PRU 10-Q Quarterly Report June 30, 2016

PRUDENTIAL FINANCIAL INC

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10-Q 1 form10-qx2q2016.htm 2Q 2016 10-Q Document

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended June 30, 2016



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

For the Transition Period from to

Commission File Number 001-16707

Prudential Financial, Inc.

(Exact Name of Registrant as Specified in its Charter)



New Jersey	22-3703799
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

751 Broad Street

Newark, New Jersey 07102

(973) 802-6000

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

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

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

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



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

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

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

Table of Contents

TABLE OF CONTENTS



		Page
PART I FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Unaudited Interim Consolidated Statements of Financial Position as of June 30, 2016 and December 31, 2015	1
	Unaudited Interim Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015	2
	Unaudited Interim Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and 2015	3
	Unaudited Interim Consolidated Statements of Equity for the six months ended June 30, 2016 and 2015	4
	Unaudited Interim Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015	5
	Notes to Unaudited Interim Consolidated Financial Statements	6
	1. Business and Basis of Presentation	6
	2. Significant Accounting Policies and Pronouncements	7
	3. Acquisitions	11
	4. Investments	11
	5. Variable Interest Entities	30
	6. Closed Block	32
	7. Equity	34
	8. Earnings Per Share	38
	9. Short-Term and Long-Term Debt	41
	10. Employee Benefit Plans	43
	11. Segment Information	44
	12. Income Taxes	50
	13. Fair Value of Assets and Liabilities	50
	14. Derivative Instruments	87
	15. Commitments and Guarantees, Contingent Liabilities and Litigation and Regulatory Matters	96
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	101
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	187
Item 4.	Controls and Procedures	187
PART II OTHER INFORMATION
Item 1.	Legal Proceedings	188
Item 1A.	Risk Factors	188
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	188
Item 6.	Exhibits	189
SIGNATURES		190
EXHIBIT INDEX		191

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Forward-Looking Statements

Certain of the statements included in this Quarterly Report on Form 10-Q, including but not limited to those in Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Prudential Financial, Inc. and its subsidiaries. There can be no assurance that future developments affecting Prudential Financial, Inc. and its subsidiaries will be those anticipated by management. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (1) general economic, market and political conditions, including the performance and fluctuations of fixed income, equity, real estate and other financial markets; (2) the availability and cost of additional debt or equity capital or external financing for our operations; (3) interest rate fluctuations or prolonged periods of low interest rates; (4) the degree to which we choose not to hedge risks, or the potential ineffectiveness or insufficiency of hedging or risk management strategies we do implement; (5) any inability to access our credit facility; (6) reestimates of our reserves for future policy benefits and claims; (7) differences between actual experience regarding mortality, morbidity, persistency, utilization, interest rates or market returns and the assumptions we use in pricing our products, establishing liabilities and reserves or for other purposes; (8) changes in our assumptions related to deferred policy acquisition costs, value of business acquired or goodwill; (9) changes in assumptions for our pension and other post-retirement benefit plans; (10) changes in our financial strength or credit ratings; (11) statutory reserve requirements associated with term and universal life insurance policies under Regulation XXX and Guideline AXXX; (12) investment losses, defaults and counterparty non-performance; (13) competition in our product lines and for personnel; (14) difficulties in marketing and distributing products through current or future distribution channels; (15) changes in tax law; (16) economic, political, currency and other risks relating to our international operations; (17) fluctuations in foreign currency exchange rates and foreign securities markets; (18) regulatory or legislative changes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the U.S. Department of Labor’s fiduciary rules; (19) inability to protect our intellectual property rights or claims of infringement of the intellectual property rights of others; (20) adverse determinations in litigation or regulatory matters, and our exposure to contingent liabilities, including related to the remediation of certain securities lending activities administered by the Company; (21) domestic or international military actions, natural or man-made disasters including terrorist activities or pandemic disease, or other events resulting in catastrophic loss of life; (22) ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks; (23) possible difficulties in executing, integrating and realizing projected results of acquisitions, divestitures and restructurings; (24) interruption in telecommunication, information technology or other operational systems or failure to maintain the security, confidentiality or privacy of sensitive data on such systems; (25) changes in statutory or U.S. GAAP accounting principles, practices or policies; and (26) Prudential Financial, Inc.’s primary reliance, as a holding company, on dividends or distributions from its subsidiaries to meet debt payment obligations and the ability of the subsidiaries to pay such dividends or distributions in light of our ratings objectives and/or applicable regulatory restrictions. Prudential Financial, Inc. does not intend, and is under no obligation, to update any particular forward-looking statement included in this document. See “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2015 for discussion of certain risks relating to our businesses and investment in our securities.

Table of Contents

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

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Financial Position

June 30, 2016 and December 31, 2015 (in millions, except share amounts)



	June 30, 2016			December 31, 2015
ASSETS
Fixed maturities, available-for-sale, at fair value (amortized cost: 2016-$286,066; 2015-$265,416)(1)	$	332,270		$	290,323
Fixed maturities, held-to-maturity, at amortized cost (fair value: 2016-$3,026; 2015-$2,624)(1)	2,485			2,308
Trading account assets supporting insurance liabilities, at fair value(1)	21,702			20,522
Other trading account assets, at fair value(1)	7,268			14,458
Equity securities, available-for-sale, at fair value (cost: 2016-$7,088; 2015-$6,847)	9,496			9,274
Commercial mortgage and other loans (includes $591 and $274 measured at fair value under the fair value option at June 30, 2016 and December 31, 2015, respectively)(1)	51,447			50,559
Policy loans	11,930			11,657
Other long-term investments (includes $1,384 and $1,322 measured at fair value under the fair value option at June 30, 2016 and December 31, 2015, respectively)(1)	10,247			9,986
Short-term investments	5,035			8,105
Total investments	451,880			417,192
Cash and cash equivalents(1)	24,142			17,612
Accrued investment income(1)	3,211			3,110
Deferred policy acquisition costs	16,152			16,718
Value of business acquired	1,951			2,828
Other assets(1)(2)	14,322			14,225
Separate account assets	284,832			285,570
TOTAL ASSETS	$	796,490		$	757,255
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits	$	242,950		$	224,384
Policyholders’ account balances(1)	142,716			136,784
Policyholders’ dividends	7,295			5,578
Securities sold under agreements to repurchase	7,335			7,882
Cash collateral for loaned securities	4,643			3,496
Income taxes	15,140			8,714
Short-term debt	676			1,216
Long-term debt(2)	18,986			19,594
Other liabilities(1)	14,645			13,517
Notes issued by consolidated variable interest entities (includes $2,094 and $8,597 measured at fair value under the fair value option at June 30, 2016 and December 31, 2015, respectively)(1)	2,094			8,597
Separate account liabilities	284,832			285,570
Total liabilities	741,312			715,332
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 15)
EQUITY
Preferred Stock ($.01 par value; 10,000,000 shares authorized; none issued)	0			0
Common Stock ($.01 par value; 1,500,000,000 shares authorized; 660,111,339 shares issued at both June 30, 2016 and December 31, 2015)	6			6
Additional paid-in capital	24,457			24,482
Common Stock held in treasury, at cost (221,372,301 and 213,009,970 shares at June 30, 2016 and December 31, 2015, respectively)	(14,432		)	(13,814		)
Accumulated other comprehensive income (loss)	24,667			12,285
Retained earnings	20,451			18,931
Total Prudential Financial, Inc. equity	55,149			41,890
Noncontrolling interests	29			33
Total equity	55,178			41,923
TOTAL LIABILITIES AND EQUITY	$	796,490		$	757,255

__________


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


(2)	Prior period amounts are presented on a basis consistent with the current period presentation, reflecting the adoption of ASU 2015-03. See Note 2 for additional information.

See Notes to Unaudited Interim Consolidated Financial Statements

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PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Operations

Three and Six Months Ended June 30, 2016 and 2015 (in millions, except per share amounts)



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
REVENUES
Premiums	$	6,935		$	7,582		$	13,232		$	14,229
Policy charges and fee income	1,276			1,250			2,875			2,858
Net investment income	3,789			3,671			7,459			7,440
Asset management and service fees	920			956			1,825			1,908
Other income	86			124			63			339
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities	(17		)	(54		)	(175		)	(68		)
Other-than-temporary impairments on fixed maturity securities transferred to Other comprehensive income	6			25			38			31
Other realized investment gains (losses), net	1,444			158			3,451			2,527
Total realized investment gains (losses), net	1,433			129			3,314			2,490
Total revenues	14,439			13,712			28,768			29,264
BENEFITS AND EXPENSES
Policyholders’ benefits	7,989			7,852			15,020			15,091
Interest credited to policyholders’ account balances	1,058			676			2,344			1,909
Dividends to policyholders	598			437			864			1,218
Amortization of deferred policy acquisition costs	427			135			1,629			924
General and administrative expenses	3,026			2,483			5,838			5,245
Total benefits and expenses	13,098			11,583			25,695			24,387
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURES	1,341			2,129			3,073			4,877
Total income tax expense (benefit)	431			679			799			1,378
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURES	910			1,450			2,274			3,499
Equity in earnings of operating joint ventures, net of taxes	15			9			20			6
INCOME (LOSS) FROM CONTINUING OPERATIONS	925			1,459			2,294			3,505
Income (loss) from discontinued operations, net of taxes	0			0			0			0
NET INCOME (LOSS)	925			1,459			2,294			3,505
Less: Income (loss) attributable to noncontrolling interests	4			53			37			63
NET INCOME (LOSS) ATTRIBUTABLE TO PRUDENTIAL FINANCIAL, INC.	$	921		$	1,406		$	2,257		$	3,442
EARNINGS PER SHARE
Basic earnings per share-Common Stock:
Income (loss) from continuing operations attributable to Prudential Financial, Inc.	$	2.06		$	3.07		$	5.03		$	7.52
Income (loss) from discontinued operations, net of taxes	0.00			0.00			0.00			0.00
Net income (loss) attributable to Prudential Financial, Inc.	$	2.06		$	3.07		$	5.03		$	7.52
Diluted earnings per share-Common Stock:
Income (loss) from continuing operations attributable to Prudential Financial, Inc.	$	2.04		$	3.03		$	4.97		$	7.40
Income (loss) from discontinued operations, net of taxes	0.00			0.00			0.00			0.00
Net income (loss) attributable to Prudential Financial, Inc.	$	2.04		$	3.03		$	4.97		$	7.40
Dividends declared per share of Common Stock	$	0.70		$	0.58		$	1.40		$	1.16

See Notes to Unaudited Interim Consolidated Financial Statements

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Comprehensive Income

Three and Six Months Ended June 30, 2016 and 2015 (in millions)



	Three Months Ended June 30,					Six Months Ended June 30,
	2016		2015			2016		2015
NET INCOME (LOSS)	$	925	$	1,459		$	2,294	$	3,505
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments for the period	546		(96		)	1,283		(163		)
Net unrealized investment gains (losses)	7,907		(6,702		)	17,320		(4,212		)
Defined benefit pension and postretirement unrecognized periodic benefit (cost)	39		54			73		106
Total	8,492		(6,744		)	18,676		(4,269		)
Less: Income tax expense (benefit) related to other comprehensive income (loss)	2,892		(2,380		)	6,291		(1,569		)
Other comprehensive income (loss), net of taxes	5,600		(4,364		)	12,385		(2,700		)
Comprehensive income (loss)	6,525		(2,905		)	14,679		805
Less: Comprehensive income (loss) attributable to noncontrolling interests	3		37			40		9
Comprehensive income (loss) attributable to Prudential Financial, Inc.	$	6,522	$	(2,942	)	$	14,639	$	796

See Notes to Unaudited Interim Consolidated Financial Statements

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PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Equity

Six Months Ended June 30, 2016 and 2015 (in millions)



	Prudential Financial, Inc. Equity
	Common Stock		Additional Paid-in Capital			Retained Earnings			Common Stock Held In Treasury			Class B Stock Held in Treasury			Accumulated Other Comprehensive Income (Loss)			Total Prudential Financial, Inc. Equity			Noncontrolling Interests			Total Equity
Balance, December 31, 2015	$	6	$	24,482		$	18,931		$	(13,814	)	$	0		$	12,285		$	41,890		$	33		$	41,923
Cumulative effect of adoption of accounting changes						11												11			(30		)	(19		)
Common Stock acquired									(750		)							(750		)				(750		)
Class B Stock repurchase adjustment						(119		)										(119		)				(119		)
Contributions from noncontrolling interests																					5			5
Distributions to noncontrolling interests																					(19		)	(19		)
Stock-based compensation programs			(25		)				132									107						107
Dividends declared on Common Stock						(629		)										(629		)				(629		)
Comprehensive income:
Net income (loss)						2,257												2,257			37			2,294
Other comprehensive income (loss), net of tax															12,382			12,382			3			12,385
Total comprehensive income (loss)																		14,639			40			14,679
Balance, June 30, 2016	$	6	$	24,457		$	20,451		$	(14,432	)	$	0		$	24,667		$	55,149		$	29		$	55,178

	Prudential Financial, Inc. Equity
	Common Stock		Additional Paid-in Capital			Retained Earnings			Common Stock Held In Treasury			Class B Stock Held in Treasury			Accumulated Other Comprehensive Income (Loss)			Total Prudential Financial, Inc. Equity			Noncontrolling Interests			Total Equity
Balance, December 31, 2014	$	6	$	24,565		$	14,888		$	(13,088	)	$	(651	)	$	16,050		$	41,770		$	579		$	42,349
Common Stock acquired									(500		)							(500		)				(500		)
Class B Stock canceled			(167		)	(484		)				651						0						0
Contributions from noncontrolling interests																					23			23
Distributions to noncontrolling interests																					(42		)	(42		)
Stock-based compensation programs			(1		)				190									189						189
Dividends declared on Common Stock						(532		)										(532		)				(532		)
Comprehensive income:
Net income (loss)						3,442												3,442			63			3,505
Other comprehensive income (loss), net of tax															(2,646		)	(2,646		)	(54		)	(2,700		)
Total comprehensive income (loss)																		796			9			805
Balance, June 30, 2015	$	6	$	24,397		$	17,314		$	(13,398	)	$	0		$	13,404		$	41,723		$	569		$	42,292

See Notes to Unaudited Interim Consolidated Financial Statements

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PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Cash Flows

Six Months Ended June 30, 2016 and 2015 (in millions)



	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	2,294		$	3,505
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment (gains) losses, net	(3,314		)	(2,490		)
Policy charges and fee income	(894		)	(760		)
Interest credited to policyholders’ account balances	2,344			1,909
Depreciation and amortization	424			(48		)
(Gains) losses on trading account assets supporting insurance liabilities, net	(324		)	137
Change in:
Deferred policy acquisition costs	227			(387		)
Future policy benefits and other insurance liabilities	4,267			3,157
Other trading account assets	(27		)	(62		)
Income taxes	299			1,038
Derivatives, net	9,357			(1,919		)
Other, net	(1,164		)	(605		)
Cash flows from (used in) operating activities	13,489			3,475
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale	24,028			24,630
Fixed maturities, held-to-maturity	121			121
Trading account assets supporting insurance liabilities and other trading account assets	14,270			6,595
Equity securities, available-for-sale	1,755			2,488
Commercial mortgage and other loans	3,034			2,392
Policy loans	1,167			1,119
Other long-term investments	269			490
Short-term investments	27,859			41,720
Payments for the purchase/origination of:
Fixed maturities, available-for-sale	(33,380		)	(23,175		)
Trading account assets supporting insurance liabilities and other trading account assets	(14,729		)	(8,433		)
Equity securities, available-for-sale	(1,527		)	(2,101		)
Commercial mortgage and other loans	(3,743		)	(4,372		)
Policy loans	(941		)	(907		)
Other long-term investments	(865		)	(870		)
Short-term investments	(25,021		)	(39,095		)
Acquisition of business, net of cash acquired	(532		)	0
Derivatives, net	268			148
Other, net	178			(36		)
Cash flows from (used in) investing activities	(7,789		)	714
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholders’ account deposits	12,631			10,730
Policyholders’ account withdrawals	(9,807		)	(10,678		)
Net change in securities sold under agreements to repurchase and cash collateral for loaned securities	600			(1,978		)
Cash dividends paid on Common Stock	(631		)	(537		)
Net change in financing arrangements (maturities 90 days or less)	40			493
Common Stock acquired	(733		)	(502		)
Class B stock acquired	(119		)	(651		)
Common Stock reissued for exercise of stock options	54			125
Proceeds from the issuance of debt (maturities longer than 90 days)	197			3,348
Repayments of debt (maturities longer than 90 days)	(1,382		)	(2,166		)
Excess tax benefits from share-based payment arrangements	3			14
Other, net	(234		)	(307		)
Cash flows from (used in) financing activities	619			(2,109		)
Effect of foreign exchange rate changes on cash balances	211			40
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	6,530			2,120
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	17,612			14,918
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	24,142		$	17,038
NON-CASH TRANSACTIONS DURING THE PERIOD(1)
Treasury Stock shares issued for stock-based compensation programs	$	111		$	109
Significant Pension Risk Transfer transactions:
Assets acquired, excluding cash and cash equivalents acquired	$	0		$	1,553
Liabilities assumed	0			1,919
Net cash paid	$	0		$	366

_______

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

See Notes to Unaudited Interim Consolidated Financial Statements

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

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

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

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

Basis of Presentation

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

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

In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations have been made. All such adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 .

The Company’s Gibraltar Life Insurance Company, Ltd. (“Gibraltar Life”) consolidated operations use a November 30 fiscal year end for purposes of inclusion in the Company’s Consolidated Financial Statements. The unaudited interim consolidated balance sheet data as of June 30, 2016 , include the assets and liabilities of Gibraltar Life as of May 31, 2016. The unaudited interim consolidated income statement data include Gibraltar Life’s results of operations for the three and six months ended May 31, 2016 and 2015, respectively.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Use of Estimates

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

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

Out of Period Adjustments

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

Reclassifications

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

2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS

This section supplements, and should be read in conjunction with, Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 .

Adoption of New Accounting Pronouncements

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

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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

In February 2015, the FASB issued updated guidance (ASU 2015-02, Consolidation (Topic 810): Amendments to Consolidation Analysis) that modifies the rules regarding consolidation. The pronouncement eliminates specialized guidance for limited partnerships and similar legal entities, and removes the indefinite deferral for certain investment funds. The new guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, with early adoption permitted. The Company adopted the updated guidance effective January 1, 2016 and applied the modified retrospective method of adoption, primarily resulting in the deconsolidation of certain of its previously consolidated collateralized loan obligations (“CLOs”), as its fee arrangements are no longer deemed variable interests in these entities. The Company continues to consolidate CLOs where it retains other economic interests which absorb more than an insignificant amount of the CLOs expected variability. The Company also deconsolidated certain investment structures where it is no longer deemed to be the primary beneficiary as the Company, through its equity ownership, no longer has the obligation to absorb losses of the VIE that could be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The impact to the Company’s consolidated statements of financial position upon adoption of the updated guidance is a reduction of $5.5 billion of “Total assets” (including $5.1 billion of “Total investments”) and $5.5 billion of “Total liabilities” (including $5.1 billion of “Notes issued by consolidated variable interest entities”), with a $30 million decrease in “Noncontrolling interests” and a $7 million increase to “Total Prudential Financial, Inc. equity.”

In August 2014, the FASB issued updated guidance (ASU 2014-14, Receivables — Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure ) requiring that mortgage loans be derecognized and that a separate other receivable be recognized upon foreclosure if certain conditions are met. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The new guidance became effective for annual periods and interim periods within those annual periods that began after December 15, 2014, and was applied prospectively. Adoption of the guidance did not have a significant effect on the Company’s consolidated financial position, results of operations or financial statement disclosures.

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

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

In April 2014, the FASB issued updated guidance (ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ) that changes the criteria for reporting discontinued operations and introduces new disclosures. The new guidance became effective for new disposals and new classifications of disposal groups as held for sale that occur within annual periods that began on or after December 15, 2014, and interim periods within those annual periods, and was applied prospectively. Adoption of the guidance did not have a significant effect on the Company’s consolidated financial position, results of operations or financial statement disclosures.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

In January 2014, the FASB issued updated guidance (ASU 2014-04, Receivables — Troubled Debt Restructuring by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure ) for troubled debt restructurings clarifying when an in-substance repossession or foreclosure occurs, and when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The new guidance became effective for annual periods and interim periods within those annual periods that began after December 15, 2014, and was applied prospectively. Adoption of the guidance did not have a significant effect on the Company’s consolidated financial position, results of operations or financial statement disclosures.

In January 2014, the FASB issued updated guidance (ASU 2014-01, Investments — Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects ) regarding investments in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. Under the guidance, an entity is permitted to make an accounting policy election to amortize the initial cost of its investment in proportion to the tax credits and other tax benefits received and recognize the net investment performance in the statement of operations as a component of income tax expense (benefit) if certain conditions are met. The new guidance became effective for annual periods and interim reporting periods within those annual periods that began after December 15, 2014. The Company did not elect the proportional amortization method under this guidance.

Future Adoption of New Accounting Pronouncements

In May 2014, the FASB issued updated guidance (ASU 2014-09, Revenue from Contracts with Customers (Topic 606) ) on accounting for revenue recognition. The guidance is based on the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from cost incurred to obtain or fulfill a contract. Revenue recognition for insurance contracts is explicitly scoped out of the guidance. In August 2015, the FASB issued an update to defer the original effective date of this guidance. As a result of the deferral, the new guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017, and must be applied using one of two retrospective application methods. Early adoption is permitted only for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently assessing the impact of the guidance on the Company’s consolidated financial position, results of operations and financial statement disclosures.

In May 2015, the FASB issued final guidance (ASU 2015-09, Financial Services — Insurance (Topic 944): Disclosures about Short-Duration Contracts ) that aims to enhance disclosures about insurance contracts classified as short-duration. The new disclosure requirements focus on providing users of financial statements with more transparent information about an insurance entity’s initial claim estimates and subsequent adjustments to those estimates, methodologies and judgments in estimating claims, and timing, frequency and severity of claims as they relate to short-duration insurance contracts. The new guidance is effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016, and is to be applied retrospectively. The Company is currently assessing the impact of the guidance on the Company’s financial statement disclosures but has concluded that this guidance will not impact the Company’s consolidated financial position or results of operations.

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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

In February 2016, the FASB issued guidance (ASU 2016-02, Leases (Topic 842) ) that ensures assets and liabilities from all outstanding lease contracts are recognized on balance sheet (with limited exception). The guidance substantially changes a Lessee’s accounting for leases and requires the recording on balance sheet of a “right-of-use” asset and liability to make lease payments for most leases. A Lessee will continue to recognize expense in its income statement in a manner similar to the requirements under the current lease accounting guidance. For Lessors, the guidance modifies classification criteria and accounting for sales-type and direct financing leases and requires a Lessor to derecognize the carrying value of the leased asset that is considered to have been transferred to a Lessee and record a lease receivable and residual asset (“receivable and residual” approach). The guidance also eliminates the real estate specific provisions of the current guidance (i.e., sale-leaseback). The new guidance is effective for financial statements issued for annual reporting periods beginning after December 15, 2018, and for interim periods within those annual periods, with early adoption permitted. The Company is currently assessing the impact of the guidance on the Company’s consolidated financial position, results of operations and financial statement disclosures.

In March 2016, the FASB issued guidance (ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting ) to simplify the transition to equity method when an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The new guidance is effective for financial statements issued for annual reporting periods beginning after December 15, 2016, and for interim periods within those annual periods. The Company is currently assessing the impact of the guidance on the Company’s consolidated financial position, results of operations and financial statement disclosures.

In March 2016, the FASB issued guidance (ASU 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payments Accounting ) to simplify and improve employee share-based payment accounting. The areas updated include income tax consequences, a policy election related to forfeitures, classification of awards as either equity or liability, and classification of operating and financing activity on the statement of cash flows. The new guidance is effective for financial statements issued for annual reporting periods beginning after December 15, 2016, and for interim periods within those annual periods, with early adoption permitted. The Company is currently assessing the impact of the guidance on the Company’s consolidated financial position, results of operations and financial statement disclosures.

In June 2016, the FASB issued guidance (ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ) that provides a new current expected credit loss model to account for credit losses on certain financial assets and off-balance sheet exposures (e.g., loans held for investment, debt securities held to maturity, reinsurance receivables, net investments in leases and loan commitments). The model requires an entity to estimate lifetime credit losses related to such financial assets and exposures based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The guidance also modifies the current other-than-temporary impairment guidance for available-for-sale debt securities to require the use of an allowance rather than a direct write down of the investment, and replaces existing guidance for purchased credit deteriorated loans and debt securities. The new guidance is effective for financial statements issued by public entities for annual reporting periods beginning after December 15, 2019, and for interim periods within those annual periods. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently assessing the impact of the guidance on the Company’s consolidated financial position, results of operations and financial statement disclosures.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

3. ACQUISITIONS

This section supplements, and should be read in conjunction with, the complete descriptions provided in Note 3 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2015 .

Acquisition of Deutsche Bank’s India Asset Management Business

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

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

In March 2016, the Company completed the purchase of an indirect 40% ownership interest in Administradora de Fondos de Pensiones Habitat S.A. (“AFP Habitat”), a leading provider of retirement services in Chile, from Inversiones La Construcción S.A. (“ILC”), the investment subsidiary of the Chilean Construction Chamber. The Company paid 899.90 Chilean pesos per share, for a total purchase price of approximately $532 million based on exchange rates at the share acquisition date. The Company and ILC now equally own an indirect controlling stake in AFP Habitat through a joint holding company. The Company’s investment will be accounted for under the equity method and is recorded within “Other assets.” This acquisition will enable the Company to participate in the growing Chilean pension market.

4. INVESTMENTS

Fixed Maturities and Equity Securities

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



	June 30, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI(4)
	(in millions)
Fixed maturities, available-for-sale
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	17,128	$	5,302	$	1	$	22,429	$	0
Obligations of U.S. states and their political subdivisions	8,326		1,456		3		9,779		0
Foreign government bonds	82,283		23,744		40		105,987		0
U.S. corporate public securities	76,570		9,391		531		85,430		(9		)
U.S. corporate private securities(1)	29,177		2,643		255		31,565		(20		)
Foreign corporate public securities	26,861		3,474		199		30,136		(5		)
Foreign corporate private securities	20,132		905		700		20,337		0
Asset-backed securities(2)	10,162		180		155		10,187		(374		)
Commercial mortgage-backed securities	10,995		653		5		11,643		(1		)
Residential mortgage-backed securities(3)	4,432		347		2		4,777		(3		)
Total fixed maturities, available-for-sale(1)	$	286,066	$	48,095	$	1,891	$	332,270	$	(412	)
Equity securities, available-for-sale	$	7,088	$	2,500	$	92	$	9,496

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	June 30, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in millions)
Fixed maturities, held-to-maturity
Foreign government bonds	$	954	$	393	$	0	$	1,347
Foreign corporate public securities	694		82		0		776
Foreign corporate private securities(5)	92		5		0		97
Commercial mortgage-backed securities	11		0		0		11
Residential mortgage-backed securities(3)	734		61		0		795
Total fixed maturities, held-to-maturity(5)	$	2,485	$	541	$	0	$	3,026

__________


(1)	Excludes notes with amortized cost of $1,127 million (fair value, $1,127 million ) which have been offset with the associated payables under a netting agreement.


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


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

(4)

Represents the amount of OTTI losses in Accumulated Other Comprehensive Income (“AOCI”), which were not included in earnings. Amount excludes $698 million of net unrealized gains on impaired available-for-sale securities and $1 million of net unrealized gains on impaired held-to-maturity securities relating to changes in the value of such securities subsequent to the impairment measurement date.


(5)	Excludes notes with amortized cost of $3,990 million (fair value, $3,990 million ) which have been offset with the associated payables under a netting agreement.



	December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI(4)
	(in millions)
Fixed maturities, available-for-sale
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	14,992	$	3,544	$	19	$	18,517	$	0
Obligations of U.S. states and their political subdivisions	8,089		747		41		8,795		0
Foreign government bonds	71,849		12,011		147		83,713		1
U.S. corporate public securities	70,979		6,344		1,955		75,368		(3		)
U.S. corporate private securities(1)	28,525		2,278		359		30,444		0
Foreign corporate public securities	26,354		2,821		621		28,554		0
Foreign corporate private securities	19,393		739		994		19,138		0
Asset-backed securities(2)	10,121		226		121		10,226		(452		)
Commercial mortgage-backed securities	10,337		195		70		10,462		(1		)
Residential mortgage-backed securities(3)	4,777		335		6		5,106		(4		)
Total fixed maturities, available-for-sale(1)	$	265,416	$	29,240	$	4,333	$	290,323	$	(459	)
Equity securities, available-for-sale	$	6,847	$	2,570	$	143	$	9,274

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in millions)
Fixed maturities, held-to-maturity
Foreign government bonds	$	816	$	196	$	0	$	1,012
Foreign corporate public securities	625		62		0		687
Foreign corporate private securities(5)	78		4		0		82
Commercial mortgage-backed securities	33		1		0		34
Residential mortgage-backed securities(3)	756		53		0		809
Total fixed maturities, held-to-maturity(5)	$	2,308	$	316	$	0	$	2,624

__________


(1)	Excludes notes with amortized cost of $1,050 million (fair value, $1,039 million ) which have been offset with the associated payables under a netting agreement.


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


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


(4)	Represents the amount of OTTI losses in AOCI, which were not included in earnings. Amount excludes $693 million of net unrealized gains on impaired available-for-sale securities and less than $1 million of net unrealized gains on impaired held-to-maturity securities relating to changes in the value of such securities subsequent to the impairment measurement date.


(5)	Excludes notes with amortized cost of $3,850 million (fair value, $4,081 million ) which have been offset with the associated payables under a netting agreement.

The amortized cost and fair value of fixed maturities by contractual maturities at June 30, 2016 , are as follows:



	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Due in one year or less	$	12,437	$	13,082	$	8	$	8
Due after one year through five years	47,952		52,497		80		85
Due after five years through ten years	58,735		64,754		702		784
Due after ten years(1)	141,353		175,330		950		1,343
Asset-backed securities	10,162		10,187		0		0
Commercial mortgage-backed securities	10,995		11,643		11		11
Residential mortgage-backed securities	4,432		4,777		734		795
Total	$	286,066	$	332,270	$	2,485	$	3,026

__________


(1)	Excludes available-for-sale notes with amortized cost of $1,127 million (fair value, $1,127 million ) and held-to-maturity notes with amortized cost of $3,990 million (fair value, $3,990 million ), which have been offset with the associated payables under a netting agreement.

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

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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(in millions)
Fixed maturities, available-for-sale
Proceeds from sales	$	9,232		$	7,626		$	14,354		$	15,044
Proceeds from maturities/repayments	5,586			4,618			9,623			9,713
Gross investment gains from sales, prepayments and maturities	499			442			794			974
Gross investment losses from sales and maturities	(55		)	(42		)	(297		)	(97		)
Fixed maturities, held-to-maturity
Gross investment gains from prepayments	$	0		$	0		$	0		$	0
Proceeds from maturities/repayments	75			63			125			123
Equity securities, available-for-sale
Proceeds from sales	$	896		$	1,564		$	1,837		$	2,553
Gross investment gains from sales	138			273			248			427
Gross investment losses from sales	(36		)	(35		)	(107		)	(61		)
Fixed maturity and equity security impairments
Net writedowns for other-than-temporary impairment losses on fixed maturities recognized in earnings(1)	$	(11	)	$	(29	)	$	(137	)	$	(37	)
Writedowns for impairments on equity securities	(31		)	(11		)	(42		)	(17		)

__________


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

As discussed in Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 , a portion of certain OTTI losses on fixed maturity securities is recognized in OCI. For these securities, the net amount recognized in earnings (“credit loss impairments”) represents the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. Any remaining difference between the fair value and amortized cost is recognized in OCI. The following table sets forth the amount of pre-tax credit loss impairments on fixed maturity securities held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized in OCI, and the corresponding changes in such amounts:



	Three Months Ended June 30, 2016			Six Months Ended June 30, 2016
	(in millions)
Balance, beginning of period	$	543		$	532
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period	(131		)	(141		)
Credit loss impairments previously recognized on securities impaired to fair value during the period(1)	0			(2		)
Credit loss impairments recognized in the current period on securities not previously impaired	7			27
Additional credit loss impairments recognized in the current period on securities previously impaired	0			0
Increases due to the passage of time on previously recorded credit losses	7			12
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected	(2		)	(4		)
Balance, end of period	$	424		$	424

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2015			Six Months Ended June 30, 2015
	(in millions)
Balance, beginning of period	$	773		$	781
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period	(15		)	(28		)
Credit loss impairments previously recognized on securities impaired to fair value during the period(1)	(12		)	(13		)
Credit loss impairments recognized in the current period on securities not previously impaired	0			3
Additional credit loss impairments recognized in the current period on securities previously impaired	2			2
Increases due to the passage of time on previously recorded credit losses	7			13
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected	(4		)	(7		)
Balance, end of period	$	751		$	751

__________


(1)	Represents circumstances where the Company determined in the current period that it intends to sell the security or it is more likely than not that it will be required to sell the security before recovery of the security’s amortized cost.

Trading Account Assets Supporting Insurance Liabilities

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



	June 30, 2016				December 31, 2015
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Short-term investments and cash equivalents	$	614	$	614	$	765	$	765
Fixed maturities:
Corporate securities	13,422		13,872		12,797		12,851
Commercial mortgage-backed securities	1,899		1,985		1,860		1,862
Residential mortgage-backed securities(1)	1,289		1,334		1,411		1,428
Asset-backed securities(2)	1,343		1,353		1,295		1,299
Foreign government bonds	803		847		680		694
U.S. government authorities and agencies and obligations of U.S. states	405		452		326		369
Total fixed maturities	19,161		19,843		18,369		18,503
Equity securities	1,194		1,245		1,030		1,254
Total trading account assets supporting insurance liabilities	$	20,969	$	21,702	$	20,164	$	20,522

__________


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


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

The net change in unrealized gains (losses) from trading account assets supporting insurance liabilities still held at period end, recorded within “Other income,” was $136 million and $(276) million during the three months ended June 30, 2016 and 2015 , respectively, and $375 million and $(266) million during the six months ended June 30, 2016 and 2015 , respectively.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Other Trading Account Assets

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



	June 30, 2016				December 31, 2015
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Short-term investments and cash equivalents	$	26	$	26	$	26	$	26
Fixed maturities	4,268		4,072		11,132		10,764
Equity securities	939		1,022		1,006		1,098
Other	5		6		12		15
Subtotal	$	5,238	5,126		$	12,176	11,903
Derivative instruments			2,142				2,555
Total other trading account assets			$	7,268			$	14,458

The net change in unrealized gains (losses) from other trading account assets, excluding derivative instruments, still held at period end, recorded within “Other income,” was $137 million and $61 million during the three months ended June 30, 2016 and 2015 , respectively, and $161 million and $9 million during the six months ended June 30, 2016 and 2015 , respectively.

Concentrations of Financial Instruments

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

As of both June 30, 2016 and December 31, 2015 , the Company’s exposure to concentrations of credit risk of single issuers greater than 10% of the Company’s stockholders’ equity included securities of the U.S. government and certain U.S. government agencies and certain securities guaranteed by the U.S. government, as well as the securities disclosed below .



	June 30, 2016				December 31, 2015
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Investments in Japanese government and government agency securities:
Fixed maturities, available-for-sale	$	63,034	$	81,467	$	53,851	$	61,911
Fixed maturities, held-to-maturity	931		1,315		796		988
Trading account assets supporting insurance liabilities	599		646		492		502
Other trading account assets	36		37		33		33
Total	$	64,600	$	83,465	$	55,172	$	63,434



	June 30, 2016				December 31, 2015
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Investments in South Korean government and government agency securities:
Fixed maturities, available-for-sale	$	7,569	$	10,485	$	7,191	$	9,233
Fixed maturities, held-to-maturity	0		0		0		0
Trading account assets supporting insurance liabilities	44		45		44		44
Other trading account assets	7		7		0		0
Total	$	7,620	$	10,537	$	7,235	$	9,277

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Commercial Mortgage and Other Loans

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



	June 30, 2016					December 31, 2015
	Amount (in millions)			% of Total		Amount (in millions)			% of Total
Commercial mortgage and agricultural property loans by property type:
Office	$	11,790		23.3	%	$	11,226		22.9	%
Retail	8,567			17.0		8,917			18.2
Apartments/Multi-Family	13,139			26.0		12,034			24.5
Industrial	7,718			15.3		7,775			15.9
Hospitality	2,372			4.7		2,513			5.1
Other	4,037			8.0		3,722			7.6
Total commercial mortgage loans	47,623			94.3		46,187			94.2
Agricultural property loans	2,873			5.7		2,859			5.8
Total commercial mortgage and agricultural property loans by property type	50,496			100.0	%	49,046			100.0	%
Valuation allowance	(92		)			(99		)
Total net commercial mortgage and agricultural property loans by property type	50,404					48,947
Other loans:
Uncollateralized loans	730					1,012
Residential property loans	310					301
Other collateralized loans	11					312
Total other loans	1,051					1,625
Valuation allowance	(8		)			(13		)
Total net other loans	1,043					1,612
Total commercial mortgage and other loans(1)	$	51,447				$	50,559

__________


(1)	Includes loans held at fair value.

