(3	)	$	1	$	0



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(in millions)
Commercial mortgage and other loans:
Interest income	$	5	$	4	$	11	$	6
Notes issued by consolidated VIEs:
Interest expense	$	13	$	9	$	22	$	18



	June 30, 2019		December 31, 2018
	(in millions)
Commercial mortgage and other loans(1):
Fair value as of period end	$	645	$	763
Aggregate contractual principal as of period end	$	639	$	754
Other assets:
Fair value as of period end	$	10	$	10
Notes issued by consolidated VIEs:
Fair value as of period end	$	816	$	595
Aggregate contractual principal as of period end	$	857	$	632

__________


(1)	As of June 30, 2019, for loans for which the fair value option has been elected, there were no loans in non-accrual status and none of the loans were more than 90 days past due and still accruing.

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. In some cases, as described below, the carrying amount equals or approximates fair value.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	June 30, 2019
	Fair Value								Carrying Amount(1)
	Level 1		Level 2		Level 3		Total		Total
	(in millions)
Assets:
Fixed maturities, held-to-maturity(2)	$	0	$	2,310	$	100	$	2,410	$	2,009
Assets supporting experience-rated contractholders liabilities	5		0		0		5		5
Commercial mortgage and other loans	0		111		62,873		62,984		60,583
Policy loans	0		0		12,030		12,030		12,030
Other invested assets	0		36		0		36		36
Short-term investments	1,065		181		0		1,246		1,246
Cash and cash equivalents	6,222		1,282		0		7,504		7,504
Accrued investment income	0		3,355		0		3,355		3,355
Other assets	149		2,707		546		3,402		3,400
Total assets	$	7,441	$	9,982	$	75,549	$	92,972	$	90,168
Liabilities:
Policyholders’ account balances—investment contracts	$	0	$	31,849	$	69,964	$	101,813	$	100,934
Securities sold under agreements to repurchase	0		9,741		0		9,741		9,741
Cash collateral for loaned securities	0		4,235		0		4,235		4,235
Short-term debt	0		1,870		926		2,796		2,659
Long-term debt(3)	1,909		16,780		1,334		20,023		17,841
Notes issued by consolidated VIEs	0		0		430		430		430
Other liabilities	0		6,431		545		6,976		6,976
Separate account liabilities—investment contracts	0		74,167		24,792		98,959		98,959
Total liabilities	$	1,909	$	145,073	$	97,991	$	244,973	$	241,775

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	December 31, 2018
	Fair Value								Carrying Amount(1)
	Level 1		Level 2		Level 3		Total		Total
	(in millions)
Assets:
Fixed maturities, held-to-maturity(2)	$	0	$	1,468	$	904	$	2,372	$	2,013
Assets supporting experience-rated contractholders liabilities	0		0		0		0		0
Commercial mortgage and other loans	0		109		59,106		59,215		59,067
Policy loans	0		0		12,016		12,016		12,016
Other invested assets	0		40		0		40		40
Short-term investments	951		25		0		976		976
Cash and cash equivalents	4,871		1,004		0		5,875		5,875
Accrued investment income	0		3,318		0		3,318		3,318
Other assets	141		2,189		483		2,813		2,813
Total assets	$	5,963	$	8,153	$	72,509	$	86,625	$	86,118
Liabilities:
Policyholders’ account balances—investment contracts	$	0	$	31,422	$	67,006	$	98,428	$	99,829
Securities sold under agreements to repurchase	0		9,950		0		9,950		9,950
Cash collateral for loaned securities	0		3,929		0		3,929		3,929
Short-term debt	0		1,854		658		2,512		2,451
Long-term debt(3)	1,734		15,057		1,181		17,972		17,378
Notes issued by consolidated VIEs	0		0		360		360		360
Other liabilities	0		6,338		510		6,848		6,848
Separate account liabilities—investment contracts	0		66,914		26,022		92,936		92,936
Total liabilities	$	1,734	$	135,464	$	95,737	$	232,935	$	233,681

__________


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


(2)	Excludes notes with fair value of $5,190 million (carrying amount of $4,879 million) and $4,879 million (carrying amount of $4,879 million) as of June 30, 2019 and December 31, 2018, respectively, which have been offset with the associated payables under a netting agreement.


(3)	Includes notes with fair value of $9,546 million (carrying amount of $9,235 million) and $9,095 million (carrying amount of $9,095 million) as of June 30, 2019 and December 31, 2018, respectively, which have been offset with the associated receivables under a netting agreement.


7.	LEASES

The Company occupies leased office space and other facilities in many locations under various long-term leases and has entered into numerous leases covering the long-term use of computers and other equipment. The leases, depending on their specific terms, are classified as either operating or finance with the vast majority of leases falling under the operating classification. The leases in the Company’s portfolio have remaining lease terms from less than one year to 30 years, some of which include options to extend the leases for up to 18 years, and some of which include options to terminate the leases within 8 years. An analysis of all economic and non-economic factors associated with leases containing certain options, including factors such as the existence of cancellation penalties, leasehold improvements made to the underlying assets and location of the underlying assets, is conducted to determine whether those leases are reasonably certain to renew, and, hence, should be included in the lease term that is used to establish the right-of-use assets and lease liabilities for those arrangements.

The Company does not have residual guarantees associated with its lessee arrangements, nor are there any restrictions or covenants associated with its lease arrangements.

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Lessee

Supplemental balance sheet information related to leases where the Company is the lessee is included below. Right-of-use assets and lease liabilities are included within “Other assets” and “Other liabilities” respectively.



	June 30, 2019
	(in millions)
Operating Leases:

Right-of-use assets	$	561
Lease liabilities	$	589

Weighted average remaining lease term	6 years
Weighted average discount rate	2.62		%

Maturities of operating lease liabilities are as follows:



	June 30, 2019
	(in millions)
2019 (July — December)	$	85
2020	141
2021	122
2022	88
2023	65
Thereafter	144
Total lease payments	645
Less imputed interest	(56		)
Total	$	589

Lease expense is included in “General and administrative expenses.” The expense was comprised of operating lease costs and short-term lease costs of $35 million and $26 million, respectively, for the three months ended June 30, 2019, and $69 million and $50 million, respectively, for the six months ended June 30, 2019. Short-term lease costs relate to those leases with terms of twelve months or less that do not include an option to purchase the underlying asset that is reasonably certain of exercise.

Lessor

The Company directly owns real estate properties within its investment portfolio. Such real estate is leased to third-parties, with the Company serving as the lessor. The terms of the leases vary depending on property type (e.g., commercial or residential). In most cases, the lessee has an option to renew the lease contract based on market rates but does not have an option to purchase the property. The terms of the leases may also include provisions for the use of common areas. Such non-lease components are not separately accounted for by the Company, as a result of applying the practical expedient discussed in Note 2. Lease income included in “Net investment income” was $50 million and $100 million for the three and six months ended June 30, 2019, respectively.

8. CLOSED BLOCK

On December 18, 2001, the date of demutualization, The Prudential Insurance Company of America (“PICA”) established a closed block for certain in-force participating insurance policies and annuity products, along with corresponding assets used for the payment of benefits and policyholders’ dividends on these products, (collectively the “Closed Block”), and ceased offering these participating products. The recorded assets and liabilities were allocated to the Closed Block at their historical carrying amounts. The Closed Block forms the principal component of the Closed Block division. For more information on the Closed Block, see Note 14 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2018.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

As of June 30, 2019 and December 31, 2018, the Company recognized a policyholder dividend obligation of $2,359 million and $2,252 million, respectively, to Closed Block policyholders for the excess of actual cumulative earnings over 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 $3,201 million and $899 million at June 30, 2019 and December 31, 2018, respectively, to be paid to Closed Block policyholders unless offset by future experience, with a corresponding amount reported in AOCI.

Closed Block liabilities and assets designated to the Closed Block, as well as maximum future earnings to be recognized from these liabilities and assets, are as follows:



	June 30, 2019			December 31, 2018
	(in millions)
Closed Block liabilities
Future policy benefits	$	47,940		$	48,282
Policyholders’ dividends payable	810			812
Policyholders’ dividend obligation	5,560			3,150
Policyholders’ account balances	5,011			5,061
Other Closed Block liabilities	4,282			3,955
Total Closed Block liabilities	63,603			61,260
Closed Block assets
Fixed maturities, available-for-sale, at fair value	40,602			38,538
Fixed maturities, trading, at fair value	236			195
Equity securities, at fair value	2,055			1,784
Commercial mortgage and other loans	8,451			8,782
Policy loans	4,328			4,410
Other invested assets	3,291			3,316
Short-term investments	659			477
Total investments	59,622			57,502
Cash and cash equivalents	633			467
Accrued investment income	460			466
Other Closed Block assets	199			105
Total Closed Block assets	60,914			58,540
Excess of reported Closed Block liabilities over Closed Block assets	2,689			2,720
Portion of above representing accumulated other comprehensive income (loss):
Net unrealized investment gains (losses)	3,156			857
Allocated to policyholder dividend obligation	(3,201		)	(899		)
Future earnings to be recognized from Closed Block assets and Closed Block liabilities	$	2,644		$	2,678

Information regarding the policyholder dividend obligation is as follows:



	Six Months Ended June 30, 2019
	(in millions)
Balance, December 31, 2018	$	3,150
Impact from earnings allocable to policyholder dividend obligation	107
Change in net unrealized investment gains (losses) allocated to policyholder dividend obligation	2,303
Balance, June 30, 2019	$	5,560

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Closed Block revenues and benefits and expenses are as follows for the periods indicated:



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in millions)
Revenues
Premiums	$	581		$	602		$	1,108		$	1,152
Net investment income	576			593			1,141			1,190
Realized investment gains (losses), net	49			110			105			108
Other income (loss)	97			85			325			107
Total Closed Block revenues	1,303			1,390			2,679			2,557
Benefits and Expenses
Policyholders’ benefits	780			778			1,489			1,506
Interest credited to policyholders’ account balances	32			33			64			66
Dividends to policyholders	415			508			968			816
General and administrative expenses	89			92			178			184
Total Closed Block benefits and expenses	1,316			1,411			2,699			2,572
Closed Block revenues, net of Closed Block benefits and expenses, before income taxes	(13		)	(21		)	(20		)	(15		)
Income tax expense (benefit)	(29		)	(36		)	(53		)	(45		)
Closed Block revenues, net of Closed Block benefits and expenses and income taxes	$	16		$	15		$	33		$	30

9. INCOME TAXES

The Company uses a full year projected effective tax rate approach to calculate year-to-date taxes. In addition, certain items impacting total income tax expense are recorded in the periods in which they occur. The projected effective tax rate is the ratio of projected “Total income tax expense” divided by projected “Income before income taxes and equity in earnings of operating joint ventures.” Taxes attributable to operating joint ventures are recorded within “Equity in earnings of operating joint ventures, net of taxes.” The interim period tax expense (or benefit) is the difference between the year-to-date income tax provision and the amounts reported for the previous interim periods of the fiscal year.

The Company’s income tax provision, on a consolidated basis, amounted to an income tax expense of $394 million, or 19.5% of income (loss) before income taxes and equity in earnings of operating joint ventures, in the first six months of 2019, compared to $420 million, or 21.6%, in the first six months of 2018. The Company’s current and prior effective tax rates differed from the U.S. statutory rate of 21% primarily due to non-taxable investment income, tax credits and foreign earnings taxed at higher rates than the U.S. statutory rate. In addition, the first six months of 2018 also includes a $27 million reduction in income tax expense primarily related to refinements of the Company’s provisional estimates related to the U.S. Tax Cuts and Jobs Act of 2017.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

10. SHORT-TERM AND LONG-TERM DEBT

Short-term Debt

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



	June 30, 2019			December 31, 2018
	($ in millions)
Commercial paper:
Prudential Financial	$	25		$	15
Prudential Funding, LLC	820			727
Subtotal commercial paper	845			742
Mortgage Debt(1)	52			53
Current portion of long-term debt(2)	1,756			1,656
Other(3)	6			0
Total short-term debt(4)	$	2,659		$	2,451
Supplemental short-term debt information:
Portion of commercial paper borrowings due overnight	$	220		$	301
Daily average commercial paper outstanding	$	1,676		$	1,554
Weighted average maturity of outstanding commercial paper, in days	11			12
Weighted average interest rate on outstanding commercial paper	2.42		%	1.90		%

__________

(1) Includes $52 million and $53 million of mortgage debt denominated in foreign currency at June 30, 2019 and December 31, 2018, respectively.

(2) Includes $1,003 million and $1,100 million of senior notes at June 30, 2019 and December 31, 2018, respectively, and $253 million and $57 million of mortgage debt that has recourse only to real estate investment property at June 30, 2019 and December 31, 2018, respectively.

(3) Includes $6 million drawn on a revolving line of credit held by a subsidiary at June 30, 2019.

(4) Includes Prudential Financial debt of $1,027 million and $1,115 million at June 30, 2019 and December 31, 2018, respectively.

Prudential Financial and certain subsidiaries have access to external sources of liquidity, including membership in the Federal Home Loan Banks, commercial paper programs and a contingent financing facility in the form of a put option agreement. The Company also maintains syndicated, unsecured committed credit facilities as an alternative source of liquidity. At June 30, 2019, no amounts were drawn on these credit facilities. For additional information on these sources of liquidity, see Note 16 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Long-term Debt

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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	June 30, 2019		December 31, 2018
	June 30, 2019		December 31, 2018
	(in millions)
Fixed-rate obligations:
Surplus notes	$	342	$	341
Surplus notes subject to set-off arrangements(1)	7,035		6,895
Senior notes	9,106		8,774
Mortgage debt(2)	160		237
Floating-rate obligations:
Line of credit	299		0
Surplus notes subject to set-off arrangements(1)	2,200		2,200
Senior notes	29		29
Mortgage debt(3)	333		429
Junior subordinated notes(4)	7,572		7,568
Subtotal	27,076		26,473
Less: assets under set-off arrangements(1)	9,235		9,095
Total long-term debt(5)	$	17,841	$	17,378

__________


(1)	The surplus notes have corresponding assets where rights to set-off exist, thereby reducing the amount of surplus notes included in long-term debt.


(2)	Includes $99 million and $101 million of debt denominated in foreign currency at June 30, 2019 and December 31, 2018, respectively.


(3)	Includes $166 million and $206 million of debt denominated in foreign currency at June 30, 2019 and December 31, 2018, respectively.


(4)	Includes Prudential Financial debt of $7,514 million at June 30, 2019. Also includes subsidiary debt of $58 million denominated in foreign currency at June 30, 2019.


(5)	Includes Prudential Financial debt of $16,475 million and $16,141 million at June 30, 2019 and December 31, 2018, respectively.

At June 30, 2019 and December 31, 2018, the Company was in compliance with all debt covenants related to the borrowings in the table above.

Line of Credit. PGIM entered into a $300 million syndicated credit facility in April 2019 that is secured by certain of PGIM’s fund investments. The facility has a three-year term and extends for additional one-year periods unless terminated. The lenders on the facility have recourse only to the collateral pledged by PGIM. The facility was fully drawn as of June 30, 2019.

Senior Notes. As of June 30, 2019, the outstanding balance of the Company’s senior notes was $10.14 billion, an increase of $0.2 billion from December 31, 2018. The increase was due to the issuance in the first quarter of $1 billion of notes with an interest rate of 4.350% maturing in February 2050, offset by $0.8 billion in debt maturities in the second quarter.

Mortgage Debt. As of June 30, 2019, the Company’s subsidiaries had mortgage debt of $799 million that has recourse only to real estate property held for investment by those subsidiaries. This represents an increase of $23 million from December 31, 2018, due to a $28 million increase from new borrowings, offset by a $5 million decrease from foreign currency exchange rate fluctuations.

11. EMPLOYEE BENEFIT PLANS

Pension and Other Postretirement Plans

The Company has funded and non-funded non-contributory defined benefit pension plans (“Pension Benefits”), 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.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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



	Three Months Ended June 30,
	Pension Benefits						Other Postretirement Benefits
	2019			2018			2019			2018
	(in millions)
Components of net periodic (benefit) cost:
Service cost	$	72		$	79		$	5		$	6
Interest cost	123			112			20			17
Expected return on plan assets	(204		)	(205		)	(23		)	(27		)
Amortization of prior service cost	(1		)	(1		)	1			0
Amortization of actuarial (gain) loss, net	54			54			6			5
Settlements	48			0			0			0
Special termination benefits	1			1			0			0
Net periodic (benefit) cost	$	93		$	40		$	9		$	1

	Six Months Ended June 30,
	Pension Benefits						Other Postretirement Benefits
	2019			2018			2019			2018
	(in millions)
Components of net periodic (benefit) cost:
Service cost	$	145		$	158		$	11		$	12
Interest cost	246			224			39			35
Expected return on plan assets	(408		)	(409		)	(47		)	(54		)
Amortization of prior service cost	(2		)	(2		)	2			0
Amortization of actuarial (gain) loss, net	108			107			12			9
Settlements	48			0			0			0
Special termination benefits	1			1			0			0
Net periodic (benefit) cost	$	138		$	79		$	17		$	2

12. EQUITY

The changes in the number of shares of Common Stock issued, held in treasury and outstanding, are as follows for the periods indicated:



	Common Stock
	Issued	Held In Treasury		Outstanding
	(in millions)
Balance, December 31, 2018	660.1	249.4		410.7
Common Stock issued	0.0	0.0		0.0
Common Stock acquired	0.0	10.4		(10.4	)
Stock-based compensation programs(1)	0.0	(2.7	)	2.7
Balance, June 30, 2019	660.1	257.1		403.0

__________


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

In December 2018, Prudential Financial’s Board of Directors (the “Board”) authorized the Company to repurchase at management’s discretion up to $2.0 billion of its outstanding Common Stock during the period from January 1, 2019 through December 31, 2019. As of June 30, 2019, 10.4 million shares of the Company’s Common Stock were repurchased under this authorization at a total cost of $1.0 billion.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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.

Dividends declared per share of Common Stock are as follows for the periods indicated:



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Dividends declared per share of Common Stock	$	1.00	$	0.90	$	2.00	$	1.80

Accumulated Other Comprehensive Income (Loss)

AOCI represents the cumulative OCI items that are reported separate from net income and detailed on the Unaudited Interim Consolidated Statements of Comprehensive Income. The balance of and changes in each component of AOCI as of and for the six months ended June 30, 2019 and 2018, 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, 2018	$	(564	)	$	14,745		$	(3,275	)	$	10,906
Change in OCI before reclassifications	98			17,296			(39		)	17,355
Amounts reclassified from AOCI	5			(501		)	120			(376		)
Income tax benefit (expense)	8			(3,899		)	(19		)	(3,910		)
Cumulative effect of adoption of ASU 2017-12	0			7			0			7
Balance, June 30, 2019	$	(453	)	$	27,648		$	(3,213	)	$	23,982



	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, 2017	$	(269	)	$	19,968		$	(2,625	)	$	17,074
Change in OCI before reclassifications	(44		)	(7,502		)	15			(7,531		)
Amounts reclassified from AOCI	0			(490		)	114			(376		)
Income tax benefit (expense)	6			1,704			(28		)	1,682
Cumulative effect of adoption of ASU 2016-01	0			(847		)	0			(847		)
Cumulative effect of adoption of ASU 2018-02	(231		)	2,282			(398		)	1,653
Balance, June 30, 2018	$	(538	)	$	15,115		$	(2,922	)	$	11,655

__________


(1)	Includes cash flow hedges of $1,017 million and $811 million as of June 30, 2019 and December 31, 2018, respectively, and $99 million and $(39) million as of June 30, 2018 and December 31, 2017, respectively.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Reclassifications out of Accumulated Other Comprehensive Income (Loss)



	Three Months Ended June 30,						Six Months Ended June 30,						Affected line item in Consolidated Statements of Operations
	2019			2018			2019			2018			Affected line item in Consolidated Statements of Operations
	(in millions)
Amounts reclassified from AOCI(1)(2):
Foreign currency translation adjustment:
Foreign currency translation adjustments	$	0		$	0		$	(5	)	$	0		Realized investment gains (losses), net
Foreign currency translation adjustments	0			0			0			0			Other income (loss)
Total foreign currency translation adjustment	0			0			(5		)	0
Net unrealized investment gains (losses):
Cash flow hedges—Interest rate	0			2			(1		)	2			(3)
Cash flow hedges—Currency	1			3			2			0			(3)
Cash flow hedges—Currency/Interest rate	156			294			171			245			(3)
Net unrealized investment gains (losses) on available-for-sale securities	69			165			329			243
Total net unrealized investment gains (losses)	226			464			501			490			(4)
Amortization of defined benefit pension items:
Prior service cost	0			1			0			2			(5)
Actuarial gain (loss)	(60		)	(59		)	(120		)	(116		)	(5)
Total amortization of defined benefit pension items	(60		)	(58		)	(120		)	(114		)
Total reclassifications for the period	$	166		$	406		$	376		$	376

__________


(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 5 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 11 for information on employee benefit plans.

Net Unrealized Investment Gains (Losses)

Net unrealized investment gains (losses) on securities classified as available-for-sale and certain other invested assets 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 (loss)” 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 (losses), are as follows:

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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



	Net Unrealized Gains (Losses) on Investments			DAC, DSI, VOBA and Reinsurance Recoverables			Future Policy Benefits, Policyholders’ Account Balances and Reinsurance Payables			Policyholders’ Dividends			Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related to Net Unrealized Investment Gains (Losses)
	(in millions)
Balance, December 31, 2018	$	189		$	(1	)	$	4		$	(23	)	$	(61	)	$	108
Net investment gains (losses) on investments arising during the period	118												(27		)	91
Reclassification adjustment for (gains) losses included in net income	(29		)										7			(22		)
Reclassification adjustment for OTTI losses excluded from net income(1)	0												0			0
Impact of net unrealized investment (gains) losses on DAC, DSI, VOBA and reinsurance recoverables				0									0			0
Impact of net unrealized investment (gains) losses on future policy benefits and policyholders’ account balances and reinsurance payables							(4		)				1			(3		)
Impact of net unrealized investment (gains) losses on policyholders’ dividends										(4		)	1			(3		)
Balance, June 30, 2019	$	278		$	(1	)	$	0		$	(27	)	$	(79	)	$	171

__________


(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.

All Other Net Unrealized Investment Gains (Losses) in AOCI



	Net Unrealized Gains (Losses) on Investments(1)			DAC, DSI, VOBA and Reinsurance Recoverables			Future Policy Benefits, Policyholders’ Account Balances and Reinsurance Payables			Policyholders’ Dividends			Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related to Net Unrealized Investment Gains (Losses)
	(in millions)
Balance, December 31, 2018	$	22,531		$	(738	)	$	(791	)	$	(894	)	$	(5,471	)	$	14,637
Net investment gains (losses) on investments arising during the period	21,474												(4,925		)	16,549
Reclassification adjustment for (gains) losses included in net income	(472		)										108			(364		)
Reclassification adjustment for OTTI losses excluded from net income(2)	0												0			0
Impact of net unrealized investment (gains) losses on DAC, DSI, VOBA and reinsurance recoverables				(1,180		)							251			(929		)
Impact of net unrealized investment (gains) losses on future policy benefits and policyholders’ account balances and reinsurance payables							(798		)				201			(597		)
Impact of net unrealized investment (gains) losses on policyholders’ dividends										(2,312		)	486			(1,826		)
Cumulative effect of adoption of ASU 2017-12	9												(2		)	7
Balance, June 30, 2019	$	43,542		$	(1,918	)	$	(1,589	)	$	(3,206	)	$	(9,352	)	$	27,477

__________


(1)	Includes cash flow hedges. See Note 5 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.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

13. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of the basic and diluted per share computations of Common Stock based on the consolidated earnings of Prudential Financial for the periods indicated, is as follows:



	Three Months Ended June 30,
	2019					2018
	Income		Weighted Average Shares	Per Share Amount		Income		Weighted Average Shares	Per Share Amount
	(in millions, except per share amounts)
Basic earnings per share
Net income (loss)	$	738				$	200
Less: Income (loss) attributable to noncontrolling interests	30					3
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards	8					4
Net income (loss) attributable to Prudential Financial available to holders of Common Stock	$	700	405.3	$	1.73	$	193	419.5	$	0.46
Effect of dilutive securities and compensation programs
Add: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Basic	$	8				$	4
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Diluted	8					4
Stock options			1.3					1.5
Deferred and long-term compensation programs			1.1					1.1
Exchangeable Surplus Notes	6		6.2			6		5.9
Diluted earnings per share
Net income (loss) attributable to Prudential Financial available to holders of Common Stock	$	706	413.9	$	1.71	$	199	428.0	$	0.46

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30,
	2019					2018
	Income		Weighted Average Shares	Per Share Amount		Income		Weighted Average Shares	Per Share Amount
	(in millions, except per share amounts)
Basic earnings per share
Net income (loss)	$	1,675				$	1,564
Less: Income (loss) attributable to noncontrolling interests	35					4
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards	18					18
Net income (loss) attributable to Prudential Financial available to holders of Common Stock	$	1,622	407.3	$	3.98	$	1,542	420.8	$	3.66
Effect of dilutive securities and compensation programs
Add: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Basic	$	18				$	18
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Diluted	18					18
Stock options			1.2					1.7
Deferred and long-term compensation programs			1.1					1.1
Exchangeable Surplus Notes	11		6.2			11		5.9
Diluted earnings per share
Net income (loss) attributable to Prudential Financial available to holders of Common Stock	$	1,633	415.8	$	3.93	$	1,553	429.5	$	3.62

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 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 net income available to holders of Common Stock, 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 a net loss available to holders of Common Stock, undistributed earnings are not allocated to participating securities and the denominator excludes the dilutive impact of these securities as they do not share in the losses of the Company. Undistributed earnings allocated to participating unvested share-based payment awards for the three months ended June 30, 2019 and 2018, as applicable, were based on 4.5 million and 4.9 million of such awards, respectively, and for the six months ended June 30, 2019 and 2018, as applicable, were based on 4.6 million and 4.9 million of such awards, respectively, 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 diluted earnings per share. Stock options are considered antidilutive based on application of the treasury stock method or in the event of a net loss available to holders of Common Stock. Shares related to deferred and long-term compensation programs are considered antidilutive in the event of a net loss available to holders of Common Stock. For the periods indicated, 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, are as follows:

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30,
	2019			2018
	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	0.9	$	105.95	0.8	$	108.61
Antidilutive stock options due to net loss available to holders of Common Stock	0.0			0.0
Antidilutive shares based on application of the treasury stock method	0.0			0.0
Antidilutive shares due to net loss available to holders of Common Stock	0.0			0.0
Total antidilutive stock options and shares	0.9			0.8



	Six Months Ended June 30,
	2019			2018
	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	1.0	$	104.57	0.5	$	108.35
Antidilutive stock options due to net loss available to holders of Common Stock	0.0			0.0
Antidilutive shares based on application of the treasury stock method	0.0			0.0
Antidilutive shares due to net loss available to holders of Common Stock	0.0			0.0
Total antidilutive stock options and shares	1.0			0.5

In September 2009, the Company issued $500 million of surplus notes with an interest rate of 5.36% per annum which were exchangeable at the option of the note holders for shares of Common Stock. As of June 30, 2019, the exchange rate for the notes was 12.3877 shares of Common Stock per each $1,000 principal amount of surplus notes, which is equivalent to approximately 6.2 million shares and an exchange price per share of Common Stock of $80.73. 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 the related interest expense, net of tax, is excluded from the numerator, if the overall effect is dilutive. In July 2019, the note holders delivered notice to the Company indicating their intention to exercise the exchange option. In August 2019, as a result of the note holders’ exercise of the exchange option, the Company issued approximately 6.2 million shares of Common Stock at an exchange rate equal to 12.3877 shares of Common Stock per each $1,000 principal amount of surplus notes. The Company’s obligations under the surplus notes are now satisfied.