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

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



	June 30, 2016
	Commercial Mortgage Loans			Agricultural Property Loans		Residential Property Loans		Other Collateralized Loans		Uncollateralized Loans			Total
	(in millions)
Allowance for credit losses, beginning of year	$	97		$	2	$	3	$	0	$	10		$	112
Addition to (release of) allowance for losses	(7		)	0		0		0		(5		)	(12		)
Charge-offs, net of recoveries	0			0		0		0		0			0
Change in foreign exchange	0			0		0		0		0			0
Total ending balance	$	90		$	2	$	3	$	0	$	5		$	100

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	December 31, 2015
	Commercial Mortgage Loans			Agricultural Property Loans		Residential Property Loans			Other Collateralized Loans		Uncollateralized Loans		Total
	(in millions)
Allowance for credit losses, beginning of year	$	104		$	1	$	5		$	0	$	9	$	119
Addition to (release of) allowance for losses	(7		)	1		(2		)	0		1		(7		)
Charge-offs, net of recoveries	0			0		0			0		0		0
Change in foreign exchange	0			0		0			0		0		0
Total ending balance	$	97		$	2	$	3		$	0	$	10	$	112

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, 2016
	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	$	4	$	0	$	0	$	0	$	0	$	4
Collectively evaluated for impairment	86		2		3		0		5		96
Loans acquired with deteriorated credit quality	0		0		0		0		0		0
Total ending balance	$	90	$	2	$	3	$	0	$	5	$	100

Recorded Investment(1):
Gross of reserves: individually evaluated for impairment	$	150	$	20	$	0	$	0	$	2	$	172
Gross of reserves: collectively evaluated for impairment	47,473		2,853		310		11		728		51,375
Gross of reserves: loans acquired with deteriorated credit quality	0		0		0		0		0		0
Total ending balance, gross of reserves	$	47,623	$	2,873	$	310	$	11	$	730	$	51,547

__________


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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	December 31, 2015
	Commercial Mortgage Loans		Agricultural Property Loans		Residential Property Loans		Other Collateralized Loans		Uncollateralized Loans		Total
	(in millions)
Allowance for Credit Losses:
Individually evaluated for impairment	$	1	$	0	$	0	$	0	$	0	$	1
Collectively evaluated for impairment	96		2		3		0		10		111
Loans acquired with deteriorated credit quality	0		0		0		0		0		0
Total ending balance	$	97	$	2	$	3	$	0	$	10	$	112

Recorded Investment(1):
Gross of reserves: individually evaluated for impairment	$	111	$	8	$	0	$	0	$	2	$	121
Gross of reserves: collectively evaluated for impairment	46,076		2,851		301		312		1,010		50,550
Gross of reserves: loans acquired with deteriorated credit quality	0		0		0		0		0		0
Total ending balance, gross of reserves	$	46,187	$	2,859	$	301	$	312	$	1,012	$	50,671

__________


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

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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	June 30, 2016
	Recorded Investment(1)		Unpaid Principal Balance		Related Allowance		Average Recorded Investment Before Allowance(2)		Interest Income Recognized(3)
	(in millions)
With no related allowance recorded:
Commercial mortgage loans	$	0	$	0	$	0	$	0	$	0
Agricultural property loans	0		0		0		0		0
Residential property loans	0		0		0		0		0
Other collateralized loans	0		0		0		0		0
Uncollateralized loans	0		2		0		0		0
Total with no related allowance	$	0	$	2	$	0	$	0	$	0

With an allowance recorded:
Commercial mortgage loans	$	51	$	51	$	4	$	19	$	2
Agricultural property loans	0		0		0		0		0
Residential property loans	0		0		0		0		0
Other collateralized loans	0		0		0		0		0
Uncollateralized loans	0		0		0		0		0
Total with related allowance	$	51	$	51	$	4	$	19	$	2

Total:
Commercial mortgage loans	$	51	$	51	$	4	$	19	$	2
Agricultural property loans	0		0		0		0		0
Residential property loans	0		0		0		0		0
Other collateralized loans	0		0		0		0		0
Uncollateralized loans	0		2		0		0		0
Total	$	51	$	53	$	4	$	19	$	2

__________


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


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


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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



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

With an allowance recorded:
Commercial mortgage loans	$	1	$	1	$	1	$	52	$	3
Agricultural property loans	0		0		0		0		0
Residential property loans	0		0		0		0		0
Other collateralized loans	0		0		0		0		0
Uncollateralized loans	0		0		0		0		0
Total with related allowance	$	1	$	1	$	1	$	52	$	3

Total:
Commercial mortgage loans	$	1	$	1	$	1	$	52	$	3
Agricultural property loans	0		0		0		2		0
Residential property loans	0		0		0		0		0
Other collateralized loans	0		0		0		0		0
Uncollateralized loans	0		1		0		0		0
Total	$	1	$	2	$	1	$	54	$	3

__________


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


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


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

The net carrying value of commercial and other loans held for sale by the Company as of June 30, 2016 and December 31, 2015 , was $591 million and $274 million , respectively. For all of these loans, the Company pre-arranges that it will sell the loan to an investor. As of both June 30, 2016 and December 31, 2015 , all of the Company’s commercial and other loans held for sale were collateralized, with collateral primarily consisting of apartment complexes.

The following tables set forth certain key credit quality indicators as of June 30, 2016 , based upon the recorded investment gross of allowance for credit losses.

Commercial mortgage loans



	Debt Service Coverage Ratio—June 30, 2016
	Greater than 1.2X		1.0X to <1.2X		Less than 1.0X		Total
	(in millions)
Loan-to-Value Ratio
0%-59.99%	$	26,709	$	431	$	414	$	27,554
60%-69.99%	12,687		331		106		13,124
70%-79.99%	6,105		330		119		6,554
Greater than 80%	231		143		17		391
Total commercial mortgage loans	$	45,732	$	1,235	$	656	$	47,623

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Agricultural property loans



	Debt Service Coverage Ratio—June 30, 2016
	Greater than 1.2X		1.0X to <1.2X		Less than 1.0X		Total
	(in millions)
Loan-to-Value Ratio
0%-59.99%	$	2,616	$	118	$	2	$	2,736
60%-69.99%	137		0		0		137
70%-79.99%	0		0		0		0
Greater than 80%	0		0		0		0
Total agricultural property loans	$	2,753	$	118	$	2	$	2,873

Total commercial mortgage and agricultural property loans



	Debt Service Coverage Ratio—June 30, 2016
	Greater than 1.2X		1.0X to <1.2X		Less than 1.0X		Total
	(in millions)
Loan-to-Value Ratio
0%-59.99%	$	29,325	$	549	$	416	$	30,290
60%-69.99%	12,824		331		106		13,261
70%-79.99%	6,105		330		119		6,554
Greater than 80%	231		143		17		391
Total commercial mortgage and agricultural property loans	$	48,485	$	1,353	$	658	$	50,496

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

Commercial mortgage loans



	Debt Service Coverage Ratio—December 31, 2015
	Greater than 1.2X		1.0X to <1.2X		Less than 1.0X		Total
	(in millions)
Loan-to-Value Ratio
0%-59.99%	$	25,978	$	515	$	207	$	26,700
60%-69.99%	12,191		395		234		12,820
70%-79.99%	5,668		500		97		6,265
Greater than 80%	119		151		132		402
Total commercial mortgage loans	$	43,956	$	1,561	$	670	$	46,187

Agricultural property loans



	Debt Service Coverage Ratio—December 31, 2015
	Greater than 1.2X		1.0X to <1.2X		Less than 1.0X		Total
	(in millions)
Loan-to-Value Ratio
0%-59.99%	$	2,587	$	84	$	3	$	2,674
60%-69.99%	185		0		0		185
70%-79.99%	0		0		0		0
Greater than 80%	0		0		0		0
Total agricultural property loans	$	2,772	$	84	$	3	$	2,859

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Total commercial mortgage and agricultural property loans



	Debt Service Coverage Ratio—December 31, 2015
	Greater than 1.2X		1.0X to <1.2X		Less than 1.0X		Total
	(in millions)
Loan-to-Value Ratio
0%-59.99%	$	28,565	$	599	$	210	$	29,374
60%-69.99%	12,376		395		234		13,005
70%-79.99%	5,668		500		97		6,265
Greater than 80%	119		151		132		402
Total commercial mortgage and agricultural property loans	$	46,728	$	1,645	$	673	$	49,046

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



	June 30, 2016
	Current		30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Total Commercial Mortgage and Other Loans		Non Accrual Status
	(in millions)
Commercial mortgage loans	$	47,619	$	0	$	0	$	4	$	4	$	47,623	$	97
Agricultural property loans	2,872		0		0		1		1		2,873		1
Residential property loans	298		5		1		6		12		310		6
Other collateralized loans	11		0		0		0		0		11		0
Uncollateralized loans	730		0		0		0		0		730		0
Total	$	51,530	$	5	$	1	$	11	$	17	$	51,547	$	104



	December 31, 2015
	Current		30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Total Commercial Mortgage and Other Loans		Non Accrual Status
	(in millions)
Commercial mortgage loans	$	46,187	$	0	$	0	$	0	$	0	$	46,187	$	53
Agricultural property loans	2,856		2		0		1		3		2,859		1
Residential property loans	288		7		0		6		13		301		6
Other collateralized loans	312		0		0		0		0		312		0
Uncollateralized loans	1,012		0		0		0		0		1,012		0
Total	$	50,655	$	9	$	0	$	7	$	16	$	50,671	$	60

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, 2015 , for further discussion regarding nonaccrual status loans.

For both the three and six months ended June 30, 2016 , there were no commercial mortgage and other loans acquired, other than those through direct origination, and there were no commercial mortgage and other loans sold, other than those classified as held-for-sale, respectively. For both the three and six months ended June 30, 2015 there were $53 million of commercial mortgage and other loans acquired, other than those through direct origination and there were $18 million of commercial mortgage and other loans sold, other than those classified as held-for-sale.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The Company’s commercial mortgage and other loans may occasionally be involved in a troubled debt restructuring. As of June 30, 2016 and December 31, 2015 , the Company had no significant commitments to borrowers that have been involved in a troubled debt restructuring. During the three and six months ended June 30, 2016 and 2015 , there were no new troubled debt restructurings related to commercial mortgage and other loans and no payment defaults on commercial mortgage and other loans that were modified as a troubled debt restructuring within the twelve months preceding. For additional information relating to the accounting for troubled debt restructurings, 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, 2015 .

As of June 30, 2016 , there were no private debt commitments to borrowers that have been involved in a troubled debt restructuring.

As of June 30, 2016 , the Company did not have any foreclosed residential real estate property.

Net Investment Income

Net investment income for the three and six months ended June 30, 2016 and 2015 , was from the following sources:



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(in millions)
Fixed maturities, available-for-sale(1)	$	2,705		$	2,611		$	5,328		$	5,194
Fixed maturities, held-to-maturity(1)	52			51			103			100
Equity securities, available-for-sale	111			81			190			177
Trading account assets	241			294			495			581
Commercial mortgage and other loans	561			556			1,116			1,100
Policy loans	156			154			310			308
Short-term investments and cash equivalents	34			11			67			24
Other long-term investments	110			137			209			381
Gross investment income	3,970			3,895			7,818			7,865
Less: investment expenses	(181		)	(224		)	(359		)	(425		)
Net investment income	$	3,789		$	3,671		$	7,459		$	7,440

__________


(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.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Realized Investment Gains (Losses), Net

Realized investment gains (losses), net, for the three and six months ended June 30, 2016 and 2015 , were from the following sources:



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(in millions)
Fixed maturities	$	433		$	371		$	360		$	840
Equity securities	71			227			99			348
Commercial mortgage and other loans	4			20			31			31
Investment real estate	1			14			1			38
Joint ventures and limited partnerships	(23		)	(4		)	(64		)	(9		)
Derivatives(1)	951			(503		)	2,895			1,235
Other	(4		)	4			(8		)	7
Realized investment gains (losses), net	$	1,433		$	129		$	3,314		$	2,490

__________


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

Net Unrealized Gains (Losses) on Investments by Asset Class

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



	June 30, 2016			December 31, 2015
	(in millions)
Fixed maturity securities on which an OTTI loss has been recognized	$	286		$	234
Fixed maturity securities, available-for-sale—all other	45,918			24,673
Equity securities, available-for-sale	2,408			2,427
Derivatives designated as cash flow hedges(1)	1,298			1,165
Other investments(2)	(31		)	(25		)
Net unrealized gains (losses) on investments	$	49,879		$	28,474

__________


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


(2)	As of June 30, 2016 , 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” and losses on notes associated with payables under a netting agreement.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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

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



	June 30, 2016
	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	$	51	$	1	$	1	$	0	$	52	$	1
Obligations of U.S. states and their political subdivisions	4		0		21		3		25		3
Foreign government bonds	235		8		434		32		669		40
U.S. corporate public securities	4,204		167		5,238		364		9,442		531
U.S. corporate private securities	2,863		174		1,482		81		4,345		255
Foreign corporate public securities	1,161		37		1,883		162		3,044		199
Foreign corporate private securities	4,096		223		4,536		477		8,632		700
Asset-backed securities	2,986		82		3,489		73		6,475		155
Commercial mortgage-backed securities	427		3		296		2		723		5
Residential mortgage-backed securities	41		0		95		2		136		2
Total	$	16,068	$	695	$	17,475	$	1,196	$	33,543	$	1,891
Equity securities, available-for-sale	$	1,194	$	91	$	9	$	1	$	1,203	$	92

__________


(1)	Includes $14 million of fair value and less than $1 million of gross unrealized losses at June 30, 2016 , on securities classified as held-to-maturity, which is not reflected in AOCI.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	December 31, 2015
	Less than twelve months				Twelve months or more				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(in millions)
Fixed maturities(1)
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	3,068	$	19	$	0	$	0	$	3,068	$	19
Obligations of U.S. states and their political subdivisions	1,391		40		7		1		1,398		41
Foreign government bonds	1,925		82		411		65		2,336		147
U.S. corporate public securities	24,642		1,396		3,455		559		28,097		1,955
U.S. corporate private securities	6,996		266		802		93		7,798		359
Foreign corporate public securities	5,985		288		1,584		333		7,569		621
Foreign corporate private securities	6,199		340		3,917		654		10,116		994
Asset-backed securities	4,342		33		3,138		88		7,480		121
Commercial mortgage-backed securities	3,888		63		473		7		4,361		70
Residential mortgage-backed securities	558		4		119		2		677		6
Total	$	58,994	$	2,531	$	13,906	$	1,802	$	72,900	$	4,333
Equity securities, available-for-sale	$	1,862	$	142	$	11	$	1	$	1,873	$	143

__________


(1)	Includes $0 million of fair value and $0 million of gross unrealized losses at December 31, 2015 , on securities classified as held-to-maturity, which is not reflected in AOCI.

The gross unrealized losses on fixed maturity securities at June 30, 2016 and December 31, 2015 , were composed of $1,349 million and $3,750 million , respectively, related to high or highest quality securities based on the National Association of Insurance Commissioners (“NAIC”) or equivalent rating and $542 million and $583 million , respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. At June 30, 2016 , the $1,196 million of gross unrealized losses of twelve months or more were concentrated in the energy, capital goods and finance sectors of the Company’s corporate securities. At December 31, 2015 , the $1,802 million of gross unrealized losses of twelve months or more were concentrated in the energy, consumer non-cyclical and basic industry sectors of the Company’s corporate securities. 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, 2015 , the Company concluded that an adjustment to earnings for OTTI for these securities was not warranted at June 30, 2016 or December 31, 2015 . These conclusions are based on a detailed analysis of the underlying credit and cash flows on each security. The gross unrealized losses are primarily attributable to general credit spread widening and foreign currency exchange rate movements. At June 30, 2016 , the Company does not intend to sell these securities, and it is not more likely than not that the Company will be required to sell these securities before the anticipated recovery of the remaining amortized cost basis.

At June 30, 2016 , $24 million of the gross unrealized losses on equity securities represented declines in value of greater than 20%, $11 million of which had been in that position for less than six months. At December 31, 2015 , $19 million of the gross unrealized losses on equity securities represented declines in value of greater than 20%, all of which had been in that position for less than six months. In accordance with its policy described in Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 , the Company concluded that an adjustment for OTTI for these equity securities was not warranted at June 30, 2016 or December 31, 2015 .

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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 repurchase agreements as of the dates indicated.



	June 30, 2016
	Remaining Contractual Maturities of the Agreements
	Overnight & Continuous		Up to 30 Days		30 to 90 Days		Greater than 90 Days		Total
	(in millions)
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	1,130	$	4,850	$	566	$	0	$	6,546
Obligations of U.S. states and their political subdivisions	0		0		0		0		0
Foreign government bonds	0		0		0		0		0
U.S. corporate public securities	0		0		0		0		0
U.S. corporate private securities	0		0		0		0		0
Foreign corporate public securities	0		0		0		0		0
Foreign corporate private securities	0		0		0		0		0
Asset-backed securities	0		0		0		0		0
Commercial mortgage-backed securities	0		0		0		0		0
Residential mortgage-backed securities	0		789		0		0		789
Equity securities	0		0		0		0		0
Total repurchase agreements	$	1,130	$	5,639	$	566	$	0	$	7,335



	December 31, 2015
	Remaining Contractual Maturities of the Agreements
	Overnight & Continuous		Up to 30 Days		30 to 90 Days		Greater than 90 Days		Total
	(in millions)
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	1,991	$	4,513	$	253	$	0	$	6,757
Obligations of U.S. states and their political subdivisions	0		0		0		0		0
Foreign government bonds	0		0		0		0		0
U.S. corporate public securities	11		0		0		0		11
U.S. corporate private securities	0		0		0		0		0
Foreign corporate public securities	0		0		0		0		0
Foreign corporate private securities	0		0		0		0		0
Asset-backed securities	0		0		0		0		0
Commercial mortgage-backed securities	0		0		0		0		0
Residential mortgage-backed securities	169		945		0		0		1,114
Equity securities	0		0		0		0		0
Total repurchase agreements	$	2,171	$	5,458	$	253	$	0	$	7,882

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The following table sets forth the composition of securities lending transactions as of the dates indicated.



	June 30, 2016
	Remaining Contractual Maturities of the Agreements
	Overnight & Continuous		Up to 30 Days		30 to 90 Days		Greater than 90 Days		Total
	(in millions)
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	6	$	0	$	0	$	0	$	6
Obligations of U.S. states and their political subdivisions	16		0		0		0		16
Foreign government bonds	262		0		0		0		262
U.S. corporate public securities	2,753		94		0		0		2,847
U.S. corporate private securities	0		0		0		0		0
Foreign corporate public securities	769		49		0		0		818
Foreign corporate private securities	0		0		0		0		0
Asset-backed securities	0		0		0		0		0
Commercial mortgage-backed securities	0		0		0		0		0
Residential mortgage-backed securities	0		86		0		0		86
Equity securities	608		0		0		0		608
Total securities lending transactions	$	4,414	$	229	$	0	$	0	$	4,643



	December 31, 2015
	Remaining Contractual Maturities of the Agreements
	Overnight & Continuous		Up to 30 Days		30 to 90 Days		Greater than 90 Days		Total
	(in millions)
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	94	$	0	$	0	$	0	$	94
Obligations of U.S. states and their political subdivisions	4		0		0		0		4
Foreign government bonds	0		0		0		0		0
U.S. corporate public securities	1,401		86		0		0		1,487
U.S. corporate private securities	0		0		0		0		0
Foreign corporate public securities	579		50		0		0		629
Foreign corporate private securities	0		0		0		0		0
Asset-backed securities	241		0		0		0		241
Commercial mortgage-backed securities	8		0		0		0		8
Residential mortgage-backed securities	0		97		0		0		97
Equity securities	936		0		0		0		936
Total securities lending transactions	$	3,263	$	233	$	0	$	0	$	3,496

Reinsurance Trust

During the second quarter of 2016, a trust was established for the benefit of certain policyholders related to a reinsurance agreement between two wholly-owned subsidiaries. Total assets related to this new trust arrangement of $1.2 billion were on deposit with trustees as of June 30, 2016 . For additional information on other securities pledged, restricted assets and special deposits, 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, 2015.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

5. VARIABLE INTEREST ENTITIES

In the normal course of its activities, the Company enters into relationships with various special-purpose entities and other entities that are deemed to be variable interest entities (“VIEs”). A VIE is an entity that either (1) has equity investors that lack certain essential characteristics of a controlling financial interest (including the ability to control activities of the entity, the obligation to absorb the entity’s expected losses and the right to receive the entity’s expected residual returns) or (2) lacks sufficient equity to finance its own activities without financial support provided by other entities, which in turn would be expected to absorb at least some of the expected losses of the VIE.

The Company is the primary beneficiary if the Company has (1) the power to direct the activities of the VIE that most significantly impact the economic performance of the entity and (2) the obligation to absorb losses of the entity that could be potentially significant to the VIE or the right to receive benefits from the entity that could be potentially significant. If the Company determines that it is the VIE’s primary beneficiary, it consolidates the VIE.

Consolidated Variable Interest Entities

The Company is the investment manager of certain asset-backed investment vehicles commonly referred to as collateralized loan obligations (“CLOs”) and certain other vehicles for which the Company earns fee income for investment management services, including certain investment structures in which the Company’s asset management business invests with other co-investors in investment funds referred to as feeder funds. The Company may sell or syndicate investments through these vehicles, principally as part of the strategic investing activity of the Company’s asset management businesses. Additionally, the Company may invest in securities issued by these vehicles. CLOs raise capital by issuing debt securities, and use the proceeds to purchase investments, typically interest-bearing financial instruments. The Company has analyzed these relationships and determined that for certain CLOs and other investment structures it is the primary beneficiary and consolidates these entities. This analysis includes a review of (1) the Company’s rights and responsibilities as investment manager and (2) variable interests (if any) held by the Company. The assets of these VIEs are restricted and must be used first to settle liabilities of the VIE. The Company is not required to provide, and has not provided, material financial or other support to any of these VIEs. Effective January 1, 2016, the Company adopted new FASB guidance ( ASU 2015-02, Consolidation (Topic 810): Amendments to Consolidation Analysis) that resulted in the deconsolidation of certain of its previously consolidated CLOs. See Note 2 for additional information.

Additionally, the Company is the primary beneficiary of certain VIEs in which the Company has invested, as part of its investment activities, but for which it is not the investment manager. These include structured investments issued by a VIE that manages yen-denominated investments coupled with cross-currency coupon swap agreements thereby creating synthetic dual currency investments. The Company’s involvement in the structuring of these investments combined with its economic interest indicates that the Company is the primary beneficiary. The Company has not provided material financial support or other support that was not contractually required to these VIEs.

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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Consolidated VIEs for Which the Company is the Investment Manager				Other Consolidated VIEs
	June 30, 2016(1)		December 31, 2015		June 30, 2016		December 31, 2015
	(in millions)
Fixed maturities, available-for-sale	$	74	$	0	$	302	$	179
Fixed maturities, held-to-maturity	92		0		890		760
Trading account assets supporting insurance liabilities	0		0		10		10
Other trading account assets	2,793		9,536		0		0
Commercial mortgage and other loans	524		0		0		300
Other long-term investments	345		0		91		155
Cash and cash equivalents	130		337		1		1
Accrued investment income	20		56		4		3
Other assets	502		324		3		3
Total assets of consolidated VIEs	$	4,480	$	10,253	$	1,301	$	1,411
Notes issued by consolidated VIEs	$	2,094	$	8,597	$	0	$	0
Other liabilities	158		674		13		3
Total liabilities of consolidated VIEs	$	2,252	$	9,271	$	13	$	3

__________


(1)	As a result of the adoption of the new accounting guidance ASU 2015-02 effective January 1, 2016, total assets of consolidated VIEs reflects $1,428 million related to VIEs whose beneficial interests are wholly-owned by consolidated subsidiaries.

Recourse is limited to the assets of the respective VIE and does not extend to the general credit of Prudential Financial . As of June 30, 2016, 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. These VIEs consist primarily of CLOs and investment funds for which the Company has determined that it is not the primary beneficiary as it does not have both (1) the power to direct the activities of the VIE that most significantly impact the economic performance of the entity and (2) the obligation to absorb losses of the entity that could be potentially significant to the VIE or the right to receive benefits from the entity that could be potentially significant. The Company’s maximum exposure to loss resulting from its relationship with unconsolidated VIEs for which it is the investment manager is limited to its investment in the VIEs, which was $440 million and $218 million at June 30, 2016 and December 31, 2015 , respectively. These investments are reflected in “Fixed maturities, available-for-sale,” “Other trading account assets, at fair value” and “Other long-term investments.” The fair value of assets held within these unconsolidated VIEs was $12,393 million and $5,262 million as of June 30, 2016 and December 31, 2015 , respectively. 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 joint ventures and limited partnerships. These ventures include hedge funds, private equity funds and real estate-related funds and may or may not be VIEs. The Company’s maximum exposure to loss on these investments, both VIEs and non-VIEs, is limited to the amount of its investment. The Company has determined that it is not required to consolidate these entities because either: (1) it does not control them or (2) it does not have the obligation to absorb losses of the entities that could be potentially significant to the entities or the right to receive benefits from the entities that could be potentially significant. The Company classifies these investments as “Other long-term investments” and its maximum exposure to loss associated with these entities was $7,638 million and $7,532 million as of June 30, 2016 and December 31, 2015 , respectively.

In addition, in the normal course of its activities, the Company will invest in structured investments including VIEs for which it is not the investment manager. These structured investments typically invest in fixed income investments and are managed by third parties and include asset-backed securities, commercial mortgage-backed securities and residential mortgage-backed securities. The Company’s maximum exposure to loss on these structured investments, both VIEs and non-VIEs, is limited to the amount of its investment. See Note 4 for details regarding the carrying amounts and classification of these assets. The Company has not provided material financial or other support that was not contractually required to these structures. The Company has determined that it is not the primary beneficiary of these structures due to the fact that it does not control these entities.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

6. CLOSED BLOCK

On the date of demutualization, Prudential Insurance established a Closed Block for certain individual life insurance policies and annuities issued in the U.S. by Prudential Insurance. The recorded assets and liabilities were allocated to the Closed Block at their historical carrying amounts. The Closed Block forms the principal component of the Closed Block division.

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

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

As of June 30, 2016 and December 31, 2015 , the Company recognized a policyholder dividend obligation of $1,517 million and $1,694 million , respectively, to Closed Block policyholders for the excess of actual cumulative earnings over the expected cumulative earnings. Additionally, accumulated net unrealized investment gains that have arisen subsequent to the establishment of the Closed Block have been reflected as a policyholder dividend obligation of $4,680 million and $2,815 million at June 30, 2016 and December 31, 2015 , respectively, to be paid to Closed Block policyholders unless offset by future experience, with a corresponding amount reported in AOCI.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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



	June 30, 2016			December 31, 2015
	(in millions)
Closed Block liabilities
Future policy benefits	$	49,361		$	49,538
Policyholders’ dividends payable	938			945
Policyholders’ dividend obligation	6,197			4,509
Policyholders’ account balances	5,221			5,250
Other Closed Block liabilities	4,232			4,171
Total Closed Block liabilities	65,949			64,413
Closed Block assets
Fixed maturities, available-for-sale, at fair value	40,009			37,584
Other trading account assets, at fair value	288			288
Equity securities, available-for-sale, at fair value	2,464			2,726
Commercial mortgage and other loans	9,747			9,770
Policy loans	4,729			4,790
Other long-term investments	2,980			2,921
Short-term investments	817			1,467
Total investments	61,034			59,546
Cash and cash equivalents	1,134			1,036
Accrued investment income	504			506
Other Closed Block assets	432			458
Total Closed Block assets	63,104			61,546
Excess of reported Closed Block liabilities over Closed Block assets	2,845			2,867
Portion of above representing accumulated other comprehensive income:
Net unrealized investment gains (losses)	4,664			2,800
Allocated to policyholder dividend obligation	(4,680		)	(2,815		)
Future earnings to be recognized from Closed Block assets and Closed Block liabilities	$	2,829		$	2,852

Information regarding the policyholder dividend obligation is as follows:



	Six Months Ended June 30, 2016
	(in millions)
Balance, January 1	$	4,509
Impact from earnings allocable to policyholder dividend obligation	(178		)
Change in net unrealized investment gains (losses) allocated to policyholder dividend obligation	1,866
Balance, June 30	$	6,197

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Closed Block revenues and benefits and expenses for the three and six months ended June 30, 2016 and 2015 , were as follows:



	Three Months Ended June 30,					Six Months Ended June 30,
	2016			2015		2016			2015
	(in millions)
Revenues
Premiums	$	692		$	701	$	1,314		$	1,335
Net investment income	643			642		1,261			1,351
Realized investment gains (losses), net	205			166		107			539
Other income (loss)	9			18		2			21
Total Closed Block revenues	1,549			1,527		2,684			3,246
Benefits and Expenses
Policyholders’ benefits	858			895		1,665			1,716
Interest credited to policyholders’ account balances	34			34		67			67
Dividends to policyholders	575			423		822			1,187
General and administrative expenses	100			107		203			215
Total Closed Block benefits and expenses	1,567			1,459		2,757			3,185
Closed Block revenues, net of Closed Block benefits and expenses, before income taxes and discontinued operations	(18		)	68		(73		)	61
Income tax expense (benefit)	(29		)	57		(95		)	39
Closed Block revenues, net of Closed Block benefits and expenses and income taxes, before discontinued operations	11			11		22			22
Income (loss) from discontinued operations, net of taxes	0			0		0			0
Closed Block revenues, net of Closed Block benefits and expenses, income taxes and discontinued operations	$	11		$	11	$	22		$	22

7. 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, 2015	660.1	213.0		447.1
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	(2.0	)	2.0
Balance, June 30, 2016	660.1	221.4		438.7

__________


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

In December 2015 , Prudential Financial’s Board of Directors authorized the Company to repurchase at management’s discretion up to $1.5 billion of its outstanding Common Stock during the period from January 1, 2016 through December 31, 2016. Effective January 1, 2016, this authorization superseded the Company’s previous $1.0 billion share repurchase authorization that was announced in June 2015, covering the period from July 1, 2015 through June 30, 2016. In August 2016, the Board of Directors authorized a $500 million increase to this authorization for calendar year 2016. As a result, the Company’s aggregate share repurchase authorization for the full year 2016 is $2.0 billion . As of June 30, 2016, 10.4 million shares of the Company’s Common Stock were repurchased under this authorization at a total cost of $750 million .

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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. 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.

Class B Stock

On January 2, 2015, pursuant to a Share Repurchase Agreement entered into on December 1, 2014, between the Company and the holders of the Class B Stock, the Company repurchased and canceled all of the shares of the Class B Stock for an aggregate cash purchase price of $651 million , resulting in the elimination of the Class B Stock held in treasury, a $484 million decrease in “Retained earnings” and a $167 million decrease in “Additional paid-in capital.”

In accordance with the terms of the Share Repurchase Agreement, the holders of the Class B Stock subsequently exercised their right to dispute the calculation of the purchase price. This dispute was resolved during the first quarter of 2016, resulting in an increase to the cash purchase price of $119 million , bringing the total aggregate purchase price to $770 million . The increase to the cash purchase price resulted in a corresponding decrease in “Retained earnings.”

Accumulated Other Comprehensive Income (Loss)

The balance of and changes in each component of “Accumulated other comprehensive income (loss) attributable to Prudential Financial, Inc.” for the six months ended June 30, 2016 and 2015 , 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, 2015	$	(1,087	)	$	15,773		$	(2,401	)	$	12,285
Change in OCI before reclassifications	1,272			17,958			(34		)	19,196
Amounts reclassified from AOCI	8			(638		)	107			(523		)
Income tax benefit (expense)	(294		)	(5,972		)	(25		)	(6,291		)
Balance, June 30, 2016	$	(101	)	$	27,121		$	(2,353	)	$	24,667



	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, 2014	$	(975	)	$	19,251		$	(2,226	)	$	16,050
Change in OCI before reclassifications	(110		)	(2,965		)	10			(3,065		)
Amounts reclassified from AOCI	1			(1,247		)	96			(1,150		)
Income tax benefit (expense)	88			1,523			(42		)	1,569
Balance, June 30, 2015	$	(996	)	$	16,562		$	(2,162	)	$	13,404

__________


(1)	Includes cash flow hedges of $1,298 million and $1,165 million as of June 30, 2016 and December 31, 2015 , respectively, and $702 million and $206 million as of June 30, 2015 and December 31, 2014 , 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 Statement of Operations
	2016			2015			2016			2015			Affected line item in Consolidated Statement of Operations
	(in millions)
Amounts reclassified from AOCI(1)(2):
Foreign currency translation adjustment:
Foreign currency translation adjustments	$	(2	)	$	(2	)	$	(8	)	$	(1	)	Realized investment gains (losses), net
Total foreign currency translation adjustment	(2		)	(2		)	(8		)	(1		)
Net unrealized investment gains (losses):
Cash flow hedges—Interest Rate	(2		)	(2		)	(3		)	(3		)	(3)
Cash flow hedges—Currency/Interest rate	160			(54		)	182			62			(3)
Net unrealized investment gains (losses) on available-for-sale securities	504			599			459			1,188
Total net unrealized investment gains (losses)	662			543			638			1,247			(4)
Amortization of defined benefit pension items:
Prior service cost	2			4			4			7			(5)
Actuarial gain (loss)	(56		)	(51		)	(111		)	(103		)	(5)
Total amortization of defined benefit pension items	(54		)	(47		)	(107		)	(96		)
Total reclassifications for the period	$	606		$	494		$	523		$	1,150

__________


(1)	All amounts are shown before tax.