14. SEGMENT INFORMATION

Segments

The Company’s principal operations are comprised of five divisions, which together encompass seven segments, and its Corporate and Other operations. The PGIM division consists of the PGIM segment. The U.S. Workplace Solutions division consists of the Retirement and Group Insurance segments. The U.S. Individual Solutions division consists of the Individual Annuities and Individual Life segments. The Company also collectively refers to the U.S. Workplace Solutions division and the U.S. Individual Solutions division as the U.S. Financial Wellness businesses. The International Insurance division consists of the International Insurance segment. The Closed Block division consists of the Closed Block segment. The Closed Block division is accounted for as a divested business that is reported separately from the Divested and Run-off Businesses that are included in Corporate and Other operations. Divested and Run-off Businesses are comprised of businesses that have been, or will be, sold or exited, including businesses that have been placed in wind down status that do not qualify for “discontinued operations” accounting treatment under U.S. GAAP. The Company’s Corporate and Other operations include corporate items and initiatives that are not allocated to business segments and businesses that have been or will be divested or placed in run-off, excluding the Closed Black division.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Adjusted Operating Income

The Company analyzes the operating performance of each segment using “adjusted operating income.” Adjusted operating income does not equate to “Income (loss) before income taxes and equity in earnings of operating joint ventures” or “Net income (loss)” as determined in accordance with U.S. GAAP but is the measure of segment profit or loss used by the Company’s chief operating decision maker 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) before income taxes and equity in earnings of operating joint ventures” for the following items:


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


•	charges related to realized investment gains (losses), net;


•	market experience updates;


•	net investment gains (losses) on assets supporting experience-rated contractholder liabilities and changes in experience-rated contractholder liabilities due to asset value changes;


•	divested and run-off businesses; 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. The Company, however, 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 its businesses. For more information on these reconciling items, see Note 21 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The Company has historically recognized the immediate impacts from changes in current market conditions on estimates of profitability in current period adjusted operating income. Beginning with the second quarter of 2019, these impacts are excluded from adjusted operating income which the Company believes enhances the understanding of underlying performance trends. These amounts represent the impact of those changes on DAC and other costs and reserves, primarily resulting from variable annuity and variable and universal life products.

Reconciliation of adjusted operating income to net income (loss)

The table below reconciles “Adjusted operating income before income taxes” to “Income (loss) before income taxes and equity in earnings of operating joint ventures”:

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in millions)
Adjusted operating income before income taxes by segment:
PGIM	$	264		$	254		$	478		$	486
Total PGIM division	264			254			478			486
Retirement	467			277			718			594
Group Insurance	81			82			134			137
Total U.S. Workplace Solutions division	548			359			852			731
Individual Annuities(1)	462			507			934			1,026
Individual Life	(135		)	43			(30		)	79
Total U.S. Individual Solutions division	327			550			904			1,105
International Insurance	849			784			1,771			1,640
Total International Insurance division	849			784			1,771			1,640
Corporate and Other operations	(335		)	(286		)	(747		)	(580		)
Total Corporate and Other	(335		)	(286		)	(747		)	(580		)
Total segment adjusted operating income before income taxes	1,653			1,661			3,258			3,382
Reconciling items:
Realized investment gains (losses), net, and related adjustments	(548		)	393			(1,211		)	480
Charges related to realized investment gains (losses), net	(82		)	(116		)	(57		)	(139		)
Market experience updates(2)	(208		)	0			(208		)	0
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net	287			(193		)	741			(596		)
Change in experience-rated contractholder liabilities due to asset value changes	(313		)	85			(716		)	503
Divested and Run-off businesses:
Closed Block division	(21		)	(31		)	(40		)	(40		)
Other Divested and Run-off businesses	112			(1,526		)	286			(1,598		)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests	(4		)	(23		)	(37		)	(49		)
Consolidated income (loss) before income taxes and equity in earnings of operating joint ventures	$	876		$	250		$	2,016		$	1,943

__________


(1)	Individual Annuities segment results reflect DAC 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.


(2)	Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. The Company has historically recognized these impacts in adjusted operating income.

Reconciliation of selected financial information

The table below presents total revenues and assets for the Company’s reportable segments and its Corporate and Other operations for the periods and as of the dates indicated:

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Revenues												Total Assets
	Three Months Ended June 30,						Six Months Ended June 30,						June 30, 2019		December 31, 2018
	2019			2018			2019			2018
	(in millions)
PGIM	$	926		$	816		$	1,796		$	1,642		$	47,681	$	47,690
Total PGIM division	926			816			1,796			1,642			47,681		47,690
Retirement	3,586			2,988			6,225			5,077			187,907		175,525
Group Insurance	1,461			1,424			2,902			2,840			43,699		41,727
Total U.S. Workplace Solutions division	5,047			4,412			9,127			7,917			231,606		217,252
Individual Annuities	1,288			1,266			2,523			2,518			184,220		167,899
Individual Life	1,508			1,451			2,990			2,876			91,245		83,739
Total U.S. Individual Solutions division	2,796			2,717			5,513			5,394			275,465		251,638
International Insurance	5,501			5,288			11,653			11,328			238,608		222,633
Total International Insurance division	5,501			5,288			11,653			11,328			238,608		222,633
Corporate and Other operations	(164		)	(190		)	(335		)	(363		)	19,053		16,826
Total Corporate and Other	(164		)	(190		)	(335		)	(363		)	19,053		16,826
Total	14,106			13,043			27,754			25,918			812,413		756,039
Reconciling items:
Realized investment gains (losses), net, and related adjustments	(548		)	393			(1,211		)	480
Charges related to realized investment gains (losses), net	(54		)	(92		)	(126		)	(163		)
Market experience updates(1)	(7		)	0			(7		)	0
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net	287			(193		)	741			(596		)
Divested and Run-off businesses:
Closed Block division	1,301			1,388			2,675			2,551			61,412		59,039
Other Divested and Run-off businesses	336			143			724			275
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests	(33		)	(27		)	(71		)	(53		)
Total per Unaudited Interim Consolidated Financial Statements	$	15,388		$	14,655		$	30,479		$	28,412		$	873,825	$	815,078

__________


(1)	Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. The Company has historically recognized these impacts in adjusted operating income.

Intersegment revenues

Management has determined the intersegment revenues with reference to market rates. Intersegment revenues are eliminated in consolidation in Corporate and Other operations. The PGIM segment revenues include intersegment revenues, primarily consisting of asset-based management and administration fees, as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(in millions)
PGIM segment intersegment revenues	$	194	$	185	$	374	$	369

Segments may also enter into internal derivative contracts with other segments. For adjusted operating income, each segment accounts for the internal derivative results consistent with the manner in which that segment accounts for other similar external derivatives.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Asset management and service fees

The table below presents asset management and service fees, predominantly related to investment management activities, for the periods indicated:



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(in millions)

Asset-based management fees	$	872	$	856	$	1,715	$	1,717
Performance-based incentive fees	62		6		98		11
Other fees	149		148		286		308
Total asset management and service fees	$	1,083	$	1,010	$	2,099	$	2,036

15. COMMITMENTS AND CONTINGENT LIABILITIES

Commitments and Guarantees

Commercial Mortgage Loan Commitments



	June 30, 2019		December 31, 2018
	(in millions)
Total outstanding mortgage loan commitments	$	2,293	$	3,299
Portion of commitment where prearrangement to sell to investor exists	$	538	$	1,490

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)



	June 30, 2019		December 31, 2018
	(in millions)
Expected to be funded from the general account and other operations outside the separate accounts	$	7,133	$	6,941
Expected to be funded from separate accounts	$	402	$	147

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.

Indemnification of Securities Lending and Securities Repurchase Transactions



	June 30, 2019		December 31, 2018
	(in millions)
Indemnification provided to certain clients for securities lending and securities repurchase transactions(1)	$	6,520	$	5,399
Fair value of related collateral associated with above indemnifications(1)	$	6,650	$	5,503
Accrued liability associated with guarantee	$	0	$	0

__________


(1)	As of June 30, 2019, indemnification provided to certain clients and fair value of related collateral associated with such indemnification include $64 million and $63 million, respectively, related to securities repurchase transactions.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

In the normal course of business, the Company may facilitate securities lending or securities repurchase transactions on behalf of certain client accounts (collectively, “the accounts”). In certain of these arrangements, the Company has provided an indemnification to the accounts to hold them harmless against losses caused by counterparty (i.e., borrower) defaults associated with such transactions facilitated by the Company. In securities lending transactions, collateral is provided by the counterparty to the accounts at the inception of the transaction in an amount at least equal to 102% of the fair value of the loaned securities and the collateral is maintained daily to equal at least 102% of the fair value of the loaned securities. In securities repurchase transactions, collateral is provided by the counterparty to the accounts at the inception of the transaction in an amount at least equal to 95% of the fair value of the securities subject to repurchase and the collateral is maintained daily to equal at least 95% of the fair value of the securities subject to repurchase. The Company is only at risk if the counterparty to the transaction defaults and the value of the collateral held is less than the value of the securities loaned to, or subject to repurchase from, such counterparty. The Company believes the possibility of any payments under these indemnities is remote.

Credit Derivatives Written

As discussed further in Note 5, 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



	June 30, 2019		December 31, 2018
	(in millions)
Guaranteed value of third-parties’ assets	$	80,337	$	79,215
Fair value of collateral supporting these assets	$	81,338	$	77,897
Asset (liability) associated with guarantee, carried at fair value	$	1	$	2

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 Unaudited Interim Consolidated Statements of Financial Position.

Indemnification of Serviced Mortgage Loans



	June 30, 2019		December 31, 2018
	(in millions)
Maximum exposure under indemnification agreements for mortgage loans serviced by the Company	$	1,980	$	1,828
First-loss exposure portion of above	$	584	$	543
Accrued liability associated with guarantees	$	18	$	17

As part of the commercial mortgage activities of the Company’s PGIM 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 determines the liability related to this exposure using historical loss experience, and the size and remaining life of the asset. The Company serviced $15,560 million and $14,335 million of mortgages subject to these loss-sharing arrangements as of June 30, 2019 and December 31, 2018, respectively, all of which are collateralized by first priority liens on the underlying multi-family residential properties. As of June 30, 2019, these mortgages had a weighted-average debt service coverage ratio of 1.89 times and a weighted-average loan-to-value ratio of 61%. As of December 31, 2018, these mortgages had a weighted average debt service coverage ratio of 1.83 times and a weighted-average loan-to-value ratio of 62%. The Company had no losses related to indemnifications that were settled for both the six months ended June 30, 2019 and 2018.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Other Guarantees



	June 30, 2019		December 31, 2018
	(in millions)
Other guarantees where amount can be determined	$	55	$	77
Accrued liability for other guarantees and indemnifications	$	0	$	0

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 $12 million and $13 million as of June 30, 2019 and December 31, 2018, 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.

Contingent Liabilities

On an ongoing basis, the Company and its regulators review its operations including, but not limited to, sales and other customer interface procedures and practices, and procedures for meeting obligations to its customers and other parties. These reviews may result in the modification or enhancement of processes or the imposition of other action plans, including concerning management oversight, sales and other customer interface procedures and practices, and the timing or computation of payments to customers and other parties. In certain cases, if appropriate, the Company may offer customers or other parties 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 potentially material, is disclosed, including matters discussed below. The Company estimates that as of June 30, 2019, 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 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.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The following discussion of litigation and regulatory matters provides an update of those matters discussed in Note 22 to the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, and should be read in conjunction with the complete descriptions provided in the Form 10-K.

Individual Annuities, Individual Life and Group Insurance

Huffman v. The Prudential Insurance Company of America

In April 2019, the court entered a Final Judgment and Order of Dismissal. This matter is now closed.

Escheatment Litigation

Total Asset Recovery Services, LLC v. MetLife, Inc., et al., Prudential Financial, Inc., The Prudential Insurance Company of America, and Prudential Insurance Agency, LLC

In April 2019, defendants’ motion to dismiss the Second Amended Complaint was granted and plaintiff subsequently filed a Notice of Appeal with the New York State Supreme Court, First Department.

Residential Mortgage-Backed Securities (“RMBS”) Trustee Litigation

PICA et al. v. HSBC, et al.

In May 2019, the court dismissed the case with prejudice. This matter is now closed.

PICA et al. v. U.S. Bank N.A.

In April 2019, a decision and order was issued dismissing plaintiffs’ state court action with prejudice.

PICA et al. v. Wells Fargo Bank, et al.

In May 2019, the state court entered an Order and Final Judgment approving the class action settlement and dismissing the case with prejudice.

LIBOR Litigation

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.

In June 2019, the court issued two orders approving stipulations dismissing with prejudice Prudential’s claims against Citigroup Inc., Citibank, N.A., Citigroup Funding Inc., and Citigroup Global Markets Inc.

Regulatory Matters

Securities Lending and Foreign Tax Reclaim Matter

In 2016, the Company self-reported to the SEC and the U.S. Department of Labor (“DOL”), and notified other regulators, that in some cases it failed to maximize securities lending income for the benefit of certain separate account investments due to a long-standing restriction benefiting the Company that limited the availability of loanable securities. The Company has removed the restriction and implemented a remediation plan for the benefit of customers. As part of the Company’s review of this matter, in 2018 it further self-reported to the SEC, and notified other regulators, that in some cases it failed to timely process foreign tax reclaims for the separate account investments. The Company has corrected the foreign tax reclaim process and has implemented a remediation plan for the benefit of customers.

The DOL’s review of the securities lending matter is closed. The Company is cooperating with the SEC in its review of the securities lending and foreign tax reclaim matters (which includes a review of the remediation plans) and has entered into discussions with the SEC staff regarding a possible settlement of both matters that would potentially involve charges under the Investment Advisers Act and financial remedies. The Company cannot predict the outcome of the discussions with the SEC regarding these matters.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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

TABLE OF CONTENTS



	Page
Overview	73
Regulatory Developments	73
Impact of a Low Interest Rate Environment	73
Results of Operations	77
Consolidated Results of Operations	77
Segment Results of Operations	78
Segment Measures	81
Impact of Foreign Currency Exchange Rates	82
Accounting Policies & Pronouncements	85
Results of Operations by Segment	86
PGIM	86
Retirement	91
Group Insurance	93
Individual Annuities	96
Individual Life	101
International Insurance	103
Corporate and Other	108
Divested and Run-off Businesses	108
Closed Block Division	109
Income Taxes	110
Experience-Rated Contractholder Liabilities, Assets Supporting Experience-Rated Contractholder Liabilities and Other Related Investments	111
Valuation of Assets and Liabilities	112
General Account Investments	115
Liquidity and Capital Resources	132
Ratings	142
Off-Balance Sheet Arrangements	142

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) addresses the consolidated financial condition of Prudential Financial, Inc. (“Prudential,” “Prudential Financial,” “PFI,” or “the Company”) as of June 30, 2019, compared with December 31, 2018, and its consolidated results of operations for the three and six months ended June 30, 2019 and 2018. 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, 2018, 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.

Table of Contents

Overview

Prudential Financial, a financial services leader with approximately $1.497 trillion of assets under management as of June 30, 2019, has operations primarily in the United States of America (“U.S.”), 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.

Our principal operations are comprised of five divisions, which together encompass seven segments, and our Corporate and Other operations. The PGIM division is comprised of the PGIM segment, our global investment management businesses. The U.S. Workplace Solutions division consists of our Retirement and Group Insurance segments, and the U.S. Individual Solutions division consists of our Individual Annuities and Individual Life segments. We also collectively refer to the U.S. Workplace Solutions division and the U.S. Individual Solutions division as our U.S. Financial Wellness businesses, as described further below. The International Insurance division consists of our International Insurance segment. The Closed Block division consists of our Closed Block segment. The Closed Block division is accounted for as a divested business that is reported separately from the Divested and Run-off Businesses that are included in Corporate and Other operations. Divested and Run-off Businesses are comprised of businesses that have been, or will be, sold or exited, including businesses that have been placed in wind down status that do not qualify for “discontinued operations” accounting treatment under generally accepted accounting principles in the United States of America (“U.S. GAAP”). Our Corporate and Other operations include corporate items and initiatives that are not allocated to business segments and businesses that have been or will be divested or placed in run-off, excluding the Closed Block division.

Our strategy centers on our mix of high-quality protection, retirement and investment management businesses which creates growth potential due to earnings diversification and the opportunity to provide customers with integrated cross-business solutions, as well as capital benefits from a balanced risk profile. We are well positioned to meet the needs of customers and tap into significant market opportunities through our U.S. Financial Wellness businesses (represented by our U.S. Workplace Solutions and U.S. Individual Solutions Divisions), PGIM (our investment management business) and our International Insurance business.

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.

U.S. Financial Wellness

Each component of our U.S. Financial Wellness businesses operates at scale, and together, they leverage our broad set of capabilities to meet the evolving needs of customers.

We see an opportunity to address the evolving needs of individual customers, workplace clients, and society at large through our financial wellness solutions. We possess the key components to execute on this strategy, including workplace solutions covering approximately twenty million individuals; solutions that cover protection, retirement, savings, income, and investment needs; and a customer-centric approach with different ways to engage with our clients through multiple channels such as meeting with one of our financial advisors, calling or video-conferencing with an advisor, or interacting with us in a purely digital manner. Our goal is to meet our customers’ needs when, where and how they want. By leveraging technology and our scale, we aim to significantly expand our presence in the market, build deeper and longer-lasting relationships with customers and clients, and make a meaningful difference in the financial wellness of their lives.

We are uniquely positioned to capture this opportunity, helping more customers and clients and driving long-term sustainable growth. We are thus accelerating the transformation of this strategy, to increase our competitive advantage by enhancing the experience of our customers and enabling the capabilities of our businesses, to more rapidly realize the benefits of our margins and growth rate. The catalyst for this transformation is our financial wellness initiative, and at the center of it, is improving the customer experience by re-imagining our end-to-end operations, leveraging state-of-the-art technology, and investing in our talent.

In 2019, we began implementing a multi-year plan of programs that span across our U.S. Financial Wellness businesses and the functional areas that support those businesses. In order to implement these programs on an accelerated basis, we expect to incur significant expenses related to technology, systems, severance, reskilling and related charges. Over the next several years, we also expect to see significant expense efficiencies including from our streamlined technology-enabled processes. In the longer-term, the higher quality customer experience should accelerate revenue growth, resulting from increased revenues in our Workplace Solutions businesses due to the competitiveness of our financial wellness platform and the increased utilization of the existing employer-offered benefits by our clients’ employees, and increased revenues in our Individual Solutions businesses, due to our ability to provide additional solutions to our clients’ employees and to other retail customers.

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Business Update

We regularly review our existing businesses and may seek to deploy capital in support of our strategy or to exit an operation if it is determined that it no longer aligns with our broader strategy. We continue to invest in our businesses and assess acquisition opportunities to build scale or complement our businesses. For additional information on our strategic acquisitions and dispositions, see “—Results of Operations by Segment” below.

Regulatory Developments

Japan Corporate Product Tax Rules

In July 2019, the Japan National Tax Authority issued rules limiting policyholders’ tax deductions for premiums paid on certain corporate insurance products. The Company and other life insurers in Japan suspended sales of these products earlier in 2019 in anticipation of the new rules. The Company is currently evaluating the rules’ impact on the covered products. For additional information on sales within our international insurance operations, see “—Results of Operations by Segment—International Insurance Division—International Insurance” below.

SEC Best Interest Regulation

In June 2019, the SEC adopted a package of rulemakings and interpretative guidance that, among other things, requires broker-dealers to act in the best interest of retail customers when recommending securities transactions or investment strategies to them. The guidance also clarifies the SEC’s views of the fiduciary duty that investment advisers owe to their clients. The new best interest standards will become effective on June 30, 2020. We are evaluating the impact of the new standards and believe that they will apply to recommendations to purchase certain products offered by our PGIM, Retirement, Individual Annuities and Individual Life segments, and will result in increased compliance costs, in particular in our Prudential Advisors distribution system, which we include in the results of our Individual Life segment.

SECURE Act

In May 2019, the U.S. House of Representatives passed the Setting Every Community up for Retirement Enhancement (“SECURE”) Act. If enacted into law in its current form, the SECURE Act would help promote retirement plan coverage by expanding access to and use of Multiple Employer Plans; facilitate access to lifetime income disclosures for plan participants to better understand how their retirement savings translate into monthly lifetime income in retirement; improve upon the current annuity selection safe harbor; and provide lifetime income portability. We cannot predict whether the SECURE Act will ultimately be adopted, or its impact on our businesses.

For additional information on the potential impacts of regulation on the Company, see “Business—Regulation” and “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.

Impact of a Low Interest Rate Environment

As a global financial services company, market interest rates are a key driver of our results of operations and financial condition. Changes in interest rates can affect our results of operations and/or our financial condition in several ways, including favorable or adverse impacts to:


•	investment-related activity, including: investment income returns, net interest margins, net investment spread results, new money rates, mortgage loan prepayments and bond redemptions;


•	insurance reserve levels, market experience true-ups and amortization of both deferred policy acquisition costs (“DAC”) and value of business acquired (“VOBA”);


•	customer account values, including their impact on fee income;


•	fair value of, and possible impairments on, intangible assets such as goodwill;


•	product offerings, design features, crediting rates and sales mix; and


•	policyholder behavior, including surrender or withdrawal activity.

For more information on interest rate risks, see “Risk Factors—Market Risk” included in our Annual Report on Form 10-K for the year ended December 31, 2018.

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See below for discussions related to the current interest rate environments in our two largest markets, the U.S. and Japan; the composition of our insurance liabilities and policyholder account balances; and the hypothetical impacts to our results if these interest rate environments are sustained.

U.S. Operations excluding the Closed Block Division

Interest rates in the U.S. have experienced a period of historically low levels in large part due to Federal Reserve efforts to assist with the economic recovery subsequent to the financial crisis of 2008. While market conditions and events make uncertain the timing, amount and impact of any monetary policy decisions by the Federal Reserve, changes in interest rates may impact our reinvestment yields, primarily for our investments in fixed maturity securities and commercial mortgage loans. As interest rates rise, our reinvestment yield may exceed the overall portfolio yield resulting in a favorable impact to earnings. Conversely, if interest rates were to decline, our reinvestment yield may be below our overall portfolio yield, resulting in an unfavorable impact to earnings.

For the general account supporting our U.S. Individual Solutions division, U.S. Workplace Solutions division, PGIM division and our Corporate and Other operations, we estimate annual principal payments and prepayments that we would be required to reinvest to be approximately 6.1% of the fixed maturity security and commercial mortgage loan portfolios through 2020. The portion of the general account attributable to these operations has approximately $214 billion of such assets (based on net carrying value) as of June 30, 2019. The average portfolio yield for fixed maturity securities and commercial mortgage loans is approximately 4.3% as of June 30, 2019.

Included in the $214 billion of fixed maturity securities and commercial mortgage loans are approximately $136 billion that are subject to call or redemption features at the issuer’s option and have a weighted average interest rate of approximately 4%. Of this $136 billion, approximately 58% contain provisions for prepayment premiums. If we reinvest scheduled payments or prepayments (not subject to a prepayment fee) at rates below the current portfolio yield, including in some cases at rates below those guaranteed under our insurance contracts, future operating results will be impacted 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.

The following table sets forth the insurance liabilities and policyholder account balances of our U.S. Operations excluding the Closed Block Division, by type, for the date indicated:



	As of June 30, 2019
	(in billions)
Long-duration insurance products with fixed and guaranteed terms	$	129
Contracts with adjustable crediting rates subject to guaranteed minimums	57
Participating contracts where investment income risk ultimately accrues to contractholders	16
Total	$	202

The $129 billion above relates to 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.

The $57 billion above relates to contracts with crediting rates that may be adjusted over the life of the contract, subject to guaranteed minimums. 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. 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 June 30, 2019, and the respective guaranteed minimums.

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	Account Values with Adjustable Crediting Rates Subject to Guaranteed Minimums:
	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%	$	0.6		$	1.3		$	0.4		$	0.1		$	0.0		$	2.4
1.00% - 1.99%	1.0			3.9			11.8			1.6			0.8			19.1
2.00% - 2.99%	1.3			0.8			1.9			1.1			0.9			6.0
3.00% - 4.00%	26.4			2.0			0.1			0.2			0.0			28.7
Greater than 4.00%	0.9			0.0			0.0			0.0			0.0			0.9
Total(1)	$	30.2		$	8.0		$	14.2		$	3.0		$	1.7		$	57.1
Percentage of total	53		%	14		%	25		%	5		%	3		%	100		%

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(1)	Includes approximately $0.74 billion related to contracts that impose a market value adjustment if the invested amount is not held to maturity.

The remaining $16 billion of insurance liabilities and policyholder account balances in these operations relates to 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 return earned on the related assets.

Assuming a hypothetical scenario where the average 10-year U.S. Treasury rate is 2.05%, which is reasonably consistent with the current rate, for the period from July 1, 2019 through December 31, 2020, and credit spreads remain unchanged from levels as of June 30, 2019, we estimate that the impact to pre-tax adjusted operating income of reinvesting in such an environment, compared to the yields on scheduled maturities and expected prepayments, would not be significant for the period from July 1, 2019 through December 31, 2020.

In order to mitigate the unfavorable impact that a low interest rate environment has on our net interest margins, we employ a proactive asset/liability management program, which includes strategic asset allocation and hedging 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 the interest rate risk associated with our 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.

Closed Block Division

Substantially all of the $60 billion of general account assets in the Closed Block division support obligations and liabilities relating to the Closed Block policies only. See Note 8 to the Unaudited Interim Consolidated Financial Statements for further information on the Closed Block.

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International Insurance Operations

While our international insurance operations have experienced a low interest rate environment for many years, the current reinvestment yields for certain blocks of business in our international insurance operations are generally lower than the current portfolio yield supporting these blocks of business. In recent years, the Bank of Japan’s monetary policy has resulted in even lower and, at times, negative yields for certain tenors of government bonds. Our international insurance operations employ a proactive asset/liability management program in order to mitigate, to the extent possible, the unfavorable impact that the current interest rate environment has on our net interest margins. In conjunction with this program, we have not purchased negative yielding assets to support the portfolio and we continue to purchase long-term bonds with tenors of 30 years or greater. Additionally, our diverse product portfolio in terms of currency mix and premium payment structure allows us to further mitigate the negative impact from this low interest rate environment. We regularly examine our product offerings and their profitability. As a result, we have repriced certain products, adjusted commissions for certain products and have discontinued sales of other products that do not meet our profit expectations. The impact of these actions, coupled with the strengthening of the yen against the U.S. dollar and introduction of certain new products, has resulted in an increase in sales of U.S. dollar-denominated products relative to products denominated in other currencies. For additional information on sales within our international insurance operations, see “—International Insurance Division—International Insurance—Sales Results,” below.

The following table sets forth the insurance liabilities and policyholder account balances of our Japanese operations, by type, for the date indicated:



	As of June 30, 2019
	(in billions)
Long-duration insurance products with fixed and guaranteed terms	$	125
Contracts with a market value adjustment if invested amount is not held to maturity	26
Contracts with adjustable crediting rates subject to guaranteed minimums	11
Total	$	162

The $125 billion above is 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 current portfolio yields. The remaining insurance liabilities and policyholder account balances include $26 billion related to contracts that impose a market value adjustment if the invested amount is not held to maturity and $11 billion related to contracts with crediting rates that may be adjusted over the life of the contract, subject to guaranteed minimums. Most of the current crediting rates on these contracts, however, are at or near contractual minimums. Although we have the ability in some cases to lower crediting rates for those contracts that are above guaranteed minimum crediting rates, the majority of this business has interest crediting rates that are determined by formula.

Assuming a hypothetical scenario within our Japanese operations where new money yields would be 25 bps lower than projected, and applying these lower new money yields to annualized investment of renewal premiums, proceeds from investment disposition and reinvestment of investment income, we estimate that as of June 30, 2019 the unfavorable impact would reduce adjusted operating income over the next twelve months by approximately $15 million. This hypothetical scenario excludes first-year premium, single pay premium, multi-currency fixed annuity cash flows, any potential benefit from repricing products and any impact from other factors, including but not limited to new business, contractholder behavior, changes in competitive conditions, changes in capital markets and the effect of derivative instruments.

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Results of Operations

Consolidated Results of Operations

The following table summarizes net income (loss) for the periods presented.