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


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


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


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

Net Unrealized Investment Gains (Losses)

Net unrealized investment gains (losses) on securities classified as available-for-sale and certain other long-term investments and other assets are included in the Company’s Unaudited Interim Consolidated Statements of Financial Position as a component of AOCI. Changes in these amounts include reclassification adjustments to exclude from “Other comprehensive income (loss)” those items that are included as part of “Net income” for a period that had been part of “Other comprehensive income (loss)” in earlier periods. The amounts for the periods indicated below, split between amounts related to fixed maturity securities on which an OTTI loss has been recognized, and all other net unrealized investment gains (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 and VOBA			Future Policy Benefits and Policyholders’ Account Balances			Policyholders’ Dividends			Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses)
	(in millions)
Balance, December 31, 2015	$	234		$	6		$	14		$	(31	)	$	(77	)	$	146
Net investment gains (losses) on investments arising during the period	50												(17		)	33
Reclassification adjustment for (gains) losses included in net income	12												(4		)	8
Reclassification adjustment for OTTI losses excluded from net income(1)	(10		)										3			(7		)
Impact of net unrealized investment (gains) losses on DAC, DSI and VOBA				(9		)							3			(6		)
Impact of net unrealized investment (gains) losses on future policy benefits and policyholders’ account balances							(19		)				5			(14		)
Impact of net unrealized investment (gains) losses on policyholders’ dividends										(3		)	1			(2		)
Balance, June 30, 2016	$	286		$	(3	)	$	(5	)	$	(34	)	$	(86	)	$	158

__________


(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 and VOBA			Future Policy Benefits and Policyholders’ Account Balances			Policyholders’ Dividends			Deferred Income Tax (Liability) Benefit			Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses)
	(in millions)
Balance, December 31, 2015	$	28,240		$	(760	)	$	(1,082	)	$	(2,802	)	$	(7,969	)	$	15,627
Net investment gains (losses) on investments arising during the period	21,993												(7,518		)	14,475
Reclassification adjustment for (gains) losses included in net income	(650		)										222			(428		)
Reclassification adjustment for OTTI losses excluded from net income(2)	10												(3		)	7
Impact of net unrealized investment (gains) losses on DAC, DSI and VOBA				(1,508		)							492			(1,016		)
Impact of net unrealized investment (gains) losses on future policy benefits and policyholders’ account balances							(675		)				190			(485		)
Impact of net unrealized investment (gains) losses on policyholders’ dividends										(1,871		)	654			(1,217		)
Balance, June 30, 2016	$	49,593		$	(2,268	)	$	(1,757	)	$	(4,673	)	$	(13,932	)	$	26,963

__________


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


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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

8. 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,
	2016					2015
	Income		Weighted Average Shares	Per Share Amount		Income		Weighted Average Shares	Per Share Amount
	(in millions, except per share amounts)
Basic earnings per share
Income (loss) from continuing operations	$	925				$	1,459
Less: Income (loss) attributable to noncontrolling interests	4					53
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards	11					15
Income (loss) from continuing operations attributable to Prudential Financial available to holders of Common Stock	$	910	441.1	$	2.06	$	1,391	452.6	$	3.07
Effect of dilutive securities and compensation programs
Add: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Basic	$	11				$	15
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Diluted	11					14
Stock options			1.8					2.5
Deferred and long-term compensation programs			0.8					0.8
Exchangeable Surplus Notes	5		5.6			5		5.5
Diluted earnings per share
Income (loss) from continuing operations attributable to Prudential Financial available to holders of Common Stock	$	915	449.3	$	2.04	$	1,397	461.4	$	3.03

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30,
	2016					2015
	Income		Weighted Average Shares	Per Share Amount		Income		Weighted Average Shares	Per Share Amount
	(in millions, except per share amounts)
Basic earnings per share
Income (loss) from continuing operations	$	2,294				$	3,505
Less: Income (loss) attributable to noncontrolling interests	37					63
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards	26					34
Income (loss) from continuing operations attributable to Prudential Financial available to holders of Common Stock	$	2,231	443.2	$	5.03	$	3,408	453.4	$	7.52
Effect of dilutive securities and compensation programs
Add: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Basic	$	26				$	34
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Diluted	25					33
Stock options			1.6					2.4
Deferred and long-term compensation programs			0.9					0.9
Exchangeable Surplus Notes	9		5.6			9		5.5
Diluted earnings per share
Income (loss) from continuing operations attributable to Prudential Financial available to holders of Common Stock	$	2,241	451.3	$	4.97	$	3,418	462.2	$	7.40

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 income from continuing operations 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 loss from continuing operations 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 and six months ended June 30, 2016 and 2015 , as applicable, were based on 5.1 million and 4.5 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 dilutive earnings per share. Stock options are considered antidilutive based on application of the treasury stock method or in the event of loss from continuing operations available to holders of Common Stock. Shares related to deferred and long-term compensation programs are considered antidilutive in the event of loss from continuing operations available to holders of Common Stock. 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,
	2016			2015
	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	3.7	$	83.56	2.1	$	88.70
Antidilutive stock options due to loss from continuing operations available to holders of Common Stock	0.0			0.0
Antidilutive shares due to loss from continuing operations available to holders of Common Stock	0.0			0.0
Total antidilutive stock options and shares	3.7			2.1



	Six Months Ended June 30,
	2016			2015
	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	3.8	$	83.40	2.4	$	87.92
Antidilutive stock options due to loss from continuing operations available to holders of Common Stock	0.0			0.0
Antidilutive shares due to loss from continuing operations available to holders of Common Stock	0.0			0.0
Total antidilutive stock options and shares	3.8			2.4

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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

9. SHORT-TERM AND LONG-TERM DEBT

Short-term Debt

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



	June 30, 2016			December 31, 2015
	($ in millions)
Commercial paper:
Prudential Financial	$	60		$	80
Prudential Funding, LLC	435			384
Subtotal commercial paper	495			464
Current portion of long-term debt	181			752
Total short-term debt(1)	$	676		$	1,216
Supplemental short-term debt information:
Portion of commercial paper borrowings due overnight	$	242		$	331
Daily average commercial paper outstanding	$	912		$	1,127
Weighted average maturity of outstanding commercial paper, in days	6			10
Weighted average interest rate on outstanding short-term debt(2)	0.40		%	0.16		%

__________


(1)	Includes Prudential Financial debt of $169 million and $831 million at June 30, 2016 and December 31, 2015 , respectively.


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

Commercial Paper

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

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

Federal Home Loan Bank of New York

Prudential Insurance is a member of the Federal Home Loan Bank of New York (“FHLBNY”). Membership allows Prudential Insurance access to the FHLBNY’s financial services, including the ability to obtain collateralized advances and to issue collateralized funding agreements. Under applicable law, the funding agreements issued to the FHLBNY have priority claim status above debt holders of Prudential Insurance. FHLBNY borrowings and funding agreements are collateralized by qualifying mortgage-related assets or U.S. Treasury securities, the fair value of which must be maintained at certain specified levels relative to outstanding borrowings. FHLBNY membership requires Prudential Insurance to own member stock and borrowings require the purchase of activity-based stock in an amount equal to 4.5% of outstanding borrowings. Under FHLBNY guidelines, if any of Prudential Insurance’s financial strength ratings decline below A/A2/A Stable by S&P/Moody’s/Fitch, respectively, and the FHLBNY does not receive written assurances from the NJDOBI regarding Prudential Insurance’s solvency, new borrowings from the FHLBNY would be limited to a term of 90 days or less. Currently, there are no restrictions on the term of borrowings from the FHLBNY.

NJDOBI permits Prudential Insurance to pledge collateral to the FHLBNY in an amount of up to 5% of its prior year-end statutory net admitted assets, excluding separate account assets. Based on Prudential Insurance’s statutory net admitted assets as of December 31, 2015 , the 5% limitation equates to a maximum amount of pledged assets of $5.8 billion and an estimated maximum borrowing capacity (after taking into account required collateralization levels) of approximately $5.0 billion . Nevertheless, FHLBNY borrowings are subject to the FHLBNY’s discretion and to the availability of qualifying assets at Prudential Insurance.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

As of June 30, 2016 , Prudential Insurance had pledged assets with a fair value of $1.2 billion supporting outstanding funding agreements totaling $1.0 billion , which are included in “Policyholders’ account balances.” The fair value of qualifying assets that were available to Prudential Insurance, but not pledged, amounted to $6.1 billion as of June 30, 2016 . Prudential Insurance had no other advances outstanding under the FHLB facility as of June 30, 2016 .

Federal Home Loan Bank of Boston

Prudential Retirement Insurance and Annuity Company (“PRIAC”) is a member of the Federal Home Loan Bank of Boston (“FHLBB”). Membership allows PRIAC access to collateralized advances which will be classified in “Short-term debt” or “Long-term debt,” depending on the maturity date of the obligation. PRIAC’s membership in FHLBB requires the ownership of member stock and borrowings from FHLBB require the purchase of activity-based stock in an amount between 3.0% and 4.5% of outstanding borrowings, depending on the maturity date of the obligation. As of June 30, 2016 , PRIAC had no advances outstanding under the FHLBB facility.

Under Connecticut state insurance law, without the prior consent of the Connecticut Insurance Department, the amount of assets insurers may pledge to secure debt obligations is limited to the lesser of 5% of prior year statutory admitted assets or 25% of prior year statutory surplus, resulting in a maximum borrowing capacity for PRIAC under the FHLBB facility of approximately $244 million as of June 30, 2016 .

Credit Facilities

As of June 30, 2016 , the Company maintained a syndicated, unsecured committed credit facility as described below.



Borrowers	Original Term	Expiration Date	Capacity		Amount Outstanding
			($ in millions)
Prudential Financial and Prudential Funding	5 years	Apr 2020	$	4,000	$	0

Borrowings under this credit facility may be used for general corporate purposes, and the Company expects that it may borrow under the facility from time to time to fund its working capital needs. In addition, amounts under the credit facility may be drawn in the form of standby letters of credit that can be used to meet the Company’s operating needs. The credit facility contains representations and warranties, covenants and events of default that are customary for facilities of this type, and borrowings are not contingent on the Company’s credit ratings nor subject to material adverse change clauses. Borrowings under the credit facility are conditioned on the Company’s maintenance of consolidated net worth of at least $ 18.985 billion , which is calculated as U.S. GAAP equity, excluding AOCI, equity of noncontrolling interests and equity attributable to the Closed Block. As of June 30, 2016 , the Company’s consolidated net worth exceeded this required minimum amount.

Put Option Agreement for Senior Debt Issuance

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

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

Long-term Debt

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Surplus Notes

During the first quarter of 2016, the Company increased the principal amount of surplus notes outstanding under its captive financing facility initially established in December 2013 for the financing of non-economic reserves required under Guideline AXXX by $140 million . As of June 30, 2016 , an aggregate of $2.2 billion of surplus notes were outstanding under this facility and no credit-linked note payments have been required.

During the second quarter of 2016, the Company increased the principal amount of surplus notes outstanding under its captive financing facility initially established in December 2014 for the financing of non-economic reserves required under Regulation XXX by $77 million . As of June 30, 2016 , an aggregate of $1.1 billion of surplus notes were outstanding under this facility and no credit-linked note payments have been required.

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

Senior Notes

Medium-Term Notes. Prudential Financial maintains a medium-term notes program under its shelf registration statement with an authorized issuance capacity of $20.0 billion . As of June 30, 2016 , the outstanding balance of the Company’s medium-term notes was $9.6 billion , a decrease of $1.3 billion from December 31, 2015 , due to maturities of $750 million and the repurchase of $500 million of medium-term notes through a tender offer. The repurchase included a prepayment premium and fees totaling $36 million which were recorded to interest expense.

Retail Medium-Term Notes. Prudential Financial also maintains a retail medium-term notes program, including the InterNotes ^® program, under its shelf registration statement with an authorized issuance capacity of $5.0 billion . As of June 30, 2016 , the outstanding balance of retail notes was $461 million .

Mortgage Debt. As of June 30, 2016 , the Company’s subsidiaries had mortgage debt of $646 million that has recourse only to real estate property held for investment by those subsidiaries. This represents an increase of $82 million from December 31, 2015 , primarily due to new borrowings.

10. EMPLOYEE BENEFIT PLANS

Pension and Other Postretirement Plans

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

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

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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30,
	Pension Benefits						Other Postretirement Benefits
	2016			2015			2016			2015
	(in millions)
Components of net periodic (benefit) cost
Service cost	$	63		$	61		$	4		$	5
Interest cost	124			117			23			22
Expected return on plan assets	(188		)	(193		)	(27		)	(28		)
Amortization of prior service cost	(2		)	(2		)	0			(2		)
Amortization of actuarial (gain) loss, net	45			42			11			9
Settlements	1			0			0			0
Special termination benefits	2			2			0			0
Net periodic (benefit) cost	$	45		$	27		$	11		$	6

	Six Months Ended June 30,
	Pension Benefits						Other Postretirement Benefits
	2016			2015			2016			2015
	(in millions)
Components of net periodic (benefit) cost
Service cost	$	125		$	122		$	9		$	10
Interest cost	249			234			46			43
Expected return on plan assets	(377		)	(387		)	(53		)	(57		)
Amortization of prior service cost	(3		)	(4		)	(1		)	(3		)
Amortization of actuarial (gain) loss, net	90			84			21			19
Settlements	2			1			0			0
Special termination benefits	2			4			0			0
Net periodic (benefit) cost	$	88		$	54		$	22		$	12

During the six months ended June 30, 2016, the Company made cash contributions of $100 million to its pension plans and anticipates making an additional $70 million of cash contributions during the remainder of 2016.

11. SEGMENT INFORMATION

Segments

The Company’s principal operations are comprised of four divisions, which together encompass seven segments, and its Corporate and Other operations. The U.S. Retirement Solutions and Investment Management division consists of the Individual Annuities, Retirement and Asset Management segments. The U.S. Individual Life and Group Insurance division consists of the Individual Life and Group Insurance segments. The International Insurance division consists of the International Insurance segment. The Closed Block division consists of the Closed Block segment, which includes certain in force participating insurance and annuity products and corresponding assets that are used for the payment of benefits and policyholders’ dividends on these products, as well as certain related assets and liabilities. The Closed Block segment is accounted for as a divested business that is reported separately from the divested businesses that are included in Corporate and Other operations. 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.

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) from continuing operations 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) from continuing operations before income taxes and equity in earnings of operating joint ventures” for the following items, which are described in greater detail below:

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


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


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


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


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

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

In addition, as discussed in Note 1, during the second quarter, the Company recorded an out of period adjustment resulting in a decrease of $148 million to “Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures” for the three month period ended June 30, 2016. The adjustment resulted in a decrease in adjusted operating income before income taxes of $148 million for the Individual Life Insurance segment.

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

Realized investment gains (losses), net

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

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
	(in millions)
Net gains (losses) from(1):
Terminated hedges of foreign currency earnings	$	7	$	79	$	43	$	160
Current period yield adjustments	$	113	$	125	$	240	$	248
Principal source of earnings	$	17	$	24	$	27	$	48

__________


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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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

Current Period Yield Adjustments. The Company uses interest rate and currency swaps and other derivatives to manage interest and currency exchange rate exposures arising from mismatches between assets and liabilities, including duration mismatches. For derivative contracts that do not qualify for hedge accounting treatment, the periodic swap settlements, as well as certain other derivative related yield adjustments are recorded in “Realized investment gains (losses), net,” and are included in adjusted operating income to reflect the after-hedge yield of the underlying instruments. In certain instances, when these derivative contracts are terminated or offset before their final maturity, the resulting realized gains or losses are recognized in adjusted operating income over periods that generally approximate the expected terms of the derivatives or underlying instruments in order for adjusted operating income to reflect the after-hedge yield of the underlying instruments. Included in the amounts shown in the table above are gains on certain derivative contracts that were terminated or offset before their final maturity of $11 million and $13 million for the three months ended June 30, 2016 and 2015 , respectively, and $23 million and $26 million for the six months ended June 30, 2016 and 2015 , respectively. Additionally, as of June 30, 2016 , there was a $137 million deferred net gain related to certain derivative contracts that were terminated or offset before their final maturity, primarily in the International Insurance segment. Also included in the amounts shown in the table above are fees related to synthetic Guaranteed Investment Contracts (“GICs”) of $39 million for both the three months ended June 30, 2016 and 2015 , and $78 million and $79 million for the six months ended June 30, 2016 and 2015 , respectively. Synthetic GICs are accounted for as derivatives under U.S. GAAP and, therefore, these fees are recorded in “Realized investment gains (losses), net.” See Note 14 for additional information on synthetic GICs.

Principal Source of Earnings. The Company conducts certain activities for which realized investment gains (losses) are a principal source of earnings for its businesses and therefore included in adjusted operating income, particularly within the Company’s Asset Management segment. For example, Asset Management’s strategic investing business makes investments for sale or syndication to other investors or for placement or co-investment in the Company’s managed funds and structured products. The realized investment gains (losses) associated with the sale of these strategic investments, as well as the majority of derivative results, are a principal activity for this business and included in adjusted operating income. In addition, the realized investment gains (losses) associated with loans originated by the Company’s commercial mortgage operations, as well as related derivative results and retained mortgage servicing rights, are a principal activity for this business and included in adjusted operating income.

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

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(in millions)
Net gains (losses) from:
Other trading account assets	$	(34	)	$	26		$	(56	)	$	(32	)
Foreign currency exchange movements	$	(217	)	$	133		$	(538	)	$	158
Other activities	$	2		$	(2	)	$	12		$	1

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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

Foreign Currency Exchange Movements. The Company has certain assets and liabilities for which, under U.S. GAAP, the changes in value, including those associated with changes in foreign currency exchange rates during the period, are recorded in “Other income.” To the extent the foreign currency exposure on these assets and liabilities is economically hedged or considered part of the Company’s capital funding strategies for its international subsidiaries, the change in value included in “Other income” is excluded from adjusted operating income.

Other Activities. The Company excludes certain other items from adjusted operating income that are consistent with similar adjustments described above.

Related charges

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


•	The portion of the amortization of DAC, VOBA, unearned revenue reserves and DSI for certain products that is related to net realized investment gains (losses).


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


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

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

Adjusted operating income excludes net investment gains (losses) on trading account assets supporting insurance liabilities, which 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.” These adjustments are in addition to the exclusion from adjusted operating income of net investment gains (losses) on the related derivatives and commercial mortgage and other loans through “Realized investment gains (losses), net, and related charges and adjustments,” as discussed above. The result of this approach is that adjusted operating income for these products includes net fee revenue and interest spread the Company earns on these experience-rated contracts, and excludes changes in fair value of the pool of investments, both realized and unrealized, that are expected to ultimately accrue to the contractholders.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Divested businesses

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

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

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

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

Reconciliation of adjusted operating income and net income (loss)

The table below reconciles adjusted operating income before income taxes to income from continuing operations before income taxes and equity in earnings of operating joint ventures:



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(in millions)
Adjusted Operating Income before income taxes by Segment:
Individual Annuities	$	427		$	548		$	755		$	1,077
Retirement	236			237			455			521
Asset Management	207			196			372			401
Total U.S. Retirement Solutions and Investment Management division	870			981			1,582			1,999
Individual Life	(290		)	237			(170		)	353
Group Insurance	89			75			115			105
Total U.S. Individual Life and Group Insurance division	(201		)	312			(55		)	458
International Insurance	803			842			1,582			1,676
Total International Insurance division	803			842			1,582			1,676
Corporate and Other operations	(415		)	(294		)	(727		)	(547		)
Total Corporate and Other	(415		)	(294		)	(727		)	(547		)
Total adjusted operating income before income taxes	1,057			1,841			2,382			3,586
Reconciling items:
Realized investment gains (losses), net, and related adjustments	802			(60		)	2,220			1,602
Charges related to realized investment gains (losses), net	(442		)	346			(1,522		)	(265		)
Investment gains (losses) on trading account assets supporting insurance liabilities, net	108			(220		)	324			(137		)
Change in experience-rated contractholder liabilities due to asset value changes	(133		)	234			(263		)	37
Divested businesses:
Closed Block division	(32		)	52			(105		)	30
Other divested businesses	(11		)	(109		)	20			(34		)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests	(8		)	45			17			58
Consolidated income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures	$	1,341		$	2,129		$	3,073		$	4,877

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The 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.

Reconciliation of select financial information

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



	Revenues												Total Assets
	Three Months Ended June 30,						Six Months Ended June 30,						June 30, 2016		December 31, 2015(1)
	2016			2015			2016			2015
	(in millions)
Individual Annuities	$	1,143		$	1,200		$	2,252		$	2,387		$	175,841	$	169,447
Retirement	2,241			3,180			4,134			5,658			172,154		171,183
Asset Management	732			776			1,438			1,509			48,867		54,491
Total U.S. Retirement Solutions and Investment Management division	4,116			5,156			7,824			9,554			396,862		395,121
Individual Life	1,155			1,160			2,521			2,511			77,193		71,856
Group Insurance	1,364			1,291			2,684			2,568			40,600		39,344
Total U.S. Individual Life and Group Insurance division	2,519			2,451			5,205			5,079			117,793		111,200
International Insurance	5,343			5,037			10,387			9,943			206,352		175,153
Total International Insurance division	5,343			5,037			10,387			9,943			206,352		175,153
Corporate and Other operations	(166		)	(144		)	(312		)	(269		)	11,775		13,654
Total Corporate and Other	(166		)	(144		)	(312		)	(269		)	11,775		13,654
Total	11,812			12,500			23,104			24,307			732,782		695,128
Reconciling items:
Realized investment gains (losses), net, and related adjustments	802			(60		)	2,220			1,602
Charges related to realized investment gains (losses), net	(12		)	(133		)	76			(79		)
Investment gains (losses) on trading account assets supporting insurance liabilities, net	108			(220		)	324			(137		)
Divested businesses:
Closed Block division	1,546			1,525			2,675			3,244			63,708		62,127
Other divested businesses	199			109			393			333
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests	(16		)	(9		)	(24		)	(6		)
Total per Unaudited Interim Consolidated Financial Statements	$	14,439		$	13,712		$	28,768		$	29,264		$	796,490	$	757,255

__________


(1)	Prior period amounts are presented on a basis consistent with the current period presentation, reflecting the adoption of ASU 2015-03.

The Asset Management 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,
	2016		2015		2016		2015
	(in millions)
Asset Management segment intersegment revenues	$	161	$	169	$	331	$	347

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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

12. INCOME TAXES

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

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

Listed below are the tax years that remain subject to examination by major tax jurisdiction, at June 30, 2016:



Major Tax Jurisdiction	Open Tax Years
United States	2009 – 2015
Japan	Fiscal years ended March 31, 2011 – 2016
Korea	Fiscal years ended March 31, 2012 and 2013, the periods ended December 31, 2014 and 2015

The dividends received deduction (“DRD”) reduces the amount of dividend income subject to U.S. tax and is a significant component of the difference between the Company’s effective tax rate and the federal statutory tax rate of 35% . The DRD for the current period was estimated using information from 2015 and current year results, and was adjusted to take into account the current year’s equity market performance and expected business results. The actual current year DRD can vary from the estimate based on factors such as, but not limited to, changes in the amount of dividends received that are eligible for the DRD, changes in the amount of distributions received from investments, changes in the account balances of variable life and annuity contracts, and the Company’s taxable income before the DRD.

There is a possibility that the IRS and the U.S. Treasury will address, through guidance, their issues related to the calculation of the DRD. For the last several years, the revenue proposals included in the Obama Administration’s budgets included proposed changes to the method used to determine the amount of the DRD. A change in the DRD, including the possible retroactive or prospective elimination of this deduction through guidance or legislation, could increase actual tax expense and reduce the Company’s consolidated net income.

For tax years 2009 through 2016, the Company is participating in the IRS’s Compliance Assurance Program (“CAP”). Under CAP, the IRS assigns an examination team to review completed transactions as they occur in order to reach agreement with the Company on how they should be reported in the relevant tax return. If disagreements arise, accelerated resolutions programs are available to try to resolve the disagreements in a timely manner before the tax return is filed.

13. FAIR VALUE OF ASSETS AND LIABILITIES

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

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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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

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. The Company’s Level 3 assets and liabilities primarily include: certain private fixed maturities and equity securities, certain manually priced public equity securities and fixed maturities, certain highly structured OTC derivative contracts, certain commercial mortgage loans, certain consolidated real estate funds for which the Company is the general partner and embedded derivatives resulting from certain products with guaranteed benefits.

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, 2016
	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	$	22,429	$	0	$			$	22,429
Obligations of U.S. states and their political subdivisions	0		9,774		5					9,779
Foreign government bonds	0		105,863		124					105,987
U.S. corporate public securities	0		85,219		211					85,430
U.S. corporate private securities(7)	0		30,309		1,256					31,565
Foreign corporate public securities	0		30,044		92					30,136
Foreign corporate private securities	0		19,642		695					20,337
Asset-backed securities(8)	0		7,106		3,081					10,187
Commercial mortgage-backed securities	0		11,640		3					11,643
Residential mortgage-backed securities	0		4,594		183					4,777
Subtotal	0		326,620		5,650					332,270
Trading account assets(2):
U.S. Treasury securities and obligations of U.S. government authorities and agencies	0		384		0					384
Obligations of U.S. states and their political subdivisions	0		209		0					209
Foreign government bonds	7		849		38					894
Corporate securities	0		17,400		216					17,616
Asset-backed securities(8)	0		1,109		305					1,414
Commercial mortgage-backed securities	0		1,994		1					1,995
Residential mortgage-backed securities	0		1,399		4					1,403
Equity securities	1,470		212		585					2,267
All other(3)	109		24,370		2		(21,693		)	2,788
Subtotal	1,586		47,926		1,151		(21,693		)	28,970
Equity securities, available-for-sale	5,939		3,256		301					9,496
Commercial mortgage and other loans	0		591		0					591
Other long-term investments	3		97		14		(14		)	100
Short-term investments	2,926		1,429		0					4,355
Cash equivalents	5,941		13,764		0					19,705
Other assets	0		3		62					65
Subtotal excluding separate account assets	16,395		393,686		7,178		(21,707		)	395,552
Separate account assets(4)	37,484		219,481		2,128					259,093
Total assets	$	53,879	$	613,167	$	9,306	$	(21,707	)	$	654,645
Future policy benefits(5)	$	0	$	0	$	13,328	$			$	13,328
Other liabilities	66		8,883		2		(7,849		)	1,102
Notes issued by consolidated VIEs	0		0		2,094					2,094
Total liabilities	$	66	$	8,883	$	15,424	$	(7,849	)	$	16,524

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	As of December 31, 2015
	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	$	18,517	$	0	$			$	18,517
Obligations of U.S. states and their political subdivisions	0		8,789		6					8,795
Foreign government bonds	0		83,590		123					83,713
U.S. corporate public securities	0		75,163		205					75,368
U.S. corporate private securities(7)	0		29,750		694					30,444
Foreign corporate public securities	0		28,510		44					28,554
Foreign corporate private securities	0		18,859		279					19,138
Asset-backed securities(8)	0		6,178		4,048					10,226
Commercial mortgage-backed securities	0		10,424		38					10,462
Residential mortgage-backed securities	0		4,923		183					5,106
Subtotal	0		284,703		5,620					290,323
Trading account assets(2):
U.S. Treasury securities and obligations of U.S. government authorities and agencies	0		288		0					288
Obligations of U.S. states and their political subdivisions	0		189		0					189
Foreign government bonds	0		697		34					731
Corporate securities	0		23,125		203					23,328
Asset-backed securities(8)	0		749		596					1,345
Commercial mortgage-backed securities	0		1,870		3					1,873
Residential mortgage-backed securities	0		1,509		4					1,513
Equity securities	1,542		221		589					2,352
All other(3)	630		14,173		5		(11,447		)	3,361
Subtotal	2,172		42,821		1,434		(11,447		)	34,980
Equity securities, available-for-sale	6,011		2,997		266					9,274
Commercial mortgage and other loans	0		274		0					274
Other long-term investments(6)	13		130		49		(10		)	182
Short-term investments	6,776		711		0					7,487
Cash equivalents	4,834		9,374		0					14,208
Other assets	0		9		7					16
Subtotal excluding separate account assets	19,806		341,019		7,376		(11,457		)	356,744
Separate account assets(4)(6)	43,076		214,838		1,995					259,909
Total assets	$	62,882	$	555,857	$	9,371	$	(11,457	)	$	616,653
Future policy benefits(5)	$	0	$	0	$	8,434	$			$	8,434
Other liabilities	1		5,306		2		(5,276		)	33
Notes issued by consolidated VIEs	0		0		8,597					8,597
Total liabilities	$	1	$	5,306	$	17,033	$	(5,276	)	$	17,064

__________


(1)	“Netting” amounts represent cash collateral of $13,858 million and $6,181 million as of June 30, 2016 and December 31, 2015 , respectively, and the impact of offsetting asset and liability positions held with the same counterparty, subject to master netting arrangements.


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


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

(4)

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

(5)

As of June 30, 2016 , the net embedded derivative liability position of $13.3 billion includes $0.8 billion of embedded derivatives in an asset position and $14.1 billion of embedded derivatives in a liability position. As of December 31, 2015 , the net embedded derivative liability position of $8.4 billion includes $0.7 billion of embedded derivatives in an asset position and $9.1 billion of embedded derivatives in a liability position.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


(6)	Prior period amounts are presented on a basis consistent with the current period presentation, reflecting the adoption of ASU 2015-07.


(7)	Excludes notes with fair value of $1,127 million and $1,039 million as of June 30, 2016 and December 31, 2015, respectively, which have been offset with the associated payables under a netting agreement.


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

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

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

Internally-developed valuations or indicative broker quotes are also used to determine fair value in circumstances where vendor pricing is not available, or where the Company ultimately concludes that pricing information received from the independent pricing services is not reflective of market activity. If the Company concludes the values from both pricing services and brokers are not reflective of market activity, it may override the information with an internally-developed valuation. As of June 30, 2016 and December 31, 2015 , overrides on a net basis were not material. Pricing service overrides, internally-developed valuations and indicative broker quotes are generally included in Level 3 in the fair value hierarchy.

The Company conducts several specific price monitoring activities. Daily analyses identify price changes over predetermined thresholds defined at the financial instrument level. Various pricing integrity reports are reviewed on a daily and monthly basis to determine if pricing is reflective of market activity or if it would warrant any adjustments. Other procedures performed include, but are not limited to, reviews of third-party pricing services methodologies, reviews of pricing trends and back testing.

The fair value of private fixed maturities, which are comprised of investments in private placement securities, originated by internal private asset managers, are primarily determined using discounted cash flow models. These models primarily use observable inputs that include Treasury or similar base rates plus estimated credit spreads to value each security. The credit spreads are obtained through a survey of private market intermediaries who are active in both primary and secondary transactions, and consider, among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements. Since most private placements are valued using standard market observable inputs and inputs derived from, or corroborated by, market observable data including observed prices and spreads for similar publicly-traded or privately-traded issues, they have been reflected within Level 2. For certain private fixed maturities, the discounted cash flow model may incorporate significant unobservable inputs, which reflect the Company’s own assumptions about the inputs that market participants would use in pricing the asset. To the extent management determines that such unobservable inputs are significant to the price of a security, a Level 3 classification is made.

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

Equity Securities —Equity securities consist principally of investments in common and preferred stock of publicly-traded companies, perpetual preferred stock, privately-traded securities, as well as mutual fund shares. The fair values of most publicly- traded equity securities are based on quoted market prices in active markets for identical assets and are classified within Level 1 in the fair value hierarchy. Estimated fair values for most privately traded equity securities are determined using discounted cash flow, earnings multiple and other valuation models that require a substantial level of judgment around inputs and therefore are classified within Level 3. The fair values of mutual fund shares that transact regularly (but do not trade in active markets because they are not publicly available) are based on transaction prices of identical fund shares and are classified within Level 2 in the fair value hierarchy. The fair values of perpetual preferred stock are based on inputs obtained from independent pricing services that are primarily based on indicative broker quotes. As a result, the fair values of perpetual preferred stock are classified as Level 3.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Commercial Mortgage and Other Loans —The fair value of loans held and accounted for using the fair value option is determined utilizing pricing indicators from the whole loan market, where investors are committed to purchase these loans at a predetermined price, which is considered the principal exit market for these loans. The Company evaluates the valuation inputs used for these assets, including the existence of predetermined exit prices, the terms of the loans, prevailing interest rates and credit risk, and deems the primary pricing inputs are Level 2 inputs in the fair value hierarchy.

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

As discussed in Note 2, the Company adopted ASU 2015-07, effective January 1, 2016, which resulted in the exclusion of certain Other long-term investments from the fair value hierarchy. The guidance was required to be applied retrospectively, and therefore, prior period amounts have been conformed to the current period presentation. At June 30, 2016 and December 31, 2015 , the fair values of these investments, which include certain hedge funds, private equity funds and other funds were $1,396 million and $1,413 million , respectively, of which $82 million and $1,331 million had been previously classified in Level 2 and Level 3, respectively, at December 31, 2015 .

Other Assets —Other assets reflected in Level 3 include reinsurance recoverables which are carried at fair value and relate to the reinsurance of the Company’s living benefit guarantees on certain variable annuity contracts. The methods and assumptions used to estimate the fair value are consistent with those described in “Future Policy Benefits.”

Derivative Instruments —Derivatives are recorded at fair value either as assets, within “Other trading account assets,” or “Other long-term investments,” or as liabilities, within “Other liabilities,” except for embedded derivatives which are recorded with the associated host contract. The fair values of derivative contracts can be affected by changes in interest rates, foreign exchange rates, commodity prices, credit spreads, market volatility, expected returns, non-performance risk (“NPR”), liquidity and other factors. For derivative positions included within Level 3 of the fair value hierarchy, liquidity valuation adjustments are made to reflect the cost of exiting significant risk positions, and consider the bid-ask spread, maturity, complexity and other specific attributes of the underlying derivative position.

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

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

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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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

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

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

Separate Account Assets —Separate account assets include fixed maturity securities, treasuries, equity securities and mutual funds for which values are determined consistent with similar instruments described above under “Fixed Maturity Securities,” and “Equity Securities.”

As discussed in Note 2, the Company adopted ASU 2015-07, effective January 1, 2016, which resulted in the exclusion of certain separate account investments from the fair value hierarchy. The guidance was required to be applied retrospectively, and therefore, prior period amounts have been conformed to the current period presentation. At June 30, 2016 and December 31, 2015, the fair values of Separate Account Assets excluded from the fair value hierarchy, which include investments in real estate and other invested assets, were $25,739 million and $25,661 million , respectively, which had been previously classified in Level 3 at December 31, 2015.

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

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

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

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

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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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

Transfers between Levels 1 and 2 —Transfers between levels are made to reflect changes in observability of inputs and market activity. Transfers into or out of any level are generally reported as the value as of the beginning of the quarter in which the transfers occur for any such assets still held at the end of the quarter. Periodically there are transfers between Level 1 and Level 2 for assets held in the Company’s Separate Account. The fair value of foreign common stock held in the Company’s Separate Account may reflect differences in market levels between the close of foreign trading markets and the close of U.S. trading markets for the respective day. Dependent on the existence of such a timing difference, the assets may move between Level 1 and Level 2. During the three months ended June 30, 2016 , $26 million were transferred from Level 1 to Level 2 and $14 million were transferred from Level 2 to Level 1. During the six months ended June 30, 2016 , $66 million were transferred from Level 1 to Level 2 and $31 million were transferred from Level 2 to Level 1. During the three months ended June 30, 2015 , $24 million were transferred from Level 1 to Level 2 and $36 million were transferred from Level 2 to Level 1. During the six months ended June 30, 2015 , $74 million were transferred from Level 1 to Level 2 and $53 million were transferred from Level 2 to Level 1.

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



	As of June 30, 2016
	Internal(1)		External(2)		Total
	(in millions)
Obligations of U.S. states and their political subdivisions	$	5	$	0	$	5
Foreign government bonds	0		162		162
Corporate securities(3)	2,115		355		2,470
Asset-backed securities(4)	153		3,233		3,386
Commercial mortgage-backed securities	3		1		4
Residential mortgage-backed securities	35		152		187
Equity securities	112		774		886
Other long-term investments	5		9		14
Other assets	64		0		64
Subtotal excluding separate account assets	2,492		4,686		7,178
Separate account assets	1,236		892		2,128
Total assets	$	3,728	$	5,578	$	9,306
Future policy benefits	$	13,328	$	0	$	13,328
Other liabilities	2		0		2
Notes issued by consolidated VIEs	0		2,094		2,094
Total liabilities	$	13,330	$	2,094	$	15,424

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	As of December 31, 2015
	Internal(1)		External(2)		Total
	(in millions)
Obligations of U.S. states and their political subdivisions	$	6	$	0	$	6
Foreign government bonds	0		157		157
Corporate securities(3)	1,085		340		1,425
Asset-backed securities(4)	149		4,495		4,644
Commercial mortgage-backed securities	5		36		41
Residential mortgage-backed securities	37		150		187
Equity securities	63		792		855
Other long-term investments(5)	39		10		49
Other assets	12		0		12
Subtotal excluding separate account assets	1,396		5,980		7,376
Separate account assets(5)	1,024		971		1,995
Total assets	$	2,420	$	6,951	$	9,371
Future policy benefits	$	8,434	$	0	$	8,434
Other liabilities	2		0		2
Notes issued by consolidated VIEs	0		8,597		8,597
Total liabilities	$	8,436	$	8,597	$	17,033

__________


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


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


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


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


(5)	Prior period amounts are presented on a basis consistent with the current period presentation, reflecting the adoption of ASU 2015-07.

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



	As of June 30, 2016
	Fair Value		Valuation Techniques	Unobservable Inputs	Minimum		Maximum	Weighted Average	Impact of Increase in Input on Fair Value(1)
	(in millions)
Assets:
Corporate securities(9)	$	2,115	Discounted cash flow	Discount rate	0.50%	-	20.46%	7.28%	Decrease
			Market comparables	EBITDA multiples(2)	5.0X	-	5.0X	5.0X	Increase
			Liquidation	Liquidation value	9.40%	-	91.00%	81.53%	Increase
Liabilities:
Future policy benefits(3)	$	13,328	Discounted cash flow	Lapse rate(4)	0%	-	13%		Decrease
				NPR spread(5)	0.41%	-	1.76%		Decrease
				Utilization rate(6)	52%	-	96%		Increase
				Withdrawal rate	See table footnote (7) below.
				Mortality rate(8)	0%	-	14%		Decrease
				Equity volatility curve	17%	-	25%		Increase

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	As of December 31, 2015
	Fair Value		Valuation Techniques	Unobservable Inputs	Minimum		Maximum	Weighted Average	Impact of Increase in Input on Fair Value(1)
	(in millions)
Assets:
Corporate securities(9)	$	1,085	Discounted cash flow	Discount rate	0.93%	-	25%	7.66%	Decrease
			Market comparables	EBITDA multiples(2)	1.4X	-	5.0X	3.7X	Increase
			Liquidation	Liquidation value	15.79%	-	29.33%	17.77%	Increase
Liabilities:
Future policy benefits(3)	$	8,434	Discounted cash flow	Lapse rate(4)	0%	-	14%		Decrease
				NPR spread(5)	0.06%	-	1.76%		Decrease
				Utilization rate(6)	56%	-	96%		Increase
				Withdrawal rate(7)	74%	-	100%		Increase
				Mortality rate(8)	0%	-	14%		Decrease
				Equity volatility curve	17%	-	28%		Increase

__________


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


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

(3)

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.


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

(5)

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

(6)

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.

(7)

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, 2016, 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%.