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(in millions)
Revenues	$	15,388	$	14,655	$	30,479	$	28,412
Benefits and expenses	14,512		14,405		28,463		26,469
Income (loss) before income taxes and equity in earnings of operating joint ventures	876		250		2,016		1,943
Income tax expense (benefit)	162		68		394		420
Income (loss) before equity in earnings of operating joint ventures	714		182		1,622		1,523
Equity in earnings of operating joint ventures, net of taxes	24		18		53		41
Net income (loss)	738		200		1,675		1,564
Less: Income attributable to noncontrolling interests	30		3		35		4
Net income (loss) attributable to Prudential Financial, Inc.	$	708	$	197	$	1,640	$	1,560

Three Month Comparison. The $511 million increase in “Net income (loss) attributable to Prudential Financial, Inc.” for the second quarter of 2019 compared to the second quarter of 2018 reflected the following notable items:

•

$1,624 million favorable variance, on a pre-tax basis, from adjustments to reserves as well as DAC and other costs, reflecting the impact of our annual reviews and update of assumptions and other refinements. This excludes the impact associated with the variable annuity hedging program discussed below (see “—Results of Operations by Segment—U.S. Financial Wellness Businesses - U.S. Individual Solutions Division—Individual Annuities” for additional information); and


•	$205 million net favorable variance, on a pre-tax basis, primarily from income in the current period from our Divested and Run-off Businesses compared to a loss in the prior period, excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above.

Partially offsetting these increases in “Net income (loss) attributable to Prudential Financial, Inc.” were the following items:


•	$463 million unfavorable variance from net pre-tax realized investment gains and losses for PFI excluding the Closed Block division, and excluding the impact of the hedging program associated with certain variable annuities discussed below (see “—General Account Investments” for additional information);

•

$382 million unfavorable variance, on a pre-tax basis, 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 by Segment—U.S. Financial Wellness Businesses - U.S. Individual Solutions Division—Individual Annuities—Variable Annuity Risks and Risk Mitigants” for additional information); and


•	$208 million unfavorable variance, on a pre-tax basis, driven by market experience updates.

Six Month Comparison. The $80 million increase in “Net income (loss) attributable to Prudential Financial, Inc.” for the first six months of 2019 compared to the first six months of 2018 reflected the following notable items:

•


•	$425 million net favorable variance, on a pre-tax basis, primarily from income in the current period from our Divested and Run-off Businesses compared to a loss in the prior period, excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above.

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Partially offsetting these increases in “Net income (loss) attributable to Prudential Financial, Inc.” were the following items:

•

$1,317 million unfavorable variance, on a pre-tax basis, 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 by Segment—U.S. Financial Wellness Businesses - U.S. Individual Solutions Division—Individual Annuities—Variable Annuity Risks and Risk Mitigants” for additional information); and


•	$510 million unfavorable variance from net pre-tax realized investment gains and losses for PFI excluding the Closed Block division, and excluding the impact of the hedging program associated with certain variable annuities discussed above (see “—General Account Investments” for additional information).

Segment Results of Operations

We analyze the performance of our segments and Corporate and Other operations using a measure of segment profitability called adjusted operating income. See “—Segment Measures” for a discussion of adjusted operating income and its use as a measure of segment operating performance.

Annual Reviews and Update of Assumptions and Other Refinements

Annually during the second quarter of each year, we perform a comprehensive review of actuarial assumptions utilized in measuring insurance liabilities and expected gross profits used in amortizing deferred acquisition costs, sales inducement costs, unearned revenue reserves and value of business acquired. The assumptions reviewed include, but are not necessarily limited to, inputs such as mortality, morbidity, contractholder behavior and expected future rates of returns on investments. As part of this review, we may update these assumptions and make refinements to our models based upon emerging experience, future expectations and other data, including any observable market data. These assumptions are generally updated annually during the second quarter of each year, unless a material change in experience that we feel is indicative of a long-term trend is observed during an interim period.

Shown below are the impacts on our adjusted operating income from our annual reviews and update of assumptions and other refinements. The information below is presented by each segment and Corporate and Other operations and includes a reconciliation of these impacts to the impacts within income (loss) before income taxes and equity in earnings of operating joint ventures.

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	Three and Six Months Ended June 30,
	2019			2018
	(in millions)
Favorable (unfavorable) impact to adjusted operating income before income taxes by segment:
Retirement	$	154		$	(68	)
Group Insurance	9			31
Total U.S. Workplace Solutions division	163			(37		)
Individual Annuities	(12		)	10
Individual Life	(208		)	(65		)
Total U.S. Individual Solutions division	(220		)	(55		)
International Insurance	8			(81		)
Total International Insurance division	8			(81		)
Corporate and Other operations	0			3
Total Corporate and Other	0			3
Total segment favorable (unfavorable) impact to adjusted operating income before income taxes	(49		)	(170		)
Reconciling items:
Realized investment gains (losses), net, and related adjustments	9			(229		)
Charges related to realized investment gains (losses), net	16			4
Divested businesses:
Closed Block division	(7		)	(1		)
Other divested businesses	(9		)	(1,458		)
Favorable (unfavorable) impact to consolidated income (loss) before income taxes and equity in earnings of operating joint ventures	$	(40	)	$	(1,854	)

See “—Results of Operations by Segment” for a discussion of the impacts of our annual reviews and update of assumptions and other refinements.

Summary of Results of Operations by Segment

Shown below are the adjusted operating income contributions of each segment and Corporate and Other operations for the periods indicated and a reconciliation of this segment measure of performance to “Income (loss) before income taxes and equity in earnings of operating joint ventures” as presented in our Unaudited Interim Consolidated Statements of Operations.

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	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in millions)
Adjusted operating income before income taxes by segment:
PGIM	$	264		$	254		$	478		$	486
Total PGIM division	264			254			478			486
Retirement	467			277			718			594
Group Insurance	81			82			134			137
Total U.S. Workplace Solutions division	548			359			852			731
Individual Annuities	462			507			934			1,026
Individual Life	(135		)	43			(30		)	79
Total U.S. Individual Solutions division	327			550			904			1,105
International Insurance	849			784			1,771			1,640
Total International Insurance division	849			784			1,771			1,640
Corporate and Other operations	(335		)	(286		)	(747		)	(580		)
Total Corporate and Other	(335		)	(286		)	(747		)	(580		)
Total segment adjusted operating income before income taxes	1,653			1,661			3,258			3,382
Reconciling items:
Realized investment gains (losses), net, and related adjustments(1)	(548		)	393			(1,211		)	480
Charges related to realized investment gains (losses), net(2)	(82		)	(116		)	(57		)	(139		)
Market experience updates(3)	(208		)	0			(208		)	0
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net(4)	287			(193		)	741			(596		)
Change in experience-rated contractholder liabilities due to asset value changes(5)	(313		)	85			(716		)	503
Divested and Run-off Businesses(6):
Closed Block division	(21		)	(31		)	(40		)	(40		)
Other Divested and Run-off Businesses	112			(1,526		)	286			(1,598		)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(7)	(4		)	(23		)	(37		)	(49		)
Consolidated income (loss) before income taxes and equity in earnings of operating joint ventures	$	876		$	250		$	2,016		$	1,943

__________


(1)	Represents “Realized investment gains (losses), net,” and related adjustments. See “—General Account Investments” and Note 14 to our Unaudited Interim Consolidated Financial Statements for additional information.


(2)	Includes charges that represent the impact of realized investment gains (losses), net, on the amortization of DAC 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 the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. The Company has historically recognized these impacts in adjusted operating income. See Note 14 to our Unaudited Interim Consolidated Financial Statements for additional information.


(4)	Represents net investment gains (losses) on assets supporting experience-rated contractholder liabilities. See “—Experience-Rated Contractholder Liabilities, Assets Supporting Experience-Rated Contractholder Liabilities and Other Related Investments.”


(5)	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, Assets Supporting Experience-Rated Contractholder Liabilities and Other Related Investments.”


(6)	Represents the contribution to income (loss) of Divested and Run-off 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. See “—Divested and Run-off Businesses.”

(7)

Equity in earnings of operating joint ventures are included in adjusted operating income but excluded from “Income (loss) before income taxes and equity in earnings of operating joint ventures” as they are reflected on an after-tax U.S. GAAP 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 (loss) before income taxes and equity in 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:

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PGIM. Segment results for the second quarter of 2019 increased in comparison to the prior year period, reflecting higher asset management fees and other related revenues, partially offset by higher expenses. Results for the first six months of 2019 decreased in comparison to the prior year period, reflecting increases in asset management fees and other related revenues that were more than offset by higher expenses.

Retirement. Segment results for both the second quarter and the first six months of 2019 increased in comparison to the prior year periods, primarily reflecting a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, results for the second quarter of 2019 decreased driven by less favorable reserve experience, partially offset by higher net investment spread results, while results for the first six months of 2019 decreased driven by less favorable reserve experience, lower net investment spread results and higher expenses.

Group Insurance. Segment results for both the second quarter and first six months of 2019 decreased modestly in comparison to the prior year periods, primarily reflecting a less favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, segment results for both periods increased in comparison to the prior year period, reflecting a higher contribution from net investment spread results and lower expenses. Underwriting results remained flat in comparison to the prior year periods.

Individual Annuities. Segment results for both the second quarter and the first six months of 2019 decreased in comparison to the prior year periods, inclusive of an unfavorable comparative net impact from our annual reviews and update of assumptions and other reserve refinements. Excluding this item, segment results for both periods decreased in comparison to the prior year periods, driven by lower net fee income and higher expenses, partially offset by higher net investment income.

Individual Life. Segment results for both the second quarter and the first six months of 2019 decreased in comparison to the prior year periods, primarily reflecting an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, segment results for the second quarter of 2019 decreased driven by lower underwriting results and higher expenses, partially offset by a higher contribution from net investment spread results. Results for the first six months of 2019 increased driven by a favorable net impact in the first quarter of 2019 from changes in the estimated profitability of the business driven by equity market performance on policyholder accounts, and a higher contribution from net investment spread results, partially offset by lower underwriting results and higher expenses.

International Insurance. Segment results for both the second quarter and first six months of 2019 increased in comparison to the prior year periods, inclusive of a favorable net impact from foreign currency exchange rates and a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding these items, segment results for the second quarter of 2019 decreased primarily driven by higher expenses, partially offset by business growth. Results for the first six months of 2019 increased primarily driven by business growth and more favorable underwriting results, partially offset by higher expenses.

Corporate and Other operations. Results for both the second quarter and first six months of 2019 reflected increased losses in comparison to the prior year periods, driven by higher levels of corporate expenses, higher capital debt interest expense and lower income from our qualified pension plan, partially offset by higher net investment income.

Closed Block Division. The Closed Block division results for the second quarter of 2019 reflected decreased losses in comparison to the prior year period, primarily reflecting a decrease in the policyholder dividend obligation as a result of lower net realized investment gains and related activity, lower net insurance activity and lower net investment income. Results for the first six months of 2019 remained flat when compared to the prior year period.

Segment Measures

Adjusted Operating Income. In managing our business, we analyze our segments’ operating performance using “adjusted operating income.” Adjusted operating income does not equate to “Income (loss) before income taxes and equity in earnings of operating joint ventures” or “Net income (loss)” 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 our businesses.

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See Note 14 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 our Individual Life, Group Insurance and International Insurance 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.

The amount of annualized new business premiums for any given period can be significantly impacted by several factors, including but not limited to: addition of new products, discontinuation of existing products, changes in credited interest rates for certain products and other product modifications, changes in premium rates, changes in tax laws, changes in regulations or changes in the competitive environment. Sales volume may increase or decrease prior to certain of these changes becoming effective, and then fluctuate in the other direction following such changes.

Assets Under Management. In managing our PGIM business, we analyze assets under management (which do not correspond directly to U.S. GAAP assets) because the principal source of revenues is fees based on assets under management. Assets under management represent 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. In managing our Individual Annuities and Retirement businesses, we analyze account values, which do not correspond to U.S. GAAP assets. Net sales (redemptions) in our Individual Annuities 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.

Impact of Foreign Currency Exchange Rates

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 (“USD”)-equivalent earnings and shareholder return on equity. Our USD-equivalent earnings could be materially affected by currency fluctuations from period to period, even if earnings on a local currency basis are relatively constant. Our USD-equivalent equity is impacted as the value of our investment in international operations may also fluctuate based on changes in foreign currency exchange rates. We seek to mitigate these impacts through various hedging strategies, including the use of derivative contracts and by holding USD-denominated assets in certain of our foreign subsidiaries.

In order to reduce earnings volatility from foreign currency exchange rate movements, we enter into forward currency derivative contracts to effectively fix the currency exchange rates for a portion of our prospective non-USD-denominated earnings streams. This forward currency hedging program is primarily associated with our insurance operations in Japan and Korea.

In order to reduce equity volatility from foreign currency exchange rate movements, we primarily 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 USD-denominated assets, foreign currency derivative contracts, and dual currency and synthetic dual currency investments held locally in our Japanese insurance subsidiaries. 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 USD-equivalent shareholder return on equity from our Japanese insurance subsidiaries as of the dates indicated.

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	June 30, 2019		December 31, 2018
	(in billions)
Foreign currency hedging instruments:
Hedging USD-equivalent earnings:
Forward currency contracts (notional amount outstanding)	$	1.2	$	1.3
Hedging USD-equivalent equity:
USD-denominated assets held in yen-based entities(1)	12.9		13.5
Dual currency and synthetic dual currency investments(2)	0.6		0.6
Total USD-equivalent equity foreign currency hedging instruments	13.5		14.1
Total foreign currency hedges	$	14.7	$	15.4

__________

(1)

Includes USD-denominated fixed maturities at amortized cost plus any related accrued investment income, as well as USD notional amount of foreign currency derivative contracts outstanding. Note this amount represents only those USD assets serving to hedge the impact of foreign currency volatility on equity. Separate from this program, our Japanese operations also have $55.5 billion and $48.9 billion as of June 30, 2019 and December 31, 2018, respectively, of USD-denominated assets supporting USD-denominated liabilities related to USD-denominated products.


(2)	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 USD-denominated interest income. The amounts shown represent the present value of future USD-denominated cash flows.

The USD-denominated investments that hedge the impact of foreign currency exchange rate movements on USD-equivalent earnings and shareholder return on equity from our Japanese insurance operations are reported within yen-based entities and, as a result, foreign currency exchange rate movements will impact their value reported within our yen-based Japanese insurance entities. We seek to mitigate the risk that future unfavorable foreign currency exchange rate movements will decrease the value of these USD-denominated investments reported within our yen-based Japanese insurance entities, and therefore negatively impact their equity and regulatory solvency margins, by having our Japanese insurance operations enter into currency hedging transactions. Those hedges are with a subsidiary of Prudential Financial. These hedging strategies have the economic effect of moving the change in value of these USD-denominated investments due to foreign currency exchange rate movements from our Japanese yen-based entities to our USD-based entities.

These USD-denominated investments also pay a coupon which is generally higher than what a similar yen-denominated investment would pay. The incremental impact of this higher yield on our USD-denominated investments, as well as our dual currency and synthetic dual currency investments, will vary over time, and is dependent on the duration of the underlying investments as well as interest rate environments in both the U.S. and Japan at the time of the investments.

Impact of intercompany foreign currency exchange rate arrangements on segment results of operations

The financial results of our International Insurance and PGIM segments reflect the impact of intercompany arrangements with our Corporate and Other operations pursuant to which certain of these segments’ non-USD-denominated earnings are translated at fixed currency exchange rates. Results of our Corporate and Other operations include any differences between the translation adjustments recorded by the segments at the fixed currency exchange rate versus the actual average rate during the period. In addition, specific to our International Insurance segment where we hedge certain currencies, the results of our Corporate and Other operations also include the impact of any 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.

For International Insurance, the fixed currency exchange rates are generally determined in connection with a foreign currency income hedging program designed to mitigate the impact of exchange rate changes on the segment’s USD-equivalent earnings. Pursuant to this program, our 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 USD 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-USD-denominated earnings are expected to be generated. In establishing the level of non-USD-denominated earnings that will be hedged through this program, we exclude the anticipated level of USD-denominated earnings that will be generated by USD-denominated products and investments. For the six months ended June 30, 2019, approximately 15% of the segment’s earnings were yen-based and, as of June 30, 2019, we have hedged 100% of expected yen-based earnings for 2019, and 92% and 50% of expected yen-based earnings for 2020 and 2021, respectively. To the extent currently unhedged, our International Insurance segment’s future expected USD-equivalent of yen-based earnings will be impacted by yen exchange rate movements.

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As a result of these arrangements, our International Insurance segment’s results for 2019 and 2018 reflect the impact of translating yen-denominated earnings at fixed currency exchange rates of 105 and 111 yen per USD, respectively, and Korean won-denominated earnings at fixed currency exchange rates of 1110 and 1150 Korean won per USD, respectively. Since determination of the fixed currency exchange rates for a given year is impacted by changes in foreign currency exchange rates over time, the segment’s future earnings will ultimately be impacted by these changes in exchange rates.

As a result of these arrangements, for PGIM and certain other currencies within International Insurance, the fixed currency exchange rates for the current year are predetermined during the third quarter of the prior year using forward currency exchange rates.

The table below presents, for the periods indicated, the increase (decrease) to revenues and adjusted operating income for the International Insurance and PGIM segments and for Corporate and Other operations, reflecting the impact of these intercompany arrangements.



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in millions)
Segment impacts of intercompany arrangements:
International Insurance	$	14		$	(6	)	$	29		$	(21	)
PGIM	2			0			3			(1		)
Impact of intercompany arrangements(1)	16			(6		)	32			(22		)
Corporate and Other operations:
Impact of intercompany arrangements(1)	(16		)	6			(32		)	22
Settlement gains (losses) on forward currency contracts(2)	20			(7		)	32			(30		)
Net benefit (detriment) to Corporate and Other operations	4			(1		)	0			(8		)
Net impact on consolidated revenues and adjusted operating income	$	20		$	(7	)	$	32		$	(30	)

__________


(1)	Represents the difference between non-USD-denominated earnings translated on the basis of weighted average monthly currency exchange rates versus fixed currency exchange rates determined in connection with the foreign currency income hedging program.


(2)	As of June 30, 2019 and 2018, the notional amounts of these forward currency contracts within our Corporate and Other operations were $2.5 billion and $2.8 billion, respectively, of which $1.2 billion and $1.5 billion, respectively, were related to our Japanese insurance operations.

Impact of products denominated in non-local currencies on U.S. GAAP earnings

While our international insurance operations offer products denominated in local currency, several also offer products denominated in non-local currencies, most notably our Japanese operations, which offer USD- and Australian dollar (“AUD”)-denominated products. The non-local currency-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-local currency-denominated assets and liabilities is economically matched, differences in the accounting for changes in the value of these assets and liabilities due to changes in foreign currency exchange rate movements have historically resulted in volatility in U.S. GAAP earnings.

In the first quarter of 2015 we implemented a structure in Gibraltar Life’s operations that disaggregated the USD- and AUD-denominated businesses into separate divisions, each with its own functional currency that aligns with the underlying products and investments. The result of this alignment was to reduce differences in the accounting for changes in the value of these assets and liabilities that arise due to changes in foreign currency exchange rate movements. For the USD- and AUD-denominated assets that were transferred under this structure, the net cumulative unrealized investment gains associated with foreign exchange remeasurement that were recorded in “Accumulated other comprehensive income (loss)” (“AOCI”) totaled $3.0 billion and $3.2 billion as of June 30, 2019 and December 31, 2018, respectively, and will be recognized in earnings within “Realized investment gains (losses), net” over time as these assets mature or are sold. Absent the sale of any of these assets prior to their stated maturity, approximately 6% of the $3.0 billion balance as of June 30, 2019 will be recognized throughout the remainder of 2019, approximately 13% will be recognized in 2020, and a majority of the remaining balance will be recognized from 2021 through 2024.

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Highly inflationary economy in Argentina

Our insurance operations in Argentina, Prudential of Argentina (“POA”), have historically utilized the Argentine peso as the functional currency given it is the currency of the primary economic environment in which the entity operates. During 2018, Argentina experienced a cumulative inflation rate that exceeded 100% over a 3-year period. As a result, Argentina’s economy was deemed to be highly inflationary resulting in reporting changes effective July 1, 2018. Under U.S. GAAP, the financial statements of a foreign entity in a highly inflationary economy are to be remeasured as if its functional currency (formerly the Argentine peso) is the reporting currency of its parent reporting entity (the USD) on a prospective basis. While this changed how the results of POA are remeasured and/or translated into USD, the impact to our financial statements was not material nor is it expected to be material in future periods given the relative size of our POA operations. It should also be noted that due to the macroeconomic environment in Argentina, POA’s sales are predominantly denominated in USD and therefore substantially all of POA’s balance sheet consists of USD-denominated product liabilities supported by USD-denominated assets. As a result, this accounting change serves to reduce the remeasurement impact reflected in net income given that the functional currency and currency in which the assets and liabilities are denominated will be more closely aligned.

Accounting Policies & Pronouncements

Application of Critical Accounting Estimates

The preparation of financial statements in conformity with U.S. GAAP requires the application of accounting policies that often involve a significant degree of judgment. Management reviews estimates and assumptions used in the preparation of financial statements on an ongoing basis. 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:


•	DAC, deferred sales inducements (“DSI”) and VOBA;


•	Policyholder liabilities;


•	Goodwill;


•	Valuation of investments, including derivatives, and the recognition of other-than-temporary impairments (“OTTI”);


•	Pension and other postretirement benefits;


•	Taxes on income; and


•	Reserves for contingencies, including reserves for losses in connection with unresolved legal matters.

Market Performance - Equity and Interest Rate Assumptions

DAC, DSI and VOBA associated with the variable and universal life policies of our Individual Life and International Insurance segments and the variable and fixed annuity contracts of our Individual Annuities and International Insurance segments are generally amortized over the expected lives of these policies in proportion to total gross profits. Total gross profits include both actual gross profits and estimates of gross profits for future periods. The quarterly adjustments for market performance reflect the impact of changes to our estimate of total gross profits to reflect actual fund performance and market conditions. A significant portion of gross profits for our variable annuity contracts and, to a lesser degree, our variable life policies are dependent upon the total rate of return on assets held in separate account investment options. This rate of return influences the fees we earn, costs we incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts, as well as other sources of profit. Returns that are higher than our expectations for a given period produce higher than expected account balances, which increase the future fees we expect to earn and decrease the future costs we expect to incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts. The opposite occurs when returns are lower than our expectations. The changes in future expected gross profits are used to recognize a cumulative adjustment to all prior periods’ amortization.

Furthermore, the calculation of the estimated liability for future policy benefits related to certain insurance products includes an estimate of associated revenues and expenses that are dependent on both historical market performance as well as estimates of market performance in the future. Similar to DAC, DSI and VOBA described above, these liabilities are subject to quarterly adjustments for experience including market performance, in addition to annual adjustments resulting from our annual reviews of assumptions.

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The weighted average rate of return assumptions used in developing estimated market returns consider many factors specific to each business, including asset durations, asset allocations and other factors. With regard to equity market assumptions, the near-term future rate of return assumption used in evaluating DAC, DSI and VOBA and liabilities for future policy benefits for certain of our products, primarily domestic variable annuity and variable life insurance products, is generally updated each quarter and is 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 of five years (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 of 15.0%, we use our maximum future rate of return. As of June 30, 2019, our variable annuities and variable life insurance businesses assume an 8.0% long-term equity expected rate of return and a 4.3% near-term mean reversion equity expected rate of return.

With regard to interest rate assumptions, we generally update the future interest rates used to project fixed income returns annually. As a result of our 2019 annual reviews and update of assumptions and other refinements, we kept our long-term expectation of the 10-year U.S. Treasury rate and 10-year Japanese Government Bond yields unchanged and continue to grade to rates of 3.75% and 1.30%, respectively, over ten years. As part of our market experience updates, in the second quarter of 2019, we updated our near-term projections of interest rates to reflect a decrease in current rates.

Adoption of New Accounting Pronouncements

ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the FASB on August 15, 2018 and is expected to have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements. In July 2019, the FASB made a tentative decision to defer the effective date of this ASU to January 1, 2022 (with early adoption permitted), representing a one year extension from the original effective date of January 1, 2021. A final decision regarding the effective date is expected in the third quarter of 2019. See Note 2 to our Unaudited Interim Consolidated Financial Statements for a more detailed discussion of ASU 2018-12, as well as other accounting pronouncements issued but not yet adopted and newly adopted accounting pronouncement.

Results of Operations by Segment

PGIM Division

PGIM

Business Update


•	In the first quarter of 2019, we completed the acquisition of Wadhwani Asset Management LLP, a London-based quantitative macro-focused investment management firm, and renamed the firm QMA Wadhwani LLP, which now operates as part of our QMA business.


•	In July 2019, we completed the acquisition of our joint venture partner’s shares of our India-based asset management joint venture, DHFL Pramerica Asset Managers, and re-named the business PGIM India Asset Management.

Operating Results

The following table sets forth the PGIM segment’s operating results for the periods indicated.

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	Three Months Ended June 30,					Six Months Ended June 30,
	2019		2018			2019		2018
	(in millions)
Operating results(1):
Revenues	$	926	$	816		$	1,796	$	1,642
Expenses	662		562			1,318		1,156
Adjusted operating income	264		254			478		486
Realized investment gains (losses), net, and related adjustments	1		0			1		(12		)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests	30		(11		)	35		(19		)
Income (loss) before income taxes and equity in earnings of operating joint ventures	$	295	$	243		$	514	$	455

__________

(1)

Certain of our PGIM segment’s investment activities are based in currencies other than the U.S. dollar and are therefore subject to foreign currency exchange rate risk. The financial results of our PGIM segment include the impact of an intercompany arrangement with our Corporate and Other operations designed to mitigate the impact of exchange rate changes on the segment’s U.S. dollar-equivalent earnings. For more information related to this intercompany arrangement, see “—Results of Operations—Impact of Foreign Currency Exchange Rates,” above.

Adjusted Operating Income

Three Month Comparison. Adjusted operating income increased $10 million. The increase primarily reflected higher asset management fees due to an increase in average assets under management as a result of market appreciation and net flows, partially offset by higher related expenses driven by the higher asset management fees and certain long-term employee compensation plans tied to Company stock and equity market performance. Also contributing to the increase were higher other related revenues, net of associated expenses, primarily driven by higher net performance-based incentive fees.

Six Month Comparison. Adjusted operating income decreased $8 million. Higher asset management fees, reflecting an increase in average assets under management driven by market appreciation and net flows, were more than offset by higher related expenses driven by the higher asset management fees and certain long-term employee compensation plans tied to Company stock and equity market performance. The decrease also reflected charges associated with a joint venture and higher non-compensation expenses, including those supporting business growth initiatives. These decreases were partially offset by higher other related revenues, net of associated expenses, primarily driven by higher net performance-based incentive fees.

Revenues and Expenses

The following table sets forth the PGIM segment’s revenues, presented on a basis consistent with the table above under “—Operating Results,” by type.

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	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(in millions)
Revenues by type:
Asset management fees by source:
Institutional customers	$	319	$	295	$	631	$	591
Retail customers(1)	220		219		429		436
General account	132		115		255		235
Total asset management fees	671		629		1,315		1,262
Other related revenues by source:
Incentive fees	62		6		98		11
Transaction fees	10		4		12		18
Strategic investing	18		19		54		53
Commercial mortgage(2)	25		36		51		56
Total other related revenues(3)	115		65		215		138
Service, distribution and other revenues(4)	140		122		266		242
Total revenues	$	926	$	816	$	1,796	$	1,642

__________

(1)

Consists of fees from: individual mutual funds and variable annuities and variable life insurance separate account assets; funds invested in proprietary mutual funds through our defined contribution plan products; and 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 from 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 $15 million and $18 million for the three months ended June 30, 2019 and 2018, respectively, and $31 million and $37 million for the six months ended June 30, 2019 and 2018, respectively.

Three Month Comparison. Revenues, as shown in the table above under “—Operating Results,” increased $110 million. Asset management fees increased $42 million driven by an increase in average assets under management as a result of market appreciation and fixed income flows. Other related revenues increased $50 million primarily due to higher gross performance-based incentive fees, partially offset by lower commercial mortgage results.

Expenses, as shown in the table above under “—Operating Results,” increased $100 million, primarily reflecting higher compensation expenses attributable to growth in incentive fees and higher earnings, and costs for certain long-term employee compensation plans, as discussed above.

Six Month Comparison. Revenues increased $154 million. Asset management fees increased $53 million driven by an increase in average assets under management as a result of market appreciation and fixed income flows, partially offset by equity outflows. Other related revenues increased $77 million due to higher gross performance-based incentive fees. These increases were partially offset by charges associated with a joint venture.

Expenses increased $162 million, primarily reflecting higher compensation expenses attributable to growth in incentive fees and higher earnings, and costs for certain long-term employee compensation plans, as discussed above. Also contributing to the increase were higher non-compensation expenses, including those supporting business growth initiatives.

Assets Under Management

The following table sets forth assets under management by asset class and source as of the dates indicated.

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	June 30, 2019		December 31, 2018		June 30, 2018
	(in billions)
Assets Under Management (at fair value):
Institutional customers:
Equity	$	60.4	$	54.7	$	62.2
Fixed income	431.4		395.1		386.1
Real estate	43.1		43.7		42.5
Institutional customers(1)	534.9		493.5		490.8
Retail customers:
Equity	130.3		112.9		133.4
Fixed income	132.7		125.2		117.1
Real estate	1.9		2.0		1.5
Retail customers(2)	264.9		240.1		252.0
General account:
Equity	5.5		5.1		5.5
Fixed income	452.3		420.8		405.9
Real estate	2.0		1.9		1.9
General account	459.8		427.8		413.3
Total assets under management	$	1,259.6	$	1,161.4	$	1,156.1

Assets under management within other operating segments(3)	$	237.8	$	215.9	$	232.1
Total PFI assets under management	$	1,497.4	$	1,377.3	$	1,388.2

__________


(1)	Consists of third-party institutional assets and group insurance contracts.


(2)	Consists of individual mutual funds and variable annuities and variable life insurance separate account assets; funds invested in proprietary mutual funds through our defined contribution plan products; and 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.

(3)

These amounts primarily include certain assets related to annuity and variable life products in our U.S. Individual Solutions division, retirement and group life products in our U.S. Workplace Solutions division and certain general account assets of our International Insurance division. These assets are not directly managed by PGIM, but rather are invested in non-proprietary funds or are managed by either the divisions themselves or our Chief Investment Officer Organization.

The following table sets forth the component changes in assets under management by asset source for the periods indicated.

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	Three Months Ended June 30,						Six Months Ended June 30,						Twelve Months Ended June 30,
	2019			2018			2019			2018			2019
	(in billions)
Institutional Customers:
Beginning assets under management	$	524.0		$	489.6		$	493.5		$	489.5		$	490.8
Net additions (withdrawals), excluding money market activity:
Third-party	(6.0		)	5.5			(5.0		)	5.3			3.8
Third-party via affiliates(1)	0.8			0.3			0.5			(0.4		)	0.4
Total	(5.2		)	5.8			(4.5		)	4.9			4.2
Market appreciation (depreciation)(3)	16.6			(4.0		)	40.9			(5.2		)	35.8
Other increases (decreases)(2)	(0.5		)	(0.6		)	5.0			1.6			4.1
Ending assets under management	$	534.9		$	490.8		$	534.9		$	490.8		$	534.9
Retail Customers:
Beginning assets under management	$	256.4		$	246.2		$	240.1		$	245.6		$	252.0
Net additions (withdrawals), excluding money market activity:
Third-party	1.1			1.8			1.5			2.8			(1.7		)
Third-party via affiliates(1)	0.2			(1.0		)	(6.7		)	(1.2		)	(3.2		)
Total	1.3			0.8			(5.2		)	1.6			(4.9		)
Market appreciation (depreciation)(3)	7.1			4.8			30.0			5.0			17.8
Other increases (decreases)(2)	0.1			0.2			0.0			(0.2		)	0.0
Ending assets under management	$	264.9		$	252.0		$	264.9		$	252.0		$	264.9
General Account:
Beginning assets under management	$	441.0		$	420.0		$	427.8		$	420.2		$	413.3
Net additions (withdrawals), excluding money market activity:
Third-party	0.0			0.0			0.0			0.0			0.0
Affiliated	1.0			(0.6		)	1.6			1.4			9.4
Total	1.0			(0.6		)	1.6			1.4			9.4
Market appreciation (depreciation)(3)	14.2			(1.6		)	28.4			(6.7		)	30.9
Other increases (decreases)(2)	3.6			(4.5		)	2.0			(1.6		)	6.2
Ending assets under management	$	459.8		$	413.3		$	459.8		$	413.3		$	459.8
Total assets under management	$	1,259.6		$	1,156.1		$	1,259.6		$	1,156.1		$	1,259.6

__________


(1)	Represents assets that our PGIM segment manages for the benefit of other reporting segments within the Company. Additions and withdrawals of these assets are attributable to third-party product inflows and outflows in other reporting segments.

(2)

Includes the effect of foreign exchange rate changes, net money market activity and the impact of acquired business. The impact from foreign currency fluctuations, which primarily impact the general account, resulted in a gain of $1.9 billion and a loss of $4.9 billion for the three months ended June 30, 2019 and 2018, respectively; a gain of $0.7 billion and a gain of $0.5 billion for the six months ended June 30, 2019 and 2018, respectively; and a gain of $1.4 billion for the twelve months ended June 30, 2019.


(3)	Includes income reinvestment, where applicable.

Strategic Investments

The following table sets forth the strategic investments of the PGIM 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.

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	June 30, 2019		December 31, 2018
	(in millions)
Co-Investments:
Real estate	$	190	$	207
Fixed income	441		438
Seed Investments:
Real estate	58		50
Public equity	731		738
Fixed income	312		272
Total	$	1,732	$	1,705

The increase of $27 million in strategic investments was primarily driven by favorable investment performance across all asset classes.

U.S. Financial Wellness Businesses - U.S. Workplace Solutions Division

Retirement

Operating Results

The following table sets forth the Retirement segment’s operating results for the periods indicated.



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in millions)
Operating results:
Revenues	$	3,586		$	2,988		$	6,225		$	5,077
Benefits and expenses	3,119			2,711			5,507			4,483
Adjusted operating income	467			277			718			594
Realized investment gains (losses), net, and related adjustments	64			122			143			(33		)
Related charges	8			(15		)	11			(16		)
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net	305			(219		)	635			(508		)
Change in experience-rated contractholder liabilities due to asset value changes	(331		)	111			(610		)	415
Income (loss) before income taxes and equity in earnings of operating joint ventures	$	513		$	276		$	897		$	452

Adjusted Operating Income

Three Month Comparison. Adjusted operating income increased $190 million, primarily reflecting a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for the second quarter of 2019 included a net benefit of $154 million from this annual review primarily driven by a reduction in expected benefit payments. Results for the second quarter of 2018 included a net charge of $68 million from these updates, primarily driven by updates to our assumptions for benefit payments. Excluding this item, adjusted operating income decreased $32 million, primarily driven by less favorable reserve experience, partially offset by higher net investment spread results. The lower contribution from reserve experience primarily reflected lower mortality gains on a comparative basis within our pension risk transfer business. The increase in net investment spread results primarily reflected higher income on non-coupon investments and higher asset balances, including growth within our pension risk transfer business, partially offset by the impact of higher crediting rates on full service account values.

Six Month Comparison. Adjusted operating income increased $124 million, primarily reflecting a favorable comparative net impact from our annual reviews and update of assumptions and other refinements, as discussed above. Excluding this item, adjusted operating income decreased $98 million, primarily driven by less favorable reserve experience, lower net investment

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spread results and higher expenses. The lower contribution from reserve experience primarily reflected lower mortality gains on a comparative basis within our pension risk transfer business. The decrease in net investment spread results primarily reflected the impact of higher crediting rates on full service account values, partially offset by higher income on non-coupon investments and higher asset balances, including growth within our pension risk transfer business. The increase in expenses was primarily driven by higher costs supporting business growth initiatives.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues, as shown in the table above under “—Operating Results,” increased $598 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues increased $604 million. Premiums increased $507 million, primarily driven by pension risk transfer transactions. This increase in premiums resulted in a corresponding increase in policyholders’ benefits, as discussed below. Investment income increased $88 million, primarily reflecting higher income on non-coupon investments and higher asset balances, including growth within our pension risk transfer business.

Benefits and expenses, as shown in the table above under “—Operating Results,” increased $408 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $636 million. Policyholders’ benefits, including the change in policy reserves, increased $613 million, primarily related to the increase in premiums discussed above, driven by growth in pension risk transfer transactions including interest on related reserves.

Six Month Comparison. Revenues increased $1,148 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues increased $1,154 million. Premiums increased $1,015 million, primarily driven by pension risk transfer transactions. This increase in premiums resulted in a corresponding increase in policyholders’ benefits, as discussed below. Investment income increased $146 million, primarily reflecting higher asset balances, including growth within our pension risk transfer business, and higher income on non-coupon investments.

Benefits and expenses increased $1,024 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $1,252 million. Policyholders’ benefits, including the change in policy reserves, increased $1,168 million, primarily related to the increase in premiums discussed above, driven by growth in pension risk transfer transactions including interest on related reserves. Interest credited to policyholders’ account balances increased $47 million, including the impact of higher crediting rates on experience-rated account balances.

Account Values

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 most of 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 plan sales and participant deposits or additions, as applicable, minus plan and participant 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 “—PGIM.”

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	Three Months Ended June 30,						Six Months Ended June 30,						Twelve Months Ended June 30,
	2019			2018			2019			2018			2019
	(in millions)
Full Service:
Beginning total account value	$	251,071		$	236,120		$	231,669		$	234,616		$	240,922
Deposits and sales	11,047			7,712			20,614			17,634			36,096
Withdrawals and benefits	(7,259		)	(6,470		)	(16,364		)	(14,624		)	(28,169		)
Change in market value, interest credited and interest income and other activity	7,274			3,560			26,214			3,296			13,284
Ending total account value	$	262,133		$	240,922		$	262,133		$	240,922		$	262,133
Institutional Investment Products:
Beginning total account value	$	203,101		$	191,518		$	200,759		$	194,492		$	191,722
Additions(1)	15,044			5,461			17,291			6,149			32,452
Withdrawals and benefits	(4,161		)	(3,851		)	(7,810		)	(8,740		)	(14,479		)
Change in market value, interest credited and interest income	2,826			1,198			5,470			984			7,789
Other(2)	(832		)	(2,604		)	268			(1,163		)	(1,506		)
Ending total account value	$	215,978		$	191,722		$	215,978		$	191,722		$	215,978

__________


(1)	Additions primarily include: group annuities calculated based on premiums received; longevity reinsurance contracts calculated as the present value of future projected benefits; and investment-only stable value contracts calculated as the fair value of customers’ funds held in a client-owned trust.

(2)

“Other” activity includes the effect of foreign exchange rate changes associated with our British pounds sterling denominated longevity reinsurance business and changes in asset balances for externally-managed accounts. For the three months ended June 30, 2019 and 2018, “other” activity also includes $792 million in receipts offset by $577 million in payments and $1,031 million in receipts offset by $1,024 million in payments, respectively, and for the six months ended June 30, 2019 and 2018, includes $1,403 million in receipts offset by $1,194 million in payments and $2,231 million in receipts offset by $2,189 million in payments, respectively, related to funding agreements backed by commercial paper which typically have maturities of less than 90 days.

The increase in full service account values for the three months ended June 30, 2019, the six months ended June 30, 2019, and the twelve months ended June 30, 2019, reflected the favorable changes in the market value of customer funds and positive net plan sales, including a large defined contribution transaction in the second quarter of 2019.

The increase in institutional investment products account values for the three months ended June 30, 2019, the six months ended June 30, 2019 and the twelve months ended June 30, 2019, primarily reflected net additions from pension risk transfer transactions and the favorable changes in the market value of account assets.

Group Insurance

Operating Results

The following table sets forth the Group Insurance segment’s operating results and benefits and administrative operating expense ratios for the periods indicated.

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	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	($ in millions)
Operating results:
Revenues	$	1,461		$	1,424		$	2,902		$	2,840
Benefits and expenses	1,380			1,342			2,768			2,703
Adjusted operating income	81			82			134			137
Realized investment gains (losses), net, and related adjustments	8			21			9			(9		)
Income (loss) before income taxes and equity in earnings of operating joint ventures	$	89		$	103		$	143		$	128
Benefits ratio(1):
Group life(2)	90.2		%	87.5		%	89.6		%	87.3		%
Group disability(2)	65.3		%	64.0		%	69.9		%	71.4		%
Total Group Insurance(2)	84.7		%	82.8		%	85.3		%	84.2		%
Administrative operating expense ratio(3):
Group life	12.2		%	12.6		%	11.9		%	12.1		%
Group disability	24.2		%	26.4		%	25.5		%	26.7		%
Total Group Insurance	14.8		%	15.3		%	14.8		%	14.9		%

__________


(1)	Ratio of policyholder benefits to earned premiums plus policy charges and fee income.

(2)

Benefits ratios reflect the impacts of our annual reviews and updates of assumptions and other refinements. Excluding these impacts, the group life, group disability and total Group Insurance benefits ratios were 88.5%, 74.5% and 85.5% for the three months ended June 30, 2019, respectively, 88.7%, 74.6% and 85.7% for the six months ended June 30, 2019, respectively, 88.6%, 71.6% and 85.3% for the three months ended June 30, 2018, respectively, and 87.9%, 75.3% and 85.4% for the six months ended June 30, 2018, respectively.


(3)	Ratio of general and administrative expenses (excluding commissions) to gross premiums plus policy charges and fee income.

Adjusted Operating Income

Three Month Comparison. Adjusted operating income decreased $1 million, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for both the second quarter of 2019 and 2018 included a net benefit from this update of $9 million and $31 million, respectively. The net benefit in both periods was primarily driven by favorable experience related to our group disability business. Excluding this item, adjusted operating income increased $21 million, reflecting a higher contribution from net investment spread results driven by higher income on non-coupon investments, and lower expenses driven by the absence of costs related to the termination of a third-party underwriting service provider contract in the prior year period. The underwriting results for both our group life and group disability businesses remained flat compared to the prior year period.

Six Month Comparison. Adjusted operating income decreased $3 million, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, adjusted operating income increased $19 million, primarily driven by more favorable underwriting results in our group disability business, a higher contribution from net investment spread results driven by higher income on non-coupon investments, and lower expenses driven by the absence of costs related to the termination of a third-party underwriting service provider contract in the prior year period. The underwriting results in our group disability business were driven by growth in the business and a favorable impact from claim experience on long-term contracts. These increases were partially offset by less favorable underwriting results in our group life business, driven by an unfavorable impact from claim experience.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues, as shown in the table above under “—Operating Results,” increased $37 million. Excluding an unfavorable comparative impact of $10 million resulting from our annual reviews and update of assumptions and other refinements, as discussed above, revenues increased $47 million. The increase primarily reflected higher premiums and policy charges and fee income driven by growth in our group disability business, and higher net investment income driven by higher income on non-coupon investments.

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Benefits and expenses, as shown in the table above under “—Operating Results,” increased $38 million. Excluding an unfavorable comparative impact of $12 million resulting from our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $26 million. The increase primarily reflected higher policyholders’ benefits and changes in reserves in our group disability business driven by claim experience, partially offset by a decrease in general and administrative expenses driven by the absence of costs related to the termination of a third-party underwriting service provider contract in the prior year period.

Six Month Comparison. Revenues increased $62 million. Excluding an unfavorable comparative impact of $10 million resulting from our annual reviews and updates of assumptions and other refinements, as discussed above, revenues increased $72 million. The increase primarily reflected higher premiums and policy charges and fee income driven by growth in our group disability business, and higher net investment income driven by higher income on non-coupon investments.

Benefits and expenses increased $65 million. Excluding an unfavorable comparative impact of $12 million resulting from our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $53 million. The increase primarily reflected higher policyholders’ benefits and changes in reserves in both our group disability and group life businesses driven by claim experience, partially offset by a decrease in general and administrative expenses driven by the absence of costs related to the termination of a third-party underwriting service provider contract in the prior year period.

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 June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(in millions)
Annualized new business premiums(1):
Group life	$	17	$	46	$	191	$	289
Group disability	16		14		135		154
Total	$	33	$	60	$	326	$	443

__________


(1)	Amounts exclude new premiums resulting from rate changes on existing policies, from additional coverage under our Servicemembers’ Group Life Insurance contract and from excess premiums on group universal life insurance that build cash value but do not purchase face amounts.

Total annualized new business premiums for the three months ended June 30, 2019 decreased $27 million compared to the prior year period, reflecting lower sales in our group life business, partially offset by higher sales in our group disability business. Total annualized new business premiums for the six months ended June 30, 2019 decreased $117 million compared to the prior year period, primarily driven by large client sales in the prior year period.

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U.S. Financial Wellness Businesses - U.S. Individual Solutions Division

Individual Annuities

Operating Results

The following table sets forth the Individual Annuities segment’s operating results for the periods indicated.



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in millions)
Operating results:
Revenues	$	1,288		$	1,266		$	2,523		$	2,518
Benefits and expenses	826			759			1,589			1,492
Adjusted operating income	462			507			934			1,026
Realized investment gains (losses), net, and related adjustments	(881		)	(70		)	(2,225		)	528
Related charges	56			(95		)	190			(221		)
Market experience updates(1)	(10		)	0			(10		)	0
Income (loss) before income taxes and equity in earnings of operating joint ventures	$	(373	)	$	342		$	(1,111	)	$	1,333

________

(1)

Adjusted Operating Income

Three Month Comparison. Adjusted operating income decreased $45 million, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results from this annual review included a net charge of $12 million and a net benefit of $10 million in the second quarter of 2019 and 2018, respectively. Excluding this item, adjusted operating income decreased $23 million primarily driven by lower net fee income and higher expenses, partially offset by higher net investment income. Asset-based fee income, net of distribution expenses and other associated costs, declined due to lower average account values largely resulting from negative net flows, partially offset by market appreciation. Also contributing to this decrease were lower average fee rates driven by unfavorable impacts from our living benefit guarantees, and certain products reaching contractual milestones for fee tier reduction. The increase in expenses was primarily driven by business growth. The increase in net investment income reflected a higher level of invested assets and higher income on non-coupon investments.

Six Month Comparison. Adjusted operating income decreased $92 million, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements, as discussed above. Excluding this item, adjusted operating income decreased $70 million primarily driven by lower net fee income, higher expenses, and unfavorable changes in the estimated profitability of the business, partially offset by higher net investment income.

Asset-based fee income, net of distribution expenses and other associated costs, declined due to lower average account values largely resulting from negative net flows, partially offset by market appreciation. Also contributing to this decrease were lower average fee rates driven by unfavorable impacts from our living benefit guarantees, and certain products reaching contractual milestones for fee tier reduction. The increase in expenses was primarily driven by business growth. The unfavorable impact of changes in the estimated profitability of the business was driven by changes in the first quarter of 2019 compared to the first quarter of 2018 due to impacts of equity market performance on policyholder accounts. Beginning in the second quarter of 2019, this activity is excluded from adjusted operating income (see Note 14 to the Unaudited Interim Consolidated Financial Statements for further information). The increase in net investment income reflected a higher level of invested assets and higher income on non-coupon investments.

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Revenues, Benefits and Expenses

Three Month Comparison. Revenues, as shown in the table above under “—Operating Results,” increased $22 million. Excluding an $18 million net decrease related to the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues increased $40 million. The increase was driven by higher premiums, primarily reflecting an increase in single premium immediate annuity sales, with offsets in policyholders’ benefits as discussed below, and higher net investment income reflecting a higher level of invested assets and higher income on non-coupon investments. These increases were partially offset by lower policy charges and fee income, as well as lower asset management and service fees and other income reflecting, lower average account values largely resulting from negative net flows, partially offset by market appreciation. Also contributing to this decrease were lower average fee rates driven by unfavorable impacts from our living benefit guarantees, and certain products reaching contractual milestones for fee tier reduction.

Benefits and expenses, as shown in the table above under “—Operating Results,” increased $67 million. Excluding a $4 million net increase related to our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $63 million primarily driven by policyholders’ benefits, including changes in reserves, due to higher reserve provisions resulting from an increase in single premium immediate annuity sales, with offsets in premiums, as discussed above.

Six Month Comparison. Revenues increased $5 million. Excluding the impact from our annual reviews and update of assumptions and other refinements, discussed above, revenues increased $23 million. The increase was driven by higher premiums, primarily reflecting an increase in single premium immediate annuity sales, with offsets in policyholders’ benefits as discussed below, and higher net investment income reflecting a higher level of invested assets and higher income on non-coupon investments. These increases were partially offset by lower policy charges and fee income, as well as lower asset management and service fees and other income reflecting, lower average account values largely resulting from negative net flows, partially offset by market appreciation. Also contributing to this decrease were lower average fee rates driven by unfavorable impacts from our living benefit guarantees, and certain products reaching contractual milestones for fee tier reduction.

Benefits and expenses increased $97 million. Excluding the impact from our annual reviews and update of assumptions and other refinements, discussed above, benefits and expenses increased $93 million primarily driven by policyholders’ benefits, including changes in reserves, due to higher reserve provisions resulting from an increase in single premium immediate annuity sales, with offsets in premiums, as discussed above.

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 the pattern of amortization of DAC and other costs. Account values are driven by net flows from new business sales, surrenders, withdrawals and benefit payments, policy charges and the impact of positive or negative market value changes. The annuity industry’s competitive and regulatory landscapes, which have been dynamic over the last few years, may impact our net flows, including new business sales. The following table sets forth account value information for the periods indicated.

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	Three Months Ended June 30,						Six Months Ended June 30,						Twelve Months Ended June 30,
	2019			2018			2019			2018			2019
	(in millions)
Total Individual Annuities(1):
Beginning total account value	$	161,890		$	164,651		$	151,080		$	168,626		$	163,645
Sales	2,675			2,067			4,982			3,791			9,461
Full surrenders and death benefits(2)	(2,397		)	(2,368		)	(4,337		)	(4,605		)	(8,690		)
Sales, net of full surrenders and death benefits(2)	278			(301		)	645			(814		)	771
Partial withdrawals and other benefit payments(2)	(1,229		)	(1,145		)	(2,465		)	(2,340		)	(4,939		)
Net flows	(951		)	(1,446		)	(1,820		)	(3,154		)	(4,168		)
Change in market value, interest credited and other activity	5,289			1,369			17,862			40			9,481
Policy charges	(915		)	(929		)	(1,809		)	(1,867		)	(3,645		)
Ending total account value	$	165,313		$	163,645		$	165,313		$	163,645		$	165,313

__________

(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 $161.0 billion and $160.1 billion as of June 30, 2019 and 2018, respectively. Fixed annuity account values were $4.3 billion and $3.5 billion as of June 30, 2019 and 2018, respectively.


(2)	Prior period amounts have been reclassified to conform to current period presentation.

The increase in account values for both the three months and six months ended June 30, 2019 primarily reflected market value appreciation. Gross sales for both the three and six months ended June 30, 2019, increased in comparison to the prior year periods, primarily attributable to certain distribution, product design and pricing actions implemented to enhance product competitiveness. The introduction of a new fixed index annuity product in 2018 also contributed to the increase in gross sales.

The increase in account values for the twelve months ended June 30, 2019 was largely driven by favorable changes in the market value of contractholder funds, partially offset by partial withdrawals and other benefit payments on contracts, as well as policy charges on contractholder accounts.

Variable Annuity Risks and Risk Mitigants

The following is a summary of: (i) certain risks associated with Individual Annuities’ products; (ii) certain strategies in mitigating those risks, including any updates to those strategies since the previous year-end; and (iii) the related financial results. For a more detailed description of these items and their related accounting treatment, refer to the complete descriptions provided in our Annual Report on Form 10-K for the year ended December 31, 2018.

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, along with actuarial assumptions such as contractholder mortality, the timing and amount of annuitization and withdrawals, and contract lapses. For these risk exposures, achievement of our expected returns and profitability is subject to the risk that actual experience will differ from the assumptions used in the original pricing of these products. We currently manage our exposure to certain risks driven by fluctuations in capital markets primarily through a combination of Product Design Features, an Asset Liability Management (“ALM”) Strategy, a Capital Hedge Program and External Reinsurance.

Product Design Features

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A portion of the variable annuity contracts that we offer include an automatic rebalancing feature, also referred to as an asset transfer feature. This feature is implemented 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 objective of the automatic rebalancing feature is to reduce our exposure to equity market risk and market volatility. Other product design features we utilize include, among others, asset allocation restrictions, minimum issuance age requirements and certain limitations on the amount of contractholder deposits, as well as a required minimum allocation to our general account for certain of our products. We continue to introduce products that diversify our risk profile and have incorporated provisions in product design allowing frequent revisions of key pricing elements for certain of our products. In addition, there is diversity in our fee arrangements, as certain fees are primarily based on the benefit guarantee amount, the contractholder account value and/or premiums, which helps preserve certain revenue streams when market fluctuations cause account values to decline.

ALM Strategy (including fixed income instruments and derivatives)

Our current ALM strategy utilizes a combination of both traditional fixed income instruments and derivatives to defray potential claims associated with our variable annuity living benefit guarantees. The economic liability we manage with this ALM strategy consists of expected living benefit claims under less severe market conditions, which are managed using a traditional ALM strategy through the accumulation of fixed income and derivative instruments, and potential living benefit claims resulting from more severe market conditions, which are hedged using derivative instruments. For the portion of our ALM strategy executed with derivatives, we enter into a range of exchange-traded, cleared, and over-the-counter (“OTC”) equity and interest rate derivatives, including, but not limited to: equity and treasury futures; total return and interest rate swaps; and options including equity options, swaptions, and floors and caps.

The valuation of the economic liability we seek to defray excludes certain items that are included within the U.S. GAAP liability, such as non-performance risk (“NPR”) (in order to maximize protection irrespective of the possibility of our own default), as well as risk margins (required by U.S. GAAP but different from our best estimate) and valuation methodology differences. The following table provides a reconciliation between the liability reported under U.S. GAAP and the economic liability we manage through our ALM strategy as of the dates indicated:



	June 30, 2019			December 31, 2018
	(in millions)
U.S. GAAP liability (including NPR)	$	12,606		$	8,860
NPR adjustment	3,673			4,619
Subtotal	16,279			13,479
Adjustments including risk margins and valuation methodology differences	(4,618		)	(4,084		)
Economic liability managed through the ALM strategy	$	11,661		$	9,395

As of June 30, 2019, our fixed income instruments and derivative assets exceed the economic liability within the entities in which the risks reside.

The following table illustrates the net impact to our Unaudited Interim Consolidated Statements of Operations from changes in the U.S. GAAP embedded derivative liability and hedge positions under the ALM strategy, and the related amortization of DAC and other costs, that are excluded from adjusted operating income.

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	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in millions)(1)
Excluding impact of assumption updates and other refinements:
Net hedging impact(2)	$	(35	)	$	10		$	(90	)	$	(140	)
Change in portions of U.S. GAAP liability, before NPR(3)	(831		)	127			(511		)	497
Change in the NPR adjustment	229			(53		)	(834		)	131
Net impact from changes in the U.S. GAAP embedded derivative and hedge positions	(637		)	84			(1,435		)	488
Related benefit (charge) to amortization of DAC and other costs	88			(61		)	249			(167		)
Net impact of assumption updates and other refinements	17			(173		)	17			(173		)
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	$	(532	)	$	(150	)	$	(1,169	)	$	148

__________


(1)	Positive amount represents income; negative amount represents a loss.


(2)	Net hedging impact represents the difference between the change in fair value of the risk we seek to hedge using derivatives and the change in fair value of the derivatives utilized with respect to that risk.


(3)	Represents risk margins and valuation methodology differences between the economic liability managed by the ALM strategy and the U.S. GAAP liability.

For the three and six months ended June 30, 2019, the net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs, was a net charge of $532 million and $1,169 million, respectively. The net impact from changes in the U.S. GAAP embedded derivative and hedge positions resulted in a net charge of $637 million in the second quarter of 2019 primarily reflecting declining interest rates, and a net charge of $1,435 million in the first six months of 2019 driven by tightening credit spreads used in measuring our living benefit contracts and declining interest rates.

For the three months ended June 30, 2018, the net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs was a net charge of $150 million which primarily reflected the impact of a $173 million net charge from our annual reviews and update of assumptions and other refinements, including updates to expected withdrawal rates, as well as economic assumptions. For the six months ended June 30, 2018, the net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs was a benefit of $148 million which primarily reflected a $488 million net impact from changes in the U.S. GAAP embedded derivative and hedge positions as a result of a widening of credit spreads used in measuring our living benefit contracts. This benefit was partially offset by the impact of a $173 million net charge from our annual reviews and update of assumptions and other refinements, including updates to expected withdrawal rates, as well as economic assumptions; and by the impact of $167 million of related charges to amortization of DAC and other costs.

For information regarding the Capital Protection Framework (the “Framework”) we use to evaluate and support the risks of the ALM strategy, see “—Liquidity and Capital Resources—Capital.”