(8)

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


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

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

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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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

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

Commercial Mortgage Loans— Separate account assets include $1,011 million and $960 million of commercial mortgage loans as of June 30, 2016 and December 31, 2015 , respectively, that are classified as Level 3 and reported at fair value. Commercial mortgage loans are primarily valued internally using discounted cash flow techniques, as described further under “—Fair Value of Financial Instruments.” The primary unobservable input used is the spread to discount cash flows, which ranged from 1.39% to 3.37% ( 1.59% weighted average) as of June 30, 2016 , and 1.49% to 4.81% ( 1.79% weighted average) as of December 31, 2015 . In isolation, an increase (decrease) in the value of this input would result in a lower (higher) fair value measurement.

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

The Company has also established policies and guidelines that require the establishment of valuation methodologies and consistent application of such methodologies. These policies and guidelines govern the use of inputs and price source hierarchies and provide controls around the valuation processes. These controls include appropriate review and analysis of investment prices against market activity or indicators of reasonableness, analysis of portfolio returns to corresponding benchmark returns, back-testing, review of bid-ask spreads to assess activity, approval of price source changes, price overrides, methodology changes and classification of fair value hierarchy levels. For living benefit features of the Company’s variable annuity products, the actuarial valuation unit periodically tests contract input data and actuarial assumptions are reviewed at least annually, and updated based upon emerging experience, future expectations and other data, including any observable market data. The valuation policies and guidelines are reviewed and updated as appropriate.

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

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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2016
	Fixed Maturities Available-For-Sale
	U.S. States			Foreign Government		U.S. Corporate Public Securities			U.S. Corporate Private Securities			Foreign Corporate Public Securities			Foreign Corporate Private Securities
	(in millions)
Fair Value, beginning of period	$	6		$	122	$	214		$	1,170		$	97		$	593
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			0		0			(4		)	0			0
Included in other comprehensive income (loss)	0			0		0			62			1			101
Net investment income	0			0		0			2			0			0
Purchases	0			0		12			60			3			55
Sales	0			0		(1		)	0			(1		)	0
Issuances	0			0		0			0			0			0
Settlements	(1		)	0		(1		)	(16		)	0			(35		)
Foreign currency translation	0			2		1			2			3			6
Other(1)	0			0		(13		)	0			13			0
Transfers into Level 3(2)	0			0		0			43			0			0
Transfers out of Level 3(2)	0			0		(1		)	(63		)	(24		)	(25		)
Fair Value, end of period	$	5		$	124	$	211		$	1,256		$	92		$	695
Unrealized gains (losses) for assets still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0		$	0	$	0		$	2		$	0		$	0

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2016
	Fixed Maturities Available-For-Sale
	Asset- Backed(7)			Commercial Mortgage- Backed			Residential Mortgage- Backed
	(in millions)
Fair Value, beginning of period	$	4,568		$	11		$	193
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	1			0			0
Included in other comprehensive income (loss)	3			0			(1		)
Net investment income	5			0			(1		)
Purchases	170			(1		)	(1		)
Sales	(8		)	0			(1		)
Issuances	0			0			0
Settlements	(167		)	0			(10		)
Foreign currency translation	7			0			4
Other(1)	25			0			0
Transfers into Level 3(2)	354			0			0
Transfers out of Level 3(2)	(1,877		)	(7		)	0
Fair Value, end of period	$	3,081		$	3		$	183
Unrealized gains (losses) for assets still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0		$	0		$	0
Other income	$	0		$	0		$	0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2016
	Trading Account Assets
	Foreign Government			Corporate			Asset- Backed(7)			Commercial Mortgage- Backed		Residential Mortgage- Backed			Equity			All Other Activity
	(in millions)
Fair Value, beginning of period	$	36		$	228		$	611		$	1	$	4		$	581		$	1
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			0			0			0		0			0			0
Other income	0			(2		)	3			0		0			(7		)	1
Net investment income	0			1			1			0		0			0			0
Purchases	4			5			8			0		0			4			0
Sales	0			0			1			0		0			(1		)	0
Issuances	0			0			0			0		0			0			0
Settlements	(2		)	(20		)	(3		)	0		(1		)	(2		)	0
Foreign currency translation	0			0			(1		)	0		0			13			0
Other(1)	0			0			3			0		1			(3		)	0
Transfers into Level 3(2)	0			40			64			0		0			0			0
Transfers out of Level 3(2)	0			(36		)	(382		)	0		0			0			0
Fair Value, end of period	$	38		$	216		$	305		$	1	$	4		$	585		$	2
Unrealized gains (losses) for assets still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0		$	0		$	0		$	0	$	0		$	0		$	0
Other income	$	0		$	(3	)	$	2		$	0	$	0		$	(6	)	$	0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2016
	Equity Securities Available- For-Sale			Other Long-term Investments			Other Assets
	(in millions)
Fair Value, beginning of period	$	292		$	19		$	36
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			(1		)	21
Other income	0			0			0
Included in other comprehensive income (loss)	(15		)	0			0
Net investment income	0			(1		)	0
Purchases	29			0			5
Sales	(1		)	0			0
Issuances	0			0			0
Settlements	0			0			0
Foreign currency translation	3			0			0
Other(1)	0			(3		)	0
Transfers into Level 3(2)	0			0			0
Transfers out of Level 3(2)	(7		)	0			0
Fair Value, end of period	$	301		$	14		$	62
Unrealized gains (losses) for assets still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0		$	(2	)	$	24
Other income	$	0		$	0		$	0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2016
	Separate Account Assets(4)			Future Policy Benefits			Other Liabilities			Notes Issued by Consolidated VIEs
	(in millions)
Fair Value, beginning of period	$	2,168		$	(11,069	)	$	(2	)	$	(2,946	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			(1,998		)	0			(98		)
Other Income	0			0			0			10
Interest credited to policyholders’ account balances	15			0			0			0
Net investment income	7			0			0			0
Purchases	96			0			0			0
Sales	(13		)	0			0			0
Issuances	0			(261		)	0			0
Settlements	(55		)	0			0			0
Foreign currency translation	0			0			0			0
Other(1)	0			0			0			940
Transfers into Level 3(2)	76			0			0			0
Transfers out of Level 3(2)	(166		)	0			0			0
Fair Value, end of period	$	2,128		$	(13,328	)	$	(2	)	$	(2,094	)
Unrealized gains (losses) for assets/liabilities still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0		$	(2,071	)	$	0		$	(98	)
Other income	$	0		$	0		$	0		$	10
Interest credited to policyholders’ account balances	$	9		$	0		$	0		$	0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30, 2016
	Fixed Maturities Available-For-Sale
	U.S. States			Foreign Government		U.S. Corporate Public Securities			U.S. Corporate Private Securities			Foreign Corporate Public Securities			Foreign Corporate Private Securities
	(in millions)
Fair Value, beginning of period	$	6		$	123	$	205		$	694		$	44		$	279
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			0		0			(87		)	0			(1		)
Included in other comprehensive income (loss)	0			1		2			22			2			(6		)
Net investment income	0			0		0			4			0			0
Purchases	0			0		13			69			27			82
Sales	0			0		(1		)	0			(1		)	(4		)
Issuances	0			0		0			0			0			0
Settlements	(1		)	0		(1		)	(43		)	0			(78		)
Foreign currency translation	0			0		5			3			8			9
Other(1)	0			0		(13		)	0			13			0
Transfers into Level 3(2)	0			0		2			657			23			439
Transfers out of Level 3(2)	0			0		(1		)	(63		)	(24		)	(25		)
Fair Value, end of period	$	5		$	124	$	211		$	1,256		$	92		$	695
Unrealized gains (losses) for assets still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0		$	0	$	0		$	(81	)	$	0		$	0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30, 2016
	Fixed Maturities Available-For-Sale
	Asset- Backed(7)			Commercial Mortgage- Backed			Residential Mortgage- Backed
	(in millions)
Fair Value, beginning of period	$	4,048		$	38		$	183
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	2			0			0
Included in other comprehensive income (loss)	(41		)	0			2
Net investment income	9			0			(1		)
Purchases	346			7			(1		)
Sales	(8		)	(34		)	(1		)
Issuances	0			0			0
Settlements	(200		)	(1		)	(19		)
Foreign currency translation	41			0			20
Other(1)	114			0			0
Transfers into Level 3(2)	1,204			0			0
Transfers out of Level 3(2)	(2,434		)	(7		)	0
Fair Value, end of period	$	3,081		$	3		$	183
Unrealized gains (losses) for assets still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0		$	0		$	0
Other income	$	0		$	0		$	0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30, 2016
	Trading Account Assets
	Foreign Government			Corporate			Asset- Backed(7)			Commercial Mortgage- Backed			Residential Mortgage- Backed			Equity			All Other Activity
	(in millions)
Fair Value, beginning of period	$	34		$	203		$	596		$	3		$	4		$	589		$	5
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			0			0			0			0			0			0
Other income	0			(12		)	(2		)	0			0			(5		)	1
Net investment income	0			1			1			0			0			0			0
Purchases	6			8			26			0			0			5			0
Sales	0			0			0			0			0			(12		)	0
Issuances	0			0			0			0			0			0			0
Settlements	(2		)	(35		)	(4		)	0			(1		)	(77		)	0
Foreign currency translation	0			0			(1		)	0			0			42			0
Other(1)	0			(15		)	20			(2		)	1			15			(4		)
Transfers into Level 3(2)	0			127			179			0			0			28			0
Transfers out of Level 3(2)	0			(61		)	(510		)	0			0			0			0
Fair Value, end of period	$	38		$	216		$	305		$	1		$	4		$	585		$	2
Unrealized gains (losses) for assets still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0		$	0		$	0		$	0		$	0		$	0		$	0
Other income	$	0		$	(13	)	$	(1	)	$	0		$	0		$	(4	)	$	1

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30, 2016
	Equity Securities Available- For-Sale			Other Long-term Investments			Other Assets
	(in millions)
Fair Value, beginning of period	$	266		$	49		$	7
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	1			(1		)	46
Other income	0			0			0
Included in other comprehensive income (loss)	(10		)	0			0
Net investment income	0			(1		)	0
Purchases	53			0			9
Sales	(14		)	0			0
Issuances	0			0			0
Settlements	(13		)	0			0
Foreign currency translation	18			0			0
Other(1)	0			(33		)	0
Transfers into Level 3(2)	7			0			0
Transfers out of Level 3(2)	(7		)	0			0
Fair Value, end of period	$	301		$	14		$	62
Unrealized gains (losses) for assets still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0		$	(1	)	$	46
Other income	$	0		$	0		$	0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30, 2016
	Separate Account Assets(4)			Future Policy Benefits			Other Liabilities			Notes Issued by Consolidated VIEs
	(in millions)
Fair Value, beginning of period	$	1,995		$	(8,434	)	$	(2	)	$	(8,597	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	1			(4,378		)	0			3
Other Income	0			0			0			(9		)
Interest credited to policyholders’ account balances	3			0			0			0
Net investment income	13			0			0			0
Purchases	258			0			0			0
Sales	(73		)	0			0			0
Issuances	0			(515		)	0			0
Settlements	(88		)	0			0			0
Foreign currency translation	0			(1		)	0			0
Other(1)	0			0			0			6,509
Transfers into Level 3(2)	273			0			0			0
Transfers out of Level 3(2)	(254		)	0			0			0
Fair Value, end of period	$	2,128		$	(13,328	)	$	(2	)	$	(2,094	)
Unrealized gains (losses) for assets/liabilities still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0		$	(4,497	)	$	0		$	3
Other income	$	0		$	0		$	0		$	(9	)
Interest credited to policyholders’ account balances	$	(3	)	$	0		$	0		$	0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2015
	Fixed Maturities Available-For-Sale(5)
	U.S. States			Foreign Government			U.S. Corporate Public Securities			U.S. Corporate Private Securities			Foreign Corporate Public Securities			Foreign Corporate Private Securities
	(in millions)
Fair Value, beginning of period	$	6		$	136		$	365		$	514		$	215		$	156
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			0			0			(12		)	0			(1		)
Included in other comprehensive income (loss)	0			(3		)	(1		)	0			2			9
Net investment income(6)	0			0			0			3			0			1
Purchases(6)	15			20			164			15			6			26
Sales	(1		)	0			(150		)	(4		)	0			0
Issuances	0			0			0			0			0			0
Settlements(6)	0			0			(2		)	(10		)	(8		)	(17		)
Foreign currency translation	0			2			(2		)	0			(7		)	0
Transfers into Level 3(2)	0			(4		)	0			0			0			0
Transfers out of Level 3(2)	0			0			(146		)	(1		)	(12		)	0
Fair Value, end of period	$	20		$	151		$	228		$	505		$	196		$	174
Unrealized gains (losses) for assets still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0		$	0		$	0		$	(13	)	$	0		$	0



	Three Months Ended June 30, 2015
	Fixed Maturities Available-For-Sale
	Asset- Backed(7)			Commercial Mortgage- Backed			Residential Mortgage- Backed
	(in millions)
Fair Value, beginning of period	$	4,362		$	75		$	242
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			0			0
Included in other comprehensive income (loss)	15			0			(1		)
Net investment income	10			0			0
Purchases	615			2			0
Sales	(286		)	0			(3		)
Issuances	0			0			0
Settlements	(39		)	(2		)	(16		)
Foreign currency translation	(11		)	0			(7		)
Transfers into Level 3(2)	293			0			0
Transfers out of Level 3(2)	(1,142		)	(34		)	0
Fair Value, end of period	$	3,817		$	41		$	215
Unrealized gains (losses) for assets still held(3):
Included in earnings:
Realized investment gains (losses), net	$	4		$	0		$	0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2015
	Trading Account Assets
	Foreign Government			Corporate			Asset- Backed(7)			Commercial Mortgage- Backed			Residential Mortgage- Backed			Equity			All Other Activity
	(in millions)
Fair Value, beginning of period	$	22		$	144		$	376		$	3		$	6		$	634		$	8
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			0			0			0			0			1			0
Other income	0			(2		)	1			0			0			(6		)	4
Net investment income	0			1			1			0			0			0			0
Purchases	4			51			243			(1		)	0			1			0
Sales	0			(4		)	(2		)	0			0			(12		)	0
Issuances	0			0			0			0			0			0			0
Settlements	(1		)	(1		)	0			0			0			(1		)	0
Foreign currency translation	0			0			0			0			0			(13		)	0
Transfers into Level 3(2)	0			0			27			0			0			0			0
Transfers out of Level 3(2)	0			(41		)	(39		)	0			(1		)	0			0
Fair Value, end of period	$	25		$	148		$	607		$	2		$	5		$	604		$	12
Unrealized gains (losses) for assets still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0		$	0		$	0		$	0		$	0		$	0		$	0
Other income	$	0		$	(2	)	$	1		$	0		$	0		$	(7	)	$	4

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2015(5)
	Equity Securities Available- For-Sale			Other Long-term Investments			Other Assets
	(in millions)
Fair Value, beginning of period	$	263		$	13		$	2
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	6			0			0
Other income	0			0			0
Included in other comprehensive income (loss)	(4		)	0			0
Net investment income	0			0			0
Purchases	8			5			0
Sales	(9		)	0			0
Issuances	0			0			0
Settlements	0			0			0
Foreign currency translation	(7		)	0			0
Transfers into Level 3(2)	2			0			0
Transfers out of Level 3(2)	0			0			0
Fair Value, end of period	$	259		$	18		$	2
Unrealized gains (losses) for assets/liabilities still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0		$	(1	)	$	0
Other income	$	0		$	0		$	0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2015(5)
	Separate Account Assets(4)			Future Policy Benefits			Other Liabilities			Notes Issued by Consolidated VIEs
	(in millions)
Fair Value, beginning of period	$	2,019		$	(9,473	)	$	(2	)	$	(6,810	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			4,236			0			(68		)
Other Income	0			0			0			(62		)
Interest credited to policyholders’ account balances	(17		)	0			0			0
Net investment income	6			0			0			0
Purchases	481			0			0			0
Sales	(65		)	0			0			0
Issuances	0			(241		)	0			(494		)
Settlements	(37		)	0			0			0
Foreign currency translation	(1		)	0			0			0
Transfers into Level 3(2)	1			0			0			0
Transfers out of Level 3(2)	(283		)	0			0			0
Fair Value, end of period	$	2,104		$	(5,478	)	$	(2	)	$	(7,434	)
Unrealized gains (losses) for assets/liabilities still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0		$	4,167		$	0		$	(68	)
Other Income	$	0		$	0		$	0		$	(62	)
Interest credited to policyholders’ account balances	$	(19	)	$	0		$	0		$	0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30, 2015
	Fixed Maturities Available-For-Sale(5)
	U.S. States			Foreign Government			U.S. Corporate Public Securities			U.S. Corporate Private Securities			Foreign Corporate Public Securities			Foreign Corporate Private Securities
	(in millions)
Fair Value, beginning of period	$	6		$	2		$	357		$	523		$	252		$	171
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			0			0			(15		)	0			1
Included in other comprehensive income (loss)	0			(3		)	0			(3		)	2			3
Net investment income(6)	0			0			0			5			0			2
Purchases(6)	15			20			328			45			18			39
Sales	(1		)	0			(300		)	(4		)	(43		)	0
Issuances	0			0			0			0			0			0
Settlements(6)	0			0			(10		)	(21		)	(8		)	(42		)
Foreign currency translation	0			(2		)	(2		)	0			(9		)	0
Other(1)	0			0			0			(3		)	0			0
Transfers into Level 3(2)	0			134			6			10			0			0
Transfers out of Level 3(2)	0			0			(151		)	(32		)	(16		)	0
Fair Value, end of period	$	20		$	151		$	228		$	505		$	196		$	174
Unrealized gains (losses) for assets still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0		$	0		$	0		$	(16	)	$	0		$	0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30, 2015
	Fixed Maturities Available-For-Sale
	Asset- Backed(7)			Commercial Mortgage- Backed			Residential Mortgage- Backed
	(in millions)
Fair Value, beginning of period	$	4,059		$	43		$	253
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	6			0			0
Included in other comprehensive income (loss)	17			0			(1		)
Net investment income	13			0			0
Purchases	940			34			0
Sales	(390		)	0			(3		)
Issuances	0			0			0
Settlements	(78		)	(4		)	(25		)
Foreign currency translation	(14		)	0			(9		)
Other(1)	3			0			0
Transfers into Level 3(2)	803			2			0
Transfers out of Level 3(2)	(1,542		)	(34		)	0
Fair Value, end of period	$	3,817		$	41		$	215
Unrealized gains (losses) for assets still held(3):
Included in earnings:
Realized investment gains (losses), net	$	4		$	0		$	0

Table of Contents

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30, 2015
	Trading Account Assets
	Foreign Government			Corporate			Asset- Backed(7)			Commercial Mortgage- Backed			Residential Mortgage- Backed			Equity			All Other Activity
	(in millions)
Fair Value, beginning of period	$	21		$	124		$	393		$	5		$	7		$	663		$	7
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			0			0			0			0			(2		)	0
Other income	0			(7		)	3			0			0			(9		)	5
Net investment income	0			1			1			0			0			0			0
Purchases	5			71			247			0			0			8			0
Sales	0			(4		)	(2		)	(2		)	0			(16		)	0
Issuances	0			0			0			0			0			0			0
Settlements	(1		)	(3		)	(1		)	(1		)	(1		)	(16		)	0
Foreign currency translation	0			0			0			0			0			(17		)	0
Other(1)	0			0			0			0			0			(7		)	0
Transfers into Level 3(2)	0			7			73			0			0			0			0
Transfers out of Level 3(2)	0			(41		)	(107		)	0			(1		)	0			0
Fair Value, end of period	$	25		$	148		$	607		$	2		$	5		$	604		$	12
Unrealized gains (losses) for assets still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0		$	0		$	0		$	0		$	0		$	(2	)	$	0
Other income	$	0		$	(7	)	$	3		$	0		$	0		$	6		$	5

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30, 2015(5)
	Equity Securities Available- For-Sale			Other Long-term Investments			Other Assets
	(in millions)
Fair Value, beginning of period	$	275		$	13		$	2
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	10			(2		)	0
Other income	0			0			0
Included in other comprehensive income (loss)	(1		)	0			0
Net investment income	0			0			0
Purchases	12			8			0
Sales	(31		)	0			0
Issuances	0			0			0
Settlements	0			0			0
Foreign currency translation	(8		)	0			0
Other(1)	0			0			0
Transfers into Level 3(2)	2			0			0
Transfers out of Level 3(2)	0			(1		)	0
Fair Value, end of period	$	259		$	18		$	2
Unrealized gains (losses) for assets/liabilities still held(3):
Included in earnings:
Realized investment gains (losses), net	$	(1	)	$	(2	)	$	0
Other income	$	0		$	0		$	0

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Six Months Ended June 30, 2015(5)
	Separate Account Assets(4)			Future Policy Benefits			Other Liabilities			Notes Issued by Consolidated VIEs
	(in millions)
Fair Value, beginning of period	$	1,738		$	(8,182	)	$	(5	)	$	(6,033	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			3,184			1			(53		)
Other Income	0			0			0			92
Interest credited to policyholders’ account balances	(6		)	0			0			0
Net investment income	12			0			0			0
Purchases	819			0			0			0
Sales	(73		)	0			0			0
Issuances	0			(480		)	0			(1,440		)
Settlements	(80		)	0			2			0
Foreign currency translation	(2		)	0			0			0
Other(1)	0			0			0			0
Transfers into Level 3(2)	1			0			0			0
Transfers out of Level 3(2)	(305		)	0			0			0
Fair Value, end of period	$	2,104		$	(5,478	)	$	(2	)	$	(7,434	)
Unrealized gains (losses) for assets/liabilities still held(3):
Included in earnings:
Realized investment gains (losses), net	$	0		$	3,062		$	1		$	(53	)
Other Income	$	0		$	0		$	0		$	(92	)
Interest credited to policyholders’ account balances	$	(9	)	$	0		$	0		$	0

__________


(1)	Other as of June 30, 2016 primarily represents deconsolidations of certain previously consolidated collateralized loan obligations. Other as of June 30, 2015 primarily represents reclassifications of certain assets between reporting categories.


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


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

(4)


(5)	Prior period amounts have been reclassified to conform to current period presentation, including the adoption of ASU 2015-07.


(6)	Amounts as of June 30, 2015 , have been revised to correct the previously reported amounts.


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

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

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. These tables include NPR and exclude embedded derivatives and associated reinsurance recoverables. The derivative assets and liabilities shown below are included in “Trading account assets-All Other Activity,” “Other long-term investments” or “Other liabilities” in the tables presented above, under the headings “Assets and Liabilities by Hierarchy Level” and “Changes in Level 3 Assets and Liabilities.”

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	As of June 30, 2016
	Level 1		Level 2		Level 3		Netting(1)			Total
	(in millions)
Derivative Assets:
Interest Rate	$	4	$	19,961	$	5	$			$	19,970
Currency	0		1,196		0					1,196
Credit	0		1		0					1
Currency/Interest Rate	0		2,601		0					2,601
Equity	1		168		2					171
Commodity	1		0		0					1
Netting(1)							(21,707		)	(21,707		)
Total derivative assets	$	6	$	23,927	$	7	$	(21,707	)	$	2,233
Derivative Liabilities:
Interest Rate	$	33	$	7,614	$	1	$			$	7,648
Currency	0		354		0					354
Credit	0		93		0					93
Currency/Interest Rate	0		472		0					472
Equity	39		359		0					398
Commodity	0		0		0					0
Netting(1)							(7,849		)	(7,849		)
Total derivative liabilities	$	72	$	8,892	$	1	$	(7,849	)	$	1,116



	As of December 31, 2015
	Level 1		Level 2		Level 3		Netting(1)			Total
	(in millions)
Derivative Assets:
Interest Rate	$	11	$	10,561	$	7	$			$	10,579
Currency	0		318		0					318
Credit	0		3		0					3
Currency/Interest Rate	0		2,995		0					2,995
Equity	4		254		32					290
Commodity	0		0		0					0
Netting(1)							(11,457		)	(11,457		)
Total derivative assets	$	15	$	14,131	$	39	$	(11,457	)	$	2,728
Derivative Liabilities:
Interest Rate	$	3	$	4,573	$	2	$			$	4,578
Currency	0		114		0					114
Credit	0		53		0					53
Currency/Interest Rate	0		244		0					244
Equity	0		327		0					327
Commodity	0		0		0					0
Netting(1)							(5,276		)	(5,276		)
Total derivative liabilities	$	3	$	5,311	$	2	$	(5,276	)	$	40

__________


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

Changes in Level 3 derivative assets and liabilities —The following tables provide a summary of the changes in fair value of Level 3 derivative assets and liabilities for the three and the six months ended June 30, 2016 , respectively, as well as the portion of gains or losses included in income for the three and the six months ended June 30, 2016 , respectively, attributable to unrealized gains or losses related to those assets and liabilities still held at June 30, 2016 .

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2016					Six Months Ended June 30, 2016
	Derivative Assets- Equity		Derivative Assets- Interest Rate			Derivative Assets- Equity			Derivative Assets- Interest Rate
	(in millions)
Fair Value, beginning of period	$	2	$	5		$	32		$	5
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0		(1		)	0			(1		)
Other income	0		0			0			0
Purchases	0		0			0			0
Sales	0		0			0			0
Issuances	0		0			0			0
Settlements	0		0			0			0
Other(1)	0		0			(30		)	0
Transfers into Level 3(2)	0		0			0			0
Transfers out of Level 3(2)	0		0			0			0
Fair Value, end of period	$	2	$	4		$	2		$	4
Unrealized gains (losses) for the period relating to those Level 3 assets that were still held at the end of the period:
Included in earnings:
Realized investment gains (losses), net	$	0	$	(1	)	$	0		$	(1	)
Other income	$	0	$	0		$	0		$	0

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	Three Months Ended June 30, 2015					Six Months Ended June 30, 2015
	Derivative Assets- Equity			Derivative Assets- Interest Rate		Derivative Assets- Equity			Derivative Assets- Interest Rate
	(in millions)
Fair Value, beginning of period	$	5		$	4	$	6		$	3
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	(2		)	2		(4		)	3
Other income	0			0		0			0
Purchases	4			0		6			0
Sales	0			0		0			0
Issuances	0			0		0			0
Settlements	0			0		0			0
Other	0			0		0			0
Transfers into Level 3(2)	0			0		0			0
Transfers out of Level 3(2)	0			0		(1		)	0
Fair Value, end of period	$	7		$	6	$	7		$	6
Unrealized gains (losses) for the period relating to those Level 3 assets that were still held at the end of the period:
Included in earnings:
Realized investment gains (losses), net	$	(2	)	$	2	$	(4	)	$	3
Other income	$	0		$	0	$	0		$	0

__________


(1)	Primarily related to private warrants reclassified from derivatives to trading securities.


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

Nonrecurring Fair Value Measurements —The following table represents information for assets measured at fair value on a nonrecurring basis. The estimated fair values were classified as Level 3 in the valuation hierarchy.



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(in millions)
Commercial mortgage loans(1):
Carrying value	$	47		$	0		$	47		$	0
Gains (Losses)	$	(4	)	$	0		$	(4	)	$	0
Mortgage servicing rights(2):
Carrying value	$	96		$	98		$	96		$	98
Gains (Losses)	$	(3	)	$	2		$	(2	)	$	(1	)
Cost method investments(3):
Carrying value	$	186		$	131		$	186		$	131
Gains (Losses)	$	(22	)	$	(12	)	$	(52	)	$	(36	)

__________


(1)	The reserve adjustments were based on discounted cash flows utilizing market rates or the fair value of the underlying real estate collateral.


(2)	Mortgage servicing rights are revalued based on internal models which utilize inputs. The fair value for mortgage servicing rights is determined using a discounted cash flow model incorporating assumptions for servicing revenues, adjusted for expected prepayments, delinquency rates, escrow deposit income and estimated loan servicing expenses.


(3)	For cost method impairments, the methodologies utilized were primarily discounted cash flow and, where appropriate, valuations provided by the general partners taking into consideration investment-related expenses.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Fair Value Option

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

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016			2015
	(in millions)
Assets:
Commercial mortgage and other loans:
Changes in instrument-specific credit risk	$	0	$	0	$	0		$	0
Other changes in fair value	$	0	$	0	$	0		$	0
Other long-term investments:
Changes in fair value	$	27	$	11	$	(24	)	$	43
Liabilities:
Notes issued by consolidated VIEs:
Changes in fair value	$	87	$	129	$	6		$	(39	)

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

Interest income on commercial mortgage and other loans is included in net investment income. The Company recorded $2 million of interest income for both the three months ended June 30, 2016 and 2015 , and $4 million and $5 million of interest income for the six months ended June 30, 2016 and 2015 , respectively, on fair value option loans. Interest income on these loans is recorded based on the effective interest rates as determined at the closing of the loan.

The fair values and aggregate contractual principal amounts of commercial mortgage and other loans, for which the fair value option has been elected, were $591 million and $582 million , respectively, as of June 30, 2016 , and $274 million and $270 million , respectively, as of December 31, 2015 . As of June 30, 2016 , for loans for which the fair value option has been elected, there were no loans in non-accrual status and none of the loans are more than 90 days past due and still accruing.

The fair value of other long-term investments was $1,384 million as of June 30, 2016 and $1,322 million as of December 31, 2015 .

The fair values and aggregate contractual principal amounts of limited recourse notes issued by consolidated VIEs, for which the fair value option has been elected at issuance, were $2,094 million and $2,287 million , respectively, as of June 30, 2016 , and $8,597 million and $9,186 million , respectively as of December 31, 2015 . Interest expense recorded for these liabilities was $30 million and $86 million for the three months ended June 30, 2016 and 2015 , respectively, and $68 million and $154 million for the six months ended June 30, 2016 and 2015 , respectively.

Fair Value of Financial Instruments

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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	June 30, 2016(1)
	Fair Value								Carrying Amount(2)
	Level 1		Level 2		Level 3		Total		Total
	(in millions)
Assets:
Fixed maturities, held-to-maturity(3)	$	0	$	1,852	$	1,174	$	3,026	$	2,485
Commercial mortgage and other loans	0		205		53,698		53,903		50,856
Policy loans	0		0		11,930		11,930		11,930
Short-term investments	0		680		0		680		680
Cash and cash equivalents	3,771		666		0		4,437		4,437
Accrued investment income	0		3,211		0		3,211		3,211
Other assets	53		2,084		655		2,792		2,792
Total assets	$	3,824	$	8,698	$	67,457	$	79,979	$	76,391
Liabilities:
Policyholders’ account balances—investment contracts	$	0	$	41,420	$	58,405	$	99,825	$	98,057
Securities sold under agreements to repurchase	0		7,335		0		7,335		7,335
Cash collateral for loaned securities	0		4,643		0		4,643		4,643
Short-term debt	0		609		73		682		676
Long-term debt(4)	1,377		16,362		3,399		21,138		18,986
Other liabilities	0		4,679		694		5,373		5,373
Separate account liabilities—investment contracts	0		68,906		29,860		98,766		98,766
Total liabilities	$	1,377	$	143,954	$	92,431	$	237,762	$	233,836

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	December 31, 2015(1)
	Fair Value								Carrying Amount(2)
	Level 1		Level 2		Level 3		Total		Total
	(in millions)
Assets:
Fixed maturities, held-to-maturity(3)	$	0	$	1,543	$	1,081	$	2,624	$	2,308
Commercial mortgage and other loans	0		533		51,046		51,579		50,285
Policy loans	0		0		11,657		11,657		11,657
Short-term investments	0		617		1		618		618
Cash and cash equivalents	2,832		572		0		3,404		3,404
Accrued investment income	0		3,110		0		3,110		3,110
Other assets	136		2,334		652		3,122		3,122
Total assets	$	2,968	$	8,709	$	64,437	$	76,114	$	74,504
Liabilities:
Policyholders’ account balances—investment contracts	$	0	$	39,314	$	54,957	$	94,271	$	93,937
Securities sold under agreements to repurchase	0		7,882		0		7,882		7,882
Cash collateral for loaned securities	0		3,496		0		3,496		3,496
Short-term debt	0		1,221		0		1,221		1,216
Long-term debt(4)(5)	1,328		16,540		3,433		21,301		19,594
Other liabilities	0		5,344		695		6,039		6,039
Separate account liabilities—investment contracts	0		69,978		32,267		102,245		102,245
Total liabilities	$	1,328	$	143,775	$	91,352	$	236,455	$	234,409

__________

(1)

As discussed in Note 2, the Company adopted ASU 2015-07, effective January 1, 2016, which resulted in the exclusion of certain other long-term investments from the fair value hierarchy. The guidance was required to be applied retrospectively, and therefore, prior period amounts have been conformed to the current period presentation. At June 30, 2016 and December 31, 2015 , the fair values of these cost method investments were $1,612 million and $1,653 million , respectively, which had been previously classified in level 3 at December 31, 2015. The carrying value of these investments were $1,488 million and $1,563 million as of June 30, 2016 and December 31, 2015 , respectively.

(2)

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 out of scope under authoritative guidance relating to disclosures of the fair value of financial instruments. Financial statement captions excluded from the above table are not considered financial instruments.


(3)	Excludes notes with fair value and carrying amount of $3,990 million as of June 30, 2016 , and $4,081 million and $3,850 million , respectively, as of December 31, 2015 , which have been offset with the associated payables under a netting agreement.


(4)	Includes notes with fair value and carrying amount of $5,117 million as of June 30, 2016 , and $5,120 million and $4,889 million , respectively, as of December 31, 2015 , which have been offset with the associated payables under a netting agreement.


(5)	Prior period amounts are presented on a basis consistent with the current period presentation, reflecting the adoption of ASU 2015-03.

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

Fixed Maturities, Held-to-Maturity

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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Commercial Mortgage and Other Loans

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

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

Policy Loans

The Company’s valuation technique for policy loans is to discount cash flows at the current policy loan coupon rate. Policy loans are fully collateralized by the cash surrender value of underlying insurance policies. As a result, the carrying value of the policy loans approximates the fair value.

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

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

Policyholders’ Account Balances—Investment Contracts

Only the portion of policyholders’ account balances related to products that are investment contracts (those without significant mortality or morbidity risk) are reflected in the table above. For fixed deferred annuities, single premium endowments, payout annuities and other similar contracts without life contingencies, fair values are generally derived using discounted projected cash flows based on interest rates that are representative of the Company’s financial strength ratings, and hence reflect the Company’s own NPR. For guaranteed investment contracts, funding agreements, structured settlements without life contingencies and other similar products, fair values are generally derived using discounted projected cash flows based on interest rates being offered for similar contracts with maturities consistent with those of the contracts being valued. For those balances that can be withdrawn by the customer at any time without prior notice or penalty, the fair value is the amount estimated to be payable to the customer as of the reporting date, which is generally the carrying value. For defined contribution and defined benefit contracts and certain other products, the fair value is the market value of the assets supporting the liabilities.

Securities Sold Under Agreements to Repurchase

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

Cash Collateral for Loaned Securities

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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Debt

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

Other Liabilities

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

Separate Account Liabilities—Investment Contracts

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

14. DERIVATIVE INSTRUMENTS

Types of Derivative Instruments and Derivative Strategies

Interest Rate Contracts

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

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

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

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

Equity Contracts

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

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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Foreign Exchange Contracts

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

Under currency forwards, the Company agrees with counterparties to deliver a specified amount of an identified currency at a specified future date. Typically, the price is agreed upon at the time of the contract and payment for such a contract is made at the specified future date. As noted above, the Company uses currency forwards to mitigate the impact of changes in currency exchange rates on U.S. dollar equivalent earnings generated by certain of its non-U.S. businesses, primarily its international insurance and investment operations. The Company executes forward sales of the hedged currency in exchange for U.S. dollars at a specified exchange rate. The maturities of these forwards correspond with the future periods in which the non-U.S. dollar-denominated earnings are expected to be generated. These earnings hedges do not qualify for hedge accounting.

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

Credit Contracts

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

Other Contracts

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

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

Embedded Derivatives. The Company sells variable annuity products, which may include guaranteed benefit features that are accounted for as embedded derivatives. These embedded derivatives are marked to market through “Realized investment gains (losses), net” based on the change in value of the underlying contractual guarantees, which are determined using valuation models. The Company maintains a portfolio of derivative instruments that is intended to offset certain risks related to the above products’ features. The derivatives may include, but are not limited to equity options, total return swaps, interest rate swaptions, caps, floors and other instruments.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Synthetic Guarantees. The Company sells synthetic GICs, through both full service and investment-only sales channels, to investment vehicles primarily used by qualified defined contribution pension plans. The synthetic GICs are issued in respect of assets that are owned by the trustees of such plans, who invest the assets according to the contract terms agreed to with the Company. The contracts establish participant balances and credit interest thereon. The participant balances are supported by the underlying assets. In connection with certain participant-initiated withdrawals, the contract guarantees that after all underlying assets are liquidated, any remaining participant balances will be paid by the Company. Under U.S. GAAP, these contracts are accounted for as derivatives and recorded at fair value.