Capital Hedge Program

We employ a capital hedge program within the Individual Annuities segment to hedge equity market impacts. The program is intended to protect a portion of the overall capital position of the variable annuities business against its exposure to the equity markets. The capital hedge program is conducted using equity derivatives which include equity call and put options, total return swaps and futures contracts. The changes in value of these derivatives are recognized in adjusted operating income over the expected duration of the capital hedge program.

External Reinsurance

As of June 30, 2019, living benefit guarantees associated with $3.1 billion of Highest Daily Lifetime Income (“HDI”) v.3.0 account values are reinsured to Union Hamilton Reinsurance Ltd., an external counterparty, pursuant to a quota share agreement that covered approximately 50% of new business between April 1, 2015 and December 31, 2016. HDI v.3.0 is the current version of our “highest daily” living benefits guarantee that is available with our Prudential Premier® Retirement Variable Annuity. New sales of HDI v.3.0 subsequent to December 31, 2016 are not covered by this external reinsurance agreement.

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Product Specific Risks and Risk Mitigants

As noted above, the risks associated with our products are mitigated through product design features, including automatic rebalancing, as well as through our ALM strategy and external reinsurance. The following table sets forth the risk management profile of our living benefit guarantees and guaranteed minimum death benefit (“GMDB”) features as of the periods indicated.



	June 30, 2019				December 31, 2018				June 30, 2018
	Account Value		% of Total		Account Value		% of Total		Account Value		% of Total
	($ in millions)
Living benefit/GMDB features(1):
Both ALM strategy and automatic rebalancing(2)	$	109,819	68	%	$	101,496	69	%	$	111,146	69	%
ALM strategy only	7,855		5	%	7,520		5	%	8,676		5	%
Automatic rebalancing only	778		1	%	804		1	%	909		1	%
External reinsurance(3)	3,096		2	%	2,873		2	%	3,146		2	%
Prudential Defined Income Variable Annuity	14,248		9	%	11,237		7	%	10,142		6	%
Other products	2,475		1	%	2,306		2	%	2,651		2	%
Total living benefit/GMDB features	$	138,271			$	126,236			$	136,670
GMDB features and other(4)	22,746		14	%	21,103		14	%	23,473		15	%
Total variable annuity account value	$	161,017			$	147,339			$	160,143

__________


(1)	All contracts with living benefit guarantees also contain GMDB features, which cover the same insured contract.


(2)	Contracts with living benefits that are included in the ALM strategy and have an automatic rebalancing feature.


(3)	Represents contracts subject to a reinsurance transaction with an external counterparty that covered certain new HDI business from April 1, 2015 through December 31, 2016. These contracts with living benefits also have an automatic rebalancing feature.


(4)	Includes contracts that have a GMDB feature and do not have an automatic rebalancing feature.

Individual Life

Operating Results

The following table sets forth the Individual Life segment’s operating results for the periods indicated.



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in millions)
Operating results:
Revenues	$	1,508		$	1,451		$	2,990		$	2,876
Benefits and expenses	1,643			1,408			3,020			2,797
Adjusted operating income	(135		)	43			(30		)	79
Realized investment gains (losses), net, and related adjustments	158			(84		)	277			(272		)
Related charges	(62		)	(8		)	(168		)	93
Market experience updates(1)	(160		)	0			(160		)	0
Income (loss) before income taxes and equity in earnings of operating joint ventures	$	(199	)	$	(49	)	$	(81	)	$	(100	)

__________

(1)

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Adjusted Operating Income

Three Month Comparison. Adjusted operating income decreased $178 million, primarily reflecting an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for the second quarter of 2019 included a $208 million net charge from this annual review, mainly driven by unfavorable impacts related to mortality rate assumptions. Results for the second quarter of 2018 included a $65 million net charge from this annual review, mainly driven by unfavorable impacts related to lapse and mortality rate assumptions. Excluding this item, adjusted operating income decreased $35 million, primarily reflecting lower underwriting results, driven by the unfavorable ongoing impact from our second quarter 2019 assumption update on current quarter results and a more unfavorable impact from mortality experience, net of reinsurance, and higher expenses. These decreases were partially offset by a higher contribution from net investment spread results driven by continued business growth and higher income on non-coupon investments.

Six Month Comparison. Adjusted operating income decreased $109 million, primarily reflecting an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements, as discussed above. Excluding this item, adjusted operating income increased $34 million, primarily reflecting a favorable net impact in the first quarter of 2019 from changes in our estimated profitability of the business driven by equity market performance on policyholder accounts. Beginning in the second quarter of 2019, this activity is excluded from adjusted operating income (see Note 14 to the Unaudited Interim Consolidated Financial Statements for further information). Also contributing to the increase was a higher contribution from net investment spread results driven by continued business growth and higher income on non-coupon investments. These increases were partially offset by lower underwriting results driven by the unfavorable ongoing impact from our second quarter 2019 assumption update on current period results and higher expenses.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues, as shown in the table above under “—Operating Results,” increased $57 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues increased $94 million. This increase was primarily driven by an increase in net investment income from higher average invested assets resulting from continued business growth, higher investment income from unaffiliated reserve financing activity that resulted in a corresponding increase in interest expense, as discussed below, and higher income on non-coupon investments.

Benefits and expenses, as shown in the table above under “—Operating Results,” increased $235 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $129 million. This increase was driven by higher policyholders’ benefits and interest credited to account balances attributable to continued business growth, the ongoing impact of the assumption update, as discussed above, and an unfavorable impact from mortality experience, net of reinsurance. Also contributing to the increase was higher reserve financing costs, as discussed above.

Six Month Comparison. Revenues increased $114 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues increased $151 million. This increase was primarily driven by an increase in net investment income from higher average invested assets resulting from continued business growth, higher investment income from unaffiliated reserve financing activity that resulted in a corresponding increase in interest expense, as discussed below, and higher income on non-coupon investments.

Benefits and expenses increased $223 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $117 million. This increase was primarily driven by higher policyholders’ benefits and interest credited to account balances attributable to continued business growth and the ongoing impact of the assumption update, as discussed above. Also contributing to the increase was higher reserve financing costs, as discussed above.

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Sales Results

The following table sets forth individual life insurance annualized new business premiums, as defined under “—Results of Operations—Segment Measures” above, by distribution channel and product, for the periods indicated.



	Three Months Ended June 30, 2019						Three Months Ended June 30, 2018
	Prudential Advisors		Third- Party		Total		Prudential Advisors		Third- Party		Total
	(in millions)
Term Life	$	7	$	46	$	53	$	7	$	47	$	54
Guaranteed Universal Life(1)	2		22		24		2		22		24
Other Universal Life(1)	11		37		48		11		18		29
Variable Life	19		37		56		13		22		35
Total	$	39	$	142	$	181	$	33	$	109	$	142

	Six Months Ended June 30, 2019						Six Months Ended June 30, 2018
	Prudential Advisors		Third- Party		Total		Prudential Advisors		Third- Party		Total
	(in millions)
Term Life	$	14	$	90	$	104	$	14	$	89	$	103
Guaranteed Universal Life(1)	4		41		45		5		40		45
Other Universal Life(1)	20		58		78		20		35		55
Variable Life	35		82		117		24		40		64
Total	$	73	$	271	$	344	$	63	$	204	$	267

__________

(1)

Single pay life premiums and excess (unscheduled) premiums are included in annualized new business premiums based on a 10% credit and represented approximately 5% and 5% of Guaranteed Universal Life and 0% and 0% of Other Universal Life annualized new business premiums for the three months ended June 30, 2019 and 2018, respectively, and approximately 6% and 14% of Guaranteed Universal Life and 0% and 0% of Other Universal Life annualized new business premiums for the six months ended June 30, 2019 and 2018, respectively.

Total annualized new business premiums for the second quarter and the first six months of 2019 increased $39 million and $77 million, respectively, compared to the prior year periods primarily driven by higher sales of variable life products as a result of product design and pricing actions implemented in September 2018. The increases for both periods were also driven by higher sales of other universal life products as a result of large case activity in the second quarter of 2019.

International Insurance Division

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 in “—Results of Operations—Impact of Foreign Currency Exchange Rates” 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 105 yen per U.S. dollar and Korean won at a rate of 1110 won per U.S. dollar, both of which were determined in connection with the foreign currency income hedging program discussed in “—Results of Operations—Impact of Foreign Currency Exchange Rates” 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.

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	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in millions)
Operating results:
Revenues:
Life Planner operations	$	2,852		$	2,687		$	6,027		$	5,765
Gibraltar Life and Other operations	2,649			2,601			5,626			5,563
Total revenues	5,501			5,288			11,653			11,328
Benefits and expenses:
Life Planner operations	2,414			2,311			5,108			4,973
Gibraltar Life and Other operations	2,238			2,193			4,774			4,715
Total benefits and expenses	4,652			4,504			9,882			9,688
Adjusted operating income:
Life Planner operations	438			376			919			792
Gibraltar Life and Other operations	411			408			852			848
Total adjusted operating income	849			784			1,771			1,640
Realized investment gains (losses), net, and related adjustments	259			205			791			50
Related charges	(3		)	1			(3		)	1
Market experience updates(1)	(38		)	0			(38		)	0
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net	(18		)	26			106			(88		)
Change in experience-rated contractholder liabilities due to asset value changes	18			(26		)	(106		)	88
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests	(28		)	(16		)	(58		)	(33		)
Income (loss) before income taxes and equity in earnings of operating joint ventures	$	1,039		$	974		$	2,463		$	1,658

__________

(1)

Adjusted Operating Income

Three Month Comparison. Adjusted operating income from our Life Planner operations increased $62 million, including a net favorable impact of $2 million from currency fluctuations, inclusive of the currency hedging program discussed above. Both periods also include the impact of our annual reviews and update of assumptions and other refinements, which resulted in a $1 million net benefit in the second quarter of 2019 compared to a $49 million net charge in the second quarter of 2018. The net charge in 2018 was primarily driven by the impact from unfavorable economic assumption updates driven by a lower long-term interest rate assumption in Japan.

Excluding these items, adjusted operating income increased $10 million, primarily reflecting the growth of business in force in our Japan and Brazil operations and higher underwriting results driven by a favorable impact from mortality experience and policyholders’ behavior. These increases were mostly offset by higher expenses driven by business growth and costs associated with business initiatives.

Adjusted operating income from our Gibraltar Life and Other operations increased $3 million, including a net favorable impact of $3 million from currency fluctuations, inclusive of the currency hedging program discussed above. Both periods also include the impact of our annual reviews and update of assumptions and other refinements, which resulted in a $7 million net benefit in the second quarter of 2019 compared to a $32 million net charge in the second quarter of 2018. The net benefit in 2019 reflected a net positive impact primarily related to updates to lapse assumptions. The net charge in 2018 was primarily driven by the impact from unfavorable economic assumption updates driven by a lower long-term interest rate assumption in Japan, as well as other refinements.

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Excluding these items, adjusted operating income from our Gibraltar Life and Other operations decreased $39 million, primarily reflecting higher expenses, including costs associated with business initiatives, and lower underwriting results driven by a less favorable impact from mortality experience. These decreases were partially offset by growth of business in force and more favorable results from joint venture investments.

Six Month Comparison. Adjusted operating income from our Life Planner operations increased $127 million, including a net favorable impact of $7 million from currency fluctuations, inclusive of the currency hedging program discussed above. Excluding the impact of currency fluctuations, as well as the impact from our annual reviews and update of assumptions and other refinements as discussed above, adjusted operating income increased $70 million, primarily reflecting the growth of business in force in our Japan and Brazil operations and higher underwriting results driven by a favorable impact from mortality experience and policyholders’ behavior. Also contributing to the increase was a favorable net impact in the first quarter of 2019 from changes in our profitability of the business driven by equity market performance on policyholder accounts. Beginning in the second quarter of 2019, this activity is excluded from adjusted operating income (see Note 14 to the Unaudited Interim Consolidated Financial Statements for further information). These increases were partially offset by higher expenses, driven by business growth and costs associated with business initiatives.

Adjusted operating income from our Gibraltar Life and Other operations increased $4 million, including a net favorable impact of $9 million from currency fluctuations, inclusive of the currency hedging program discussed above. Excluding the impact of currency fluctuations, as well as the impact from our annual reviews and update of assumptions and other refinements as discussed above, adjusted operating income from our Gibraltar Life and Other operations decreased $44 million, primarily reflecting higher expenses, including costs associated with business initiatives. Also contributing to the decrease were lower underwriting results driven by a less favorable impact from mortality experience. These decreases were partially offset by growth of business in force, as well as higher net investment results driven by higher average invested assets resulting from continued business growth.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues from our Life Planner operations, as shown in the table above under “—Operating Results,” increased $165 million, including a net unfavorable impact of $53 million from currency fluctuations and a net charge of $16 million from our annual reviews and update of assumptions and other refinements. Excluding these items, revenues increased $234 million, primarily driven by higher premiums and policy charges and fee income related to the growth of business in force.

Benefits and expenses of our Life Planner operations, as shown in the table above under “—Operating Results,” increased $103 million, including a net favorable impact of $55 million from currency fluctuations and a net benefit of $66 million from our annual review and update of assumptions and other refinements. Excluding these items, benefits and expenses increased $224 million. This increase primarily reflects higher policyholders’ benefits, including changes in reserves, driven by business growth, and higher expenses.

Revenues from our Gibraltar Life and Other operations, as shown in the table above under “—Operating Results,” increased $48 million, including a net unfavorable impact of $4 million from currency fluctuations. Excluding this item, revenues increased $52 million, primarily reflecting higher net investment income driven by higher non-coupon investments and higher average invested assets resulting from business growth. Also contributing to the increase were higher other income driven by more favorable results from joint venture investments.

Benefits and expenses of our Gibraltar Life and Other operations, as shown in the table above under “—Operating Results,” increased $45 million, including a net favorable impact of $7 million from currency fluctuations and a net benefit of $39 million from our annual reviews and update of assumptions and other refinements. Excluding these items, benefits and expenses increased $91 million, primarily driven by an increase in policyholders’ benefits, including changes in reserves, driven by continued business growth, and higher expenses, including costs associated with business initiatives.

Six Month Comparison. Revenues from our Life Planner operations increased $262 million, including a net unfavorable impact of $137 million from currency fluctuations and a net charge of $16 million from our annual reviews and update of assumptions and other refinements. Excluding these items, revenues increased $415 million, primarily driven by higher premiums and policy charges and fee income related to the growth of business in force.

Benefits and expenses of our Life Planner operations increased $135 million, including a net favorable impact of $144 million from currency fluctuations and a net benefit of $66 million from our annual review and update of assumptions and other refinements. Excluding these items, benefits and expenses increased $345 million. This increase primarily reflects higher policyholders’ benefits, including changes in reserves, driven by business growth, and higher expenses.

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Revenues from our Gibraltar Life and Other operations increased $63 million, including a net unfavorable impact of $34 million from currency fluctuations. Excluding this item, revenues increased $97 million, primarily reflecting higher net investment income driven by higher average invested assets resulting from continued business growth.

Benefits and expenses of our Gibraltar Life and Other operations increased $59 million, including a net favorable impact of $43 million from currency fluctuations and a net benefit of $39 million from our annual reviews and update of assumptions and other refinements. Excluding these items, benefits and expenses increased $141 million, primarily driven by an increase in policyholders’ benefits, including changes in reserves, driven by business growth, and higher expenses, including costs associated with business initiatives.

Sales Results

The following table sets forth annualized new business premiums, as defined under “—Results of Operations—Segment Measures” above, on an actual and constant exchange rate basis for the periods indicated.



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(in millions)
Annualized new business premiums:
On an actual exchange rate basis:
Life Planner operations	$	224	$	296	$	628	$	647
Gibraltar Life	271		399		594		806
Total	$	495	$	695	$	1,222	$	1,453
On a constant exchange rate basis:
Life Planner operations	$	309	$	295	$	718	$	639
Gibraltar Life	297		401		622		809
Total	$	606	$	696	$	1,340	$	1,448

The amount of annualized new business premiums and the sales mix in terms of types and currency denomination of products for any given period can be significantly impacted by several factors, including but not limited to: the addition of new products, discontinuation of existing products, changes in credited interest rates for certain products and other product modifications, changes in premium rates, changes in interest rates or fluctuations in currency markets, changes in tax laws, changes in life insurance regulations or changes in the competitive environment. Sales volume may increase or decrease prior to certain of these changes becoming effective, and then fluctuate in the other direction following such changes.

Our diverse product portfolio in Japan, in terms of currency mix and premium payment structure, allows us to adapt to changing market and competitive dynamics, including the extremely low interest rate environment. We regularly examine our product offerings and their related profitability and, as a result, we have repriced or discontinued sales of certain products that do not meet our profit expectations. The impact of these actions, coupled with the introduction of certain new products, has generally resulted in an increase in sales of products denominated in U.S. dollars relative to products denominated in other currencies.

The table below presents annualized new business premiums on a constant exchange rate basis, by product and distribution channel, for the periods indicated.

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	Three Months Ended June 30, 2019										Three Months Ended June 30, 2018
	Life		Accident & Health		Retirement(1)		Annuity		Total		Life		Accident & Health		Retirement(1)		Annuity		Total
	(in millions)
Life Planner	$	166	$	26	$	96	$	21	$	309	$	165	$	27	$	77	$	26	$	295
Gibraltar Life:
Life Consultants	$	84	$	10	$	18	$	56	$	168	$	73	$	11	$	24	$	127	$	235
Banks(2)	73		0		9		3		85		88		0		6		10		104
Independent Agency	19		3		18		4		44		32		5		18		7		62
Subtotal	176		13		45		63		297		193		16		48		144		401
Total	$	342	$	39	$	141	$	84	$	606	$	358	$	43	$	125	$	170	$	696

__________


(1)	Includes retirement income, endowment and savings 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 0% and 68%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended June 30, 2019, and 0% and 75%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended June 30, 2018.

Three Month Comparison. Annualized new business premiums, on a constant exchange rate basis, from our Life Planner operations increased $14 million, primarily reflecting higher sales in our Brazil operation driven by growth in Life Planner headcount.

Annualized new business premiums, on a constant exchange rate basis, from our Gibraltar Life and Other operations decreased $104 million. Life Consultants sales decreased $67 million, primarily reflecting lower sales of USD-denominated fixed annuity products driven by declines in crediting rates and prioritization of our strategy to focus on recurring pay protection products. Bank channel sales decreased $19 million, primarily from lower sales of USD-denominated life products due to increased competition. Independent Agency sales decreased $18 million, primarily driven by the suspension of corporate term products in the first quarter of 2019 (see “Overview—Regulatory Developments—Japan Corporate Product Tax Rules”) and declines in crediting rates for fixed annuity products.

The table below presents annualized new business premiums on a constant exchange rate basis, by product and distribution channel, for the periods indicated.



	Six Months Ended June 30, 2019										Six Months Ended June 30, 2018
	Life		Accident & Health		Retirement(1)		Annuity		Total		Life		Accident & Health		Retirement(1)		Annuity		Total
	(in millions)
Life Planner	$	403	$	62	$	212	$	41	$	718	$	348	$	57	$	186	$	48	$	639
Gibraltar Life:
Life Consultants	$	171	$	21	$	41	$	101	$	334	$	150	$	23	$	53	$	206	$	432
Banks(2)	167		0		18		8		193		224		0		14		24		262
Independent Agency	50		6		27		12		95		58		8		34		15		115
Subtotal	388		27		86		121		622		432		31		101		245		809
Total	$	791	$	89	$	298	$	162	$	1,340	$	780	$	88	$	287	$	293	$	1,448

__________


(1)	Includes retirement income, endowment and savings 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 0% and 66%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the six months ended June 30, 2019, and 0% and 73%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the six months ended June 30, 2018.

Six Month Comparison. Annualized new business premiums, on a constant exchange rate basis, from our Life Planner operations increased $79 million, primarily reflecting higher sales of USD-denominated products driven by growth in Life Planner headcount, as well as higher average premium sizes, in our Japan and Brazil operations.

Annualized new business premiums, on a constant exchange rate basis, from our Gibraltar Life and Other operations decreased $187 million. Life Consultants sales decreased $98 million, primarily reflecting lower sales of U.S. dollar-denominated fixed

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annuity products driven by declines in crediting rates and prioritization of our strategy to focus on recurring pay protection products. Bank channel sales decreased $69 million, primarily from lower sales of USD-denominated life products due to increased competition. Independent Agency sales decreased $20 million, primarily driven by the suspension of corporate term products in the first quarter of 2019 (see “Overview—Regulatory Developments—Japan Corporate Product Tax Rules”) and declines in crediting rates for fixed annuity products.

Corporate and Other

Corporate and Other includes corporate operations, after allocations to our business segments, and Divested and Run-off Businesses other than those that qualify for “discontinued operations” accounting treatment under U.S. GAAP.



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in millions)
Operating results:
Capital debt interest expense	$	(200	)	$	(172	)	$	(399	)	$	(353	)
Investment income, net of operating debt interest expense	42			9			86			36
Pension and employee benefits	36			56			60			96
Other corporate activities(1)	(213		)	(179		)	(494		)	(359		)
Adjusted operating income	(335		)	(286		)	(747		)	(580		)
Realized investment gains (losses), net, and related adjustments	(157		)	199			(207		)	228
Related charges	(81		)	1			(87		)	4
Divested and Run-off Businesses	112			(1,526		)	286			(1,598		)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests	(7		)	4			(15		)	3
Income (loss) before income taxes and equity in earnings of operating joint ventures	$	(468	)	$	(1,608	)	$	(770	)	$	(1,943	)

__________


(1)	Includes consolidating adjustments.

Three Month Comparison. The loss from Corporate and Other operations, on an adjusted operating income basis, increased $49 million. Net charges from other corporate activities increased $34 million, primarily reflecting higher costs for long-term and deferred employee compensation plans tied to Company stock and equity market performance, and increases in other corporate costs, including higher expenses related to corporate initiatives partially offset by lower enhanced supervision costs. Capital debt interest expense increased $28 million, reflecting higher average debt balances. Results from pension and employee benefits decreased $20 million, primarily reflecting lower income from our qualified pension plan, due to higher interest costs on plan obligations driven by the increase in interest rates in 2018. Results for investment income, net of operating debt interest expense, increased $33 million, including higher income on highly liquid assets.

Six Month Comparison. The loss from Corporate and Other operations, on an adjusted operating income basis, increased $167 million. Net charges from other corporate activities increased $135 million, primarily reflecting higher costs for long-term and deferred employee compensation plans tied to Company stock and equity market performance, and increases in other corporate costs, including higher expenses related to corporate initiatives partially offset by lower enhanced supervision costs. Capital debt interest expense increased $46 million, reflecting higher average debt balances. Results from pension and employee benefits decreased $36 million, primarily reflecting lower income from our qualified pension plan, due to higher interest costs on plan obligations driven by the increase in interest rates in 2018. Results for investment income, net of operating debt interest expense, increased $50 million, primarily reflecting higher income on highly liquid assets.

Divested and Run-off Businesses

Divested and Run-off Businesses Included in Corporate and Other

Income from our Divested and Run-off Businesses includes results from several businesses that have been or will be sold or exited, including businesses that have been placed in wind down status that do not qualify for “discontinued operations” accounting treatment under U.S. GAAP. The results of these Divested and Run-off Businesses are reflected in our Corporate and Other operations, but are excluded from adjusted operating income. A summary of the results of the Divested and Run-off Businesses reflected in our Corporate and Other operations is as follows for the periods indicated:

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	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in millions)
Long-Term Care	$	145		$	(1,425	)	$	309		$	(1,498	)
Other	(33		)	(101		)	(23		)	(100		)
Total Divested and Run-off Businesses income (loss) excluded from adjusted operating income	$	112		$	(1,526	)	$	286		$	(1,598	)

Long-Term Care. Results for the second quarter and the first six months of 2019 increased compared to the prior year periods, primarily reflecting a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for the second quarter of 2019 included a $9 million net charge from these updates. Results for the prior period included a $1,458 million net charge from these updates, including the removal of our assumption of expected future morbidity improvement, reflecting unfavorable morbidity experience relative to prior expectations. Excluding these items, results for the second quarter and the first six months of 2019 increased compared to the prior year periods, reflecting net realized investment gains in the current periods compared to net realized investment losses in the prior year periods, driven by the favorable comparative change in market values of derivatives used for duration management. The increases also reflect the favorable comparative increase in the market value of investments in equity securities.

Other. Results for the second quarter and the first six months of 2019 reflect less unfavorable results compared to the prior year periods primarily reflecting lower comparative losses in the current period related to the anticipated sale of our Pramerica of Italy subsidiary and the exit of our PGIM Brazil operations in the second quarter of 2018. In August 2019, we entered into an agreement to sell our Pramerica of Italy subsidiary, subject to regulatory approvals and customary closing conditions.

Closed Block Division

The Closed Block division includes certain 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 (collectively the “Closed Block”), as well as certain related assets and liabilities. We no longer offer these traditional domestic participating policies. See Note 8 to the Unaudited Interim Consolidated Financial Statements for additional details.

Each year, the Board of Directors of The Prudential Insurance Company of America (“PICA”) 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 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 division 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 PICA.

As of June 30, 2019, the excess of actual cumulative earnings over the expected cumulative earnings was $2,359 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 has been reflected as a policyholder dividend obligation of $3,201 million at June 30, 2019, to be paid to Closed Block policyholders unless offset by future experience, with a corresponding amount reported in AOCI.

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Operating Results

The following table sets forth the Closed Block division’s results for the periods indicated.



	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in millions)
U.S. GAAP results:
Revenues	$	1,301		$	1,388		$	2,675		$	2,551
Benefits and expenses	1,322			1,419			2,715			2,591
Income (loss) before income taxes and equity in earnings of operating joint ventures	$	(21	)	$	(31	)	$	(40	)	$	(40	)

Income (loss) Before Income Taxes and Equity in Earnings of Operating Joint Ventures

Three Month Comparison. Income (loss) before income taxes and equity in earnings of operating joint ventures decreased $10 million. Net realized investment gains and related activity decreased $52 million primarily due to lower gains from derivatives used in risk management activities, partially offset by gains from sales of fixed maturities. Net insurance activity results decreased $19 million primarily due to higher benefit payments. Net investment income decreased $17 million, primarily due to lower prepayment fee income. As a result of the above and other variances, a $17 million reduction in the policyholder dividend obligation was recorded in the second quarter of 2019, compared to a $64 million increase in the second quarter of 2018. If actual cumulative earnings fall below expected cumulative earnings in future periods, earnings volatility in the Closed Block division, which is primarily due to changes in investment results, may not be offset by changes in the cumulative earnings policyholder dividend obligation. For a discussion of Closed Block division realized investment gains (losses), net, see “—General Account Investments.”

Six Month Comparison. Income (loss) before income taxes and equity in earnings of operating joint ventures remained flat. Net realized investment gains and related activity increased $214 million primarily due to favorable changes in the value of equity securities. Net investment income decreased $47 million, primarily due to lower income on coupon and non-coupon investments and prepayment fee income. Net insurance activity results decreased $26 million primarily due to higher benefit payments. As a result of the above and other variances, a $106 million increase in the policyholder dividend obligation was recorded in the first six months 2019, compared to a $75 million reduction in the first six months of 2018. If actual cumulative earnings fall below expected cumulative earnings in future periods, earnings volatility in the Closed Block division, which is primarily due to changes in investment results, may not be offset by changes in the cumulative earnings policyholder dividend obligation. For a discussion of Closed Block division realized investment gains (losses), net, see “—General Account Investments.”

Revenues, Benefits and Expenses

Three Month Comparison. Revenues, as shown in the table above under “—U.S. GAAP results,” decreased $87 million due to lower net realized investment gains and related activity, as discussed above, lower premiums due to runoff of policies in force, and lower net investment income, as discussed above.

Benefits and expenses, as shown in the table above under “—U.S. GAAP results,” decreased $97 million primarily due to a $95 million decrease in dividends to policyholders, reflecting a decrease in the policyholder dividend obligation expense due to changes in cumulative earnings.

Six Month Comparison. Revenues increased $124 million due to increases in net realized investment gains and related activity, partially offset by lower net investment income, as discussed above, and lower premiums due to runoff of policies in force.

Benefits and expenses increased $124 million, primarily due to a $150 million increase in dividends to policyholders, reflecting an increase in the policyholder dividend obligation expense due to changes in cumulative earnings.

Income Taxes

For information regarding income taxes, see Note 9 to the Unaudited Interim Consolidated Financial Statements.