The table below provides a summary of the gross notional amount and fair value of derivatives contracts by the primary underlying, excluding embedded derivatives and associated reinsurance recoverables. Many derivative instruments contain multiple underlyings. The fair value amounts below represent the gross fair value of derivative contracts prior to taking into account the netting effects of master netting agreements, cash collateral and NPR. This netting impact results in total derivative assets of $2,233 million and $2,728 million as of June 30, 2016 and December 31, 2015 , respectively, and total derivative liabilities of $1,116 million and $40 million as of June 30, 2016 and December 31, 2015 , 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/Instrument Type	June 30, 2016							December 31, 2015
			Gross Fair Value							Gross Fair Value
	Notional(1)		Assets		Liabilities			Notional(1)		Assets		Liabilities
	(in millions)
Derivatives Designated as Hedge Accounting Instruments:
Interest Rate
Interest Rate Swaps	$	1,358	$	21	$	(176	)	$	1,431	$	20	$	(148	)
Foreign Currency
Foreign Currency Forwards	353		30		(5		)	323		7		(1		)
Currency/Interest Rate
Foreign Currency Swaps	13,089		1,801		(24		)	12,739		1,592		(5		)
Total Qualifying Hedges	$	14,800	$	1,852	$	(205	)	$	14,493	$	1,619	$	(154	)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Swaps	$	175,452	$	19,322	$	(7,323	)	$	173,091	$	10,161	$	(4,232	)
Interest Rate Futures	33,941		4		(33		)	28,209		11		(3		)
Interest Rate Options	14,736		616		(114		)	40,056		387		(196		)
Interest Rate Forwards	1,324		3		(1		)	86		0		0
Foreign Currency
Foreign Currency Forwards	17,946		1,165		(349		)	17,400		311		(113		)
Foreign Currency Options	93		1		0			93		0		0
Currency/Interest Rate
Foreign Currency Swaps	11,476		800		(448		)	11,607		1,404		(238		)
Credit
Credit Default Swaps	2,023		1		(93		)	1,839		3		(53		)
Equity
Equity Futures	3,540		0		(39		)	249		2		0
Equity Options	55,616		81		(95		)	48,958		159		(118		)
Total Return Swaps	21,678		89		(265		)	18,804		128		(209		)
Commodity
Commodity Futures	78		1		0			80		0		0
Synthetic GICs	74,661		5		0			72,585		7		0
Total Non-Qualifying Derivatives(2)	$	412,564	$	22,088	$	(8,760	)	$	413,057	$	12,573	$	(5,162	)
Total Derivatives(3)	$	427,364	$	23,940	$	(8,965	)	$	427,550	$	14,192	$	(5,316	)

__________


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

(2)

Based on notional amounts, most of the Company’s derivatives do not qualify for hedge accounting as follows: 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, 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 synthetic GICs, which are product standalone derivatives, do not qualify as hedging instruments under hedge accounting rules.


(3)	Excludes embedded derivatives and associated reinsurance recoverables which contain multiple underlyings. The fair value of these embedded derivatives was a net liability of $13,254 million and $8,408 million as of June 30, 2016 and December 31, 2015 , respectively, primarily included in “Future policy benefits.”

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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, 2016
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statement of Financial Position			Net Amounts Presented in the Statement of Financial Position		Financial Instruments/ Collateral(1)			Net Amount
	(in millions)
Offsetting of Financial Assets:
Derivatives(1)	$	23,856	$	(21,707	)	$	2,149	$	(1,438	)	$	711
Securities purchased under agreement to resell	997		0			997		(997		)	0
Total assets	$	24,853	$	(21,707	)	$	3,146	$	(2,435	)	$	711
Offsetting of Financial Liabilities:
Derivatives(1)	$	8,950	$	(7,849	)	$	1,101	$	(66	)	$	1,035
Securities sold under agreement to repurchase	7,335		0			7,335		(7,335		)	0
Total liabilities	$	16,285	$	(7,849	)	$	8,436	$	(7,401	)	$	1,035



	December 31, 2015
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statement of Financial Position			Net Amounts Presented in the Statement of Financial Position		Financial Instruments/ Collateral(1)			Net Amount
	(in millions)
Offsetting of Financial Assets:
Derivatives(1)	$	14,028	$	(11,457	)	$	2,571	$	(1,296	)	$	1,275
Securities purchased under agreement to resell	776		0			776		(776		)	0
Total assets	$	14,804	$	(11,457	)	$	3,347	$	(2,072	)	$	1,275
Offsetting of Financial Liabilities:
Derivatives(1)	$	5,310	$	(5,276	)	$	34	$	(14	)	$	20
Securities sold under agreement to repurchase	7,882		0			7,882		(7,882		)	0
Total liabilities	$	13,192	$	(5,276	)	$	7,916	$	(7,896	)	$	20

__________


(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, 2015 .

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Cash Flow, Fair Value and Net Investment Hedges

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

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



	Three Months Ended June 30, 2016
	Realized Investment Gains (Losses)			Net Investment Income			Other Income			Interest Expense			Interest Credited To Policyholders’ Account Balances		AOCI(1)
	(in millions)
Derivatives Designated as Hedge Accounting Instruments:
Fair value hedges
Interest Rate	$	(4	)	$	(9	)	$	0		$	0		$	0	$	0
Currency	11			0			0			0			0		0
Total fair value hedges	7			(9		)	0			0			0		0
Cash flow hedges
Interest Rate	0			0			0			(1		)	0		(1		)
Currency/Interest Rate	0			30			127			0			0		403
Total cash flow hedges	0			30			127			(1		)	0		402
Net investment hedges
Currency	0			0			0			0			0		(3		)
Currency/Interest Rate	0			0			0			0			0		0
Total net investment hedges	0			0			0			0			0		(3		)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	3,380			0			0			0			0		0
Currency	68			0			(1		)	0			0		0
Currency/Interest Rate	(41		)	0			1			0			0		0
Credit	9			0			0			0			0		0
Equity	(523		)	0			0			0			0		0
Commodity	0			0			0			0			0		0
Embedded Derivatives	(1,948		)	0			0			0			0		0
Total non-qualifying hedges	945			0			0			0			0		0
Total	$	952		$	21		$	127		$	(1	)	$	0	$	399


	Six Months Ended June 30, 2016
	Realized Investment Gains (Losses)			Net Investment Income			Other Income			Interest Expense			Interest Credited to Policyholders’ Account Balances		AOCI(1)
	(in millions)
Derivatives Designated as Hedge Accounting Instruments:
Fair value hedges

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



Interest Rate	$	(18	)	$	(17	)	$	0		$	0		$	0	$	0
Currency	21			0			0			0			0		0
Total fair value hedges	3			(17		)	0			0			0		0
Cash flow hedges
Interest Rate	0			0			0			(3		)	0		(9		)
Currency/Interest Rate	0			58			118			0			0		142
Total cash flow hedges	0			58			118			(3		)	0		133
Net investment hedges
Currency	0			0			0			0			0		(10		)
Currency/Interest Rate	0			0			0			0			0		0
Total net investment hedges	0			0			0			0			0		(10		)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	7,873			0			0			0			0		0
Currency	567			0			(2		)	0			0		0
Currency/Interest Rate	(530		)	0			0			0			0		0
Credit	(7		)	0			0			0			0		0
Equity	(751		)	0			0			0			0		0
Commodity	(1		)	0			0			0			0		0
Embedded Derivatives	(4,267		)	0			0			0			0		0
Total non-qualifying hedges	2,884			0			(2		)	0			0		0
Total	$	2,887		$	41		$	116		$	(3	)	$	0	$	123



	Three Months Ended June 30, 2015
	Realized Investment Gains (Losses)			Net Investment Income			Other Income			Interest Expense			Interest Credited To Policyholders’ Account Balances		AOCI(1)
	(in millions)
Derivatives Designated as Hedge Accounting Instruments:
Fair value hedges
Interest Rate	$	26		$	(11	)	$	0		$	0		$	0	$	0
Currency	(10		)	0			0			0			0		0
Total fair value hedges	16			(11		)	0			0			0		0
Cash flow hedges
Interest Rate	0			0			0			(2		)	0		6
Currency/Interest Rate	0			16			(79		)	0			0		(308		)
Total cash flow hedges	0			16			(79		)	(2		)	0		(302		)
Net investment hedges
Currency	1			0			0			0			0		(3		)
Currency/Interest Rate	0			0			0			0			0		18
Total net investment hedges	1			0			0			0			0		15
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	(4,180		)	0			0			0			0		0
Currency	(339		)	0			1			0			0		0

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



Currency/Interest Rate	(28		)	0			0			0			0		0
Credit	7			0			0			0			0		0
Equity	(177		)	0			0			0			0		0
Commodity	(1		)	0			0			0			0		0
Embedded Derivatives	4,217			0			0			0			0		0
Total non-qualifying hedges	(501		)	0			1			0			0		0
Total	$	(484	)	$	5		$	(78	)	$	(2	)	$	0	$	(287	)


	Six Months Ended June 30, 2015
	Realized Investment Gains (Losses)			Net Investment Income			Other Income			Interest Expense			Interest Credited to Policyholders’ Account Balances		AOCI(1)
	(in millions)
Derivatives Designated as Hedge Accounting Instruments:
Fair value hedges
Interest Rate	$	21		$	(23	)	$	0		$	0		$	0	$	0
Currency	9			0			0			0			0		0
Total fair value hedges	30			(23		)	0			0			0		0
Cash flow hedges
Interest Rate	0			0			0			(3		)	0		1
Currency/Interest Rate	0			27			25			0			0		495
Total cash flow hedges	0			27			25			(3		)	0		496
Net investment hedges
Currency	(3		)	0			0			0			0		7
Currency/Interest Rate	0			0			0			0			0		26
Total net investment hedges	(3		)	0			0			0			0		33
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	(1,468		)	0			0			0			0		0
Currency	(228		)	0			1			0			0		0
Currency/Interest Rate	405			0			4			0			0		0
Credit	0			0			0			0			0		0
Equity	(657		)	0			0			0			0		0
Commodity	(1		)	0			0			0			0		0
Embedded Derivatives	3,181			0			0			0			0		0
Total non-qualifying hedges	1,232			0			5			0			0		0
Total	$	1,259		$	4		$	30		$	(3	)	$	0	$	529

__________


(1)	Amounts deferred in AOCI.

For the three and six months ended June 30, 2016 and 2015 , the ineffective portion of derivatives accounted for using hedge accounting was not material to the Company’s results of operations. Also, there were no material amounts reclassified into earnings relating to instances in which the Company discontinued cash flow hedge accounting because the forecasted transaction did not occur by the anticipated date or within the additional time period permitted by the authoritative guidance for the accounting for derivatives and hedging. In addition, there were no instances in which the Company discontinued fair value hedge accounting due to a hedged firm commitment no longer qualifying as a fair value hedge.

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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, 2015	$	1,165
Net deferred gains (losses) on cash flow hedges from January 1 to June 30, 2016	312
Amount reclassified into current period earnings	(179		)
Balance, June 30, 2016	$	1,298

Using June 30, 2016 values, it is estimated that a pre-tax gain of approximately $123 million will be reclassified from AOCI to earnings during the subsequent twelve months ending June 30, 2017 , offset by amounts pertaining to the hedged items. As of June 30, 2016 , the Company does not have any qualifying cash flow hedges of forecasted transactions other than those related to the variability of the payment or receipt of interest or foreign currency amounts on existing financial instruments. The maximum length of time for which these variable cash flows are hedged is 29 years . Income amounts deferred in AOCI as a result of cash flow hedges are included in “Net unrealized investment gains (losses)” in the Unaudited Interim Consolidated Statements of Comprehensive Income.

For effective net investment hedges, the amounts, before applicable taxes, recorded in the cumulative translation adjustment account within AOCI were $530 million and $541 million as of June 30, 2016 and December 31, 2015 , respectively.

Credit Derivatives

Credit derivatives, where the Company has written credit protection on a single name reference, had outstanding notional amounts of $110 million and $ 106 million as of June 30, 2016 and December 31, 2015 , respectively. These credit derivatives are reported at fair value as a liability of $1 million and $ 3 million as of June 30, 2016 and December 31, 2015 , respectively. As of June 30, 2016 , these credit derivatives’ notionals had the following NAIC ratings: $ 48 million in NAIC 1, $ 48 million in NAIC 2, $5 million in NAIC 3, $3 million in NAIC 5 and $6 million in NAIC 6. The Company has also written credit protection on certain index references with notional amounts of $1,050 million and $701 million , reported at fair value as a liability of $48 million and $24 million as of June 30, 2016 and December 31, 2015 , respectively. As of June 30, 2016 , these credit derivatives’ notionals had a NAIC rating of NAIC 1. 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. These single name credit derivatives have maturities of less than 5 years , while the credit protection on the index references have maturities of less than 43 years . This excludes a credit derivative related to surplus notes issued by a subsidiary of Prudential Insurance as further disclosed below.

The Company entered into a credit derivative that will require the Company to make certain payments in the event of deterioration in the value of the surplus notes issued by a subsidiary of Prudential Insurance. The notional amount of this credit derivative was $500 million and was reported at fair value as of June 30, 2016 and December 31, 2015 as a liability of $34 million and $15 million , respectively, and has a maturity date of December 14, 2047. No collateral was pledged in either period.

In addition to writing credit protection, the Company has purchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio. As of June 30, 2016 and December 31, 2015 , the Company had $363 million and $532 million of outstanding notional amounts reported at fair value as a liability of $9 million and $8 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. The Company manages credit risk by entering into derivative transactions with highly rated major international financial institutions and other creditworthy counterparties, and by obtaining collateral, such as cash and securities, when appropriate. Additionally, limits are set on single party credit exposures which are subject to periodic management review.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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

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

Certain of the Company’s derivative agreements with some of its counterparties contain credit-rating related triggers. If the Company’s credit rating were to fall below a certain level, the counterparties to the derivative instruments could request termination at the then fair value of the derivative or demand immediate full collateralization on derivative instruments in net liability positions. As of June 30, 2016 , there were no net liability derivative positions with counterparties with credit-risk-related contingent features. As such, the Company has not posted any collateral related to these positions and the Company would not be required to post any additional collateral to the counterparties if the credit-risk-related contingent features underlying these agreements had been triggered as of June 30, 2016 .

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

MATTERS

Commitments and Guarantees

Commercial Mortgage Loan Commitments



	June 30, 2016		December 31, 2015
	(in millions)
Total outstanding mortgage loan commitments	$	2,478	$	2,272
Portion of commitment where prearrangement to sell to investor exists	$	522	$	721

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, 2016		December 31, 2015
	(in millions)
Expected to be funded from the general account and other operations outside the separate accounts(1)	$	4,638	$	3,787
Expected to be funded from separate accounts	$	508	$	92

__________


(1)	Includes a remaining commitment of $132 million and $152 million at June 30, 2016 and December 31, 2015 , respectively, related to the Company’s agreement to co-invest with the Fosun Group (“Fosun”) in a private equity fund, managed by Fosun, for the Chinese marketplace.

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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Indemnification of Securities Lending Transactions



	June 30, 2016		December 31, 2015
	(in millions)
Indemnification provided to mutual fund, trust fund, and insurance company separate account clients for securities lending	$	8,926	$	15,084
Fair value of related collateral associated with above indemnifications	$	9,087	$	15,508
Accrued liability associated with guarantee	$	0	$	0

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

Credit Derivatives Written

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

Guarantees of Asset Values



	June 30, 2016		December 31, 2015
	(in millions)
Guaranteed value of third parties’ assets	$	74,661	$	72,585
Fair value of collateral supporting these assets	$	76,832	$	73,634
Asset associated with guarantee, carried at fair value	$	5	$	7

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, 2016		December 31, 2015
	(in millions)
Maximum exposure under indemnification agreements for mortgage loans serviced by the Company	$	1,280	$	1,200
First-loss exposure portion of above	$	395	$	371
Accrued liability associated with guarantees	$	12	$	14

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

As part of the commercial mortgage activities of the Company’s Asset Management segment, the Company provides commercial mortgage origination, underwriting and servicing for certain government sponsored entities, such as Fannie Mae and Freddie Mac. The Company has agreed to indemnify the government sponsored entities for a portion of the credit risk associated with certain of the mortgages it services through a delegated authority arrangement. Under these arrangements, the Company originates multi-family mortgages for sale to the government sponsored entities based on underwriting standards they specify, and makes payments to them for a specified percentage share of losses they incur on certain loans serviced by the Company. The Company’s percentage share of losses incurred generally varies from 2% to 20% of the loan balance, and is typically based on a first-loss exposure for a stated percentage of the loan balance, plus a shared exposure with the government sponsored entity for any losses in excess of the stated first-loss percentage, subject to a contractually specified maximum percentage. The Company services $10,597 million of mortgages subject to these loss-sharing arrangements as of June 30, 2016 , all of which are collateralized by first priority liens on the underlying multi-family residential properties. As of June 30, 2016 , these mortgages had a weighted-average debt service coverage ratio of 2.09 times and a weighted-average loan-to-value ratio of 60% . The Company had no losses related to indemnifications that were settled for the six months ended June 30, 2016 and 2015 , respectively.

Other Guarantees



	June 30, 2016		December 31, 2015
	(in millions)
Other guarantees where amount can be determined	$	333	$	324
Accrued liability for other guarantees and indemnifications	$	4	$	4

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 $326 million and $317 million as of June 30, 2016 and December 31, 2015 , 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’s internal supervisory and control functions review the quality of sales, marketing and other customer interface procedures and practices and may recommend modifications or enhancements. From time to time, this review process results in the discovery of product administration, servicing or other errors, including errors relating to the timing or amount of payments or contract values due to customers. In certain cases, if appropriate, the Company may offer customers remediation and may incur charges, including the cost of such remediation, administrative costs and regulatory fines.

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

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

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Litigation and Regulatory Matters

The Company is subject to legal and regulatory actions in the ordinary course of its businesses. Pending legal and regulatory actions include proceedings relating to aspects of the Company’s businesses and operations that are specific to it and proceedings that are typical of the businesses in which it operates, including in both cases businesses that have been either divested or placed in wind-down status. Some of these proceedings have been brought on behalf of various alleged classes of complainants. In certain of these matters, the plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary damages. The outcome of litigation or a regulatory matter, and the amount or range of potential loss at any particular time, is often inherently uncertain. The Company establishes accruals for litigation and regulatory matters when it is probable that a loss has been incurred and the amount of that loss can be reasonably estimated. For litigation and regulatory matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established but the matter, if material, is disclosed, including matters discussed below. The Company estimates that as of June 30, 2016 , 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.

The following discussion of litigations and regulatory matters provides an update of those matters discussed in Note 23 to the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 , and should be read in conjunction with the complete descriptions provided in the Form 10-K.

Rosen, v. PRIAC, et al.

In April 2016, Plaintiff filed an amended complaint: (i) removing Prudential Investment Management Services, LLC, as a defendant; (ii) withdrawing all claims concerning Stable Value Accounts; and (iii) adding as defendants the employer/sponsor of Plaintiff's retirement plan (Ferguson Enterprises, Inc.), and the investment advisor for Plaintiff’s retirement plan (Capfinancial Partners, LLC d/b/a Captrust Financial Advisors). In May 2016, the Muir v. PRIAC complaint was consolidated with this lawsuit. In June 2016, PRIAC, along with the other named defendants, filed motions to dismiss the amended complaint.

Muir v. PRIAC, et al.

In February 2016, a putative class action complaint entitled Randall C. Muir, on behalf of the Ferguson Enterprises, Inc. 401(k) Retirement Savings Plan and All Other Similarly Situated Plans v. PRIAC, Prudential Bank & Trust, FSB, and Prudential Investment Management Services, LLC, was filed in the United States District Court, District of Connecticut. The complaint: (1) seeks certification of a class of all Employee Retirement Income Security Act covered employee pension benefit plans with which Prudential has maintained a contractual relationship based on a group annuity contract or group funding agreement; and (2) alleges that the defendants breached their fiduciary obligations by accepting revenue sharing payments from investment vehicles in its separate accounts and/or by accepting excessive compensation by crediting rates on stable value accounts that are less than PRIAC’s internal rate of return. In April 2016, Plaintiff filed an unopposed motion to consolidate this lawsuit with the Rosen lawsuit. In May 2016, the Court granted the unopposed motion to consolidate the Muir and Rosen lawsuits. The Muir case has been removed from the Court’s docket.

Financial Disclosures Concerning Death Benefits and Unclaimed Property

City of Sterling Heights General Employees’ Retirement System v. Prudential Financial, Inc., et. al. —In April 2016, the parties entered into a proposed agreement to resolve the class action claims asserted in the amended complaint. Thereafter, plaintiffs filed a motion for an order preliminarily approving the settlement in accordance with the parties' April 2016 Stipulation of Settlement. In June 2016, the Court issued an order “preliminarily approving settlement and providing for notice.”

Residential Mortgage-Backed Securities Trustee

PICA et al. v. Bank of New York Mellon (“BONYM”) —In March 2016, the Court issued a decision involving BONYM’s motion to dismiss: (i) denying the motion to dismiss the Pooling and Servicing Agreement (“PSA”) trust claims for lack of jurisdiction; (ii) denying the motion regarding claims for violations of the Trust Indenture Act of 1939 and breach of contract; and (iii) granting the motion regarding claims for negligence and breach of fiduciary duty.

PICA et al. v. Citibank N.A. —In February 2016, Citibank filed a motion to dismiss the state court complaint.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

PICA et al. v. Deutsche Bank, et al. —In February 2016, the Company, together with other institutional investor plaintiffs, filed an amended complaint in federal court. In March 2016, the Company, together with other institutional investors, filed a complaint in California State Superior Court, captioned BlackRock Balanced Capital Portfolio (FI), et al. v. Deutsche Bank Trust Company Americas , asserting claims relating to the PSA trusts. In May 2016, the Company, together with other institutional investors, filed an amended class action complaint in California State Superior Court. In July 2016, defendant filed a motion to dismiss the amended complaint filed previously in federal court.

PICA et al. v. U.S. Bank National Association —In February 2016, the federal district court issued a decision involving U.S. Bank’s motion to dismiss: (1) upholding the breach of contract and Trust Indenture Act claims; and (2) dismissing the breach of fiduciary duty and extra-contractual claims.

PICA et al. v. Wells Fargo Bank, et al .—In February 2016, the Company, together with other institutional investor plaintiffs, filed an amended complaint in federal court. In March 2016, the Company, together with other institutional investors, filed a complaint in California State Superior Court, captioned BlackRock Balanced Capital Portfolio (FI), et al. v. Wells Fargo Bank, Nat’l Ass’n ., asserting claims relating to the PSA trusts. In May 2016, defendant filed a motion to dismiss or to stay the state court action. In July 2016, defendant filed a motion to dismiss the amended complaint filed previously in federal court.

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 May 2016, the Second Circuit Court of Appeals vacated the District Court’s dismissal of the Libor plaintiffs’ antitrust claims and remanded to the District Court the question of whether plaintiffs possess standing as "efficient enforcers" of applicable antitrust laws. In July 2016, defendants filed a joint motion to dismiss all antitrust claims based on lack of standing and lack of personal jurisdiction.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) addresses the consolidated financial condition of Prudential Financial, Inc. (“Prudential Financial”) as of June 30, 2016 , compared with December 31, 2015 , and its consolidated results of operations for the three and six months ended June 30, 2016 and 2015 . 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, 2015 , as well as the statements under “Forward-Looking Statements” and the Unaudited Interim Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Overview

Our principal operations are comprised of four divisions, which together encompass seven segments, and our Corporate and Other operations. The U.S. Retirement Solutions and Investment Management division consists of our Individual Annuities, Retirement and Asset Management segments. The U.S. Individual Life and Group Insurance division consists of our Individual Life and Group Insurance segments. The International Insurance division consists of our International Insurance segment. The Closed Block division consists of our Closed Block segment, which includes certain in force participating insurance and annuity products and corresponding assets that are used for the payment of benefits and policyholders’ dividends on these products (the “Closed Block”), as well as certain related assets and liabilities. The Closed Block segment is accounted for as a divested business that is reported separately from the divested businesses that are included in Corporate and Other operations. 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. See Note 6 to the Unaudited Interim Consolidated Financial Statements for additional information on the Closed Block.

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.

Executive Summary

Prudential Financial, a financial services leader with approximately $1.268 trillion of assets under management as of June 30, 2016 , has operations in the United States, Asia, Europe and Latin America. Through our subsidiaries and affiliates, we offer a wide array of financial products and services, including life insurance, annuities, retirement-related services, mutual funds, and investment management. We offer these products and services to individual and institutional customers through one of the largest distribution networks in the financial services industry.

Regulatory Developments

Capital and Prudential Standards

In June 2016, the Board of Governors of the Federal Reserve System (“FRB”) issued an advance notice of proposed rulemaking regarding approaches to regulatory capital requirements for institutions supervised by the FRB that are significantly engaged in insurance activities, including non-bank financial companies (“Designated Financial Companies”) supervised by the FRB under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), such as Prudential Financial. The advance notice invites comments on a “building block approach” and a “consolidated approach” for determining capital requirements, including which approach is appropriate for Designated Financial Companies. The building block approach would aggregate capital resources and requirements across different legal entities to calculate combined qualifying and required capital for the insurance group. The consolidated approach would categorize insurance liabilities, assets and certain other exposures into risk segments, determine consolidated required capital by applying risk factors to the amounts in each segment, define qualifying capital for the consolidated firm, and then compare consolidated qualifying capital to consolidated required capital. The building block approach and the consolidated approach as described in the advance notice of proposed rulemaking are high level concepts for capital standards, and will ultimately need to be defined in detail in any final standards. The comment period for the advance notice closes on September 16, 2016.

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Also in June 2016, the FRB issued proposed enhanced prudential standards for Designated Financial Companies relating to corporate governance, risk management, and liquidity risk management. The proposed corporate governance standards would require Designated Financial Companies to establish and maintain a risk committee of the board of directors and appoint a chief risk officer and chief actuary. The proposed risk management standards would require Designated Financial Companies to establish a risk management framework that includes policies, procedures, processes and systems. The proposed liquidity risk management standards would require periodic cash-flow projections, liquidity stress testing and maintenance of a liquidity buffer. The comment period for this proposal closes on August 17, 2016.

We cannot predict the timing of the issuance or content of final capital requirements or enhanced prudential standards or how the FRB ultimately will apply the final requirements to us. For additional information on FRB supervision, see “Business—Regulation—Dodd-Frank Wall Street Reform and Consumer Protection Act—Regulation as a Designated Financial Company” in our Annual Report on Form 10-K for the year ended December 31, 2015.

Principles Based Reserving

In June 2016, the National Association of Insurance Commissioners (the “NAIC”) adopted a recommendation that will activate a principles-based reserving approach for life insurance products. Principles-based reserving replaces the reserving methods for life insurance products for which the current formulaic basis for reserves may not fully reflect the risks or costs of the liability or obligations of the insurer. The principles-based reserving approach has a three year phase in period. At the Company's discretion, it may be applied to new individual life business beginning as early as January 1, 2017, and must be applied for all new individual life business issued January 1, 2020 and later. Principles-based reserving will not affect reserves for policies in force prior to January 1, 2017. The Company is currently assessing the impact of this new reserving approach on projected statutory reserve levels and product pricing for its portfolio of individual life product offerings.

Brexit

In June 2016, the United Kingdom approved a non-binding referendum to exit the European Union. The formal process for the United Kingdom to exit from the European Union would ultimately be triggered by the filing of a notice to withdraw and a negotiation between the United Kingdom and the European Union on the timing and terms of the exit. The outcome of the negotiations will determine the ultimate impact of the exit on our operations and investments in those jurisdictions and may lead to volatility in currency exchange rates and asset prices, as well as changes in regulation. See “General Account Investments—General Account Investments of PFI excluding Closed Block Division—Fixed Maturity Securities—Fixed Maturity Securities and Unrealized Gains (Losses) by Industry Category” for a discussion of our United Kingdom and European Union related investment exposures and see “Results of Operations by Segment—U.S. Retirement Solutions and Investment Management Division—Retirement—Operating Results” for a discussion of Retirement segment business denominated in pounds sterling.

DOL Fiduciary Rule

In April 2016, the U.S. Department of Labor (“DOL”) issued a final regulation accompanied by new class exemptions and amendments to long-standing exemptions from the prohibited transaction provisions under the Employee Retirement Income Security Act (“ERISA”) (collectively, the “Rules”), with implementation beginning in April 2017, and compliance with certain additional provisions required by January 2018. The Rules redefine who will be considered a “fiduciary” for purposes of transactions with qualified plans, plan participants and Individual Retirement Accounts (“IRAs”), and generally provide that advice to a plan participant or IRA owner will be treated as a fiduciary activity. We are analyzing the Rules’ impact on our operations and preparing to implement the necessary adjustments to come into alignment with the Rules’ requirements. Overall, we believe the Rules will result in increased compliance costs and may create increased exposure to legal claims under certain circumstances, including class actions. We believe the Rules will primarily impact our Individual Annuities business, our Prudential Advisors distribution system which we include in the results of Individual Life, and our Retirement and Asset Management segments. During the second quarter of 2016 several financial services industry groups initiated litigation challenging the Rules on both procedural and substantive grounds. The outcome of these litigations may alter whether and how some or all of the Rules are applied to our businesses. Significant aspects of the Rules and their impact on our businesses include the following.

•

Prudential Advisors: We are taking the steps we believe are required to comply with the new “best interest contract exemption” for investment advice concerning retirement plans and IRAs including recommendations to purchase products sold to IRAs, which constitutes a significant part of Prudential Advisors’ non-life insurance new business revenues. The Rules state that proprietary products may be sold to IRA owners if certain conditions are met, subject to significant new requirements for this type of sale, which we continue to review. The Rules will impose compliance and contract requirements and would give customers a new private right of action for breach of contract that in some circumstances may result in damages and liability under ERISA and the Internal Revenue Code for excise taxes, disgorgement of profit, and other possible remedies. The Rules are expected to lead to changes to compensation and benefit structures, and possibly to our product offerings.

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•

Annuities: Sales of variable annuities by our retail distributors will be subject to the best interest contract exemption described above, but certain fixed annuities will be subject to a separate exemption. As a result of the Rules, certain distributors may restrict the sale of annuities. In addition, we may need to alter our product design or offerings to meet the needs of distributors in complying with the Rules. We may also need to monitor or limit wholesaling and other sales support and customer service activities if we do not want to be considered a fiduciary under the Rules.

•

Retirement: Asset allocation tools included in our product offerings, which may include illustrations based on specific investments, are not expected to fall within the definition of acting as a fiduciary for plan clients provided we make certain changes to the tools we offer. IRA offerings and asset retention and consolidation activities may need to comply with the new best interest contract exemption, referred to above. In addition, changes to the relationship with sponsors and intermediaries for plans with less than $50 million in assets will be required if we do not want to be considered a fiduciary under the Rules. Historically, the substantial majority of our earnings in the Retirement business have not come from IRA offerings, asset retention and consolidation activities, and plans with less than $50 million in assets.


•	Asset Management: Distributors may have specific product and pricing needs, and may request tailoring product offerings or pricing to support their compliance with the Rules. We also may need to monitor or limit wholesaling and other sales support and customer service activities if we do not want to be considered a fiduciary under the Rules.

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, 2015.

Impact of a Low Interest Rate Environment

U.S. Operations excluding the Closed Block Division

Interest rates in the U.S. continue to remain lower than historical levels, despite the Federal Reserve Board’s decision to raise short-term interest rates in December 2015. Market conditions and events, including but not limited to the United Kingdom referendum to leave the European Union contrasted with strengthening economic growth and job creation, make uncertain the timing and amount of future monetary policy decisions by the Federal Reserve. Given this current low rate environment, our current reinvestment yields continue to be lower than the overall portfolio yield, primarily for our investments in fixed maturity securities and commercial mortgage loans and, as a result, our overall portfolio yields are expected to continue to decline.

For the general account supporting our U.S. Retirement Solutions and Investment Management division, our U.S. Individual Life and Group Insurance division and our Corporate and Other operations, we expect annual scheduled payments and prepayments to be approximately 10% of the fixed maturity security and commercial mortgage loan portfolios through 2017 . The general account for these operations has approximately $182 billion of such assets (based on net carrying value) as of June 30, 2016 . As these assets mature, the current average portfolio yield for fixed maturities and commercial mortgage loans of approximately 4.5%, as of June 30, 2016 , is expected to decline due to reinvesting in a lower interest rate environment. Included in the $182 billion of fixed maturity securities and commercial mortgage loans are approximately $89 billion that are subject to call or redemption features at the issuer’s option and have a weighted average interest rate of approximately 5%.

As of June 30, 2016 , approximately 70% of these assets contain provisions for prepayment premiums. The reinvestment of scheduled payments and prepayments at rates below the current portfolio yield, including in some cases at rates below those guaranteed under our insurance contracts, will impact future operating results to the extent we do not, or are unable to, reduce crediting rates on in force blocks of business, or effectively utilize other asset/liability management strategies described below, in order to maintain current net interest margins.

As of June 30, 2016 , these operations have approximately $178 billion of insurance liabilities and policyholder account balances. Of this amount, approximately $53 billion represents 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, 2016 , 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		$	0.7		$	0.4		$	0.0		$	0.0		$	1.7
1.00% - 1.99%	1.4			10.9			4.2			1.1			0.1			17.7
2.00% - 2.99%	2.3			0.3			1.8			0.9			0.1			5.4
3.00% - 4.00%	26.7			0.8			0.2			0.1			0.0			27.8
Greater than 4.00%	0.7			0.0			0.0			0.0			0.0			0.7
Total	$	31.7		$	12.7		$	6.6		$	2.1		$	0.2		$	53.3
Percentage of total	59		%	24		%	12		%	4		%	1		%	100		%

Also included in the table above is approximately $1.3 billion related to contracts that impose a market value adjustment if the invested amount is not held to maturity.

These operations also have approximately $15 billion of insurance liabilities and policyholder account balances representing participating contracts for which the investment income risk is expected to ultimately accrue to contractholders. The crediting rates for these contracts are periodically adjusted based on the yield earned on the related assets. The remaining $110 billion of the $178 billion of insurance liabilities and policyholder account balances in these operations represents long duration products such as group annuities, structured settlements and other insurance products that have fixed and guaranteed terms, for which underlying assets may have to be reinvested at interest rates that are lower than portfolio rates. We seek to mitigate the impact of a prolonged low interest rate environment on these contracts through asset/liability management, as discussed further below.

Assuming a hypothetical scenario where the average 10-year U.S. Treasury rate is 1.50% for the period from July 1, 2016 through December 31, 2017, and credit spreads remain unchanged from levels as of June 30, 2016 , we estimate that the unfavorable impact to net interest margins included in pre-tax adjusted operating income of reinvesting in such an environment, compared to reinvesting at current average portfolio yields, would be approximately $8 million in 2016 and $64 million in 2017. This impact is most significant in the Retirement, Individual Life and Individual Annuities segments. This hypothetical scenario only reflects the impact related to the approximately $53 billion of contracts shown in the table above, and does not reflect: any benefit from potential changes to the crediting rates on the corresponding contractholder liabilities where the Company has the contractual ability to do so, or other potential mitigants such as changes in investment mix that we may implement as funds are reinvested; any impact related to assets that do not directly support our liabilities; any impact from other factors, including but not limited to, new business, contractholder behavior, changes in competitive conditions, and changes in capital markets; or any impact from other factors described below.

In order to mitigate the unfavorable impact that the current interest rate environment has on our net interest margins, we employ a proactive asset/liability management program, which includes strategic asset allocation and derivative strategies within a disciplined risk management framework. These strategies seek to match the characteristics of our products, and to closely approximate the interest rate sensitivity of the assets with the estimated interest rate sensitivity of the product liabilities. Our asset/liability management program also helps manage duration gaps, currency and other risks between assets and liabilities through the use of derivatives. We adjust this dynamic process as products change, as customer behavior changes and as changes in the market environment occur. As a result, our asset/liability management process has permitted us to manage 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 $ 61 billion of general account assets in the Closed Block division support obligations and liabilities relating to the Closed Block policies only. See Note 6 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 largest international insurance operations are generally lower than the current portfolio yield supporting these blocks of business. Recently, the Bank of Japan has been pursuing further expansionary monetary policy resulting in even lower, and at times negative yields for both 10-year and 20-year 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 that carry positive yields. Additionally, our diverse product portfolio in terms of currency mix and premium payment mode allows us to further mitigate the negative impact from this low interest rate environment. We regularly examine our yen-based 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.

As of June 30, 2016 , our international insurance operations have $138 billion of insurance liabilities and policyholder account balances. Included in the $138 billion is approximately $22 billion related to contracts that impose a market value adjustment if the invested amount is not held to maturity, and $9 billion of insurance liabilities and policyholder account balances with crediting rates that may be adjusted over the life of the contract, subject to guaranteed minimums. However, for these contracts, most of the current crediting rates are at or near contractual minimums. Although we have the ability to lower crediting rates in some cases for those contracts that are above guaranteed minimum crediting rates, the majority of this business has interest crediting rates that are determined by formula. The remaining $107 billion of insurance liabilities and policyholder account balances are predominantly comprised of long-duration insurance products that have fixed and guaranteed terms, for which underlying assets may have to be reinvested at interest rates that are lower than portfolio rates.

Based on current sales and premium assumptions, and assuming a hypothetical scenario within our Japanese and Korean operations where 2016 new money yields were 25 basis points lower than actual 2016 new money yields, we estimate that the unfavorable impact to net interest margins included in 2016 pre-tax adjusted operating income would have been in a range of approximately $10 to $15 million. This hypothetical scenario represents 2016 annualized investment of renewal premiums and reinvestment of investment income and proceeds from disposition of investments at 25 basis points lower than actual 2016 new money yields. This hypothetical scenario excludes first-year single premium and multi-currency fixed annuity cash flows, any 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.

Variable Annuities Recapture

Effective April 1, 2016, we recaptured the risks related to our variable annuities living benefit riders and certain retirement products that were previously reinsured to our captive reinsurance company, Pruco Reinsurance, Ltd. (“Pruco Re”). These risks were recaptured by the originating insurance entities, thereby combining those risks with their base contracts. In addition, variable annuity contracts issued by Pruco Life Insurance Company (“Pruco Life”), a subsidiary of Prudential Insurance, were reinsured to our subsidiary, Prudential Annuities Life Assurance Corporation (“PALAC”) while variable annuity contracts issued by Pruco Life Insurance Company of New Jersey (“PLNJ”), a subsidiary of Pruco Life, were reinsured to Prudential Insurance. These series of transactions are collectively referred to as the “Variable Annuities Recapture.”

The Variable Annuities Recapture allows us to manage the capital and liquidity risks of these products more efficiently by aggregating both the risks and the assets supporting these risks in the same entities. The Variable Annuities Recapture resulted in an increase of highly liquid assets at Prudential Financial of approximately $1.0 billion, due to payments received from subsidiaries in the form of dividends, returns of capital, and repayments under affiliate loan agreements, net of capital contributions, and is expected to reduce future capital volatility associated with our variable annuities business. Additionally, in connection with this transaction, we evaluated the overall risk management strategy associated with our Individual Annuities segment, including potential future enhancements to the living benefit hedging program. During the third quarter of 2016, we began modifying our hedging strategy in order to more efficiently manage capital and liquidity associated with these products while continuing to mitigate fluctuations in net income due to capital market movements, within established tolerances. These modifications include utilizing a combination of traditional fixed income instruments and derivatives to manage the associated risks. For more information on the hedging strategy in place during the three and six months ended June 30, 2016, and the results of that hedging strategy, see

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“Results of Operations by Segment—U.S. Retirement Solutions and Investment Management Division—Individual Annuities—Variable Annuity Hedging Program Results.”

Results of Operations

Net income attributable to Prudential Financial, Inc. for the three and six months ended June 30, 2016 was $921 million and $2,257 million , respectively, compared to $1,406 million and $3,442 million , respectively, for the three and six months ended June 30, 2015.

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

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, and unearned revenue reserves. The assumptions reviewed include, but are not necessarily limited to, inputs such as mortality, 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 of our annual reviews and updates of assumptions and other refinements to our adjusted operating income by each segment and Corporate and Other operations and a reconciliation of these impacts to the impacts within income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures.



	Three and Six Months Ended June 30,
	2016			2015
	(in millions)
Favorable (unfavorable) impact to adjusted operating income before income taxes:
Individual Annuities	$	4		$	31
Retirement	6			0
Total U.S. Retirement Solutions and Investment Management division	10			31
Individual Life	(420		)	68
Group Insurance	41			28
Total U.S. Individual Life and Group Insurance division	(379		)	96
International Insurance	(72		)	(21		)
Total International Insurance division	(72		)	(21		)
Corporate and Other operations	(3		)	11
Total Corporate and Other	(3		)	11
Total favorable (unfavorable) impact to adjusted operating income before income taxes	(444		)	117
Reconciling items:
Realized investment gains (losses), net, and related adjustments	1,607			(70		)
Charges related to realized investment gains (losses), net	(573		)	43
Divested businesses:
Closed Block division	(3		)	(2		)
Other divested businesses	(42		)	(49		)
Favorable (unfavorable) impact to consolidated income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures	$	545		$	39

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

Shown below are the contributions of each segment and Corporate and Other operations to our adjusted operating income for the periods indicated and a reconciliation of adjusted operating income of our segments and Corporate and Other operations to income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures.

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	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(in millions)
Adjusted operating income before income taxes:
Individual Annuities	$	427		$	548		$	755		$	1,077
Retirement	236			237			455			521
Asset Management	207			196			372			401
Total U.S. Retirement Solutions and Investment Management division	870			981			1,582			1,999
Individual Life	(290		)	237			(170		)	353
Group Insurance	89			75			115			105
Total U.S. Individual Life and Group Insurance division	(201		)	312			(55		)	458
International Insurance	803			842			1,582			1,676
Total International Insurance division	803			842			1,582			1,676
Corporate and Other operations	(415		)	(294		)	(727		)	(547		)
Total Corporate and Other	(415		)	(294		)	(727		)	(547		)
Total adjusted operating income before income taxes	1,057			1,841			2,382			3,586
Reconciling items:
Realized investment gains (losses), net, and related adjustments(1)	802			(60		)	2,220			1,602
Charges related to realized investment gains (losses), net(2)	(442		)	346			(1,522		)	(265		)
Investment gains (losses) on trading account assets supporting insurance liabilities, net(3)	108			(220		)	324			(137		)
Change in experience-rated contractholder liabilities due to asset value changes(4)	(133		)	234			(263		)	37
Divested businesses(5):
Closed Block division	(32		)	52			(105		)	30
Other divested businesses	(11		)	(109		)	20			(34		)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(6)	(8		)	45			17			58
Consolidated income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures	$	1,341		$	2,129		$	3,073		$	4,877

__________


(1)	Represents “Realized investment gains (losses), net,” and related adjustments. See “ — Realized Investment Gains (Losses)” and Note 11 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 deferred policy acquisition costs (“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 net investment gains (losses) on trading account assets supporting insurance liabilities. See “—Experience-Rated Contractholder Liabilities, Trading Account Assets Supporting Insurance Liabilities and Other Related Investments.”


(4)	Represents changes in contractholder liabilities due to asset value changes in the pool of investments supporting these experience-rated contracts. See “—Experience-Rated Contractholder Liabilities, Trading Account Assets Supporting Insurance Liabilities and Other Related Investments.”


(5)	See “—Divested Businesses.”

(6)

Equity in earnings of operating joint ventures are included in adjusted operating income but excluded from income from continuing operations before income taxes and equity in earnings of operating joint ventures as they are reflected on 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 from continuing operations before taxes and equity earnings of operating joint ventures as they are reflected on a U.S. GAAP basis as a separate line in our Unaudited Interim Consolidated Statements of Operations. Earnings attributable to noncontrolling interests represent the portion of earnings from consolidated entities that relates to the equity interests of minority investors.

Results for the periods presented above reflect the following:

Individual Annuities. Segment results for both the second quarter and first six months of 2016 decreased in comparison to the prior year periods, primarily reflecting unfavorable comparative impacts on reserves and the amortization of DAC and other costs from changes in the estimated profitability of the business, including those resulting from our annual reviews and updates of assumptions. Also contributing to the decreases for both periods was lower net asset-based fee income.

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Retirement. Segment results for the second quarter of 2016 decreased slightly in comparison to the prior year period, primarily reflecting lower fee income and a lower contribution from positive case experience, partially offset by higher net investment spread results and favorable comparative net impacts from our annual reviews and updates of assumptions. Segment results for the first six months of 2016 decreased in comparison to the prior year period, primarily reflecting lower net investment spread results, a lower contribution from positive case experience and lower fee income, partially offset by favorable comparative net impacts from our annual reviews and updates of assumptions.

Asset Management. Segment results for the second quarter of 2016 increased in comparison to the prior year period, primarily reflecting higher other related revenues, net of associated expenses. Results for the first six months of 2016 decreased in comparison to the prior year period, primarily reflecting lower other related revenues, net of associated expenses.

Individual Life. Segment results for both the second quarter and the first six months of 2016 decreased in comparison to the prior year periods, primarily reflecting unfavorable comparative net impacts from our annual reviews and updates of assumptions and other refinements, as well as less favorable mortality experience, net of reinsurance, partially offset by higher contributions from investment results.

Group Insurance. Segment results for both the second quarter and first six months of 2016 increased in comparison to the prior year periods, primarily reflecting favorable comparative net impacts from our annual reviews and updates of assumptions. Excluding these impacts, segment results for the second quarter of 2016 increased slightly compared to the prior year period, as more favorable underwriting results in our group disability business were mostly offset by less favorable underwriting results in our group life business. Segment results for the first six months of 2016 decreased slightly in comparison to the prior year period primarily reflecting a lower contribution from net investment spread results and higher expenses, partially offset by more net favorable comparative underwriting results.

International Insurance . Segment results for both the second quarter and first six months of 2016 decreased in comparison to the prior year periods, primarily reflecting unfavorable comparative net impacts from foreign currency exchange rates and unfavorable net impacts from our annual reviews and updates of assumptions and other refinements. Excluding these items, segment results increased from the prior periods as both current periods benefited from business growth, inclusive of contributions from the Company’s recent indirect investment in AFP Habitat in Chile, and more favorable mortality experience. Net investment results were relatively flat for the quarterly comparison and unfavorable for the six month comparison due to lower contributions from both non-coupon investments and investment spreads.

Corporate and Other operations . The results for both the second quarter and first six months of 2016 in comparison to the prior year periods reflected increased losses, driven by higher levels of corporate expenses including the early extinguishment of certain debt, lower net investment income and lower income from our qualified pension plan, partially offset by lower capital debt interest expense.

Closed Block Division. The Closed Block division results for the second quarter of 2016 decreased in comparison to the prior year period, primarily driven by an increase in the policyholder dividend obligation, partially offset by an increase in net realized investment gains and an increase in net insurance results. The Closed Block division results for the first six months of 2016 decreased in comparison to the prior year period, primarily driven by a decrease in net realized investment gains and lower net investment income, partially offset by a decrease in the policyholder dividend obligation.

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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,
	2016		2015		2016		2015
	(in millions)
Revenues	$	14,439	$	13,712	$	28,768	$	29,264
Benefits and expenses	13,098		11,583		25,695		24,387
Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures	1,341		2,129		3,073		4,877
Income tax expense (benefit)	431		679		799		1,378
Income (loss) from continuing operations before equity in earnings of operating joint ventures	910		1,450		2,274		3,499
Equity in earnings of operating joint ventures, net of taxes	15		9		20		6
Income (loss) from continuing operations	925		1,459		2,294		3,505
Income (loss) from discontinued operations, net of taxes	0		0		0		0
Net income (loss)	925		1,459		2,294		3,505
Less: Income attributable to noncontrolling interests	4		53		37		63
Net income (loss) attributable to Prudential Financial, Inc.	$	921	$	1,406	$	2,257	$	3,442

Results of Operations

Three Month Comparison. The decrease in “Income (loss) from continuing operations” for the second quarter of 2016 compared to the second quarter of 2015 reflected the following notable items:


•	$1,670 million unfavorable variance, on a pre-tax basis, reflecting our decision to manage a portion of our interest rate risk through our Capital Protection Framework (see “—Results of Operations by Segment—Corporate and Other—Capital Protection Framework” for additional information); and

•

$1,029 million unfavorable variance, on a pre-tax basis, from adjustments to DAC and other costs as well as reserves, reflecting updates to the estimated profitability of our businesses, including 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. Retirement Solutions and Investment Management Division—Individual Annuities” for additional information);

Partially offsetting these decreases in “Income (loss) from continuing operations” were the following items:


•	$1,652 million higher net pre-tax realized gains for PFI excluding the Closed Block division and the impact of the hedging program associated with certain variable annuities discussed below (see “—Realized Investment Gains (Losses)” for additional information); and

•

$916 million favorable 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 and other products (see “—Results of Operations by Segment—U.S. Retirement Solutions and Investment Management Division—Individual Annuities—Variable Annuity Hedging Program Results” for additional information).

Six Month Comparison. The decrease in “Income (loss) from continuing operations” for the first six months of 2016 compared to the first six months of 2015 reflected the following notable items:


•	$2,262 million unfavorable variance, on a pre-tax basis, reflecting our decision to manage a portion of our interest rate risk through our Capital Protection Framework (see “—Results of Operations by Segment—Corporate and Other—Capital Protection Framework” for additional information); and

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•

$1,188 million unfavorable variance, on a pre-tax basis, from adjustments to DAC and other costs as well as reserves, reflecting updates to the estimated profitability of our businesses, including 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. Retirement Solutions and Investment Management Division—Individual Annuities” for additional information);

Partially offsetting these decreases in “Income (loss) from continuing operations” were the following items:

•

$1,417 million favorable 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 and other products (see “—Results of Operations by Segment—U.S. Retirement Solutions and Investment Management Division—Individual Annuities—Variable Annuity Hedging Program Results” for additional information); and


•	$1,265 million higher net pre-tax realized gains for PFI excluding the Closed Block division and the impact of the hedging program associated with certain variable annuities discussed above (see “—Realized Investment Gains (Losses)” for additional information).

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) from continuing operations before income taxes and equity in earnings of operating joint ventures” or “Net income (loss)” as determined in accordance with accounting principles generally accepted in the United States of America (“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.

See Note 11 to the Unaudited Interim Consolidated Financial Statements for further information on the presentation of segment results and our definition of adjusted operating income.

Annualized New Business Premiums. In managing certain of our businesses, we analyze annualized new business premiums, which do not correspond to revenues under U.S. GAAP. Annualized new business premiums measure the current sales performance of the business, while revenues primarily reflect the renewal persistency of policies written in prior years and net investment income, in addition to current sales. Annualized new business premiums include 10% of first year premiums or deposits from single pay products. No other adjustments are made for limited pay contracts.

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 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 Asset Management business, we analyze assets under management, which do not correspond to U.S. GAAP assets, because the principal source of revenues is fees based on assets under management. Assets under management represents the fair market value or account value of assets which we manage directly for institutional clients, retail clients, and for our general account, as well as assets invested in our products that are managed by third-party managers.

Account Values. 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.

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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, on an ongoing basis, reviews estimates and assumptions used in the preparation of financial statements. If management determines that modifications in assumptions and estimates are appropriate given current facts and circumstances, the Company’s results of operations and financial position as reported in the Unaudited Interim Consolidated Financial Statements could change significantly.

Management believes the accounting policies relating to the following areas are most dependent on the application of estimates and assumptions and require management’s most difficult, subjective, or complex judgments:


•	DAC and other costs, including deferred sales inducements (“DSI”) and value of business acquired (“VOBA”);


•	Goodwill;


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


•	Policyholder liabilities;


•	Pension and other postretirement benefits;


•	Taxes on income; and


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

DAC and Other Costs

The near-term future equity rate of return assumption used in evaluating DAC and other costs for our domestic variable annuity and variable life insurance products 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%, we use our maximum future rate of return. As of June 30, 2016 , our variable annuities and variable life insurance businesses assume an 8.0% long-term equity expected rate of return and a 6.3% near-term mean reversion equity rate of return.

The weighted average rate of return assumptions consider many factors specific to each business, including asset durations, asset allocations and other factors. We generally update the near-term equity rates of return and our estimate of total gross profits each quarter to reflect the result of the reversion to the mean approach. We generally update the future interest rates used to project fixed income returns annually and in any quarter when interest rates vary significantly from these assumptions. These market performance related adjustments to our estimate of total gross profits result in cumulative adjustments to prior amortization, reflecting the application of the new required rate of amortization to all prior periods’ gross profits.

For additional information on our policies for DAC and other costs and for the remaining critical accounting estimates listed above, see our Annual Report on Form 10-K for the year ended December 31, 2015 , under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Accounting Policies & Pronouncements—Application of Critical Accounting Estimates.”

Policyholder Liabilities

Profits Followed by Losses

In certain instances the policyholder liability for a particular line of business may not be deficient in the aggregate to trigger loss recognition, but the pattern of earnings may be such that profits are expected to be recognized in earlier years followed by losses in later years. In these situations, accounting standards require that an additional liability (Profits Followed by Losses or “PFL” liability) be recognized by an amount necessary to sufficiently offset the losses that would be recognized in later years. As a result, in connection with the second quarter assumption updates we recorded a charge to earnings of $444 million to recognize a PFL liability based on our current estimate of the present value of the amount necessary to offset losses anticipated in future periods. Because the liability is measured on a discounted basis, there will also be accretion into future earnings through an interest charge, and the liability will ultimately be released into earnings as an offset to future losses. This PFL liability is predominantly associated with certain universal life contracts that measure GAAP reserves using a dynamic approach and accordingly, will be updated each quarter using current inforce and market data and as part of the annual assumption update.

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Adoption of New Accounting Pronouncements

See Note 2 to our Unaudited Interim Consolidated Financial Statements for a discussion of newly adopted accounting pronouncements.

Results of Operations by Segment

U.S. Retirement Solutions and Investment Management Division

Individual Annuities

The Individual Annuities segment offers both variable and fixed annuities that may include guaranteed living or death benefits. It also offers fixed annuities that provide a guarantee of principal and interest credited at rates we determine, subject to certain contractual minimums. We derive our revenue mainly from fee income generated on variable annuity account values, as the investment return on the contractholder funds is generally attributed directly to the contractholder. We also earn investment income on fixed annuity account values and certain other management fees. Our expenses primarily consist of interest credited and other benefits to contractholders, amortization of DAC and other costs, non-deferred expenses related to the selling and servicing of the various products we offer, costs of hedging certain risks associated with these products, changes in the reserves for benefit guarantees and other general business expenses. These drivers of our business results are generally included in adjusted operating income, with exceptions related to certain guarantees, as discussed below.

The U.S. GAAP accounting and our adjusted operating income treatment for our guarantees differ depending upon the specific feature. The reserves for our guaranteed minimum death benefit (“GMDB”) and guaranteed minimum income benefit (“GMIB”) features are calculated based on our best estimate of actuarial and capital markets return assumptions. The risks associated with these benefit features are retained and results are included in adjusted operating income. In contrast, certain of our guaranteed living benefit features are accounted for as embedded derivatives and reported at fair value. Under U.S. GAAP, the fair values of these benefit features are based on assumptions a market participant would use in valuing these embedded derivatives. We hedge or limit our exposure to certain risks associated with these features through our living benefits hedging program and product design features. Adjusted operating income, as discussed below in “—Adjusted Operating Income” and “—Revenues, Benefits and Expenses,” excludes amounts related to changes in the market value of the embedded derivatives and related hedge positions, and the related impact to amortization of DAC and other costs. The items excluded from adjusted operating income are discussed below in “—Variable Annuity Hedging Program Results.”

Account Values

Account values are a significant driver of our operating results. Since most fees are determined by the level of separate account assets, fee income varies according to the level of account values. Additionally, our fee income generally drives other items such as our pattern of amortization of DAC and other costs. Account values are driven by net flows from new business sales, surrenders, withdrawals and benefit payments, the impact of market value changes, which can be either positive or negative, and policy charges. The annuity industry competitive landscape, which has 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,
	2016			2015			2016			2015			2016
	(in millions)
Total Individual Annuities(1):
Beginning total account value	$	152,733		$	161,127		$	152,945		$	158,664		$	158,976
Sales	2,281			2,341			4,298			4,568			8,510
Surrenders and withdrawals	(1,940		)	(2,203		)	(3,719		)	(4,399		)	(7,735		)
Net sales	341			138			579			169			775
Benefit payments	(489		)	(489		)	(932		)	(977		)	(1,865		)
Net flows	(148		)	(351		)	(353		)	(808		)	(1,090		)
Change in market value, interest credited and other activity	2,978			(889		)	3,828			2,923			320
Policy charges	(886		)	(911		)	(1,743		)	(1,803		)	(3,529		)
Ending total account value	$	154,677		$	158,976		$	154,677		$	158,976		$	154,677

__________

(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 $151.2 billion and $155.4 billion as of June 30, 2016 and 2015 , respectively. Fixed annuity account values were $3.5 billion and $3.6 billion as of June 30, 2016 and 2015 , respectively.

The decrease in account values as of June 30, 2016, compared to June 30, 2015, was largely driven by contract charges on contractholder accounts and benefit payments. These negative impacts were partially offset by positive net sales and favorable changes in the market value of contractholder funds over the last twelve months.

The increase in net sales for the three and six months ended June 30, 2016, compared to the prior year periods, respectively, reflects lower surrenders and withdrawals partially offset by lower gross sales. The decline in gross sales for both periods was largely driven by decreased sales of our Prudential Premier ^® Retirement Variable Annuity with “highest daily” benefit riders and Prudential Premier ^® Investment Variable Annuity (“PPI”). The declines were partially offset by an increase in sales of our Prudential Defined Income Variable Annuity (“PDI”) product as a result of pricing actions and product enhancements .

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,
	2016		2015			2016			2015
	(in millions)
Operating results:
Revenues	$	1,143	$	1,200		$	2,252		$	2,387
Benefits and expenses	716		652			1,497			1,310
Adjusted operating income	427		548			755			1,077
Realized investment gains (losses), net, and related adjustments	833		(409		)	3,192			1,000
Related charges	50		128			(876		)	(325		)
Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures	$	1,310	$	267		$	3,071		$	1,752

Adjusted Operating Income

Three Month Comparison. Adjusted operating income decreased $121 million. Excluding the impacts of changes in the estimated profitability of the business, discussed below, adjusted operating income decreased $48 million. The decrease was primarily driven by lower asset-based fee income, net of a related decrease in asset-based commissions, due to a decline in average variable annuity account values.

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The impacts of changes in the estimated profitability of the business include adjustments to the amortization of DAC and other costs and to the reserves for the GMDB and GMIB features of our variable annuity products. These adjustments resulted in a net benefit of $52 million and $125 million in the second quarter of 2016 and 2015, respectively. The net benefit in the second quarter of 2016 primarily reflected the net impact of equity market performance on contractholder accounts relative to our assumptions, as well as the impact of favorable fund performance relative to indices. The remaining net benefit included a $4 million net benefit resulting from our annual review and update of assumptions and other refinements. The net benefit in the second quarter of 2015 primarily reflected the impact of expected favorable future equity market performance and higher expected rates of return on fixed income investments within contractholder accounts and on future expected claims relative to our assumptions. The remaining net benefit included a $31 million net benefit resulting from our annual review and update of assumptions.

Six Month Comparison. Adjusted operating income decreased $322 million. Excluding the impacts of changes in the estimated profitability of the business, discussed below, adjusted operating income decreased $90 million. The decrease was primarily driven by lower asset-based fee income, net of a related decrease in asset-based commissions, due to a decline in average variable annuity account values.

Adjustments to the amortization of DAC and other costs and to the reserves for the GMDB and GMIB features of our variable annuity products resulted in a net charge of $1 million and a net benefit of $231 million in the first six months of 2016 and 2015, respectively. The net charge in the first six months of 2016 primarily reflected the impact of lower reinvestment rates in the general account, partially offset by the net favorable impact of equity market performance on contractholder accounts relative to our assumptions and the net benefit resulting from our annual review and update of assumptions and other refinements, as discussed above. The net benefit in the first six months of 2015 primarily reflected the impact of favorable equity market performance and the net benefit resulting from our annual review and update of assumptions, as discussed above.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues, as shown in the table above under “—Operating Results,” decreased $57 million, primarily driven by a decrease in policy charges and fee income, asset management and service fees and other income, due to a decline in average account values. Partially offsetting this decrease was an increase in premiums reflecting an increase in annuitizations of our variable annuity contracts, which was offset by higher policyholders’ benefits, including changes in reserves, as discussed below.

Benefits and expenses, as shown in the table above under “—Operating Results,” increased $64 million. Excluding the $73 million net increase related to the impacts of certain changes in our estimated profitability of the business discussed above, benefits and expenses decreased $9 million. General and administrative expenses, net of capitalization, decreased $11 million driven by lower asset-based commissions and lower asset management costs due to lower average account values, partially offset by higher operating expenses. Interest credited to policyholders’ account balances decreased $9 million driven by lower average account values. Amortization of DAC decreased $9 million primarily driven by lower fee income, as discussed above. Partially offsetting these decreases was a $16 million increase in policyholders’ benefits, including changes in reserves, primarily reflecting an increase in annuitizations of our variable annuity contracts with offsets in premiums, as discussed above.

Six Month Comparison. Revenues decreased $135 million, primarily driven by a decrease in policy charges and fee income, asset management and service fees and other income, due to a decline in average account values. Partially offsetting this decrease was an increase in premiums reflecting an increase in annuitizations of our variable annuity contracts, which was offset by higher policyholders’ benefits, including changes in reserves, as discussed below.

Benefits and expenses increased $187 million. Excluding the $232 million net increase related to the impacts of certain changes in our estimated profitability of the business discussed above, benefits and expenses decreased $45 million. General and administrative expenses, net of capitalization, decreased $21 million driven by lower asset-based commissions and lower asset management costs due to lower average account values, partially offset by higher operating expenses. Amortization of DAC and Interest credited to policyholders’ account balances decreased $20 million and $16 million, respectively, driven by lower fee income, as discussed above. Partially offsetting these decreases was a $15 million increase in policyholders’ benefits, including changes in reserves, primarily reflecting an increase in annuitizations of our variable annuity contracts with offsets in premiums, as discussed above.

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Variable Annuity Risks and Risk Mitigants

The primary risk exposures of our variable annuity contracts relate to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including capital markets assumptions such as equity market returns, interest rates and market volatility, along with actuarial assumptions such as contractholder mortality, the timing and amount of annuitization and withdrawals, and contract lapses. For our actuarial assumptions, we have retained the majority of the risk that actual experience will differ from the assumptions used in the original pricing of these products. For our capital markets assumptions, we hedge or limit our exposure to certain risks created by capital markets fluctuations through a combination of product design features, such as an automatic rebalancing feature, also referred to as an asset transfer feature, and inclusion of certain living benefits in our hedging program. In addition, we consider external reinsurance a form of risk mitigation. Effective April 1, 2015, we entered into an agreement with Union Hamilton Reinsurance, Ltd. (“Union Hamilton”), an external counterparty, to reinsure approximately 50% of the Highest Daily Lifetime Income (“HDI”) v.3.0 business. HDI v.3.0 is the newest version of our “highest daily” living benefits guarantee that is available with our Prudential Premier ® Retirement Variable Annuity. This reinsurance agreement covers most new HDI v.3.0 variable annuity business issued between April 1, 2015 and December 31, 2016 on a quota share basis, until Union Hamilton’s quota share reaches $5 billion of new rider premiums through December 31, 2016. From April 1, 2015 through June 30, 2016, approximately $2.3 billion of new rider premiums were ceded to Union Hamilton under this agreement.

Our automatic rebalancing feature occurs at the contract level, and transfers assets between certain variable investment sub-accounts selected by the annuity contractholder and, depending on the benefit feature, a fixed-rate account in the general account or a bond fund sub-account within the separate accounts. The automatic rebalancing feature associated with currently-sold highest daily benefit products uses a designated bond fund sub-account within the separate accounts. The transfers are based on a static mathematical formula used with the particular benefit which considers a number of factors, including, but not limited to, the impact of investment performance on the contractholder’s total account value. The objective of the automatic rebalancing 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 allocation to our general account for certain of our products. We have also introduced products that diversify our risk profile and have incorporated provisions in product design allowing frequent revisions of key pricing elements for certain products. In addition, 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.

We use our hedging program to help manage certain risks associated with certain of our guarantees. The hedging program’s objective is to help mitigate fluctuations in net income and capital from living benefit liabilities due to capital market movements, within established tolerances. Through our hedging program, we enter into derivative positions that seek to offset the net change in our hedge target, discussed further below. In addition to mitigating fluctuations of the living benefit liabilities due to capital market movements, the hedging program is also focused on a long-term goal of accumulating assets that could be used to pay claims under these benefits irrespective of market path. For additional information regarding our current hedging program, see “—Variable Annuities Hedging Program Results” below.

Through March 31, 2016, we reinsured living benefit guarantees issued by our domestic statutory life insurance companies to a captive reinsurance company, Pruco Re, in order to facilitate the capital markets hedging program for these living benefit guarantees. Effective April 1, 2016, as part of the Variable Annuities Recapture, living benefit guarantees and certain retirement products were recaptured. The recapture transaction resulted in the transfer of these product risks to certain of our domestic statutory life insurance companies. After the foregoing transactions, Pruco Re no longer has any material active reinsurance with affiliates. During the third quarter of 2016, we began modifying our hedging strategy in order to more efficiently manage capital and liquidity associated with these products while continuing to mitigate fluctuations in net income due to capital market movements, within established tolerances. These modifications include utilizing a combination of traditional fixed income instruments and derivatives to manage the risks associated with our variable annuity living benefit guarantees. For additional information, see “—Liquidity and Capital Resources—Liquidity—Liquidity associated with other activities—Hedging activities associated with living benefit guarantees.”

For certain living benefits features, claims will primarily represent the funding of contractholder lifetime withdrawals after the cumulative withdrawals have first exhausted the contractholder account value. Due to the age of the in force block, limited claim payments have occurred to date, and they are not expected to increase significantly within the next five years, based upon current assumptions. The timing and amount of future claims will depend on actual returns on contractholder account value and actual contractholder behavior relative to our assumptions. The majority of our current living benefits features provide for guaranteed lifetime contractholder withdrawal payments inclusive of a “highest daily” contract value guarantee. Our PDI variable annuity complements our variable annuity products with the highest daily benefit and provides for guaranteed lifetime contractholder withdrawal payments, but restricts contractholder asset allocation to a single bond fund sub-account within the separate accounts.

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The majority of our variable annuity contracts with living benefits features, and all new contracts sold with our highest daily living benefits feature, include risk mitigants in the form of an automatic rebalancing feature and/or inclusion in our hedging program. As discussed above, we also utilize external reinsurance as a form of additional risk mitigation. The guaranteed benefits of certain legacy products that were sold prior to our implementation of the automatic rebalancing feature are also included in our hedging program. Certain legacy guaranteed minimum accumulation benefit (“GMAB”) products include the automatic rebalancing feature, but are not included in the hedging program. The PDI product and contracts with the GMIB feature have neither risk mitigant. Rather than utilizing a capital markets hedging strategy, certain risks associated with PDI are managed through the limitation of contractholder asset allocations to a single bond fund sub-account.

For our GMDBs, we provide a benefit payable in the event of death. Our base GMDB is generally equal to a return of cumulative deposits adjusted for any partial withdrawals. Certain products include an optional enhanced GMDB based on the greater of a minimum return on the contract value or an enhanced value. We have retained the risk that the total amount of death benefit payable may be greater than the contractholder account value. However, a substantial portion of the account values associated with GMDBs are subject to an automatic rebalancing feature because the contractholder also selected a living benefit feature which includes an automatic rebalancing feature. All of the variable annuity account values with living benefit features also contain GMDBs. The living and death benefit features for these contracts cover the same insured life and, consequently, we have insured both the longevity and mortality risk on these contracts.

The following table sets forth the risk profile of our living benefits and GMDB features as of the periods indicated.



	June 30, 2016				December 31, 2015				June 30, 2015
	Account Value		% of Total		Account Value		% of Total		Account Value		% of Total
	(in millions)
Living benefit/GMDB features(1):
Both hedging program and automatic rebalancing(2)	$	105,985	71	%	$	106,018	71	%	$	111,196	72	%
Hedging program only	9,629		5	%	9,994		7	%	10,896		7	%
Automatic rebalancing only	1,268		1	%	1,393		1	%	1,574		1	%
External reinsurance(3)	2,259		1	%	1,513		1	%	553		0	%
PDI	6,845		5	%	4,664		3	%	3,634		2	%
Other Products	2,749		2	%	2,870		2	%	3,151		2	%
Total living benefit/GMDB features	$	128,735			$	126,452			$	131,004
GMDB features and other(4)	22,453		15	%	22,989		15	%	24,420		16	%
Total variable annuity account value	$	151,188			$	149,441			$	155,424

__________


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


(2)	Contracts with living benefits that are included in our hedging program, and have an automatic rebalancing feature.


(3)	Represents contracts subject to reinsurance transaction with external counterparty effective April 1, 2015. 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.

The risk profile of our variable annuity account values as of the periods above reflect our product risk diversification strategy and the runoff of legacy products over time.

Variable Annuity Hedging Program Results

Under U.S. GAAP, the liability for certain living benefit features is accounted for as an embedded derivative and recorded at fair value, based on assumptions a market participant would use in valuing these features. The fair value is calculated as the present value of future expected benefit payments to contractholders less the present value of future rider fees attributable to the applicable living benefit features using option pricing techniques. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information regarding the methodology and assumptions used in calculating the fair value under U.S. GAAP.

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As noted within “—Variable Annuity Risks and Risk Mitigants” above, we maintain a hedging program to help manage certain capital market risks associated with certain of these guarantees. Our hedging program utilizes an internally-defined hedge target. We review our hedge target and hedging program on an ongoing basis, and may periodically adjust them based on our evaluation of the risks associated with the guarantees and other factors. As of the reporting periods presented, our hedge target includes the following modifications to the assumptions used in the U.S. GAAP valuation:


•	The impact of non-performance risk (“NPR”) is excluded to maximize protection against the entire projected claim irrespective of the possibility of our own default.


•	The assumptions used in the projection of customer account values for fixed income and equity funds and the discounted net living benefits (claims less fees) are adjusted to reflect returns in excess of risk-free rates equal to our expectations of credit or equity risk premiums.


•	Actuarial assumptions are adjusted to remove risk margins and reflect our best estimates.

Due to these modifications, we expect differences each period between the change in the value of the embedded derivative as defined by U.S. GAAP and the change in the value of the hedge positions used to manage the hedge target, thus potentially increasing volatility in U.S. GAAP earnings. Application of the valuation methodologies described above could result in either a liability or contra-liability balance for the fair value of the embedded derivative under U.S. GAAP and/or the value of the hedge target, given changing capital market conditions and various actuarial assumptions. The following table provides a reconciliation between the fair value of the embedded derivative as defined by U.S. GAAP and the value of our hedge target as of the periods indicated.



	As of June 30, 2016			As of December 31, 2015
	(in billions)
Embedded derivative liability as defined by U.S. GAAP	$	13.2		$	8.4
Less: NPR Adjustment	(11.4		)	(8.9		)
Embedded derivative liability as defined by U.S. GAAP, excluding NPR	24.6			17.3
Less: Amount of embedded derivative liability, excluding NPR, excluded from hedge target liability	7.6			6.4
Hedge target liability (contra-liability)	$	17.0		$	10.9

We seek to offset the changes in our hedge target by entering into a range of exchange-traded, cleared and over-the-counter (“OTC”) equity and interest rate derivatives to hedge certain capital market risks present in our hedge target. The instruments include, but are not limited to: equity and treasury futures; total return and interest rate swaps; and options including equity options, swaptions, and floors and caps. The following table sets forth the market and notional values of these instruments as of the periods indicated.



	As of June 30, 2016									As of December 31, 2015
	Equity					Interest Rate				Equity					Interest Rate
Instrument	Notional		Market Value			Notional		Market Value		Notional		Market Value			Notional		Market Value
	(in billions)
Futures	$	3.4	$	0.0		$	3.8	$	0.0	$	0.1	$	0.0		$	0.8	$	0.0
Swaps(1)	20.6		(0.2		)	89.3		11.9		17.2		(0.1		)	91.7		6.2
Options	5.6		0.0			10.1		0.5		5.0		0.0			14.4		0.2
Total	$	29.6	$	(0.2	)	$	103.2	$	12.4	$	22.3	$	(0.1	)	$	106.9	$	6.4

__________


(1)	Includes interest rate swaps for which offsetting positions exist in Corporate and Other operations, reflecting the impact of managing interest rate risk through capital management strategies other than hedging of particular exposures. See “—Corporate and Other.”

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Due to cash flow timing differences between our hedging instruments and the corresponding hedge target, as well as other factors such as updates to actuarial assumptions which are not hedged, the market value of the hedge portfolio compared to our hedge target measured as of any specific point in time may be different and is not expected to be fully offsetting. In addition to the derivatives held as part of the hedging program, we have cash and other invested assets available to cover the future claims payable under these guarantees and other liabilities. For additional information on the liquidity needs associated with our hedging program, see “—Liquidity and Capital Resources—Liquidity—Liquidity associated with other activities—Hedging activities associated with living benefit guarantees.”

The primary sources of differences between the changes in the fair value of the hedge positions and the hedge target, other than changes related to actuarial assumption updates, fall into one of three categories:

•

Fund Performance—In order to project future account value changes, we make certain assumptions about how each underlying fund will perform. We map contractholder funds to hedgeable indices that we believe are the best representation of the liability to be hedged in the capital markets. The difference between the modeled fund performance and actual fund performance results in basis that can be either positive or negative.


•	Net Market Impact—We incur rebalancing costs related to the dynamic rebalancing of the hedging instruments as markets move. Our hedging program is also subject to the impact of implied and realized market volatility on the hedge positions relative to our hedge target that can lead to positive or negative results.