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Experience-Rated Contractholder Liabilities,

Assets Supporting Experience-Rated Contractholder 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 carried at fair value. These investments are reflected on the Unaudited Interim Consolidated Statements of Financial Position as “Assets supporting experience-rated contractholder liabilities, at fair value.” Realized and unrealized gains (losses) for these investments are reported in “Other income (loss).” 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 Unaudited Interim Consolidated Statements of Financial Position as “Other invested assets” and are carried at fair value, and the realized and unrealized gains (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 Unaudited Interim Consolidated Statements of Financial Position as “Commercial mortgage and other loans.” Gains (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 assets supporting experience-rated contractholder liabilities 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, primarily classified in the Unaudited Interim Consolidated Statements of Financial Position as “Policyholders’ account balances.” 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 (losses) on assets supporting experience-rated contractholder liabilities, related derivatives and commercial mortgage and other loans. This is consistent with the exclusion of realized investment gains (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 (losses) on investments, adjusted operating income also excludes the change in contractholder liabilities due to asset value changes in the pool of investments (including changes in the fair value of commercial mortgage and other loans) supporting these experience-rated contracts, which are reflected in “Interest credited to policyholders’ account balances.” The result of this approach is that adjusted operating income for these products includes net fee revenue and interest spread 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.

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The following table sets forth the impact on results for the periods indicated of these items that are excluded from adjusted operating income:



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in millions)
Retirement Segment:
Investment gains (losses) on:
Assets supporting experience-rated contractholder liabilities, net	$	305		$	(219	)	$	635		$	(508	)
Derivatives	17			77			14			40
Commercial mortgages and other loans	(4		)	1			(5		)	3
Change in experience-rated contractholder liabilities due to asset value changes(1)(2)	(331		)	111			(610		)	415
Net gains (losses)	$	(13	)	$	(30	)	$	34		$	(50	)
International Insurance Segment:
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net	$	(18	)	$	26		$	106		$	(88	)
Change in experience-rated contractholder liabilities due to asset value changes	18			(26		)	(106		)	88
Net gains (losses)	$	0		$	0		$	0		$	0
Total:
Investment gains (losses) on:
Assets supporting experience-rated contractholder liabilities, net	$	287		$	(193	)	$	741		$	(596	)
Derivatives	17			77			14			40
Commercial mortgages and other loans	(4		)	1			(5		)	3
Change in experience-rated contractholder liabilities due to asset value changes(1)(2)	(313		)	85			(716		)	503
Net gains (losses)	$	(13	)	$	(30	)	$	34		$	(50	)

__________

(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 $9 million and $122 million as of June 30, 2019 and 2018, 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 an increase of $26 million and a decrease of $13 million for the three months ended June 30, 2019 and 2018, respectively, and an increase of $55 million and a decrease of $30 million for the six months ended June 30, 2019 and 2018, 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 (losses) on assets supporting experience-rated contractholder liabilities and other related investments reflect timing differences between the recognition of the mark-to-market adjustments and the recognition of the 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 mortgages 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 significant unobservable input in the measurement. See Note 6 to the Unaudited Interim Consolidated Financial Statements for an additional description of the valuation hierarchy levels as well as for the balances of assets and liabilities measured at fair value on a recurring basis by hierarchy level presented on a consolidated basis.

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The table below presents the balances of assets and liabilities measured at fair value on a recurring basis, as of the periods indicated, and the portion of such assets and liabilities that are classified in Level 3 of the valuation hierarchy. The table also provides details about these assets and liabilities excluding those held in the Closed Block division. We believe the amounts excluding the Closed Block division are most relevant to an understanding of our operations that are pertinent to investors in Prudential Financial because substantially all Closed Block division assets support obligations and liabilities relating to the Closed Block policies only. See Note 8 to the Unaudited Interim Consolidated Financial Statements for further information on the Closed Block.



	As of June 30, 2019								As of December 31, 2018
	PFI excluding Closed Block Division				Closed Block Division				PFI excluding Closed Block Division				Closed Block Division
	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	$	342,562	$	3,069	$	40,828	$	706	$	314,911	$	3,455	$	38,745	$	780
Assets supporting experience-rated contractholder liabilities:
Fixed maturities	19,839		636		0		0		19,579		818		0		0
Equity securities	1,633		1		0		0		1,460		1		0		0
All other(2)	366		1		0		0		215		0		0		0
Subtotal	21,838		638		0		0		21,254		819		0		0
Fixed maturities, trading	3,519		285		236		11		3,048		204		195		2
Equity securities	4,612		549		2,055		75		4,316		604		1,784		67
Commercial mortgage and other loans	645		0		0		0		763		0		0		0
Other invested assets(3)	1,478		436		0		0		1,404		263		5		0
Short-term investments	4,057		214		569		74		5,040		65		453		24
Cash equivalents	7,387		1		530		0		9,027		59		451		18
Other assets	98		98		0		0		25		25		0		0
Separate account assets	279,072		1,708		0		0		254,066		1,534		0		0
Total assets	$	665,268	$	6,998	$	44,218	$	866	$	613,854	$	7,028	$	41,633	$	891
Future policy benefits	$	12,723	$	12,723	$	0	$	0	$	8,926	$	8,926	$	0	$	0
Policyholders’ account balances	1,047		1,047		0		0		56		56		0		0
Other liabilities(3)	556		0		1		0		135		0		0		0
Notes issued by consolidated variable interest entities (“VIEs”)	816		816		0		0		595		595		0		0
Total liabilities	$	15,142	$	14,586	$	1	$	0	$	9,712	$	9,577	$	0	$	0

__________


(1)	Level 3 assets expressed as a percentage of total assets measured at fair value on a recurring basis for PFI excluding the Closed Block division and for the Closed Block division totaled 1.1% and 2.0%, respectively, as of June 30, 2019, and 1.1% and 2.1%, respectively, as of December 31, 2018.


(2)	“All other” represents cash equivalents and short-term investments.


(3)	“Other invested assets” and “Other liabilities” primarily include derivatives. The amounts include the impact of netting subject to master netting agreements.

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 which are valued using Level 3 inputs and could have a significant impact on our results of operations.

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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 internal valuation models use significant unobservable inputs and, accordingly, such securities are included in Level 3 in our fair value hierarchy. Level 3 fixed maturity securities for PFI excluding the Closed Block division included approximately $1.4 billion of public fixed maturities as of June 30, 2019, with values primarily based on indicative broker quotes, and approximately $2.6 billion of private fixed maturities, with values primarily based on internally-developed models. Significant unobservable inputs used included: issue specific spread 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 Company’s determination to classify assets and liabilities within Level 3 is based on significance of the unobservable inputs in the overall fair value measurement. Periodically, transfers between levels are made to reflect changes in observability of inputs and market activity. All transfers are generally reported at the value as of the beginning of the quarter in which transfers occur for any such assets still held at the end of the quarter.

The impact that fair value changes of fixed maturity securities have on the results of operations is dependent on the classification of the security as trading, available-for-sale, or held-to-maturity. For investments classified as trading, changes in fair value are recorded within “Other income (loss).” For investments classified as available-for-sale, changes in fair value are recorded as an unrealized gain or loss in AOCI, a separate component of equity. Investments classified as held-to-maturity are carried at amortized cost and the changes in fair value have no impact on the results of operations.

Separate Account Assets

Separate account assets included in Level 3 primarily include corporate securities and commercial mortgage loans. The valuation of corporate securities is determined as described above for fixed maturity and equity securities. See Note 6 to the Unaudited Interim Consolidated Financial Statements for additional information on the valuation of commercial mortgage loans. Separate account liabilities are reported at contract value and not at fair value.

Variable Annuity Living Benefit Features

Future policy benefits classified in Level 3 primarily include liabilities related to guarantees associated with the 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 future 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 for PFI excluding the Closed Block division were a net liability of $12.7 billion as of June 30, 2019. For additional information, see “—Results of Operations by Segment—U.S. Individual Solutions Division—Individual Annuities.”

Notes Issued by Consolidated VIEs

As discussed in Note 4 to the Unaudited Interim Consolidated Financial Statements, notes issued by consolidated VIEs represent non-recourse notes issued by certain asset-backed investment vehicles, primarily collateralized loan obligations (“CLOs”), which we are required to consolidate. We have elected the fair value option for these notes, which are valued based on corresponding bank loan collateral.

For additional information about the key estimates and assumptions used in our determination of fair value, see Note 6 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

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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 invested assets such as limited partnerships and limited liability companies (“LPs/LLCs”), real estate held through direct ownership, derivative instruments 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 PGIM 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 our general account investment portfolio apportioned between PFI excluding the Closed Block division and the Closed Block division, as of the dates indicated:



	June 30, 2019
	PFI Excluding Closed Block Division				Closed Block Division		Total
	($ in millions)
Fixed maturities:
Public, available-for-sale, at fair value	$	292,636	65.5	%	$	28,176	$	320,812
Public, held-to-maturity, at amortized cost	1,754		0.4		0		1,754
Private, available-for-sale, at fair value	49,421		11.1		12,652		62,073
Private, held-to-maturity, at amortized cost	255		0.1		0		255
Fixed maturities, trading, at fair value	2,316		0.5		236		2,552
Assets supporting experience-rated contractholder liabilities, at fair value	21,843		4.9		0		21,843
Equity securities, at fair value	4,125		0.9		2,055		6,180
Commercial mortgage and other loans, at book value	52,100		11.7		8,451		60,551
Policy loans, at outstanding balance	7,702		1.7		4,328		12,030
Other invested assets(1)	8,825		2.0		3,291		12,116
Short-term investments	5,198		1.2		660		5,858
Total general account investments	446,175		100.0	%	59,849		506,024
Invested assets of other entities and operations(2)	5,988				0		5,988
Total investments	$	452,163			$	59,849	$	512,012

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	December 31, 2018
	PFI Excluding Closed Block Division				Closed Block Division		Total
	($ in millions)
Fixed maturities:
Public, available-for-sale, at fair value	$	269,109	64.8	%	$	26,203	$	295,312
Public, held-to-maturity, at amortized cost	1,745		0.4		0		1,745
Private, available-for-sale, at fair value	45,328		10.9		12,542		57,870
Private, held-to-maturity, at amortized cost	268		0.1		0		268
Fixed maturities, trading, at fair value	1,893		0.5		195		2,088
Assets supporting experience-rated contractholder liabilities, at fair value	21,254		5.1		0		21,254
Equity securities, at fair value	3,849		0.9		1,784		5,633
Commercial mortgage and other loans, at book value	50,251		12.1		8,782		59,033
Policy loans, at outstanding balance	7,606		1.8		4,410		12,016
Other invested assets(1)	8,407		2.0		3,316		11,723
Short-term investments	5,948		1.4		478		6,426
Total general account investments	415,658		100.0	%	57,710		473,368
Invested assets of other entities and operations(2)	5,877				0		5,877
Total investments	$	421,535			$	57,710	$	479,245

__________


(1)	Other invested assets consist of investments in LPs/LLCs, investment real estate held through direct ownership, derivative instruments and other miscellaneous investments. For additional information regarding these investments, see “—Other Invested Assets” below.


(2)	Includes invested assets of our investment management and derivative operations. Excludes assets of our investment 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 PFI excluding the Closed Block division in the first six months of 2019 was primarily due to market appreciation from a decrease in U.S. and Japan interest rates and tighter credit spreads, the reinvestment of net investment income and net business inflows. For information regarding the methodology used in determining the fair value of our fixed maturities, see Note 6 to the Unaudited Interim Consolidated Financial Statements.

As of both June 30, 2019 and December 31, 2018, 43% of our general account investments attributable to PFI excluding the Closed Block division related to our Japanese insurance operations. The following table sets forth the composition of the investments of our Japanese insurance operations’ general account, as of the dates indicated:



	June 30, 2019		December 31, 2018
	(in millions)
Fixed maturities:
Public, available-for-sale, at fair value	$	143,741	$	133,084
Public, held-to-maturity, at amortized cost	1,754		1,745
Private, available-for-sale, at fair value	17,765		16,222
Private, held-to-maturity, at amortized cost	255		268
Fixed maturities, trading, at fair value	452		328
Assets supporting experience-rated contractholder liabilities, at fair value	2,632		2,441
Equity securities, at fair value	2,011		1,972
Commercial mortgage and other loans, at book value	18,312		17,228
Policy loans, at outstanding balance	2,825		2,715
Other invested assets(1)	2,296		1,957
Short-term investments	303		451
Total Japanese general account investments	$	192,346	$	178,411

__________


(1)	Other invested assets consist of investments in LPs/LLCs, investment real estate held through direct ownership, derivative instruments and other miscellaneous investments.

116

The increase in general account investments related to our Japanese insurance operations in the first six months of 2019 was primarily attributable to market appreciation from a decrease in U.S. and Japan interest rates and tighter credit spreads, net business inflows, and reinvestment of net investment income.

As of June 30, 2019, our Japanese insurance operations had $74.5 billion, at carrying value, of investments denominated in U.S. dollars, including $2.3 billion that were hedged to yen through third-party derivative contracts and $59.4 billion that support liabilities denominated in U.S. dollars, with the remainder hedging our foreign currency exchange rate exposure to U.S. dollar-equivalent equity. As of December 31, 2018, our Japanese insurance operations had $64.9 billion, at carrying value, of investments denominated in U.S. dollars, including $2.5 billion that were hedged to yen through third-party derivative contracts and $50.0 billion that support liabilities denominated in U.S. dollars, with the remainder hedging our foreign currency exchange rate exposure of U.S. dollar-equivalent equity. The $9.6 billion increase in the carrying value of U.S. dollar-denominated investments from December 31, 2018 was primarily attributable to portfolio growth as a result of net business inflows, reinvestment of net investment income, and the impact of the decrease in the U.S. treasury bond rates.

Our Japanese insurance operations had $10.3 billion and $10.1 billion, at carrying value, of investments denominated in Australian dollars that support liabilities denominated in Australian dollars as of June 30, 2019 and December 31, 2018, respectively. The $0.2 billion increase in the carrying value of Australian dollar-denominated investments from December 31, 2018 was primarily attributable to the impact of the decrease in Australian government bond rates. For additional information regarding U.S. and Australian dollar investments held in our Japanese insurance operations and a discussion of our yen hedging strategy, see “—Results of Operations by Segment—Impact of Foreign Currency Exchange Rates” above.

Investment Results

The following tables set forth the investment results of our general account apportioned between PFI excluding the Closed Block division and the Closed Block division, 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 investment gains (losses), net.”

2019 to 2018 Three Month Comparison



	Three Months Ended June 30, 2019
	PFI Excluding Closed Block Division and Japanese Operations					Japanese Insurance Operations					PFI Excluding Closed Block Division					Closed Block Division			Total(5)
	Yield(1)		Amount			Yield(1)		Amount			Yield(1)		Amount			Amount			Amount
	($ in millions)
Fixed maturities(2)	4.63	%	$	1,887		2.83	%	$	955		3.82	%	$	2,842		$	426		$	3,268
Assets supporting experience-rated contractholder liabilities	3.66		175			1.17		7			3.36		182			0			182
Equity securities	1.82		10			5.48		27			3.60		37			14			51
Commercial mortgage and other loans	4.15		350			3.87		174			4.05		524			98			622
Policy loans	5.25		64			3.81		26			4.73		90			62			152
Short-term investments and cash equivalents	2.85		94			2.91		6			2.85		100			10			110
Gross investment income	4.38		2,580			2.97		1,195			3.81		3,775			610			4,385
Investment expenses	(0.12	)	(103		)	(0.13	)	(71		)	(0.13	)	(174		)	(55		)	(229		)
Investment income after investment expenses	4.26	%	2,477			2.84	%	1,124			3.68	%	3,601			555			4,156
Other invested assets(3)			132					52					184			19			203
Investment results of other entities and operations(4)			31					0					31			0			31
Total investment income			$	2,640				$	1,176				$	3,816		$	574		$	4,390

117



	Three Months Ended June 30, 2018
	PFI Excluding Closed Block Division and Japanese Operations					Japanese Insurance Operations					PFI Excluding Closed Block Division					Closed Block Division			Total(5)
	Yield(1)		Amount			Yield(1)		Amount			Yield(1)		Amount			Amount			Amount
	($ in millions)
Fixed maturities(2)	4.68	%	$	1,747		2.87	%	$	922		3.84	%	$	2,669		$	433		$	3,102
Assets supporting experience-rated contractholder liabilities	3.69		174			1.14		7			3.38		181			0			181
Equity securities	1.56		9			5.48		30			3.50		39			14			53
Commercial mortgage and other loans	3.98		328			3.93		156			3.97		484			105			589
Policy loans	5.35		65			3.83		25			4.81		90			66			156
Short-term investments and cash equivalents	2.02		61			1.92		10			2.01		71			9			80
Gross investment income	4.35		2,384			3.00		1,150			3.79		3,534			627			4,161
Investment expenses	(0.15	)	(99		)	(0.12	)	(60		)	(0.14	)	(159		)	(52		)	(211		)
Investment income after investment expenses	4.20	%	2,285			2.88	%	1,090			3.65	%	3,375			575			3,950
Other invested assets(3)			66					33					99			16			115
Investment results of other entities and operations(4)			31					0					31			0			31
Total investment income			$	2,382				$	1,123				$	3,505		$	591		$	4,096

__________

(1)

For interim periods, yields are annualized. The denominator in the yield percentage is based on quarterly average carrying values for all asset types except for fixed maturities which are based on amortized cost. Amounts for fixed maturities, short-term investments and cash equivalents are also netted for securities lending activity (i.e., income netted for rebate expenses and asset values netted for securities lending liabilities). A yield is not presented for other invested assets as it is not considered a meaningful measure of investment performance. Total yields exclude investment income and assets related to other invested assets. Prior period yields have been revised to conform to current period presentation.


(2)	Includes fixed maturity securities classified as available-for-sale and held-to-maturity and excludes fixed maturity securities classified as trading, which are included in other invested assets.


(3)	Other invested assets consist of investments in LPs/LLCs, investment real estate held through direct ownership, derivative instruments, fixed maturities classified as trading and other miscellaneous investments.


(4)	Includes net investment income of our investment management operations.


(5)	The total yield was 3.76% for both the three months ended June 30, 2019 and 2018. Prior period yield has been revised to conform to current period presentation.

The increase in investment income after investment expenses yield attributable to our general account investments, excluding both the Closed Block division and the Japanese insurance operations’ portfolio, for the three months ended June 30, 2019, compared to the three months ended June 30, 2018, was primarily the result of higher returns on short-term investments based on an increase in short-term rates.

The decrease in investment income after investment expenses yield attributable to the Japanese insurance operations’ portfolio, for the three months ended June 30, 2019, compared to the three months ended June 30, 2018, was primarily the result of lower reinvestment rates.

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 $47.9 billion and $43.6 billion for the three months ended June 30, 2019 and 2018, 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 $9.0 billion and $10.0 billion for the three months ended June 30, 2019 and 2018, respectively. The majority of 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 by Segment—Impact of Foreign Currency Exchange Rates” above.

2019 to 2018 Six Month Comparison

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	Six Months Ended June 30, 2019
	PFI Excluding Closed Block Division and Japanese Operations					Japanese Insurance Operations					PFI Excluding Closed Block Division					Closed Block Division			Total(5)
	Yield(1)		Amount			Yield(1)		Amount			Yield(1)		Amount			Amount			Amount
	($ in millions)
Fixed maturities(2)	4.64	%	$	3,735		2.83	%	$	1,892		3.82	%	$	5,627		$	845		$	6,472
Assets supporting experience-rated contractholder liabilities	3.60		340			2.15		27			3.43		367			0			367
Equity securities	2.12		22			3.48		34			2.79		56			25			81
Commercial mortgage and other loans	4.10		682			3.85		339			4.02		1,021			193			1,214
Policy loans	5.21		126			3.84		52			4.72		178			125			303
Short-term investments and cash equivalents	2.80		189			3.43		14			2.82		203			19			222
Gross investment income	4.37		5,094			2.96		2,358			3.80		7,452			1,207			8,659
Investment expenses	(0.13	)	(209		)	(0.13	)	(139		)	(0.13	)	(348		)	(109		)	(457		)
Investment income after investment expenses	4.24	%	4,885			2.83	%	2,219			3.67	%	7,104			1,098			8,202
Other invested assets(3)			170					103					273			39			312
Investment results of other entities and operations(4)			92					0					92			0			92
Total investment income			$	5,147				$	2,322				$	7,469		$	1,137		$	8,606



	Six Months Ended June 30, 2018
	PFI Excluding Closed Block Division and Japanese Operations					Japanese Insurance Operations					PFI Excluding Closed Block Division					Closed Block Division			Total(5)
	Yield(1)		Amount			Yield(1)		Amount			Yield(1)		Amount			Amount			Amount
	($ in millions)
Fixed maturities(2)	4.65	%	$	3,449		2.92	%	$	1,845		3.86	%	$	5,294		$	857		$	6,151
Assets supporting experience-rated contractholder liabilities	3.66		347			1.94		25			3.45		372			0			372
Equity securities	1.68		19			3.54		38			2.61		57			24			81
Commercial mortgage and other loans	3.99		647			3.92		299			3.97		946			208			1,154
Policy loans	5.34		128			3.86		50			4.82		178			130			308
Short-term investments and cash equivalents	1.81		115			1.91		17			1.82		132			17			149
Gross investment income	4.31		4,705			3.03		2,274			3.79		6,979			1,236			8,215
Investment expenses	(0.14	)	(185		)	(0.12	)	(113		)	(0.14	)	(298		)	(101		)	(399		)
Investment income after investment expenses	4.17	%	4,520			2.91	%	$	2,161		3.65	%	6,681			1,135			7,816
Other invested assets(3)			120					60					180			49			229
Investment results of other entities and operations(4)			49					0					49			0			49
Total investment income			$	4,689				$	2,221				$	6,910		$	1,184		$	8,094

119

__________

(1)


(2)	Includes fixed maturity securities classified as available-for-sale and held-to-maturity and excludes fixed maturity securities classified as trading, which are included in other invested assets.


(3)	Other invested assets consist of investments in LPs/LLCs, investment real estate held through direct ownership, derivative instruments, fixed maturities classified as trading and other miscellaneous investments.


(4)	Includes net investment income of our investment management operations.


(5)	The total yield was 3.75% for both the six months ended June 30, 2019 and 2018. Prior period yield has been revised to conform to current period presentation.

The increase in investment income after investment expenses yield attributable to our general account investments, excluding both the Closed Block division and the Japanese insurance operations’ portfolio, for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, was primarily the result of higher returns on short-term investments based on an increase in short-term rates.

The decrease in investment income after investment expenses yield attributable to the Japanese insurance operations’ portfolio, for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, was primarily the result of lower reinvestment rates.

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 $47.2 billion and $43.6 billion for the six months ended June 30, 2019 and 2018, 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 $9.0 billion and $10.1 billion for the six months ended June 30, 2019 and 2018, respectively. The majority of 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 by Segment—Impact of Foreign Currency Exchange Rates” above.

Realized Investment Gains and Losses

The following table sets forth “Realized investment gains (losses), net” of our general account apportioned between PFI excluding Closed Block division and the Closed Block division by investment type as well as related charges and adjustments, for the periods indicated:

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	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in millions)
PFI excluding Closed Block Division:
Realized investment gains (losses), net:
Due to foreign exchange movements on securities approaching maturity	$	(16	)	$	(8	)	$	(16	)	$	(16	)
Due to securities actively marketed for sale	0			(3		)	(1		)	(11		)
Due to credit or adverse conditions of the respective issuer(1)	(12		)	(24		)	(42		)	(39		)
OTTI losses on fixed maturities recognized in earnings(2)	(28		)	(35		)	(59		)	(66		)
Net gains (losses) on sales and maturities	103			233			372			315
Fixed maturities(3)	75			198			313			249
Commercial mortgage and other loans	(8		)	(13		)	(11		)	(14		)
Derivatives	(463		)	277			(1,469		)	626
OTTI losses on other invested assets recognized in earnings(4)	0			(3		)	0			(6		)
Other net gains (losses)	5			69			6			79
Other	5			66			6			73
Subtotal	(391		)	528			(1,161		)	934
Investment results of other entities and operations(5)	6			47			(46		)	68
Total — PFI excluding Closed Block Division	(385		)	575			(1,207		)	1,002
Related adjustments	(163		)	(182		)	(4		)	(522		)
Realized investment gains (losses), net, and related adjustments	(548		)	393			(1,211		)	480
Related charges	(82		)	(116		)	(57		)	(139		)
Realized investment gains (losses), net, and related charges and adjustments	$	(630	)	$	277		$	(1,268	)	$	341
Closed Block Division:
Realized investment gains (losses), net:
Due to foreign exchange movements on securities approaching maturity	$	(34	)	$	(14	)	$	(34	)	$	(22	)
Due to securities actively marketed for sale	0			(2		)	0			(2		)
Due to credit or adverse conditions of the respective issuer(1)	(2		)	(7		)	(6		)	(7		)
OTTI losses on fixed maturities recognized in earnings(2)	(36		)	(23		)	(40		)	(31		)
Net gains (losses) on sales and maturities	30			(10		)	56			25
Fixed maturities(3)	(6		)	(33		)	16			(6		)
Commercial mortgage and other loans	0			(3		)	0			(2		)
Derivatives	54			142			93			112
OTTI losses on other invested assets recognized in earnings(4)	0			0			0			(1		)
Other net gains (losses)	1			4			(4		)	5
Other	1			4			(4		)	4
Subtotal — Closed Block Division	49			110			105			108
Consolidated PFI realized investment gains (losses), net	$	(336	)	$	685		$	(1,102	)	$	1,110

__________

(1)

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.


(2)	Excludes the portion of OTTI recorded in OCI, representing any difference between the fair value of the impaired debt security and the net present value of its projected future cash flows at the time of impairment.


(3)	Includes fixed maturity securities classified as available-for-sale and held-to-maturity and excludes fixed maturity securities classified as trading.


(4)	Primarily includes OTTI related to investments in LPs/LLCs and real estate held through direct ownership.


(5)	Includes “Realized investment gains (losses), net” of our investment management operations.

121

Three Month Comparison. Net gains on sales and maturities of fixed maturity securities were $103 million and $233 million for the second quarter of 2019 and 2018, respectively, primarily driven by the impact of foreign currency exchange rate movements of U.S. and Australian dollar-denominated securities that matured or were sold within our International Insurance segment.

Net realized losses on derivative instruments of $(463) million for the second quarter of 2019 primarily included:


•	$(1,219) million of losses on product-related embedded derivatives and related hedge positions associated with certain variable annuity contracts;


•	$(177) million of losses on capital hedges due to increases in equity indices;


•	$676 million of gains on interest rate derivatives due to decreases in swap and U.S. Treasury rates;


•	$145 million of gains on foreign currency hedges due to U.S. dollar appreciation versus the British pound and Japanese yen appreciation;


•	$36 million of gains on credit default swaps primarily due to spreads tightening; and


•	$36 million of gains for fees earned on fee-based synthetic guaranteed investment contracts (“GICs”).

Net realized gains on derivative instruments of $277 million for the second quarter of 2018 primarily included:


•	$338 million of gains on foreign currency hedges due to U.S. dollar appreciation versus the euro and British pound, partially offset by Japanese yen appreciation,


•	$33 million of gains for fees earned on fee-based synthetic GICs; and


•	$(73) million of losses on interest rate derivatives due to increases in swap and U.S. Treasury rates.

For a discussion of living benefit guarantees and related hedge positions in our Individual Annuities segment, see “—Results of Operations by Segment—U.S. Individual Solutions Division—Individual Annuities” above.

Related adjustments include the portions of “Realized investment gains (losses), net” that are included in adjusted operating income and the portions of “Other income (loss)” 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 second quarter of 2019 and 2018 reflected net negative related adjustments of $163 million and $182 million, respectively. Both periods’ results were primarily driven by settlements and changes in values related to interest rate and currency derivatives. The second quarter of 2018 was also driven by the impact of foreign currency exchange rate movements on certain non-local currency denominated assets and liabilities within the International Insurance segment, for which the majority of the foreign currency exposure is hedged and offset in “Realized Investment gains (losses), net.”

Charges that relate to “Realized investment gains (losses), net” are also excluded from adjusted operating income and may be reflected as net charges or net benefits. Results for the second quarter of 2019 and 2018 reflected net related charges of $82 million and $116 million, respectively. Both periods’ results were driven by the impact of derivative activity on the amortization of DAC, other costs and certain policyholder reserves.