•	Liability Basis—We make assumptions about expected changes in the hedge target related to certain items, such as contractholder behavior. The difference between the actual change in the hedge target and the expected changes we have modeled results in basis that can be either positive or negative.

The net impact of the change in the fair value of the embedded derivative associated with our living benefit features and the change in the fair value of the related hedge positions is included in “Realized investment gains (losses), net, and related adjustments” and the related impact to the amortization of DAC and other costs is included in “Related charges,” both of which are excluded from adjusted operating income. The following table shows the net impact of changes in the embedded derivative and related hedge positions, as well as the related amortization of DAC and other costs, for the periods indicated.



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(1) (in millions)
Hedge Program Results:
Change in value of hedge target(2)(3)	$	(2,816	)	$	4,581		$	(7,855	)	$	2,166
Change in fair value of hedge positions	2,827			(4,582		)	7,504			(2,165		)
Net hedging impact(2)(4)	$	11		$	(1	)	$	(351	)	$	1
Reconciliation of Hedge Program Results to U.S. GAAP Results:
Net hedging impact (from above)	$	11		$	(1	)	$	(351	)	$	1
Change in portions of U.S. GAAP liability, before NPR, excluded from hedge target(2)(5)	(569		)	840			(1,236		)	409
Change in the NPR adjustment(2)	(161		)	(1,148		)	3,217			660
Net impact from changes in the U.S. GAAP embedded derivative and hedge positions—reported in Individual Annuities	(719		)	(309		)	1,630			1,070
Related benefit (charge) to amortization of DAC and other costs(2)	212			77			(720		)	(382		)
Net impact of assumption updates and other refinements	1,455			(34		)	1,455			(34		)
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(4)	$	948		$	(266	)	$	2,365		$	654

__________


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

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(2)

Excludes the net impacts of assumption updates and other refinements, and includes rider fees received attributable to future benefit payments. For both the three and six months ended June 30, 2016 , the assumption update impact to the change in value of hedge target, change in portions of U.S. GAAP liability, before NPR, excluded from hedge target, change in the NPR adjustment and related benefit (charge) to amortization of DAC and other costs was approximately $2,304 million, $(23) million, $(663) million and $(163) million, respectively. For both the three and six months ended June 30, 2015, the assumption update impact to the change in value of hedge target, change in portions of U.S. GAAP liability, before NPR, excluded from hedge target, change in the NPR adjustment and related benefit (charge) to amortization of DAC and other costs was approximately $106 million, $(172) million, $(8) million and $40 million, respectively.


(3)	Attributed fees received for the three and six months ended June 30, 2016 were approximately $265 million and $524 million, respectively, and were included in “Change in value of hedge target.” Attributed fees received for the three and six months ended June 30, 2015 were approximately $250 million and $494 million, respectively, and were included in “Change in value of hedge target.”

(4)

Excludes $(357) million and $768 million for the three months ended June 30, 2016 and 2015 , respectively, and $(1,492) million and $111 million for the six months ended June 30, 2016 and 2015 , respectively, representing the impact of managing interest rate risk through capital management strategies other than hedging of particular exposures. Because this decision is based on the capital considerations of the Company as a whole, the impact is reported in Corporate and Other operations. See “—Corporate and Other.”


(5)	Represents the impact attributable to the difference between the value of the hedge target and the value of the embedded derivative as defined by U.S. GAAP, before adjusting for NPR, as discussed above.

The net benefits of $948 million and $2,365 million for the three and six months ended June 30, 2016, respectively, primarily reflected the impact of a $1,455 million benefit from our annual review and update of assumptions, driven by modifications to both our actuarial assumptions, including updates to expected withdrawal rates, as well as economic assumptions. Results for both periods also reflected changes in the NPR adjustment. The impact on NPR from tightening credit spreads more than offset the increase due to declining interest rates for the three months ended June 30, 2016. For the six months ended June 30, 2016, declining interest rates drove increases in the base embedded derivative liability before NPR, which resulted in corresponding increases in the NPR adjustment. To a lesser extent, results for both periods also reflect the impacts of changes in the value of our hedge target and related hedge positions. The second quarter of 2016 reflected a net realized gain from these items, driven by fund outperformance relative to indices. Unfavorable liability basis drove a net hedging charge for the first six months of 2016. Each of these items had corresponding partial offsets included in the related impacts to amortization of DAC and other costs for both periods. Results for both periods also reflected the changes in the portions of the U.S. GAAP liability that are excluded from our hedge target, net of related impacts to the amortization of DAC and other costs.

The net charge of $266 million and net benefit of $654 million for the three and six months ended June 30, 2015, respectively, were primarily driven by changes in the NPR adjustment. For the three months ended June 30, 2015, rising interest rates drove decreases in the base embedded derivative liability before NPR, which resulted in corresponding decreases in the NPR adjustment. The impact on NPR from rising interest rates was partially offset by the impact of widening credit spreads. For the six months ended June 30, 2015, increases in the NPR adjustment driven by widening credit spreads more than offset the decrease due to net interest rate increases. These impacts were partially offset by related impacts to the amortization of DAC and other costs for both periods. Results for both periods also reflected the changes in the portions of the U.S. GAAP liability that are excluded from our hedge target, net of related impacts to the amortization of DAC and other costs. The net charge from the impact of assumption updates and other refinements of $34 million for both periods resulted from our annual review and update of assumptions, primarily driven by modifications to our actuarial assumptions and other refinements.

For information regarding the Capital Protection Framework we use to evaluate and support the risks of our hedging program, see “—Liquidity and Capital Resources—Capital.”

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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,
	2016			2015			2016			2015
	(in millions)
Operating results:
Revenues	$	2,241		$	3,180		$	4,134		$	5,658
Benefits and expenses	2,005			2,943			3,679			5,137
Adjusted operating income	236			237			455			521
Realized investment gains (losses), net, and related adjustments	220			(273		)	197			136
Related charges	(249		)	0			(250		)	(1		)
Investment gains (losses) on trading account assets supporting insurance liabilities, net	180			(270		)	502			(243		)
Change in experience-rated contractholder liabilities due to asset value changes	(205		)	284			(441		)	143
Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures	$	182		$	(22	)	$	463		$	556

Our longevity reinsurance contracts are denominated in pounds sterling and are therefore subject to foreign currency exchange rate risk. Effective January 1, 2016, the financial results of our Retirement segment include the impact of an intercompany arrangement with our Corporate and Other operations pursuant to which certain of the segment’s non-U.S. dollar-denominated earnings from longevity reinsurance contracts are translated at fixed currency exchange rates. These fixed rates are designed to mitigate the impact of exchange rate changes on the Retirement segment’s U.S. dollar-equivalent earnings. Results of our Corporate and Other operations include any differences between the translation adjustments recorded by the segment at the fixed currency exchange rate versus the actual average rate during the period. The impact of this intercompany arrangement was immaterial to the operating results of the Retirement segment and our Corporate and Other operations for the three and six months ended June 30, 2016.

Adjusted Operating Income

Three Month Comparison. Adjusted operating income decreased $ 1 million . Results for the second quarter of 2016 reflected a net benefit of $6 million from our annual review and update of assumptions and other refinements, driven by favorable updates to actuarial assumptions, while results for the second quarter of 2015 had no net impact from our annual review and update of assumptions. Excluding this favorable comparative impact, adjusted operating income decreased $7 million, primarily driven by lower fee income and a lower contribution from positive case experience, partially offset by higher net investment spread results. The decrease in fee income primarily reflected lower margins on full service account values. The lower contribution from positive case experience primarily reflected less favorable mortality for pension risk transfer contracts. The increase in net investment spread results primarily reflected the impact of crediting rate reductions on full service general account stable value account values, growth in full service account values and significant pension risk transfer transactions and higher net prepayment fee income, partially offset by lower reinvestment rates and lower income on non-coupon investments.

Six Month Comparison. Adjusted operating income decreased $ 66 million . Results for 2016 reflected a net benefit of $6 million from our annual review and update of assumptions and other refinements, while results for 2015 reflected no net impact from our annual review and update of assumptions, as discussed above. Excluding this favorable comparative impact, adjusted operating income decreased $72 million, primarily driven by lower net investment spread results, a lower contribution from positive case experience and lower fee income. The decrease in net investment spread results primarily reflected lower income on non-coupon investments and lower reinvestment rates, partially offset by the impact of crediting rate reductions on full service general account stable value account values, growth in full service account values and significant pension risk transfer transactions and higher net prepayment fee income. The lower contribution from positive case experience primarily reflected less favorable mortality for pension risk transfer contracts. The decrease in fee income primarily reflected lower margins on full service account values, partially offset by an increase in ongoing premiums for longevity reinsurance contracts.

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Revenues, Benefits and Expenses

Three Month Comparison. Revenues, as shown in the table above under “—Operating Results,” decreased $ 939 million . Premiums decreased $ 934 million , primarily driven by significant pension risk transfer transactions in the prior year period, partially offset by an increase in ongoing premiums for longevity reinsurance contracts. This decrease in premiums resulted in a corresponding decrease in policyholders’ benefits, as discussed below.

Benefits and expenses, as shown in the table above under “—Operating Results,” decreased $ 938 million . Excluding the impact of our annual review and update of assumptions, as discussed above, benefits and expenses decreased $932 million. Policyholders’ benefits, including the change in policy reserves, decreased $904 million, primarily related to the decrease in premiums discussed above. General and administrative expenses, net of capitalization, decreased $16 million, primarily driven by lower amortization of DAC and lower commission expense net of capitalization. Interest credited to policyholders’ account balances decreased $ 12 million , primarily driven by the impact of crediting rate reductions on full service general account stable value account values, partially offset by growth in account values.

Six Month Comparison. Revenues decreased $ 1,524 million . Premiums decreased $ 1,479 million , primarily driven by significant pension risk transfer transactions in the prior year. This decrease in premiums resulted in a corresponding decrease in policyholders’ benefits, as discussed below. Policy charges and fee income, asset management and service fees and other income decreased $ 26 million , primarily driven by lower fee income from lower margins on full service account values. Net investment income decreased $ 19 million , primarily reflecting lower income on non-coupon investments and lower reinvestment rates, partially offset by growth in account values.

Benefits and expenses decreased $ 1,458 million . Excluding the impact of our annual review and update of assumptions, as discussed above, benefits and expenses decreased $1,452 million. Policyholders’ benefits, including the change in policy reserves, decreased $1,412 million, primarily related to the decrease in premiums discussed above. Interest credited to policyholders’ account balances decreased $ 28 million primarily driven by the impact of crediting rate reductions on full service general account stable value account values, partially offset by growth in account values. General and administrative expenses, net of capitalization, decreased $11 million, primarily driven by lower amortization of DAC.

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 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 general and administrative expenses and pattern of amortization of DAC and VOBA. 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 “—Asset Management.”

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	Three Months Ended June 30,						Six Months Ended June 30,						Twelve Months Ended June 30,
	2016			2015			2016			2015			2016
	(in millions)
Full Service:
Beginning total account value	$	190,953		$	188,145		$	188,961		$	184,196		$	188,807
Deposits and sales	4,699			5,040			11,355			11,354			25,685
Withdrawals and benefits	(4,513		)	(4,683		)	(9,799		)	(10,912		)	(20,446		)
Change in market value, interest credited and interest income and other activity	2,868			305			3,490			4,169			(39		)
Ending total account value	$	194,007		$	188,807		$	194,007		$	188,807		$	194,007
Net additions (withdrawals)	$	186		$	357		$	1,556		$	442		$	5,239
Institutional Investment Products:
Beginning total account value	$	180,819		$	177,120		$	179,964		$	179,641		$	183,798
Additions(1)	3,421			9,147			5,482			10,116			10,938
Withdrawals and benefits	(3,119		)	(3,808		)	(5,902		)	(7,303		)	(13,987		)
Change in market value, interest credited and interest income	2,053			83			4,251			1,712			6,015
Other(2)	(2,292		)	1,256			(2,913		)	(368		)	(5,882		)
Ending total account value	$	180,882		$	183,798		$	180,882		$	183,798		$	180,882
Net additions (withdrawals)	$	302		$	5,339		$	(420	)	$	2,813		$	(3,049	)

__________


(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 United Kingdom longevity reinsurance business and changes in asset balances for externally-managed accounts.

The increase in full service account values as of June 30, 2016 , compared to June 30, 2015 , primarily reflected the impact of net additions from net plan sales. The decrease in net additions for the three months ended June 30, 2016 , compared to the prior year period was primarily driven by lower plan sales in the current year period, partially offset by net participant deposits in the current year period compared to net participant withdrawals in the prior year period. The increase in net additions for the six months ended June 30, 2016 compared to the prior year period was primarily driven by lower plan lapses, partially offset by lower plan sales. Also contributing to the increase were net participant deposits in the current year period compared to net participant withdrawals in the prior year period.

The decrease in institutional investment products account values as of June 30, 2016 , compared to June 30, 2015 , primarily reflected the impact of net withdrawals. The decrease in net additions for both the three months and six months ended June 30, 2016 compared to the prior year periods, was primarily driven by the fact that prior year periods experienced sizeable additions resulting from significant pension risk transfer transactions and a bank-owned life insurance stable value transaction, partially offset by net additions in investment-only stable value accounts in the current year periods versus net withdrawals in the prior year periods.

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Asset Management

Operating Results

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016		2015
	(in millions)
Operating results:
Revenues	$	732		$	776		$	1,438	$	1,509
Expenses	525			580			1,066		1,108
Adjusted operating income	207			196			372		401
Realized investment gains (losses), net, and related adjustments	(1		)	(9		)	7		(3		)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests	5			49			36		54
Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures	$	211		$	236		$	415	$	452

Effective January 1, 2016, the financial results of our Asset Management segment include the impact of an intercompany arrangement with Corporate and Other operations pursuant to which certain of the segment’s non-U.S. dollar-denominated earnings are translated at fixed currency exchange rates. The fixed rates are designed to mitigate the impact of exchange rate changes on the segment’s U.S. dollar-equivalent earnings. The impact of this intercompany arrangement was immaterial to the operating results of the Asset Management segment and our Corporate and Other operations for the three and six months ended June 30, 2016.

Adjusted Operating Income

Three Month Comparison. Adjusted operating income increased $11 million . The increase primarily reflected higher other related revenues, net of associated expenses, including higher strategic investing results driven by mark-to-market gains on certain fund co-investments and favorable market performance for certain fixed income funds, as well as higher real estate transaction fees.

Six Month Comparison. Adjusted operating income decreased $ 29 million . The decrease primarily reflected lower other related revenues, net of associated expenses, driven by lower strategic investing results due to the absence of outperformance recognized in the first quarter of 2015 and lower net performance-based incentive fees recognized in the first quarter of 2016. The decrease also reflected lower asset management fees, net of expenses, from a decline in average equity assets under management as a result of market depreciation and outflows, partially offset by strong fixed income flows.

Revenues and Expenses

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

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	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
	(in millions)
Revenues by type:
Asset management fees by source:
Institutional customers	$	256	$	230	$	498	$	458
Retail customers(1)	173		197		342		386
General account	118		113		231		226
Total asset management fees	547		540		1,071		1,070
Other related revenues by source:
Incentive fees	20		16		65		47
Transaction fees	8		5		11		10
Strategic investing	15		7		19		23
Commercial mortgage(2)	24		24		43		44
Total other related revenues(3)	67		52		138		124
Service, distribution and other revenues(4)	118		184		229		315
Total revenues	$	732	$	776	$	1,438	$	1,509

__________

(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 $21 million and $20 million for the three months ended June 30, 2016 and 2015 , and $42 million and $39 million for the six months ended June 30, 2016 and 2015.

Three Month Comparison. Revenues, as shown in the table above, under “—Operating Results,” decreased $44 million . Service, distribution and other revenues decreased $66 million reflecting lower service and other fees primarily related to the sale and liquidation of the underlying assets in a real estate fund that was previously consolidated and which has corresponding expense offsets as noted below, as well as the deconsolidation of certain collateralized loan obligations which caused earnings previously recorded within net investment income to be reflected as asset management fees. Partially offsetting this decrease was an $8 million increase in strategic investing, primarily reflecting mark-to-market gains on certain fund co-investments and increased returns in certain emerging market fixed income strategies. Total asset management fees increased $7 million , primarily as a result of market appreciation and strong fixed income flows, partially offset by equity outflows and equity market depreciation.

Expenses, as shown in the table above under “—Operating Results,” decreased $55 million , reflecting the deconsolidation of certain funds, as discussed above, and lower compensation due to continued equity outflows and equity market performance.

Six Month Comparison. Revenues decreased $71 million . Service, distribution and other revenues decreased $86 million reflecting lower service and other fees primarily related to the sale and liquidation of the underlying assets in a real estate fund that was previously consolidated and which has corresponding expense offsets as noted below, as well as the deconsolidation of certain collateralized loan obligations which caused earnings previously recorded within net investment income to be reflected as asset management fees. Partially offsetting these decreases was an $18 million increase in gross performance-based incentive fees primarily related to certain fixed income funds; however, net incentive fees declined primarily due to expenses related to performance-based incentive fees, as noted below.

Expenses decreased $ 42 million , reflecting the deconsolidation of certain funds, as discussed above, and lower compensation due to continued equity outflows and equity market performance, partially offset by higher performance-based incentive fees (included in noncontrolling interest).

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, 2016		December 31, 2015		June 30, 2015
	(in billions)
Assets Under Management (at fair market value):
Institutional customers:
Equity	$	58.1	$	59.9	$	65.7
Fixed income	319.6		289.9		277.4
Real estate	41.1		39.3		37.5
Institutional customers(1)	418.8		389.1		380.6
Retail customers:
Equity	113.8		121.4		128.5
Fixed income	86.2		73.7		68.4
Real estate	2.1		2.2		2.3
Retail customers(2)	202.1		197.3		199.2
General account:
Equity	6.3		7.4		7.7
Fixed income	418.2		367.5		359.0
Real estate	1.8		1.8		1.8
General account	426.3		376.7		368.5
Total assets under management	$	1,047.2	$	963.1	$	948.3

__________


(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.

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



	Three Months Ended June 30,						Six Months Ended June 30,						Twelve Months Ended June 30,
	2016			2015			2016			2015			2016
	(in billions)
Institutional Customers:
Beginning Assets Under Management	$	403.6		$	380.9		$	389.1		$	370.0		$	380.6
Net additions (withdrawals), excluding money market activity:
Third-party	2.0			6.8			(0.6		)	10.5			10.1
Affiliated	(0.2		)	(1.1		)	1.1			(1.8		)	(1.9		)
Total	1.8			5.7			0.5			8.7			8.2
Market appreciation (depreciation)	12.4			(5.8		)	26.1			1.9			26.8
Other increases (decreases)(1)	1.0			(0.2		)	3.1			0.0			3.2
Ending Assets Under Management	$	418.8		$	380.6		$	418.8		$	380.6		$	418.8
Retail Customers:
Beginning Assets Under Management	$	198.6		$	198.4		$	197.3		$	186.1		$	199.2
Net additions (withdrawals), excluding money market activity:
Third-party	1.6			(0.4		)	1.1			3.6			(1.7		)
Affiliated	(1.6		)	0.8			(0.1		)	3.6			5.5
Total	0.0			0.4			1.0			7.2			3.8
Market appreciation (depreciation)	3.4			0.2			3.0			6.0			(1.6		)
Other increases (decreases)(1)	0.1			0.2			0.8			(0.1		)	0.7
Ending Assets Under Management	$	202.1		$	199.2		$	202.1		$	199.2		$	202.1
General Account:
Beginning Assets Under Management	$	400.8		$	382.4		$	376.7		$	377.4		$	368.5
Net additions (withdrawals), excluding money market activity:
Third-party	0.0			0.0			0.0			0.0			0.0
Affiliated	1.4			(0.9		)	2.1			(2.0		)	3.0
Total	1.4			(0.9		)	2.1			(2.0		)	3.0
Market appreciation (depreciation)	13.8			(9.1		)	28.8			(3.8		)	31.1
Other increases (decreases)(1)	10.3			(3.9		)	18.7			(3.1		)	23.7
Ending Assets Under Management	$	426.3		$	368.5		$	426.3		$	368.5		$	426.3

__________

(1)

Includes the effect of foreign exchange rate changes, net money market activity, impact of acquired business and transfers from/(to) the Retirement segment as a result of changes in the client contract form. The impact from foreign currency fluctuations, which primarily impact the general account, resulted in gains of $8.7 billion and losses of $1.4 billion for the three months ended June 30, 2016 and 2015 , respectively, gains of $15.4 billion and losses of $2.0 billion for the six months ended June 30, 2016 and 2015, respectively, and gains of $15.7 billion for the twelve months ended June 30, 2016 .

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Strategic Investments

The following table sets forth the strategic investments of the Asset Management segment at carrying value (including the value of derivative instruments used to mitigate equity market and currency risk) by asset class and source as of the dates indicated.



	June 30,
	2016		2015
	(in millions)
Co-Investments:
Real estate	$	197	$	245
Fixed income	185		150
Seed Investments:
Real estate	58		37
Public equity	263		290
Fixed income	179		165
Investments Secured by Investor Equity Commitments:
Private equity secured by investor equity	52		15
Total	$	934	$	902

U.S. Individual Life and Group Insurance Division

Individual Life

Operating Results

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(in millions)
Operating results:
Revenues	$	1,155		$	1,160		$	2,521		$	2,511
Benefits and expenses	1,445			923			2,691			2,158
Adjusted operating income	(290		)	237			(170		)	353
Realized investment gains (losses), net, and related adjustments	267			(429		)	579			(135		)
Related charges	(224		)	244			(404		)	96
Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures	$	(247	)	$	52		$	5		$	314

Adjusted Operating Income

Three Month Comparison. Adjusted operating income decreased $527 million , primarily reflecting unfavorable comparative net impacts from our annual reviews and updates of assumptions and other refinements. Results for the second quarter of 2016 included a $420 million net charge from these impacts, mainly driven by a charge to accrue a liability to offset the present value of losses expected to be recognized in later years (“Profits Followed by Losses” liability, see “—Accounting Policies & Pronouncements—Policyholder Liabilities”) and a charge related to an out of period adjustment (see Note 1 to the Unaudited Interim Consolidated Financial Statements). Partially offsetting these charges was a net benefit from the impacts of other refinements. Results for the second quarter of 2015 included a $68 million net benefit from our annual review and update of assumptions and other refinements, mainly driven by net favorable modifications to our economic and actuarial assumptions. Excluding these impacts, adjusted operating income decreased $39 million , primarily driven by less favorable mortality experience, net of reinsurance, partially offset by a higher contribution from investment results.

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Six Month Comparison. Adjusted operating income decreased $523 million , primarily reflecting unfavorable comparative net impacts from our annual reviews and updates of assumptions and other refinements, as discussed above. Excluding these impacts, adjusted operating income decreased $35 million , primarily driven by less favorable mortality experience, net of reinsurance, partially offset by a higher contribution from investment results.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues, as shown in the table above under “—Operating Results,” decreased $5 million . Excluding the impact of our annual review and update of assumptions and other refinements, as discussed above, revenues increased $72 million . Policy charges and fee income, asset management and service fees and other income increased $49 million primarily driven by growth in our universal life business, as well as an increase in the amortization of unearned revenue reserves, driven by the impact of changes in the estimated profitability of the business due to market performance and other experience relative to our assumptions. Net investment income increased $36 million primarily reflecting higher invested assets resulting from continued business growth and higher prepayment fee income. Partially offsetting these increases was a $ 13 million decrease in premiums, primarily driven by higher ceded reinsurance premiums which were mostly offset by reserve changes in Policyholders’ benefits.

Benefits and expenses, as shown in the table above under “—Operating Results,” increased $522 million . Excluding the impact of our annual review and update of assumptions and other refinements, as discussed above, benefits and expenses increased $111 million . Policyholders’ benefits and interest credited to account balances increased $70 million primarily reflecting universal life business growth and less favorable mortality experience, partially offset by reserve changes for ceded reinsurance premiums discussed above. The amortization of DAC increased $30 million , including the impact of changes in the estimated profitability of the business due to market performance and other experience relative to our assumptions. Interest expense increased $8 million related to higher reserve financing costs.

Six Month Comparison. Revenues increased $10 million . Excluding the impact of our annual review and update of assumptions and other refinements, as discussed above, revenues increased $87 million . Net investment income increased $69 million primarily reflecting higher invested assets resulting from continued business growth and higher prepayment fee income, partially offset by lower income on non-coupon investments. Policy charges and fee income, asset management and service fees and other income increased $53 million primarily driven by growth in our universal life business, as well as an increase in the amortization of unearned revenue reserves, driven by the impact of changes in the estimated profitability of the business due to market performance and other experience relative to our assumptions. Partially offsetting these increases was a $35 million decrease in premiums, primarily driven by higher ceded reinsurance premiums which were mostly offset by reserve changes in Policyholders’ benefits.

Benefits and expenses increased $533 million . Excluding the impact of our annual review and update of assumptions and other refinements, as discussed above, benefits and expenses increased $122 million . Policyholders’ benefits and interest credited to account balances increased $78 million primarily reflecting universal life business growth and less favorable mortality experience, partially offset by reserve changes for ceded reinsurance premiums discussed above. The amortization of DAC increased $21 million , including the impact of changes in the estimated profitability of the business due to market performance and other experience relative to our assumptions. Interest expense increased $15 million related to higher reserve financing costs.

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Sales Results

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



	Three Months Ended June 30, 2016						Three Months Ended June 30, 2015
	Prudential Advisors		Third Party		Total		Prudential Advisors		Third Party		Total
	(in millions)
Term Life	$	8	$	42	$	50	$	8	$	44	$	52
Guaranteed Universal Life(1)	6		55		61		8		40		48
Other Universal Life(1)	9		14		23		8		9		17
Variable Life	7		18		25		3		10		13
Total	$	30	$	129	$	159	$	27	$	103	$	130

	Six Months Ended June 30, 2016						Six Months Ended June 30, 2015
	Prudential Advisors		Third Party		Total		Prudential Advisors		Third Party		Total
	(in millions)
Term Life	$	16	$	82	$	98	$	16	$	85	$	101
Guaranteed Universal Life(1)	13		99		112		15		73		88
Other Universal Life(1)	17		26		43		11		23		34
Variable Life	13		38		51		10		21		31
Total	$	59	$	245	$	304	$	52	$	202	$	254

__________

(1)

Single pay life annualized new business premiums, which include 10% of excess (unscheduled) premiums, represented approximately 12% and 16% of Guaranteed Universal Life and 4% and 10% of Other Universal Life annualized new business premiums for the three months ended June 30, 2016 and 2015 , respectively, and approximately 12% and 18% of Guaranteed Universal Life and 5% and 9% of Other Universal Life annualized new business premiums for the six months ended June 30, 2016 and 2015 .

Annualized new business premiums for both the second quarter and the first six months of 2016 increased relative to the prior year periods, primarily driven by improved distribution execution and the continued impact of product enhancements in both universal and variable life.

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,
	2016			2015			2016			2015
	(in millions)
Operating results:
Revenues	$	1,364		$	1,291		$	2,684		$	2,568
Benefits and expenses	1,275			1,216			2,569			2,463
Adjusted operating income	89			75			115			105
Realized investment gains (losses), net, and related adjustments	14			(21		)	14			8
Related charges	(6		)	0			(6		)	(1		)
Income from continuing operations before income taxes and equity in earnings of operating joint ventures	$	97		$	54		$	123		$	112
Benefits ratio(1):
Group life(2)	90.8		%	86.5		%	90.1		%	89.6		%
Group disability(2)	47.9		%	61.6		%	65.2		%	67.0		%
Total group insurance(2)	83.8		%	82.7		%	85.9		%	86.0		%
Administrative operating expense ratio(3):
Group life	10.6		%	10.5		%	10.7		%	10.6		%
Group disability	31.1		%	34.1		%	31.6		%	33.4		%

__________


(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 88.6% , 77.5% and 86.6% for the three months ended June 30, 2016, respectively, 89.0% , 79.7% and 87.4% for the six months ended June 30, 2016, respectively, 88.3% , 76.3% and 86.5% for the three months ended June 30, 2015, respectively, and 90.5% , 74.2% and 87.9% for the six months ended June 30, 2015, 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 increased $ 14 million , primarily reflecting favorable comparative net impacts from our annual reviews and update of assumptions and other refinements. Results for the second quarter of 2016 included a $41 million net benefit from these updates while results for the second quarter of 2015 included a $28 million net benefit. The net benefit in 2016 was primarily driven by favorable experience related to our group disability business. Excluding the effect of these items, adjusted operating income increased slightly, as more favorable underwriting results in our group disability business were largely offset by less favorable underwriting results in our group life business. The underwriting results in our group disability business reflected the impact of fewer new claims and increased new business, partially offset by the impact of lower claim resolutions on long-term contracts. The underwriting results in our group life business reflected less favorable claim experience.

Six Month Comparison. Adjusted operating income increased $ 10 million , primarily reflecting favorable comparative net impacts from our annual reviews and update of assumptions and other refinements, as discussed above. Excluding the effect of these items, adjusted operating income decreased $3 million primarily reflecting a lower contribution from net investment spread results, driven by lower returns on non-coupon investments, less favorable underwriting results in our group disability business and higher expenses, net of fees. These decreases were partially offset by more favorable underwriting results in our group life business. The underwriting results in our group disability business reflect the impact of lower claim resolutions on long-term contracts and higher benefits resulting from other claims-related charges, partially offset by the impact of fewer new claims and increased new business. The underwriting results in our group life business reflect a favorable impact from a reserve refinement and a reduction in run-off of claims from lapsed cases.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues, as shown in the table above under “—Operating Results,” increased $ 73 million . Excluding a favorable comparative impact of $42 million resulting from our annual reviews and update of assumptions and other refinements, as discussed above, revenues increased $31 million. The increase reflected $25 million of higher premiums and policy charges and fee income primarily driven by the increase in new business in both our group life and group disability businesses.

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Benefits and expenses, as shown in the table above under “—Operating Results,” increased $ 59 million . Excluding an unfavorable comparative impact of $29 million resulting from our annual reviews and updates of assumptions and other refinements, as discussed above, benefits and expenses increased $30 million primarily from a $25 million increase in policyholders’ benefits, including the change in reserves. This increase was driven by the impact of new business for both our group life and group disability businesses, lower claim resolutions on long-term contracts in our group disability business and less favorable claim experience in our group life business.

Six Month Comparison. Revenues increased $ 116 million . Excluding a favorable comparative impact of $42 million resulting from our annual reviews and update of assumptions and other refinements, as discussed above, revenues increased $74 million. The increase reflected $85 million of higher premiums and policy charges and fee income primarily driven by the increase in new business in both our group life and group disability businesses, partially offset by a $20 million decrease in other income driven by lower income on non-coupon investments.

Benefits and expenses increased $ 106 million . Excluding an unfavorable comparative impact of $29 million resulting from our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $77 million. Policyholders’ benefits, including the change in reserves, increased $62 million, driven by the impact of new business for both our group life and group disability businesses and the impact of lower claim resolutions on long-term contracts in our group disability business, partially offset by fewer new claims for long-term contracts.

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,
	2016		2015		2016		2015
	(in millions)
Annualized new business premiums(1):
Group life	$	24	$	10	$	256	$	141
Group disability	21		14		100		45
Total	$	45	$	24	$	356	$	186

__________


(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, 2016, increased $21 million compared to the three months ended June 30, 2015, primarily reflecting additional voluntary enrollments from existing clients in our group life business. Total annualized new business premiums for the six months ended June 30, 2016, increased $170 million compared to the six months ended June 30, 2015, primarily driven by sales to new and existing clients in both our group life and group disability businesses.

International Insurance Division

Foreign Currency Exchange Rate Movements and Related Hedging Strategies

As a U.S.-based company with significant business operations outside the U.S., particularly in Japan, we are subject to foreign currency exchange rate movements that could impact our U.S. dollar-equivalent shareholder return on equity. We seek to mitigate this impact through various hedging strategies, including the use of derivative contracts and by holding U.S. dollar-denominated assets in certain of our foreign subsidiaries.

The operations of our International Insurance division are subject to currency fluctuations that can materially affect our U.S. dollar-equivalent earnings from period to period, even if earnings on a local currency basis are relatively constant. We enter into forward currency derivative contracts as part of our strategy to effectively fix the currency exchange rates for a portion of our prospective non-U.S. dollar-denominated earnings streams, thereby reducing earnings volatility from foreign currency exchange rate movements. The foreign currency income hedging program is primarily associated with our insurance operations in Japan and Korea.

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Separately, our Japanese insurance operations offer a variety of non-yen denominated products, primarily comprised of U.S. and Australian dollar-denominated products that are supported by investments in corresponding currencies. While these non-yen denominated assets and liabilities are 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 reported U.S. GAAP earnings. As a result of continued growth in these portfolios, we implemented a structure in Gibraltar Life in the first quarter of 2015 that disaggregated the U.S. and Australian dollar-denominated businesses into separate divisions, each with its own functional currency that aligns with the underlying products and investments.

For further information on the hedging strategies used to mitigate the risks of foreign currency exchange rate movements on earnings as well as the U.S. GAAP earnings impact from products denominated in non-local currencies, see “—Impact of foreign currency exchange rate movements on earnings.”

We utilize a yen hedging strategy that calibrates the hedge level to preserve the relative contribution of our yen-based business to the Company’s overall return on equity on a leverage neutral basis. We implement this hedging strategy utilizing a variety of instruments, including foreign currency derivative contracts, as discussed above, as well as U.S. dollar-denominated assets and, to a lesser extent, “dual currency” and “synthetic dual currency” assets held locally in our Japanese insurance subsidiaries. We may also hedge using instruments held in our U.S. domiciled entities, such as U.S. dollar-denominated debt that has been swapped to yen. The total hedge level may vary based on our periodic assessment of the relative contribution of our yen-based business to the Company’s overall return on equity.

The table below presents the aggregate amount of instruments that serve to hedge the impact of foreign currency exchange movements on our U.S. dollar-equivalent shareholder return on equity from our Japanese insurance subsidiaries for the periods indicated.



	June 30, 2016		December 31, 2015
	(in billions)
Instruments hedging foreign currency exchange rate exposure on U.S. dollar-equivalent earnings:
Forward currency hedging program(1)	$	1.8	$	1.9
Instruments hedging foreign currency exchange rate exposure on U.S. dollar-equivalent equity:
U.S. dollar-denominated assets held in yen-based entities(2):
Available-for-sale U.S. dollar-denominated investments, at amortized cost	12.7		13.0
Other	0.1		0.1
Subtotal	12.8		13.1
Dual currency and synthetic dual currency investments(3)	0.8		0.8
Total instruments hedging foreign currency exchange rate exposure on U.S. dollar-equivalent equity	13.6		13.9
Total hedges	$	15.4	$	15.8

__________


(1)	Represents the notional amount of forward currency contracts outstanding.


(2)	Excludes $32.7 billion and $30.5 billion as of June 30, 2016 and December 31, 2015, respectively, of U.S. dollar assets supporting U.S. dollar liabilities related to U.S. dollar-denominated products issued by our Japanese insurance operations.


(3)	Dual currency and synthetic dual currency investments are held by our yen-based entities in the form of fixed maturities and loans with a yen-denominated principal component and U.S. dollar-denominated interest income. The amounts shown represent the present value of future U.S. dollar cash flows.

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Impact of foreign currency exchange rate movements on earnings

Foreign currency income hedging program

The financial results of our International Insurance segment reflect the impact of an intercompany arrangement with Corporate and Other operations pursuant to which certain of the segment’s non-U.S. dollar-denominated earnings are translated at fixed currency exchange rates. The fixed rates are determined in connection with a foreign currency income hedging program designed to mitigate the impact of exchange rate changes on the segment’s U.S. dollar-equivalent earnings. Pursuant to this program, Corporate and Other operations execute forward currency contracts with third parties to sell the net exposure of projected earnings for certain currencies in exchange for U.S. dollars at specified exchange rates. The maturities of these contracts correspond with the future periods (typically on a three-year rolling basis) in which the identified non-U.S. dollar-denominated earnings are expected to be generated. In establishing the level of non-U.S. dollar-denominated earnings that will be hedged through this program, we exclude the anticipated level of U.S. dollar-denominated earnings that will be generated by dual currency and synthetic dual currency investments, as well as the anticipated level of non-yen denominated earnings that will be generated by non-yen denominated products and investments. For the six months ended June 30, 2016 , approximately 34% of the segment’s earnings were yen-based and, as of June 30, 2016 , we have hedged 100% of expected yen-based earnings for 2016 and 92%, 50% and 8% of expected yen-based earnings for 2017, 2018 and 2019, respectively. To the extent currently unhedged, our International Insurance segment’s future expected U.S. dollar-equivalent earnings will be impacted by yen exchange rate movements.