Six Month Comparison. Net gains on sales and maturities of fixed maturity securities were $372 million and $315 million for the first six months of 2019 and 2018, respectively, primarily driven by the impact of foreign currency exchange rate movements of U.S. and Australian dollar-denominated securities that matured or were sold within our International Insurance segment.

Net realized losses on derivative instruments of $(1,469) million for the first six months of 2019 primarily included:


•	$(2,419) million of losses on product-related embedded derivatives and related hedge positions associated with certain variable annuity contracts;


•	$(663) million of losses on capital hedges due to increases in equity indices;


•	$1,104 million of gains on interest rate derivatives due to decreases in swap and U.S. Treasury rates;


•	$245 million of gains on foreign currency hedges due to U.S. dollar appreciation versus the euro and British pound and Japanese yen appreciation;


•	$104 million of gains on credit default swaps primarily due to spreads tightening; and


•	$72 million of gains for fees earned on fee-based synthetic GICs.

Net realized gains on derivative instruments of $626 million for the first six months of 2018 primarily included:


•	$800 million of gains on product-related embedded derivatives and related hedge positions associated with certain variable annuity contracts;

122


•	$233 million of gains on foreign currency hedges due to U.S. dollar appreciation versus the euro and British pound and Japanese yen appreciation;


•	$76 million of gains for fees earned on fee-based synthetic GICs; and


•	$(451) million of losses on interest rate derivatives due to increases in swap and U.S. Treasury rates.

Results for the first six months of 2019 and 2018 included net negative related adjustments of $4 million and $522 million, respectively. Both periods’ results were primarily driven by settlements and changes in values related to interest rate and currency derivatives. The first six months of 2019 results also included changes in fair value of equity securities recorded in “Other income (loss),” while the first six months of 2018 results also included the impact of foreign currency exchange rate movements on certain non-local currency denominated assets and liabilities within the International Insurance segment, for which the majority of the foreign currency exposure is hedged and offset in “Realized Investment gains (losses), net.”

Results for the first six months of 2019 and 2018 reflected net related charges of $57 million and $139 million, respectively. Both periods’ results were driven by the impact of derivative activity on the amortization of DAC, other costs and certain policyholder reserves.

Impairments

The level of OTTI generally reflects economic conditions and is expected to increase when economic conditions worsen and to decrease when economic conditions improve. Historically, the causes of OTTI 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.

We maintain separate monitoring processes for public and private fixed maturities and create watch lists to highlight securities that require special scrutiny and management. 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 public and private fixed maturity investment managers formally review all public and 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 LPs/LLCs accounted for using the equity method, the carrying value of these investments is written down or impaired to fair value when a decline in value is considered to be other-than-temporary. For additional information regarding our OTTI policies, see Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Retail-Related Investments

As of June 30, 2019, PFI excluding the Closed Block division had retail-related investments of approximately $14 billion consisting primarily of $6 billion of corporate fixed maturities of which 89% were considered investment grade; $7 billion of commercial mortgage loans with a weighted-average loan-to-value ratio of approximately 50% and a weighted-average debt service coverage ratio of 2.41 times; and $1 billion of real estate held through direct ownership and real estate-related LPs/LLCs.

In addition, we held approximately $11 billion of commercial mortgage-backed securities, of which approximately 79% and 20% were rated AAA (super-senior) and AA, respectively, and comprised of diversified collateral pools. Approximately 30% of the collateral pools were comprised of retail-related investments, with no pools solely collateralized by retail-related investments. For additional information regarding commercial mortgage-backed securities, see “—Fixed Maturity Securities—Fixed Maturity Securities Credit Quality” below.

123

General Account Investments of PFI excluding Closed Block Division

In the following sections, we provide details about our investment portfolio, excluding investments held in the Closed Block division. We believe the details of the composition of our investment portfolio excluding the Closed Block division are most relevant to an understanding of our operations that are pertinent to investors in Prudential Financial because substantially all Closed Block division assets support obligations and liabilities relating to the Closed Block policies only. See Note 8 to the Unaudited Interim Consolidated Financial Statements for further information on the Closed Block.

Fixed Maturity Securities

In the following sections, we provide details about our fixed maturity securities portfolio, which excludes fixed maturity securities classified as assets supporting experience-rated contractholder liabilities and classified as trading.

Fixed Maturity Securities and Unrealized Gains and Losses by Industry

The following table sets forth the composition of the portion of our fixed maturity securities portfolio by industry category attributable to PFI excluding the Closed Block division and the associated gross unrealized gains and losses, as of the dates indicated:



	June 30, 2019								December 31, 2018
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	$	32,398	$	2,184	$	108	$	34,474	$	29,831	$	726	$	724	$	29,833
Consumer non-cyclical	24,997		2,365		167		27,195		24,136		1,172		748		24,560
Utility	21,785		2,009		131		23,663		22,179		1,073		624		22,628
Capital goods	12,135		1,004		106		13,033		11,623		561		386		11,798
Consumer cyclical	11,157		825		96		11,886		11,001		429		330		11,100
Foreign agencies	5,936		1,010		35		6,911		5,946		785		91		6,640
Energy	12,392		993		180		13,205		11,753		524		553		11,724
Communications	6,029		782		51		6,760		6,163		455		234		6,384
Basic industry	5,709		438		49		6,098		5,431		238		158		5,511
Transportation	8,908		760		51		9,617		8,633		428		225		8,836
Technology	3,569		243		41		3,771		3,855		155		99		3,911
Industrial other	3,728		301		54		3,975		3,764		151		154		3,761
Total corporate securities	148,743		12,914		1,069		160,588		144,315		6,697		4,326		146,686
Foreign government(3)	99,069		22,615		68		121,616		97,087		16,942		301		113,728
Residential mortgage-backed(4)	3,283		167		4		3,446		3,205		120		31		3,294
Asset-backed	9,775		144		34		9,885		9,803		122		62		9,863
Commercial mortgage-backed	10,052		442		5		10,489		8,953		87		86		8,954
U.S. Government	23,717		4,134		85		27,766		22,290		2,563		569		24,284
State & Municipal	9,471		1,207		1		10,677		9,456		607		63		10,000
Total(5)	$	304,110	$	41,623	$	1,266	$	344,467	$	295,109	$	27,138	$	5,438	$	316,809

__________


(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 $401 million of gross unrealized gains and no gross unrealized losses, as of June 30, 2019, compared to $359 million of gross unrealized gains and less than $1 million of gross unrealized losses, as of December 31, 2018, on securities classified as held-to-maturity.


(3)	As of both June 30, 2019 and December 31, 2018, based on amortized cost, 76% represent Japanese government bonds held by our Japanese insurance operations with no other individual country representing more than 10% and 11% of the balance, respectively.


(4)	As of both June 30, 2019 and December 31, 2018, based on amortized cost, more than 99% were rated A or higher.

124


(5)	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.

The increase in net unrealized gains from December 31, 2018 to June 30, 2019 was primarily due to a decrease in U.S. interest rates and credit spread tightening.

Fixed Maturity Securities Credit Quality

The Securities Valuation Office (“SVO”) of the National Association of Insurance Commissioners (“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 Investor Service, Inc. (“Moody’s”) or BBB- or higher by Standard & Poor’s Rating Services (“S&P”). 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 S&P. 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 includes certain securities that have not yet been designated by the SVO as of each balance sheet date. Pending receipt of SVO designations, 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 (“FSA”), an agency of the Japanese government. The FSA has its own investment quality criteria and risk control standards. Our Japanese insurance companies comply with the FSA’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 and S&P, or rating equivalents based on ratings assigned by Japanese credit ratings agencies.

The following table sets forth our fixed maturity portfolio by NAIC Designation or equivalent rating attributable to PFI excluding the Closed Block division, as of the dates indicated:



	June 30, 2019								December 31, 2018
NAIC Designation(1)(2)	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	$	230,753	$	36,081	$	285	$	266,549	$	222,290	$	24,138	$	2,568	$	243,860
2	56,348		4,414		544		60,218		55,768		2,267		1,999		56,036
Subtotal High or Highest Quality Securities(5)	287,101		40,495		829		326,767		278,058		26,405		4,567		299,896
3	10,027		687		137		10,577		10,149		330		408		10,071
4	5,438		326		244		5,520		5,254		291		368		5,177
5	1,280		85		45		1,320		1,395		99		77		1,417
6	264		30		11		283		253		13		18		248
Subtotal Other Securities(6)(7)	17,009		1,128		437		17,700		17,051		733		871		16,913
Total fixed maturities	$	304,110	$	41,623	$	1,266	$	344,467	$	295,109	$	27,138	$	5,438	$	316,809

__________


(1)	Reflects equivalent ratings for investments of the international insurance operations.


(2)	Includes, as of June 30, 2019 and December 31, 2018, 1,013 securities with amortized cost of $4,541 million (fair value, $4,768 million) and 1,744 securities with amortized cost of $9,079 million (fair value, $9,135 million), respectively, that have been categorized based on expected NAIC Designations pending receipt of SVO ratings.


(3)	Includes $401 million of gross unrealized gains and no gross unrealized losses, as of June 30, 2019, compared to $359 million of gross unrealized gains and less than $1 million of gross unrealized losses, as of December 31, 2018, on securities classified as held-to-maturity.

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(4)	As of June 30, 2019, includes gross unrealized losses of $279 million on public fixed maturities and $158 million on private fixed maturities considered to be other than high or highest quality and, as of December 31, 2018, includes gross unrealized losses of $591 million on public fixed maturities and $280 million on private fixed maturities considered to be other than high or highest quality.


(5)	On an amortized cost basis, as of June 30, 2019, includes $246,294 million of public fixed maturities and $40,807 million of private fixed maturities and, as of December 31, 2018, includes $238,824 million of public fixed maturities and $39,234 million of private fixed maturities.


(6)	On an amortized cost basis, as of June 30, 2019, includes $10,118 million of public fixed maturities and $6,891 million of private fixed maturities and, as of December 31, 2018, includes $10,588 million of public fixed maturities and $6,463 million of private fixed maturities.


(7)	On an amortized cost basis, as of June 30, 2019, securities considered below investment grade based on lowest of external rating agency ratings total $19,468 million, or 6% of the total fixed maturities, and include securities considered high or highest quality by the NAIC based on the rules described above.

Asset-Backed and Commercial Mortgage-Backed Securities

The following table sets forth the amortized cost and fair value of asset-backed and commercial mortgage-backed securities within our fixed maturity available-for-sale portfolio attributable to PFI excluding the Closed Block division by credit quality, as of the dates indicated:



	June 30, 2019								December 31, 2018
	Asset-Backed Securities(2)				Commercial Mortgage-Backed Securities(3)				Asset-Backed Securities(2)				Commercial Mortgage-Backed Securities(3)
Lowest Rating Agency Rating(1)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
AAA	$	9,287	$	9,289	$	7,991	$	8,338	$	9,188	$	9,151	$	7,523	$	7,528
AA	299		320		2,046		2,135		405		430		1,415		1,410
A	16		22		6		7		30		36		6		7
BBB	11		11		9		9		15		15		9		9
BB and below	162		243		0		0		165		231		0		0
Total(4)	$	9,775	$	9,885	$	10,052	$	10,489	$	9,803	$	9,863	$	8,953	$	8,954

__________


(1)	The table above provides ratings as assigned by nationally recognized rating agencies as of June 30, 2019, including S&P, Moody’s, Fitch Ratings, Inc. (“Fitch”) and Morningstar, Inc. (“Morningstar”).


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


(3)	As of June 30, 2019 and December 31, 2018, based on amortized cost, 97% and 96% were securities with vintages of 2013 or later, respectively.


(4)	Excludes fixed maturity securities classified as “Assets supporting experience-rated contractholder liabilities” and “Fixed maturities, trading,” as well as securities held outside the general account in other entities and operations.

Included in “Asset-backed securities” above are investments in CLOs. The following table sets forth information pertaining to these investments in CLOs within our fixed maturity available-for-sale portfolio attributable to PFI excluding the Closed Block division, as of the dates indicated:



	June 30, 2019				December 31, 2018
	Collateralized Loan Obligations
Lowest Rating Agency Rating(1)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
AAA	$	7,460	$	7,438	$	7,355	$	7,318
AA	0		0		0		0
A	0		0		0		0
BBB	0		0		0		0
BB and below	0		0		0		0
Total(2)	$	7,460	$	7,438	$	7,355	$	7,318

__________


(1)	The table above provides ratings as assigned by nationally recognized rating agencies as of June 30, 2019, including S&P, Moody’s, Fitch and Morningstar.


(2)	Excludes fixed maturity securities classified as “Assets supporting experience-rated contractholder liabilities” and “Fixed maturities, trading,” as well as securities held outside the general account in other entities and operations.

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Assets Supporting Experience-Rated Contractholder Liabilities

For information regarding the composition of “Assets supporting experience-rated contractholder liabilities,” see Note 3 to the Unaudited Interim Consolidated Financial Statements.

Commercial Mortgage and Other Loans

Investment Mix

The following table sets forth the composition of our commercial mortgage and other loans portfolio attributable to PFI excluding the Closed Block division, as of the dates indicated:



	June 30, 2019			December 31, 2018
	(in millions)
Commercial mortgage and agricultural property loans	$	51,364		$	49,524
Uncollateralized loans	664			658
Residential property loans	143			158
Other collateralized loans	27			17
Total recorded investment gross of allowance(1)	52,198			50,357
Allowance for credit losses	(98		)	(106		)
Total net commercial mortgage and other loans(2)	$	52,100		$	50,251

__________


(1)	As a percentage of recorded investment gross of allowance, more than 99% of these assets were current as of both June 30, 2019 and December 31, 2018.


(2)	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 mortgage and agricultural property loans using a dedicated sales and underwriting staff through our various regional offices in the U.S. and international offices primarily in London and Tokyo. All loans are underwritten consistently to our standards using a proprietary quality rating system that has been developed from our industry experience in real estate and mortgage lending.

Uncollateralized loans primarily represent 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 include consumer loans.

Composition of Commercial Mortgage and Agricultural Property Loans

Our commercial mortgage and agricultural property loan portfolio strategy emphasizes diversification by property type and geographic location. The following tables set forth the breakdown of the gross carrying values of commercial mortgage and agricultural property loans attributable to PFI excluding the Closed Block division by geographic region and property type, as of the dates indicated:

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	June 30, 2019				December 31, 2018
	Gross Carrying Value		% of Total		Gross Carrying Value		% of Total
	($ in millions)
Commercial mortgage and agricultural property loans by region:
U.S. Regions(1):
Pacific	$	16,919	32.9	%	$	16,553	33.4	%
South Atlantic	8,813		17.2		8,633		17.4
Middle Atlantic	6,387		12.4		6,088		12.3
East North Central	3,358		6.5		2,813		5.7
West South Central	5,512		10.7		5,044		10.2
Mountain	2,546		5.0		2,508		5.0
New England	1,880		3.7		1,879		3.8
West North Central	448		0.9		476		1.0
East South Central	582		1.1		595		1.2
Subtotal-U.S.	46,445		90.4		44,589		90.0
Europe	3,016		5.9		3,077		6.2
Asia	766		1.5		733		1.5
Other	1,137		2.2		1,125		2.3
Total commercial mortgage and agricultural property loans	$	51,364	100.0	%	$	49,524	100.0	%

__________


(1)	Regions as defined by the United States Census Bureau.



	June 30, 2019				December 31, 2018
	Gross Carrying Value		% of Total		Gross Carrying Value		% of Total
	($ in millions)
Commercial mortgage and agricultural property loans by property type:
Industrial	$	11,831	23.0	%	$	10,490	21.2	%
Retail	6,514		12.7		6,693		13.5
Office	10,771		21.0		10,971		22.1
Apartments/Multi-Family	14,214		27.7		13,818		27.9
Other	3,384		6.6		3,255		6.6
Agricultural properties	2,817		5.5		2,710		5.5
Hospitality	1,833		3.5		1,587		3.2
Total commercial mortgage and agricultural property loans	$	51,364	100.0	%	$	49,524	100.0	%

Loan-to-value and debt service coverage ratios are measures commonly used to assess the quality of commercial mortgage and agricultural property loans. The loan-to-value ratio compares the amount of the loan to the fair value of the underlying property collateralizing the loan and is commonly expressed as a percentage. A loan-to-value ratio less than 100% indicates an excess of collateral value over the loan amount. Loan-to-value ratios greater than 100% indicate that the loan amount exceeds the collateral value. 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 debt service coverage ratio greater than 1.0 times indicates an excess of net operating income over the debt service payments.

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As of June 30, 2019, our commercial mortgage and agricultural property loans attributable to PFI excluding the Closed Block division had a weighted-average debt service coverage ratio of 2.40 times and a weighted-average loan-to-value ratio of 56%. As of June 30, 2019, 97% of commercial mortgage and agricultural property loans were fixed rate loans. For those commercial mortgage and agricultural property loans that were originated in 2019, the weighted-average debt service coverage ratio was 2.32 times, and the weighted-average loan-to-value ratio was 64%.

The values utilized in calculating these loan-to-value ratios are developed as part of our periodic review of the commercial mortgage and agricultural property 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 credit 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 mortgage and agricultural property loan portfolio included $1.1 billion and $0.7 billion of such loans as of June 30, 2019 and December 31, 2018, respectively. All else being equal, these loans are inherently riskier than those collateralized by properties that have already stabilized. As of June 30, 2019, there were no loan-specific reserves related to these loans. In addition, these unstabilized loans are included in the calculation of our portfolio reserve, as discussed below.

The following table sets forth the gross carrying value of our commercial mortgage and agricultural property loans attributable to PFI excluding the Closed Block division by loan-to-value and debt service coverage ratios, as of the date indicated:



	June 30, 2019
	Debt Service Coverage Ratio
	> 1.2x		1.0x to < 1.2x		< 1.0x		Total Commercial Mortgage and Agricultural Property Loans
Loan-to-Value Ratio	(in millions)
0%-59.99%	$	27,661	$	690	$	92	$	28,443
60%-69.99%	15,246		530		0		15,776
70%-79.99%	6,210		574		0		6,784
80% or greater	208		83		70		361
Total commercial mortgage and agricultural property loans	$	49,325	$	1,877	$	162	$	51,364

The following table sets forth the breakdown of our commercial mortgage and agricultural property loans attributable to PFI excluding the Closed Block division by year of origination, as of the date indicated:



	June 30, 2019
	Gross Carrying Value		% of Total
Year of Origination	($ in millions)
2019	$	4,118	8.0	%
2018	8,935		17.4
2017	7,856		15.3
2016	6,813		13.3
2015	6,664		13.0
2014	5,444		10.6
2013	5,260		10.2
2012 & Prior	6,274		12.2
Total commercial mortgage and agricultural property loans	$	51,364	100.0	%

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Commercial Mortgage and Other Loans Quality

The commercial mortgage and other loans portfolio is monitored on an ongoing basis. If certain criteria are met, loans are assigned to either of the following “watch list” categories:

(1) “Closely Monitored,” which includes a variety of considerations, such as when loan metrics fall below acceptable levels, the borrower is not cooperative or has requested a material modification, or the portfolio manager has directed a change in category; or

(2) “Not in Good Standing,” which includes loans in default or with a high probability of loss of principal, such as when the loan is in the process of foreclosure or the borrower is in bankruptcy.

Our workout and special servicing professionals manage the loans on the watch list.

We establish an allowance for credit 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 allowance for credit losses is based on our assessment as to ultimate collectability of loan principal and interest. An allowance for credit losses for an impaired loan is 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 allowance for credit losses for commercial mortgage and other loans can increase or decrease from period to period based on these factors.

The following table sets forth the change in allowance for credit losses for our commercial mortgage and other loans portfolio, as of the dates indicated:



	June 30, 2019			December 31, 2018
	(in millions)
Allowance, beginning of year	$	106		$	91
Addition to (release of) allowance for credit losses	(8		)	15
Charge-offs, net of recoveries	0			0
Change in foreign exchange	0			0
Allowance, end of period	$	98		$	106
Loan-specific reserve	$	0		$	11
Portfolio reserve	$	98		$	95

The allowance for credit losses as of June 30, 2019 decreased compared to December 31, 2018, primarily due to the payoff of a loan included in the loan-specific reserve.

Equity Securities

The equity securities attributable to PFI excluding the Closed Block division 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 and the associated gross unrealized gains and losses, as of the dates indicated:

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	June 30, 2019								December 31, 2018
	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in millions)
Mutual funds	$	786	$	186	$	0	$	972	$	769	$	87	$	13	$	843
Other common stocks	2,273		912		64		3,121		2,353		751		118		2,986
Non-redeemable preferred stocks	33		4		5		32		24		0		4		20
Equity securities, at fair value(1)	$	3,092	$	1,102	$	69	$	4,125	$	3,146	$	838	$	135	$	3,849

__________


(1)	Amounts presented exclude investments in private equity and hedge funds and other investments which are reported in “Other invested assets.”

The net change in unrealized gains (losses) from equity securities attributable to PFI excluding Closed Block division still held at period end, recorded within “Other income (loss),” was $81 million and $(34) million during the three months ended June 30, 2019 and 2018, respectively, and $330 million and $(111) million during the six months ended June 30, 2019 and 2018, respectively.

Other Invested Assets

The following table sets forth the composition of “Other invested assets” attributable to PFI excluding the Closed Block division, as of the dates indicated:



	June 30, 2019		December 31, 2018
	(in millions)
LPs/LLCs:
Equity method:
Private equity	$	2,465	$	2,318
Hedge funds	1,048		836
Real estate-related	580		544
Subtotal equity method	4,093		3,698
Fair value:
Private equity	925		938
Hedge funds	1,233		1,256
Real estate-related	49		44
Subtotal fair value	2,207		2,238
Total LPs/LLCs	6,300		5,936
Real estate held through direct ownership(1)	1,819		1,777
Derivative instruments	74		42
Other(2)	632		652
Total other invested assets	$	8,825	$	8,407

__________


(1)	As of June 30, 2019 and December 31, 2018, real estate held through direct ownership had mortgage debt of $799 million and $776 million, respectively.


(2)	Primarily includes leveraged leases 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 16 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Invested Assets of Other Entities and Operations

“Invested Assets of Other Entities and Operations” presented below includes investments held outside the general account and primarily represents investments associated with our investment management operations and derivative operations. Our derivative operations act on behalf of affiliates primarily to manage interest rate, foreign currency, credit and equity exposures. Assets within our investment management operations that are managed for third-parties and those assets classified as “Separate account assets” on our balance sheet are not included.

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	June 30, 2019		December 31, 2018
	(in millions)
Fixed maturities:
Public, available-for-sale, at fair value(1)	$	504	$	473
Private, available-for-sale, at fair value	1		1
Fixed maturities, trading, at fair value(1)	1,203		1,155
Equity securities, at fair value	624		605
Commercial mortgage and other loans, at book value(2)	677		797
Other invested assets	2,965		2,803
Short-term investments	14		43
Total investments	$	5,988	$	5,877

__________


(1)	As of June 30, 2019 and December 31, 2018, balances include investments in collateralized loan obligations with fair value of $427 million and $408 million, respectively.


(2)	Book value is generally based on unpaid principal balance, net of any allowance for credit losses, or at fair value, when the fair value option has been elected.

Fixed Maturities, Trading

“Fixed maturities, trading, at fair value” are primarily related to assets associated with consolidated VIEs for which the Company is the investment manager. The assets of the consolidated VIEs are generally offset by liabilities for which the fair value option has been elected. For further information on these consolidated VIEs, see Note 4 to the Unaudited Interim Consolidated Financial Statements.

Commercial Mortgage and Other Loans

Our investment management operations include our commercial mortgage operations, which provide mortgage origination, investment management and servicing for our general account, institutional clients, the Federal Housing Administration and government-sponsored entities such as Fannie Mae and Freddie Mac.

The mortgage loans of our commercial mortgage operations are included in “Commercial mortgage and other loans.” Derivatives and other hedging instruments related to our commercial mortgage operations are primarily included in “Other invested assets.”

Other Invested Assets

“Other invested assets” primarily include assets of our derivative operations used to manage interest rate, foreign currency, credit, and equity exposures.

Furthermore, other invested assets include strategic investments made as part of our investment 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 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 investment management operations, we also make loans to our managed funds that are secured by equity commitments from investors or assets of the funds. Other invested assets also include certain assets in consolidated investment funds where the Company is deemed to exercise control over the funds.

Liquidity and Capital Resources

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.

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Table of Contents

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 periodic 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. We also employ a Capital Protection Framework to ensure the availability of capital resources to maintain adequate capitalization on a consolidated basis and for our insurance subsidiaries under various stress scenarios.

Our businesses are subject to comprehensive regulation and supervision by domestic and international regulators. These regulations currently include, or may include in the future requirements and limitations (many of which are the subject of ongoing rule-making) relating to capital, leverage, liquidity, stress-testing, overall risk management, credit exposure reporting and credit concentration. For information on regulation and its potential impact, see “Business—Regulation” and “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2018 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Regulatory Developments” within this Form 10-Q.

During the six months ended June 30, 2019, we took the following significant actions that impacted our liquidity and capital position:


•	We repurchased $1.0 billion of shares of our Common Stock and declared aggregate Common Stock dividends of $826 million;


•	We issued $1.0 billion of senior notes to be utilized for general corporate purposes, which may include refinancing portions of our senior notes maturing during 2019; and


•	In the second quarter of 2019, PGIM closed on a $300 million limited-recourse credit facility that is secured by certain of PGIM’s fund investments.

In July 2019, the holders of Prudential Insurance’s $500 million of exchangeable surplus notes delivered notice to the Company indicating their intention to exercise the exchange option. In August 2019, we issued approximately 6.2 million shares of our Common Stock to the note holders as a result of the exchange. The Company’s obligations under the surplus notes are now satisfied.

Capital

The primary components of the Company’s capitalization consist of equity and outstanding capital debt, including junior subordinated debt. As shown in the table below, as of June 30, 2019, the Company had $51.3 billion in capital, all of which was available to support the aggregate capital requirements of its 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.



	June 30, 2019		December 31, 2018
	(in millions)
Equity(1)	$	37,678	$	37,711
Junior subordinated debt (including hybrid securities)	7,572		7,568
Other capital debt	6,024		5,793
Total capital	$	51,274	$	51,072

__________


(1)	Amounts attributable to Prudential Financial, excluding AOCI.

We manage PICA, The Prudential Life Insurance Company, Ltd. (“Prudential of Japan”), Gibraltar Life, and other significant 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, 2018, the most recent statutory fiscal year-end and RBC reporting date for these subsidiaries.

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Table of Contents



	Ratio(1)
PICA(2)	385	%
Prudential Annuities Life Assurance Corporation (“PALAC”)	511	%
Composite Major U.S. Insurance Subsidiaries(3)	417	%

__________


(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 Prudential Retirement Insurance and Annuity Company (“PRIAC”), Pruco Life Insurance Company (“Pruco Life”), Pruco Life Insurance Company of New Jersey (“PLNJ”), which is a subsidiary of Pruco Life, and Prudential Legacy Insurance Company of New Jersey (“PLIC”).


(3)	Includes PICA and its subsidiaries, as noted above, and PALAC. Composite RBC is not reported to regulators and is based on the summation of total adjusted capital and risk charges for the included companies as determined under statutory accounting and RBC guidance to calculate a composite numerator and denominator, respectively, for purposes of calculating the composite ratio.

The table below presents the solvency margin ratios of our most significant international insurance subsidiaries as of March 31, 2019, the most recent date for which this information is available.



	Ratio
Prudential of Japan consolidated(1)	806	%
Gibraltar Life consolidated(2)	884	%

__________


(1)	Includes Prudential Trust Co., Ltd., a subsidiary of Prudential of Japan.


(2)	Includes Prudential Gibraltar Financial Life Insurance Co., Ltd. (“PGFL”), a subsidiary of Gibraltar Life.

All of our domestic and significant international insurance subsidiaries have capital levels that substantially exceed the minimum level required by applicable insurance regulations. Our regulatory capital levels may be affected in the future by changes to the applicable regulations, proposals for which are currently under consideration by both domestic and international insurance regulators. For further information on the calculation of RBC and solvency margin ratios, as well as regulatory minimums, see Note 18 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Capital Protection Framework

We employ a Capital Protection Framework (the “Framework”) to ensure that sufficient capital resources are available to maintain adequate capitalization on a consolidated basis for our insurance subsidiaries under various stress scenarios. The Framework incorporates the potential impacts from market-related stresses, including equity markets, real estate, interest rates, credit losses and foreign currency exchange rates. In evaluating these potential impacts, we assess risk holistically at the enterprise level, recognizing that our business mix may produce results that partially offset on a net basis.

The Framework accommodates periodic volatility within ranges that we deem acceptable, while also providing for additional potential sources of capital, including on-balance sheet capital capacity and contingent sources of capital. We believe we currently have access to sufficient resources to maintain adequate capitalization under a range of potential stress scenarios.

Captive Reinsurance Companies

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital—Captive Reinsurance Companies” included in our Annual Report on Form 10-K for the year ended December 31, 2018, for a discussion of our use of captive reinsurance companies.

Shareholder Distributions

Share Repurchase Program and Shareholder Dividends

In December 2018, our Board of Directors (the “Board”) authorized the Company to repurchase at management’s discretion up to $2.0 billion of its outstanding Common Stock during the period from January 1, 2019 through December 31, 2019. The timing and amount of share repurchases are determined by management based on market conditions and other considerations, including any increased capital needs of our businesses due to, among other things, changes in regulatory capital requirements and opportunities for growth and acquisitions. Repurchases may be executed 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 Securities Exchange Act of 1934.

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The following table sets forth information about declarations of Common Stock dividends, as well as repurchases of shares of Prudential Financial’s Common Stock, for the six months ended June 30, 2019.



	Dividend Amount				Shares Repurchased
Three months ended:	Per Share		Aggregate		Shares	Total Cost
	(in millions, except per share data)
March 31, 2019	$	1.00	$	415	5.4	$	500
June 30, 2019	$	1.00	$	411	5.0	$	500

Liquidity

The principles of our liquidity management framework are described in an enterprise-wide Liquidity Management Policy that is reviewed and approved by the Board. 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. We seek to maintain a minimum balance of highly liquid assets of $1.3 billion 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 at a time when access to capital markets is also not available. The level of this minimum balance is reviewed and approved annually by the Board.

We seek to mitigate the risk of having limited or no access to financing due to stressed market conditions by generally pre-funding 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 adequate liquidity in stress scenarios, stress testing is performed for our major operating subsidiaries. We seek to further mitigate liquidity risk by maintaining our access to alternative sources of liquidity, as discussed below.

Liquidity of Prudential Financial

The principal sources of funds available to Prudential Financial, the parent holding company, are dividends, returns of capital and loans from subsidiaries, and proceeds from debt issuances and certain stock-based compensation activity. 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, making capital contributions and loans to subsidiaries, paying declared shareholder dividends and repurchasing outstanding shares of Common Stock executed under authority from the Board.

As of June 30, 2019, Prudential Financial had highly liquid assets with a carrying value totaling $5,664 million, a decrease of $535 million from December 31, 2018. Highly liquid assets predominantly include cash, short-term investments, U.S. Treasury securities, obligations of other U.S. government authorities and agencies, and/or foreign government bonds. 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 the balance of this intercompany liquidity account, Prudential Financial had highly liquid assets of $4,867 million as of June 30, 2019, a decrease of $681 million from December 31, 2018.

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The following table sets forth Prudential Financial’s principal sources and uses of highly liquid assets, excluding net borrowings from our intercompany liquidity account, for the period indicated.



	Six Months Ended June 30, 2019
	(in millions)
Sources:
Net receipts under intercompany loans agreements(1)	$	1,064
Proceeds from the issuance of debt	989
Dividends and/or returns of capital from subsidiaries(2)	929
Proceeds from stock-based compensation and exercise of stock options	243
Interest income from subsidiaries on intercompany agreements, net of interest paid	10
Total sources	3,235
Uses:
Share repurchases(3)	983
Common stock dividends(4)	827
Repayments on external debt	761
Capital contributions to subsidiaries(5)	268
Net income tax payments	491
Interest paid on external debt	480
Other, net	106
Total uses	3,916
Net increase (decrease) in highly liquid assets	$	(681	)

__________


(1)	Includes net receipts of $817 million from International insurance subsidiaries, $250 million from PGIM subsidiaries and payments of $3 million to other subsidiaries.


(2)	Includes dividends and/or returns of capital of $492 million from PALAC, $223 million from PGIM subsidiaries, $126 million from international insurance subsidiaries, $79 million from Prudential Annuities Holding Company and $9 million from other subsidiaries.


(3)	Excludes $17 million related to trades that settled in July 2019.


(4)	Includes cash payments made on dividends declared in prior periods.


(5)	Includes capital contributions of $200 million to PICA and $68 million to PGIM subsidiaries.

Dividends and Returns of Capital from Subsidiaries

Domestic insurance subsidiaries. During the first six months of 2019, Prudential Financial received dividends of $492 million from PALAC and $79 million from Prudential Annuities Holding Company.

International insurance subsidiaries. During the first six months of 2019, Prudential Financial received dividends of $126 million from its international insurance subsidiaries. In addition to paying common stock dividends, our international insurance operations may return capital to Prudential Financial through or facilitated by other means, such as the repayment of preferred stock obligations held by Prudential Financial or other affiliates, affiliated lending, affiliated derivatives and reinsurance with U.S.- and Bermuda-based affiliates. Effective January 1, 2019, our Japan insurance operations entered into a reinsurance agreement with Gibraltar Re, our Bermuda-based reinsurance affiliate, to reinsure the mortality and morbidity risk associated with a portion of the in-force contracts for certain products, which we expect will allow us to more efficiently manage our capital and risk profile.

Other subsidiaries. During the first six months of 2019, Prudential Financial received dividends of $223 million from PGIM subsidiaries and $9 million from other subsidiaries.

Restriction 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.

With respect to our domestic insurance subsidiaries, PICA 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 twelve-month period are considered to be “extraordinary” dividends, and the approval of the 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.

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Capital redeployment from our international insurance subsidiaries is subject to local regulatory requirements in the international jurisdictions in which they operate. Our most significant international insurance subsidiaries, Prudential of Japan and Gibraltar Life, are permitted to pay common stock dividends based on calculations specified by Japanese insurance law, subject to prior notification to the FSA. Dividends in excess of these amounts and other forms of capital distribution require the prior approval of the FSA.

The ability of our PGIM subsidiaries and the majority of our other operating subsidiaries to pay dividends is largely unrestricted from a regulatory standpoint.

See Note 18 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, for details on specific dividend restrictions.

Liquidity of Insurance Subsidiaries

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 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.

Liquidity is measured against internally-developed benchmarks that take into account the characteristics of both the asset portfolio and the liabilities that they support. We consider attributes of the various categories of liquid assets (for example, type of asset and credit quality) in calculating internal liquidity measures to evaluate our insurance operations’ liquidity under various stress scenarios, including company-specific and market-wide events. 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, investment and fee income, investment maturities, sales of investments, 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 and dividends paid to policyholders, and payments to policyholders and contractholders in connection with surrenders, withdrawals and net policy loan activity. Other uses of liquidity may include commissions, general and administrative expenses, purchases of investments, the payment of dividends to the parent holding company, hedging and reinsurance activity and payments in connection with financing activities.

The following table sets forth the fair value of certain of our domestic insurance operations’ portfolio of liquid assets, as of the dates indicated.



	June 30, 2019
	Prudential Insurance		PLIC		PRIAC		PALAC		Pruco Life		Total		December 31, 2018
	(in billions)
Cash and short-term investments	$	5.3	$	1.3	$	0.4	$	4.0	$	0.4	$	11.4	$	11.1
Fixed maturity investments(1):
High or highest quality	120.1		36.6		19.6		12.2		5.6		194.1		179.2
Other than high or highest quality	7.2		2.7		1.3		0.5		0.4		12.1		11.3
Subtotal	127.3		39.3		20.9		12.7		6.0		206.2		190.5
Public equity securities, at fair value	0.1		2.0		0.0		0.0		0.0		2.1		1.9
Total	$	132.7	$	42.6	$	21.3	$	16.7	$	6.4	$	219.7	$	203.5

__________


(1)	Excludes fixed maturities designated as held-to-maturity. Credit quality is based on NAIC or equivalent rating.

The following table sets forth the fair value of our international insurance operations’ portfolio of liquid assets, as of the dates indicated.

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	June 30, 2019
	Prudential of Japan		Gibraltar Life(1)		All Other(2)		Total		December 31, 2018
	(in billions)
Cash and short-term investments	$	0.8	$	1.9	$	1.5	$	4.2	$	4.1
Fixed maturity investments(3):
High or highest quality(4)	43.3		94.4		22.2		159.9		149.1
Other than high or highest quality	0.8		3.2		2.1		6.1		6.2
Subtotal	44.1		97.6		24.3		166.0		155.3
Public equity securities	1.9		1.7		0.7		4.3		4.0
Total	$	46.8	$	101.2	$	26.5	$	174.5	$	163.4

__________


(1)	Includes PGFL.


(2)	Represents our international insurance operations, excluding Japan.


(3)	Excludes fixed maturities designated as held-to-maturity. Credit quality is based on NAIC or equivalent rating.


(4)	As of June 30, 2019, $121.7 billion, or 76%, were invested in government or government agency bonds.

Liquidity associated with other activities

Hedging activities associated with Individual Annuities

For the portion of our Individual Annuities’ ALM strategy executed through hedging, as well as the capital hedge program, we enter into a range of exchange-traded, cleared and other OTC equity and interest rate derivatives in order to hedge certain capital market risks related to more severe market conditions. For a full discussion of our Individual Annuities’ risk management strategy, see “—Results of Operations by Segment—U.S. Individual Solutions Division—Individual Annuities.” This portion of our Individual Annuities’ ALM strategy and capital hedge program requires access to liquidity to meet payment obligations relating to these derivatives, such as payments for periodic settlements, purchases, maturities and terminations. These liquidity needs can vary materially due to, among other items, changes in interest rates, equity markets, mortality and policyholder behavior.

The hedging portion of our Individual Annuities’ ALM strategy and capital hedge program may also result in derivative-related collateral postings to (when we are in a net pay position) or from (when we are in a net receive position) 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 when we are in a net pay position. As of June 30, 2019, the derivatives comprising the hedging portion of our ALM strategy and capital hedge program were in a net receive position of $4.6 billion compared to a net receive position of $2.9 billion as of December 31, 2018. The change in collateral position was driven by a net positive impact from declining interest rates, partially offset by rising equity markets.

Foreign exchange hedging activities

We employ various hedging strategies to manage potential exposure to foreign currency exchange rate movements, particularly those associated with the 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. The hedging strategy includes two primary components:

Income Hedges—We hedge a portion of our prospective yen-based earnings streams by entering into external forward currency derivative contracts that effectively fix the currency exchange rates for that portion of earnings, thereby reducing volatility from foreign currency exchange rate movements. As of June 30, 2019, we have hedged 100%, 92%, 50% and 8% of expected yen-based earnings for 2019, 2020, 2021 and 2022, respectively.

Equity Hedges—We hold both internal and external hedges primarily to hedge our USD-equivalent equity. These hedges also mitigate volatility in the solvency margins of yen-based subsidiaries resulting from changes in the market value of their USD-denominated investments hedging our U.S. dollar-equivalent equity attributable to changes in the yen-U.S. dollar exchange rate.

For additional information on our hedging strategy, see “—Results of Operations—Impact of Foreign Currency Exchange Rates.”

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Cash settlements from these hedging activities result in cash flows between subsidiaries of Prudential Financial and either international-based subsidiaries or external parties. The cash flows are dependent on changes in foreign currency exchange rates and the notional amount of the exposures hedged. For example, a significant yen depreciation over an extended period of time could result in net cash inflows, while a significant yen appreciation could result in net cash outflows. The following tables set forth information about net cash settlements and the net asset or liability resulting from these hedging activities related to the yen and other currencies for the and as of periods indicated.



	Six Months Ended June 30,
Cash Settlements: Received (Paid)	2019		2018
	(in millions)
Income Hedges (External)(1)	$	32	$	(30	)
Equity Hedges:
Internal(2)	233		14
External(3)	4		154
Total Equity Hedges	237		168
Total Cash Settlements	$	269	$	138

	June 30,		December 31,
Assets (Liabilities):	2019		2018
	(in millions)
Income Hedges (External)(4)	$	54	$	67
Equity Hedges:
Internal(2)	360		436
External(5)	148		78
Total Equity Hedges(6)	508		514
Total Assets (Liabilities)	$	562	$	581

__________


(1)	Includes non-yen related cash settlements of $17 million, primarily denominated in Australian dollar, Chilean peso, Korean won and Brazilian real and $(17) million, primarily denominated in Korean won, Chilean peso and Australian dollar, for the six months ended June 30, 2019 and 2018, respectively.


(2)	Represents internal transactions between international-based and U.S.-based entities. Amounts noted are from the U.S.-based entities’ perspectives.


(3)	Includes non-yen related cash settlements of $5 million, denominated in Korean won for the six months ended June 30, 2019.


(4)	Includes non-yen related assets of $41 million, primarily denominated in Korean won, Australian dollar and Brazilian real, and assets of $44 million, primarily denominated in Australian dollar and Brazilian real, as of June 30, 2019 and December 31, 2018, respectively.


(5)	Includes non-yen related assets of $15 million, denominated in Korean won, and liabilities of $(2) million, denominated in Korean won, as of June 30, 2019 and December 31, 2018, respectively.


(6)	As of June 30, 2019, approximately $305 million, $287 million and $(84) million of the net market values are scheduled to settle in 2019, 2020 and thereafter, respectively. The net market value of the assets (liabilities) will vary with changing market conditions to the extent there are no corresponding offsetting positions.

PGIM operations

The principal sources of liquidity for our fee-based PGIM businesses include asset management fees and commercial mortgage origination and servicing fees. The principal uses of liquidity include general and administrative expenses, facilitating our commercial mortgage loan business and distributions of dividends and returns of capital to Prudential Financial. The primary liquidity risks for our fee-based PGIM 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 PGIM 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 PGIM businesses are cash flows from investments, the ability to liquidate investments, borrowing lines from internal sources, including Prudential Financial and Prudential Funding, LLC (“Prudential Funding”), a wholly-owned subsidiary of PICA, and external sources. The principal use of liquidity for our strategic investments includes making investments to support business growth and paying interest expense from the internal and external borrowings used to fund those investments. 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 PGIM operations since December 31, 2018.

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Alternative Sources of Liquidity

In addition to asset-based financing as discussed below, Prudential Financial and certain subsidiaries have access to other sources of liquidity, including syndicated, unsecured committed credit facilities, membership in the Federal Home Loan Banks, commercial paper programs and a put option agreement. For more information on these sources of liquidity, see Note 10 to the Unaudited Interim Consolidated Financial Statements contained herein and Note 16 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2018.

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 (primarily corporate bonds), mortgage loans and fixed maturities (primarily collateralized loan obligations and other structured 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 as of the dates indicated.



	June 30, 2019						December 31, 2018
	PFI Excluding Closed Block Division		Closed Block Division		Consolidated		PFI Excluding Closed Block Division		Closed Block Division		Consolidated
	($ in millions)
Securities sold under agreements to repurchase	$	6,727	$	3,014	$	9,741	$	6,982	$	2,968	$	9,950
Cash collateral for loaned securities	3,318		917		4,235		3,063		866		3,929
Securities sold but not yet purchased	0		0		0		9		0		9
Total(1)	$	10,045	$	3,931	$	13,976	$	10,054	$	3,834	$	13,888
Portion of above securities that may be returned to the Company overnight requiring immediate return of the cash collateral(2)	$	10,025	$	3,931	$	13,956	$	9,875	$	3,834	$	13,709
Weighted average maturity, in days(2)(3)	8		0				10		0

__________


(1)	The daily weighted average outstanding balance for the three and six months ended June 30, 2019 was $10,598 million and $10,574 million, respectively, for PFI excluding the Closed Block division, and $4,161 million and $4,137 million, respectively, for the Closed Block division.


(2)	Prior period amounts have been updated to conform to current period presentation.


(3)	Excludes securities that may be returned to the Company overnight.

As of June 30, 2019, our domestic insurance entities had assets eligible for the asset-based or secured financing programs of $121.5 billion, of which $14.1 billion were on loan. Taking into account market conditions and outstanding loan balances as of June 30, 2019, we believe approximately $17.4 billion of the remaining eligible assets are readily lendable, including approximately $12.6 billion relating to PFI excluding the Closed Block division, of which $4.0 billion relates to certain separate accounts and may only be used for financing activities related to those accounts, and the remaining $4.8 billion relating to the Closed Block division.

Financing Activities

As of June 30, 2019, total short-term and long-term debt of the Company on a consolidated basis was $20.5 billion, an increase of $0.7 billion from December 31, 2018. 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 actions will depend on prevailing market conditions, our liquidity position and other factors.

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	June 30, 2019						December 31, 2018
Borrowings:	Prudential Financial		Subsidiaries		Consolidated		Prudential Financial		Subsidiaries		Consolidated
	(in millions)
General obligation short-term debt:
Commercial paper	$	25	$	820	$	845	$	15	$	727	$	742
Current portion of long-term debt	1,003		500		1,503		1,100		499		1,599
Subtotal	1,028		1,320		2,348		1,115		1,226		2,341
General obligation long-term debt:
Senior debt	8,961		173		9,134		8,630		173		8,803
Junior subordinated debt	7,514		58		7,572		7,511		57		7,568
Surplus notes(1)	0		342		342		0		341		341
Subtotal	16,475		573		17,048		16,141		571		16,712
Total general obligations	17,503		1,893		19,396		17,256		1,797		19,053
Limited and non-recourse borrowings(2):
Short-term debt	0		58		58		0		53		53
Current portion of long-term debt	0		253		253		0		57		57
Long-term debt	0		793		793		0		666		666
Total limited and non-recourse borrowings	0		1,104		1,104		0		776		776
Total borrowings	$	17,503	$	2,997	$	20,500	$	17,256	$	2,573	$	19,829

__________


(1)	Amounts are net of assets under set-off arrangements of $9,235 million and $9,095 million as of June 30, 2019 and December 31, 2018, respectively.

(2)

Limited and non-recourse borrowing primarily represents mortgage debt of our subsidiaries that has recourse only to real estate investment property of $799 million and $776 million as of June 30, 2019 and December 31, 2018, respectively, and a draw on a credit facility with recourse only to collateral pledged by the Company of $299 million and $0 as of June 30, 2019 and December 31, 2018, respectively.

As of June 30, 2019, and December 31, 2018, 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 10 to the Unaudited Interim Consolidated Financial Statements contained herein and Note 16 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2018.

Prudential Financial’s borrowings increased $247 million from December 31, 2018, primarily driven by the issuance, net of related costs, of $989 million of senior debt and a $10 million increase in commercial paper outstanding, offset by $750 million in debt maturities. Borrowings of our subsidiaries increased $424 million from December 31, 2018, primarily driven by a $299 million draw on a credit facility, a $93 million increase in commercial paper, a $23 million increase in mortgage debt, and a $6 million increase in short-term debt.

Term and Universal Life Reserve Financing

We use captive reinsurance subsidiaries to finance the portion of the statutory reserves required to be held by our domestic life insurance companies under Regulation XXX and Guideline AXXX that we consider to be non-economic. The financing arrangements involve the reinsurance of term and universal life business to our captive reinsurers and the issuance of surplus notes by those captives that are treated as capital for statutory purposes. These surplus notes are subordinated to policyholder obligations, and the payment of principal and interest on the surplus notes can only be made with prior insurance regulatory approval.

We have entered into agreements with external counterparties providing for the issuance of surplus notes by our captive reinsurers in return for the receipt of credit-linked notes (“Credit-Linked Note Structures”). As of June 30, 2019, we had Credit-Linked Note Structures with an aggregate issuance capacity of $13,700 million, of which $11,535 million was outstanding, as compared to an aggregate issuance capacity of $13,750 million, of which $11,445 million was outstanding, as of December 31, 2018. Under the 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 with an aggregate principal amount equal to the surplus notes outstanding. The captive holds the credit-linked notes as assets supporting Regulation XXX or Guideline AXXX non-economic reserves, as applicable. For more information on our Credit-Linked Note Structures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Activities” in our Annual Report on Form 10-K for the year ended December 31, 2018.

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The following table summarizes our Credit-Linked Note Structures, which are reported on a net basis, as of June 30, 2019.



	Surplus Notes		Outstanding as of June 30, 2019
Credit-Linked Note Structures:	Original Issue Dates	Maturity Dates	Outstanding as of June 30, 2019			Facility Size
	($ in millions)
XXX	2011-2014	2021-2024	$	1,750	(1)	$	1,750
AXXX	2013	2033	3,129			3,500
XXX	2014-2018	2021-2034	2,300		(2)	2,450
XXX	2014-2017	2024,2037	2,200			2,400
AXXX	2017	2037	1,466			2,000
XXX	2018	2038	690			1,600
Total Credit-Linked Note Structures			$	11,535		$	13,700

__________


(1)	Prudential Financial has agreed to reimburse any amounts paid under the credit-linked notes issued in this structure.


(2)	The $2.3 billion of surplus notes represents an intercompany transaction that eliminates upon consolidation. Prudential Financial has agreed to reimburse amounts paid under credit-linked notes issued in this structure up to $1.0 billion.

As of June 30, 2019, we also had outstanding an aggregate of $2.3 billion of debt issued for the purpose of financing Regulation XXX and Guideline AXXX non-economic reserves, of which approximately $0.6 billion relates to Regulation XXX reserves and approximately $1.7 billion relates to Guideline AXXX reserves. In addition, as of June 30, 2019, for purposes of financing Guideline AXXX reserves, one of our captives had approximately $4.0 billion of surplus notes outstanding that were issued to affiliates.

The Company has introduced updated versions of several products in its individual life product portfolio in conjunction with the requirement to adopt principle-based reserving by January 1, 2020. Notably, the Company adopted principle-based reserving for its guaranteed universal life products and introduced updated versions of these products in 2017. The guaranteed universal life updated products support the principle-based statutory reserve level without the need for financing through captive reinsurance. The Company is continuing to assess the impact of current and proposed amendments to principle-based reserving on projected statutory reserve levels and product pricing. The Company is on track to adopt principle-based reserving for its remaining portfolio of individual life product offerings by January 1, 2020.

Ratings

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Ratings” in our Annual Report on Form 10-K for the year ended December 31, 2018, for a discussion of our financial strength and credit ratings and their impact on our business.

The following is a summary of significant changes or actions in ratings and rating outlooks for our Company that have occurred from January 1, 2019 through the date of this filing.

On May 9, 2019, Moody’s Investors Service upgraded the financial strength rating of Prudential Insurance, Pruco Life and PRIAC to ‘Aa3’ from ‘A1’with a Stable outlook. Moody’s also upgraded Prudential Financial’s long-term senior debt rating to ‘A3’ from ‘Baa1’ with a Stable outlook.

Off-Balance Sheet Arrangements

Guarantees, Other Contingencies and Other Contingent Commitments

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. 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. For further discussion of certain of these commitments that relate to our separate accounts, also see “—Liquidity—Liquidity associated with other activities—PGIM operations.”

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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. In 2014, Prudential Financial entered into financing transactions, pursuant to which it issued $500 million of limited-recourse notes and, in return, obtained $500 million of asset-backed notes from a Delaware master trust and ultimately contributed the asset-backed notes to its subsidiary, PRIAC. As of June 30, 2019, no principal payments have been received or are currently due on the asset-backed notes and, as a result, there was no payment obligation under the limited-recourse notes. Accordingly, none of the notes are reflected in the Company’s Unaudited Interim Consolidated Financial Statements as of that date.

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. As of June 30, 2019, there have been no material changes in our economic exposure to market risk from December 31, 2018, a description of which may be found in our Annual Report on Form 10-K, for the year ended December 31, 2018, 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, 2018, 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.

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 June 30, 2019. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2019, 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 June 30, 2019, 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 certain 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, 2018. 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” 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 three months ended June 30, 2019, 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)
April 1, 2019 through April 30, 2019	1,657,498	$	100.74	1,654,250
May 1, 2019 through May 31, 2019	1,681,255	$	99.22	1,679,816
June 1, 2019 through June 30, 2019	1,693,860	$	98.76	1,684,690
Total	5,032,613	$	99.57	5,018,756	$	1,000,000,000

__________


(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.


(2)	In December 2018, Prudential Financial’s Board of Directors authorized the Company to repurchase, at management’s discretion, up to $2.0 billion of its outstanding Common Stock during the period from January 1, 2019 through December 31, 2019.

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ITEM 6. EXHIBITS

EXHIBIT INDEX



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 - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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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GLOSSARY

Throughout this Quarterly Report on Form 10-Q, the Company may use certain abbreviations, acronyms and terms which are defined below.



Prudential Entities

Company	Prudential Financial, Inc. and its subsidiaries	Pruco Life	Pruco Life Insurance Company
PALAC	Prudential Annuities Life Assurance Corporation	Prudential	Prudential Financial, Inc. and its subsidiaries
PFI	Prudential Financial, Inc. and its subsidiaries	Prudential Financial	Prudential Financial, Inc.
PGFL	Prudential Gibraltar Financial Life Insurance Co., Ltd.	Prudential Funding	Prudential Funding, LLC
PLIC	Prudential Legacy Insurance Company of New Jersey	Prudential Insurance/PICA	The Prudential Insurance Company of America
PLNJ	Pruco Life Insurance Company of New Jersey	Prudential of Japan	The Prudential Life Insurance Company, Ltd.
POA	Prudential of Argentina	Registrant	Prudential Financial, Inc.
PRIAC	Prudential Retirement Insurance and Annuity Company



Defined Terms

Board	Prudential Financial's Board of Directors	Other Postretirement Benefits	Certain health care and life insurance benefits provided by the Company for retired employees, their beneficiaries and covered dependents
Closed Block	Certain in-force traditional domestic participating insurance and annuity products and corresponding assets that are used for the payment of benefits and policyholders' dividends on these products	Pension Benefits	Funded and non-funded non-contributory defined benefit pension plans which cover substantially all of the Company’s employees
Exchange Act	The Securities Exchange Act of 1934	PGIM	The Global Investment Management Businesses of Prudential Financial, Inc.
Fitch	Fitch Ratings Inc.	Regulation XXX	Valuation of Life Insurance Policies Model Regulation
Framework	Prudential's capital protection framework	S&P	Standard & Poor's Rating Services
Guideline AXXX	The Application of the Valuation of Life Insurance Policies Model Regulation	Tax Act of 2017	The United States Tax Cuts and Jobs Act of 2017
Moody's	Moody's Investor Service, Inc.	U.S. GAAP	Generally accepted accounting principles in the United States of America
Morningstar	Morningstar, Inc.

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Acronyms

ALM	Asset Liability Management	LIBOR	London Inter-Bank Offered Rate
AOCI	Accumulated Other Comprehensive Income (Loss)	LPs/LLCs	Limited Partnerships and Limited Liability Companies
ASU	Accounting Standards Update	MD&A	Management's Discussion and Analysis of Financial Condition and Results of Operations
AUD	Australian Dollar	NAIC	National Association of Insurance Commissioners
bps	Basis Points	NAV	Net Asset Value
DAC	Deferred Policy Acquisition Costs	NJDOBI	New Jersey Department of Banking and Insurance
DOL	U.S. Department of Labor	NPR	Non-Performance Risk
DSI	Deferred Sales Inducements	OCI	Other Comprehensive Income (Loss)
EBITDA	Earnings Before Interest, Taxes, Depreciation and Amortization	OTC	Over-The-Counter
FASB	Financial Accounting Standards Board	OTTI	Other-Than-Temporary Impairments
FSA	Financial Services Agency (an agency of the Japanese government)	RBC	Risk-Based Capital
GICs	Guaranteed Investment Contracts	SEC	Securities and Exchange Commission
GMAB	Guaranteed Minimum Accumulation Benefits	SVO	Securities Valuation Office
GMDB	Guaranteed Minimum Death Benefits	U.S.	The United States of America
GMIWB	Guaranteed Minimum Income and Withdrawal Benefits	USD	U.S. Dollar
GMWB	Guaranteed Minimum Withdrawal Benefits	VIEs	Variable Interest Entities
HDI	Highest Daily Lifetime Income	VOBA	Value of Business Acquired

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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/ KENNETH Y. TANJI
			Kenneth Y. Tanji Executive Vice President and Chief Financial Officer (Authorized signatory and principal financial officer)

Date: August 2, 2019

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