As a result of this intercompany arrangement, our International Insurance segment’s results for 2016 and 2015 reflect the impact of translating yen-denominated earnings at fixed currency exchange rates of 106 and 91 yen per U.S. dollar, respectively, and Korean won-denominated earnings at fixed currency exchange rates of 1100 and 1120 Korean won per U.S. dollar, respectively. Since determination of the fixed currency exchange rates for each respective 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.

Results of Corporate and Other operations include any differences between the translation adjustments recorded by the segment at the fixed currency exchange rate versus the actual average rate during the period, and the gains or losses recorded from the forward currency contracts that settled during the period, which include the impact of any over or under hedging of actual earnings that differ from projected earnings. Results of Corporate and Other operations also include any differences between the translation adjustments recorded by the segment at the fixed currency exchange rate versus the actual average rate during the period related to currencies for which we choose not to hedge our exposure. The table below presents, for the periods indicated, the increase (decrease) to revenues and adjusted operating income for the International Insurance segment and for Corporate and Other operations, reflecting the impact of this intercompany arrangement.



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(in millions)
International Insurance Segment:
Impact of intercompany arrangement(1)	$	8		$	85		$	35		$	165
Corporate and Other operations:
Impact of intercompany arrangement(1)	(8		)	(85		)	(35		)	(165		)
Settlement gains (losses) on forward currency contracts	7			78			43			161
Net benefit (detriment) to Corporate and Other operations	(1		)	(7		)	8			(4		)
Net impact on consolidated revenues and adjusted operating income	$	7		$	78		$	43		$	161

__________


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

The notional amount of these forward currency contracts was $2.4 billion as of both June 30, 2016 and December 31, 2015, of which $1.8 billion and $1.9 billion, respectively, were related to our Japanese insurance operations.

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

Our international insurance operations primarily offer products denominated in local currency; however, several of our international insurance operations, most notably our Japanese operations, also offer products denominated in non-local currencies, primarily comprised of U.S. and Australian dollar-denominated products. The non-yen denominated insurance liabilities related to these products are supported by investments denominated in corresponding currencies, including a significant portion designated as available-for-sale. While the impact from foreign currency exchange rate movements on these non-yen denominated assets and liabilities is economically matched, 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.

As discussed above, we have implemented a structure in Gibraltar Life that disaggregated the U.S. and Australian dollar-denominated businesses into separate divisions, each with its own functional currency that aligns with the underlying products and investments. For the U.S. and Australian dollar-denominated assets that were transferred under this structure, the net cumulative unrealized investment gains associated with foreign exchange remeasurement that were recorded in AOCI totaled $5.1 billion as of December 31, 2015, 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 4% of the $5.1 billion balance will be recognized throughout the remainder of 2016 and approximately 8% will be recognized in 2017, with the remainder primarily recognized over the following ten years. As of June 30, 2016 , the remaining net cumulative unrealized investment gains balance related to these assets was $4.7 billion.

International Insurance

Operating Results

The results of our International Insurance operations are translated on the basis of weighted average monthly exchange rates, inclusive of the effects of the intercompany arrangement discussed above. To provide a better understanding of operating performance within the International Insurance segment, where indicated below, we have analyzed our results of operations excluding the effect of the year over year change in foreign currency exchange rates. Our results of operations, excluding the effect of foreign currency fluctuations, were derived by translating foreign currencies to U.S. dollars at uniform exchange rates for all periods presented, including for constant dollar information discussed below. The exchange rates used were Japanese yen at a rate of 106 yen per U.S. dollar and Korean won at a rate of 1100 won per U.S. dollar, both of which were determined in connection with the foreign currency income hedging program discussed above. In addition, for constant dollar information discussed below, activity denominated in U.S. dollars is generally reported based on the amounts as transacted in U.S. dollars. Annualized new business premiums presented on a constant exchange rate basis in the “Sales Results” section below reflect translation based on these same uniform exchange rates.

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

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	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(in millions)
Operating results:
Revenues:
Life Planner operations	$	2,417		$	2,231		$	4,976		$	4,673
Gibraltar Life and Other operations	2,926			2,806			5,411			5,270
Total revenues	5,343			5,037			10,387			9,943
Benefits and expenses:
Life Planner operations	2,074			1,850			4,223			3,853
Gibraltar Life and Other operations	2,466			2,345			4,582			4,414
Total benefits and expenses	4,540			4,195			8,805			8,267
Adjusted operating income:
Life Planner operations	343			381			753			820
Gibraltar Life and Other operations	460			461			829			856
Total adjusted operating income	803			842			1,582			1,676
Realized investment gains (losses), net, and related adjustments(1)	482			11			989			451
Related charges	(11		)	(20		)	(16		)	(43		)
Investment gains (losses) on trading account assets supporting insurance liabilities, net	(72		)	50			(178		)	106
Change in experience-rated contractholder liabilities due to asset value changes	72			(50		)	178			(106		)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests	(11		)	(2		)	(19		)	6
Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures	$	1,263		$	831		$	2,536		$	2,090

__________


(1)	Includes gains (losses) from changes in value of certain assets and liabilities relating to foreign currency exchange movements that are economically matched.

Adjusted Operating Income

Three Month Comparison. Adjusted operating income from our Life Planner operations decreased $38 million , including a net unfavorable impact of $22 million from currency fluctuations, inclusive of the currency hedging program discussed above. Both periods also include the impact of our annual reviews and updates of assumptions and other refinements, which resulted in a $38 million net charge in the second quarter of 2016, including unfavorable economic assumption updates driven by lower interest rates in Japan and Korea, compared to an $11 million net charge in the second quarter of 2015.

Excluding the effect of these items, adjusted operating income increased $11 million , as the growth of business in force, driven by sales results and continued strong persistency in Japan, and more favorable comparative mortality experience were partially offset by higher expenses, including those supporting business growth.

Adjusted operating income from our Gibraltar Life and Other operations decreased $1 million including a net unfavorable impact of $36 million from currency fluctuations, inclusive of the currency hedging program discussed above. Both periods also include the impact of our annual reviews and updates of assumptions and other refinements, which resulted in a $34 million net charge in the second quarter of 2016, including unfavorable economic assumption updates driven by lower interest rates in Japan, compared to a $10 million net charge in the second quarter of 2015.

Excluding the effect of these items, adjusted operating income increased $59 million , primarily driven by lower net expenses, including a gain on the sale of a home office property in Japan, and by impacts from the growth of business in force, driven by sales results, continued strong persistency and contributions from the Company’s recent indirect investment in AFP Habitat in Chile. Net investment results were relatively flat as higher non-coupon investment income was offset by unfavorable spread impacts due to market conditions.

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Six Month Comparison. Adjusted operating income from our Life Planner operations decreased $67 million , including a net unfavorable impact of $52 million from currency fluctuations. Excluding the impact of currency fluctuations, as well as the impact from our annual reviews and updates of assumptions and other refinements as discussed above, adjusted operating income increased $12 million , as growth of business in force driven by sales results and continued strong persistency in Japan was offset by higher expenses, including those supporting business growth, less favorable comparative mortality experience and lower net investment spreads.

Adjusted operating income from our Gibraltar Life and Other operations decreased $27 million including a net unfavorable impact of $64 million from currency fluctuations. Excluding the impact of currency fluctuations, as well as the impact from our annual reviews and updates of assumptions and other refinements as discussed above, adjusted operating income from our Gibraltar Life and Other operations increased $61 million as lower net expenses, including a gain on the sale of a home office property in Japan, impacts from the growth of business in force, driven by sales results, continued strong persistency and contributions from the Company’s recent indirect investment in AFP Habitat in Chile, and more favorable comparative mortality experience were partially offset by a lower contribution from net investment spreads, primarily from lower income on non-coupon investments.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues from our Life Planner operations increased $186 million including a net favorable impact of $55 million from currency fluctuations and a net charge of $19 million from our annual reviews and updates of assumptions and other refinements. Excluding these items, revenues increased $150 million. This increase was primarily driven by higher premiums and policy charges and fee income of $114 million related to the growth of business in force, as discussed above. Net investment income increased $41 million primarily reflecting investment portfolio growth related to the growth of business in force, partially offset by the impact of lower reinvestment rates.

Benefits and expenses of our Life Planner operations increased $224 million including a net unfavorable impact of $77 million from currency fluctuations and a net charge of $8 million from our annual reviews and updates of assumptions and other refinements. Excluding these items, benefits and expenses increased $139 million. Policyholder benefits, including changes in reserves, increased $102 million primarily driven by business growth. General and administrative expenses, net of capitalization, increased $22 million primarily due to higher costs, including those supporting business growth.

Revenues from our Gibraltar Life and Other operations increased $120 million including a net favorable impact of $78 million from currency fluctuations. Excluding the impact of currency fluctuations, revenues for Gibraltar Life increased $42 million, driven by business growth, as discussed above, the gain on the sale of a home office property and higher non-coupon investment income.

Benefits and expenses of our Gibraltar Life and Other operations increased $121 million including a net unfavorable impact of $114 million from currency fluctuations and a net charge of $24 million from our annual reviews and updates of assumptions and other refinements. Excluding these items, benefits and expenses decreased $17 million driven by a decrease of $34 million in policyholder benefits, including changes in reserves, partially offset by an increase of $17 million in general and administrative expenses, net of capitalization, due to higher costs, including those supporting business growth.

Six Month Comparison. Revenues from our Life Planner operations increased $303 million including a net favorable impact of $7 million from currency fluctuations and a net charge of $19 million from our annual reviews and updates of assumptions, as discussed above. Excluding these items, revenues increased $315 million. This increase was primarily driven by higher premiums and policy charges and fee income of $234 million related to the growth of business in force, as discussed above. Net investment income increased $83 million primarily reflecting investment portfolio growth related to the growth of business in force, partially offset by the impact of lower reinvestment rates.

Benefits and expenses of our Life Planner operations increased $370 million including a net unfavorable impact of $59 million from currency fluctuations and a net charge of $8 million from our annual reviews and updates of assumptions, as discussed above. Excluding these items, benefits and expenses increased $303 million. Policyholder benefits, including changes in reserves, increased $227 million primarily driven by business growth. General and administrative expenses, net of capitalization, increased $50 million primarily due to higher costs, including those supporting business growth.

Revenues from our Gibraltar Life and Other operations increased $141 million including a net favorable impact of $48 million from currency fluctuations. Excluding the impact of currency fluctuations, revenues for Gibraltar Life increased $93 million, driven by business growth, as discussed above, the gain on the sale of a home office property and higher non-coupon investment income.

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Benefits and expenses of our Gibraltar Life and Other operations increased $168 million including a net unfavorable impact of $112 million from currency fluctuations and a net charge of $24 million from our annual reviews and updates of assumptions, as discussed above. Excluding these items, benefits and expenses increased $32 million driven by an increase of $13 million in policyholder benefits, including changes in reserves, related to business growth and $5 million in general and administrative expenses, net of capitalization, due to higher costs, including those supporting business growth.

Sales Results

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
	(in millions)
Annualized new business premiums:
On an actual exchange rate basis:
Life Planner operations	$	289	$	258	$	624	$	574
Gibraltar Life	449		413		858		770
Total	$	738	$	671	$	1,482	$	1,344
On a constant exchange rate basis:
Life Planner operations	$	294	$	269	$	650	$	595
Gibraltar Life	453		428		878		797
Total	$	747	$	697	$	1,528	$	1,392

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: addition of new products, discontinuation of existing products, changes in credited interest rates for certain products and other product modifications, changes in tax laws, changes in life insurance regulations or changes in the competitive environment. Sales volume may increase or decrease prior to certain of these changes becoming effective, and then fluctuate in the other direction following such changes.

The current low interest rate environment in Japan, as discussed further in “—Executive Summary—Impact of a Low Interest Rate Environment” above, and fluctuating currency markets have contributed to a shift in demand for certain products. Our diverse product portfolio in Japan, in terms of currency mix and premium payment mode, allows us to mitigate the negative impact from this extremely low interest rate environment. We regularly examine our yen-based product offerings and their profitability and as a result, we have been repricing our products and have discontinued sales of certain 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 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.



	Three Months Ended June 30, 2016										Three Months Ended June 30, 2015
	Life		Accident & Health		Retirement(1)		Annuity		Total		Life		Accident & Health		Retirement(1)		Annuity		Total
	(in millions)
Life Planner	$	174	$	27	$	76	$	17	$	294	$	167	$	26	$	59	$	17	$	269
Gibraltar Life:
Life Consultants	92		13		28		73		206		92		15		34		38		179
Banks(2)	125		0		18		34		177		129		0		3		46		178
Independent Agency	35		9		17		9		70		30		9		20		12		71
Subtotal	252		22		63		116		453		251		24		57		96		428
Total	$	426	$	49	$	139	$	133	$	747	$	418	$	50	$	116	$	113	$	697

__________


(1)	Includes retirement income, endowment and savings variable universal life.

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(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 7% and 51%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended June 30, 2016, and 6% and 55%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended June 30, 2015.

Three Month Comparison. Annualized new business premiums, on a constant exchange rate basis, from our Life Planner operations increased $25 million. Growth in Life Planner count and productivity in our Japan operation resulted in an increase in sales of U.S. dollar-denominated retirement income and whole life products and sales of yen-denominated term life products remained strong in the corporate market. Lower sales of life protection products in our Korean operation as a result of recent pricing actions were partially offset by higher sales in our Brazilian operation across various product lines as Life Planner count and average premiums continued to grow.

Annualized new business premiums, on a constant exchange rate basis, from our Gibraltar Life operations increased $25 million. Life Consultant sales increased $27 million as higher sales of certain U.S. dollar-denominated annuity and whole life products were partially offset by lower sales of yen-denominated whole life products and Australian dollar-denominated retirement and annuity products. Bank channel sales declined $1 million as lower sales of yen-denominated annuity and life protection products were offset by higher sales of U.S. dollar-denominated retirement, whole life and annuity products. Independent Agency sales declined $1 million as lower sales of yen-denominated endowment products and Australian dollar-denominated annuity products were offset by higher sales of U.S. dollar-denominated whole life and retirement income products.



	Six Months Ended June 30, 2016										Six Months Ended June 30, 2015
	Life		Accident & Health		Retirement(1)		Annuity		Total		Life		Accident & Health		Retirement(1)		Annuity		Total
	(in millions)
Life Planner	$	382	$	59	$	172	$	37	$	650	$	368	$	56	$	141	$	30	$	595
Gibraltar Life:
Life Consultants	186		28		55		106		375		170		32		67		63		332
Banks(2)	253		0		40		83		376		240		1		6		88		335
Independent Agency	62		13		30		22		127		51		14		37		28		130
Subtotal	501		41		125		211		878		461		47		110		179		797
Total	$	883	$	100	$	297	$	248	$	1,528	$	829	$	103	$	251	$	209	$	1,392

__________


(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 6% and 50%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the six months ended June 30, 2016, and 6% and 52%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the six months ended June 30, 2015.

Six Month Comparison. Annualized new business premiums, on a constant exchange rate basis, from our Life Planner operations increased $55 million. Growth in Life Planner count and productivity in our Japan operation resulted in an increase in sales of U.S. dollar-denominated retirement and whole life products and sales of yen-denominated term life products remained strong in the corporate market. Lower sales of life protection products in our Korean operation as a result of recent pricing actions were partially offset by higher sales in our Brazilian operation across various product lines as Life Planner count and average premiums continued to grow.

Annualized new business premiums, on a constant exchange rate basis, from our Gibraltar Life operations increased $81 million. Life Consultant sales increased $43 million as higher sales of certain U.S. dollar-denominated annuity and whole life products were partially offset by lower sales of yen-denominated life protection products and Australian dollar-denominated retirement income and annuity products. Bank channel sales increased $41 million primarily driven by higher sales of U.S. dollar-denominated retirement income, whole life and annuity products, partially offset by lower sales of yen-denominated annuity and life protection products. Independent Agency sales declined $3 million as lower sales of Australian dollar-denominated annuity and retirement products and yen-denominated life protection products were partially offset by higher U.S. dollar-denominated whole life and retirement income products.

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Corporate and Other

As described in our Annual Report on Form 10-K for the year ended December 31, 2015 under “Business—Financial Services Businesses—Corporate and Other,” Corporate and Other includes corporate operations, after allocations to our business segments, and divested 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,
	2016			2015			2016			2015
	(in millions)
Operating results:
Capital debt interest expense	$	(169	)	$	(198	)	$	(343	)	$	(390	)
Operating debt interest expense, net of investment income	(20		)	25			(24		)	60
Pension and employee benefits	28			51			48			83
Other corporate activities(1)	(254		)	(172		)	(408		)	(300		)
Adjusted operating income	(415		)	(294		)	(727		)	(547		)
Realized investment gains (losses), net, and related adjustments	(1,013		)	1,070			(2,758		)	145
Related charges	(2		)	(6		)	30			9
Divested businesses	(11		)	(109		)	20			(34		)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests	(2		)	(2		)	0			(2		)
Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures	$	(1,443	)	$	659		$	(3,435	)	$	(429	)

__________


(1)	Includes consolidating adjustments.

Three Month Comparison. The loss from Corporate and Other operations, on an adjusted operating income basis, increased $ 121 million . Net charges from other corporate activities increased $ 82 million , primarily reflecting $36 million in costs associated with the early extinguishment of certain debt, increased costs for enhanced regulatory supervision and other corporate expenses. Operating debt interest expense, net of investment income, increased $ 45 million , primarily reflecting lower net investment income from non-coupon investments. Results from pension and employee benefits decreased $ 23 million , primarily reflecting lower income from our qualified pension plan driven by lower plan asset values as well as the unfavorable impact of higher interest costs on the plan obligation due to the increase in interest rates in 2015. Capital debt interest expense decreased $29 million , primarily from efforts to reduce leverage and senior debt maturities in early 2016.

Six Month Comparison. The loss from Corporate and Other operations, on an adjusted operating income basis, increased $ 180 million . Net charges from other corporate activities increased $ 108 million , primarily reflecting $36 million in costs associated with the early extinguishment of certain debt, higher legal costs, increased costs for enhanced regulatory supervision and other corporate expenses. Operating debt interest expense, net of investment income, increased $ 84 million , primarily reflecting lower net investment income from non-coupon investments and lower levels of invested assets resulting from assets transferred to other business segments. Results from pension and employee benefits decreased $ 35 million , primarily reflecting lower income from our qualified pension plan driven by lower plan asset values as well as the unfavorable impact of higher interest costs on the plan obligation due to the increase in interest rates in 2015. Capital debt interest expense decreased $47 million , primarily from efforts to reduce leverage and senior debt maturities in early 2016.

Capital Protection Framework

“Realized investment gains (losses), net and related adjustments,” which are excluded from adjusted operating income, included net losses of $579 million and $2,024 million for the three and six months ended June 30, 2016 , respectively, and net gains of $1,091 million and $239 million for the three and six months ended June 30, 2015, respectively, primarily resulting from our utilization of capital management strategies to manage a portion of our interest rate risk, and reflect changes in interest rates with respect to the exposures outstanding during the respective periods. For more information on our Capital Protection Framework, see “—Liquidity and Capital Resources—Capital Protection Framework.”

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Divested Businesses

Divested Businesses Included in Corporate and Other

Our income from continuing operations 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 businesses are reflected in our Corporate and Other operations, but are excluded from adjusted operating income. A summary of the results of the divested businesses reflected in our Corporate and Other operations is as follows for the periods indicated:



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(in millions)
Long-Term Care	$	(6	)	$	(94	)	$	27		$	(38	)
Other	(5		)	(15		)	(7		)	4
Total divested businesses income (loss) excluded from adjusted operating income	$	(11	)	$	(109	)	$	20		$	(34	)

Long-Term Care. Results for the second quarter and the first six months of 2016 increased compared to the prior year periods primarily reflecting realized gains in 2016 from derivatives used in duration management, driven by the impact of declining interest rates during that period as compared to losses on these types of derivatives in 2015, driven by the impact of rising interest rates during that period.

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, as well as certain related assets and liabilities. We no longer offer these traditional domestic participating policies. See Note 6 to the Unaudited Interim Consolidated Financial Statements for additional details.

Each year, the Board of Directors of Prudential Insurance determines the dividends payable on participating policies for the following year based on the experience of the Closed Block, including investment income, net realized and unrealized investment gains, mortality experience and other factors. Although Closed Block experience for dividend action decisions is based upon statutory results, at the time the Closed Block was established, we developed, as required by U.S. GAAP, an actuarial calculation of the timing of the maximum future earnings from the policies included in the Closed Block. If actual cumulative earnings in any given period are greater than the cumulative earnings we expected, we record this excess as a policyholder dividend 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 Prudential Insurance.

As of June 30, 2016 , the excess of actual cumulative earnings over the expected cumulative earnings was $ 1,517 million, which was recorded as a policyholder dividend obligation. Actual cumulative earnings, as required by U.S. GAAP, reflect the recognition of realized investment gains and losses in the current period, as well as changes in assets and related liabilities that support the Closed Block policies. Additionally, the accumulation of net unrealized investment gains that have arisen subsequent to the establishment of the Closed Block have been reflected as a policyholder dividend obligation of $4,680 million at June 30, 2016 , 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,
	2016			2015		2016			2015
	(in millions)
U.S. GAAP results:
Revenues	$	1,546		$	1,525	$	2,675		$	3,244
Benefits and expenses	1,578			1,473		2,780			3,214
Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures	$	(32	)	$	52	$	(105	)	$	30

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

Three Month Comparison. Income from continuing operations before income taxes and equity in earnings of operating joint ventures decreased $ 84 million . Results for the second quarter of 2016 reflected a $ 40 million increase in net realized investment gains, primarily due to more favorable changes in the value of derivatives used in risk management activities, partially offset by lower gains from sales of fixed maturities and unfavorable equity market performance. Net insurance activity results increased $18 million, primarily due to lower benefit payments in the current period. As a result of the above and other variances, a $ 75 million increase in the policyholder dividend obligation was recorded in the second quarter of 2016 , compared to a $ 67 million reduction in the second quarter of 2015 . As noted above, as of June 30, 2016 , the excess of actual cumulative earnings over the expected cumulative earnings was $ 1,517 million. 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 “—Realized Investment Gains and Losses.”

Six Month Comparison. Income from continuing operations before income taxes and equity in earnings of operating joint ventures decreased $ 135 million . Results for the first six months of 2016 reflected a $ 431 million decrease in net realized investment gains, primarily due to unfavorable equity market performance, lower gains from sales of fixed maturities and less favorable changes in the value of derivatives used in risk management activities. Net investment income decrease d $ 97 million , primarily due to lower returns on non-coupon investments and lower reinvestment rates. Net insurance activity results increased $11 million primarily due to lower benefit payments in the current period. As a result of the above and other variances, a $ 177 million reduction in the policyholder dividend obligation was recorded in the first six months of 2016 , compared to a $ 208 million increase in the second quarter of 2015 .

Revenues, Benefits and Expenses

Three Month Comparison. Revenues, as shown in the table above under “—Operating Results,” increased $ 21 million , primarily due to a $ 40 million increase in net realized investment gains. In addition, premiums declined $ 9 million , primarily due to the runoff of policies in force.

Benefits and expenses, as shown in the table above under “—Operating Results,” increased $ 105 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.

Six Month Comparison. Revenues decreased $ 569 million , primarily due to a $ 431 million decrease in net realized investment gains and $ 97 million decrease in net investment income, as discussed above. In addition, premiums declined $ 21 million , primarily due to the runoff of policies in force.

Benefits and expenses decreased $ 434 million , primarily due to a $ 366 million decrease in dividends to policyholders, reflecting a decrease in the policyholder dividend obligation expense due to changes in cumulative earnings.

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Income Taxes

Our income tax provision, on a consolidated basis, amounted to an income tax expense of $431 million in the second quarter of 2016, compared to an expense of $679 million in the second quarter of 2015. The decreased expense was primarily due to a decrease in “Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures” in the current quarter compared to the year ago quarter. On March 31, 2016, the government of Japan enacted a reduction in the Japanese tax rate by approximately 2%, effective April 1, 2016. On March 31, 2015, the government of Japan enacted a reduction in the Japanese tax rate by approximately 2%, effective April 1, 2015. As a result, the impact of lower “Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures” in the current quarter compared to the year ago quarter was partially offset by $22 million and $70 million of additional tax expense related to re-measurement of Japan deferred tax assets as a result of the tax rate reduction included in our income tax provision for the second quarter of 2016 and 2015, respectively.

Our income tax provision, on a consolidated basis, amounted to an income tax expense of $799 million in the first six months of 2016 compared to an expense of $1,378 million in the first six months of 2015. The decreased expense was primarily due to a decrease in “Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures” in the first six months of 2016 compared to the first six months of 2015. In addition, due to the tax rate reductions discussed above, the impact of lower “Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures” for the first six months in 2016 compared to the first six months in 2015 was partially offset by $24 million and $75 million of additional tax expense related to re-measurement of Japan deferred tax assets included in first six months of 2016 and 2015, respectively.

For additional information regarding income taxes, see Note 12 to the Unaudited Interim Consolidated Financial Statements.

Discontinued Operations

Included within net income are the results of businesses that are reflected as discontinued operations under U.S. GAAP. Income (loss) from discontinued operations, net of taxes, was less than $1 million for the three and six months ended June 30, 2016 and 2015.

Experience-Rated Contractholder Liabilities,

Trading Account Assets Supporting Insurance Liabilities and Other Related Investments

Certain products included in the Retirement and International Insurance segments are experience-rated in that investment results associated with these products are expected to ultimately accrue to contractholders. The majority of investments supporting these experience-rated products are classified as trading and are carried at fair value. These trading investments are reflected on the statements of financial position as “Trading account assets supporting insurance liabilities, at fair value” (“TAASIL”). Realized and unrealized gains (losses) for these investments are reported in “Other income.” Interest and dividend income for these investments is reported in “Net investment income.” To a lesser extent, these experience-rated products are also supported by derivatives and commercial mortgage and other loans. The derivatives that support these experience-rated products are reflected on the Unaudited Interim Consolidated Statements of Financial Position as “Other long-term investments” 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. These loans 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 TAASIL and other related investments. Fully participating products are those for which the entire return on underlying investments is passed back to the policyholders through a corresponding adjustment to the related liability. The adjustment to the liability is based on changes in the fair value of all of the related assets, including commercial mortgage and other loans, which are carried at amortized cost, less any valuation allowance. Partially participating products are those for which only a portion of the return on underlying investments is passed back to the policyholders over time through changes to the contractual crediting rates. The crediting rates are typically reset semiannually, often subject to a minimum crediting rate, and returns are required to be passed back within ten years.

In our International Insurance segment, the experience-rated products are fully participating. As a result, the entire return on the underlying investments is passed back to policyholders through a corresponding adjustment to the related liability.

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Adjusted operating income excludes net investment gains (losses) on TAASIL, 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.

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,
	2016			2015			2016			2015
	(in millions)
Retirement Segment:
Investment gains (losses) on:
Trading account assets supporting insurance liabilities, net	$	180		$	(270	)	$	502		$	(243	)
Derivatives	0			12			(108		)	122
Commercial mortgages and other loans	(1		)	1			(4		)	4
Change in experience-rated contractholder liabilities due to asset value changes(1)(2)	(205		)	284			(441		)	143
Net gains (losses)	$	(26	)	$	27		$	(51	)	$	26
International Insurance Segment:
Investment gains (losses) on trading account assets supporting insurance liabilities, net	$	(72	)	$	50		$	(178	)	$	106
Change in experience-rated contractholder liabilities due to asset value changes	72			(50		)	178			(106		)
Net gains (losses)	$	0		$	0		$	0		$	0
Total:
Investment gains (losses) on:
Trading account assets supporting insurance liabilities, net	$	108		$	(220	)	$	324		$	(137	)
Derivatives	0			12			(108		)	122
Commercial mortgages and other loans	(1		)	1			(4		)	4
Change in experience-rated contractholder liabilities due to asset value changes(1)(2)	(133		)	234			(263		)	37
Net gains (losses)	$	(26	)	$	27		$	(51	)	$	26

__________

(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 less than $1 million and $3 million as of June 30, 2016 and 2015 , 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 increases of $16 million and decreases of $30 million for the three months ended June 30, 2016 and 2015 , respectively, and increases of $55 million and decreases of $25 million for the six months ended June 30, 2016 and 2015 , 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 trading account assets supporting insurance liabilities and other related investments reflect timing differences between the recognition of the mark-to-market adjustments and the recognition of the recovery of these adjustments in future periods through subsequent increases in asset values or reductions in crediting rates on contractholder liabilities for partially participating products. These impacts also reflect the difference between the fair value of the underlying commercial mortgage and other loans and the amortized cost, less any valuation allowance, of these loans, as described above.

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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 13 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.

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 6 to the Unaudited Interim Consolidated Financial Statements for further information on the Closed Block.



	As of June 30, 2016								As of December 31, 2015
	PFI excluding Closed Block Division				Closed Block Division				PFI excluding Closed Block Division				Closed Block Division
	Total at Fair Value		Total Level 3(2)		Total at Fair Value		Total Level 3(2)		Total at Fair Value		Total Level 3(2)		Total at Fair Value		Total Level 3(2)
	(in millions)
Fixed maturities, available-for-sale	$	292,021	$	4,740	$	40,249	$	910	$	252,528	$	4,598	$	37,795	$	1,022
Trading account assets:
Fixed maturities	23,747		564		168		0		29,091		840		176		0
Equity securities	2,146		497		121		88		2,240		537		112		52
All other(3)	2,788		2		0		0		3,361		5		0		0
Subtotal	28,681		1,063		289		88		34,692		1,382		288		52
Equity securities, available-for-sale	7,032		291		2,464		10		6,547		264		2,727		2
Commercial mortgage and other loans	591		0		0		0		274		0		0		0
Other long-term investments(1)	96		14		4		0		172		39		10		10
Short-term investments	3,740		0		615		0		6,270		0		1,217		0
Cash equivalents	18,556		0		1,149		0		13,143		0		1,065		0
Other assets	65		62		0		0		16		7		0		0
Subtotal excluding separate account assets	350,782		6,170		44,770		1,008		313,642		6,290		43,102		1,086
Separate account assets(1)	259,093		2,128		0		0		259,909		1,995		0		0
Total assets	$	609,875	$	8,298	$	44,770	$	1,008	$	573,551	$	8,285	$	43,102	$	1,086
Future policy benefits	$	13,328	$	13,328	$	0	$	0	$	8,434	$	8,434	$	0	$	0
Other liabilities(3)	1,101		2		1		0		32		2		1		0
Notes issued by consolidated variable interest entities (“VIEs”)	2,094		2,094		0		0		8,597		8,597		0		0
Total liabilities	$	16,523	$	15,424	$	1	$	0	$	17,063	$	17,033	$	1	$	0

__________


(1)	Prior period amounts are presented on a basis consistent with the current period presentation, reflecting the adoption of ASU 2015-07.


(2)	The amount of Level 3 assets taken 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 1.4% and 2.3% , respectively, as of June 30, 2016 , and 1.4% and 2.5% , respectively, as of December 31, 2015 .


(3)	“All other” and “Other liabilities” primarily include derivatives. The amounts classified as Level 3 exclude the impact of netting.

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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.

Fixed Maturity and Equity Securities

Fixed maturity securities included in Level 3 in our fair value hierarchy are generally priced based on internally-developed valuations or indicative broker quotes. For certain private fixed maturity and equity securities, the internally-developed valuation model uses significant unobservable inputs and, accordingly, such securities are included in Level 3 in our fair value hierarchy. Level 3 fixed maturity securities for PFI excluding the Closed Block division included approximately $3.3 billion of public fixed maturities as of June 30, 2016 with values primarily based on indicative broker quotes, and approximately $2.0 billion of private fixed maturities, with values primarily based on internally-developed models. Significant unobservable inputs used included: issue specific credit adjustments, material non-public financial information, management judgment, estimation of future earnings and cash flows, default rate assumptions, liquidity assumptions and indicative quotes from market makers. These inputs are usually considered unobservable, as not all market participants have access to this data.

The impact our determination of fair value for fixed maturity and equity securities has on our results of operations is dependent on our classification of the security as either trading, available-for-sale, or held-to-maturity. For our investments classified as trading, the impact of changes in fair value is recorded within “Other income.” For our investments classified as available-for-sale, the impact of changes in fair value is recorded as an unrealized gain or loss in AOCI, a separate component of equity. Our investments classified as held-to-maturity are carried at amortized cost.

Separate Account Assets

Separate account assets included in Level 3 primarily include corporate securities and commercial mortgage loans. The valuation of corporate securities are determined as described above for fixed maturity and equity securities. See Note 13 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 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 $13.3 billion as of June 30, 2016 . For additional information, see “—Results of Operations by Segment—U.S. Retirement Solutions and Investment Management Division—Individual Annuities.”

Notes Issued by Consolidated VIEs

As discussed in Note 5 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, which we are required to consolidate. We have elected the fair value option for these notes, which are valued based on broker quotes.

For additional information about the key estimates and assumptions used in our determination of fair value, see Note 13 to the Unaudited Interim Consolidated Financial Statements.

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Realized Investment Gains and Losses

Realized investment gains and losses are generated from numerous sources, including the following significant items:


•	sale of investments;


•	maturities of foreign denominated investments;


•	adjustments to the cost basis of investments for OTTI;


•	recognition of OTTI in earnings for foreign denominated securities that are approaching maturity and are in an unrealized loss position due to foreign currency exchange rate movements;


•	net changes in the allowance for losses, certain restructurings and foreclosures on commercial mortgage and other loans; and


•	fair value changes on embedded derivatives and free-standing derivatives that do not qualify for hedge accounting treatment.

Effective January 1, 2016, the Company classifies fixed maturity prepayment fees and call premiums in “Net investment income” rather than “Realized investment gains (losses), net.” The impact of this change was immaterial.

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. For additional information regarding our policies regarding OTTI for fixed maturity and equity securities, see Note 2 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2015.

We use interest rate and currency swaps and other derivatives to manage interest and currency exchange rate exposures arising from mismatches between assets and liabilities, including duration mismatches. We use derivative contracts to mitigate the risk that unfavorable changes in currency exchange rates will materially affect U.S. dollar equivalent earnings generated by certain of our non-U.S. businesses. We also use equity-based and interest rate derivatives to hedge a portion of the risks embedded in certain variable annuity products with optional living benefit guarantees. Many of these derivative contracts do not qualify for hedge accounting and, consequently, we recognize the changes in fair value of such contracts from period to period in current earnings, although we do not necessarily account for the related assets or liabilities the same way.

Accordingly, realized investment gains and losses from our derivative activities can contribute significantly to fluctuations in net income. For a further discussion of living benefit guarantees and related hedge positions in our Individual Annuities segment, see “—Results of Operations by Segment—U.S. Retirement Solutions and Investment Management Division—Individual Annuities” above.

Adjusted operating income generally excludes “Realized investment gains (losses), net,” subject to certain exceptions. These exceptions primarily include realized investment gains or losses within certain of our businesses for which such gains or losses are a principal source of earnings, gains or losses associated with terminating hedges of foreign currency earnings and current period yield adjustments, and related charges and adjustments. OTTI, interest rate related losses and credit related losses on sales (other than those related to certain of our businesses which primarily originate investments for sale or syndication to unrelated investors) are excluded from adjusted operating income.

The following table sets forth “Realized investment gains (losses), net,” by investment type as well as related charges and adjustments for the periods indicated. For additional details regarding adjusted operating income, see Note 11 to the Unaudited Interim Consolidated Financial Statements.

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	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(in millions)
Realized investment gains (losses), net:
PFI excluding Closed Block division	$	1,228		$	(36	)	$	3,207		$	1,952
Closed Block division	205			165			107			538
Consolidated realized investment gains (losses), net	$	1,433		$	129		$	3,314		$	2,490
PFI excluding Closed Block Division:
Realized investment gains (losses), net:
Fixed maturity securities	$	385		$	312		$	353		$	672
Equity securities	(20		)	33			(25		)	78
Commercial mortgage and other loans	4			20			29			30
Derivative instruments	879			(415		)	2,906			1,129
Other	(20		)	14			(56		)	43
Total	$	1,228		$	(36	)	$	3,207		$	1,952
Related adjustments	(426		)	(24		)	(987		)	(350		)
Realized investment gains (losses), net, and related adjustments	802			(60		)	2,220			1,602
Related charges	(442		)	346			(1,522		)	(265		)
Realized investment gains (losses), net, and related charges and adjustments	$	360		$	286		$	698		$	1,337
Closed Block Division:
Realized investment gains (losses), net:
Fixed maturity securities	$	48		$	59		$	7		$	168
Equity securities	91			194			124			269
Commercial mortgage and other loans	0			0			2			1
Derivative instruments	72			(88		)	(11		)	106
Other	(6		)	0			(15		)	(6		)
Total	$	205		$	165		$	107		$	538

2016 to 2015 Three Month Comparison

PFI excluding Closed Block Division

The following table sets forth net realized gains (losses) on fixed maturity securities, as of the dates indicated.



	Three Months Ended June 30,
	2016			2015
	(in millions)
Gross realized investment gains:
Gross gains on sales and maturities(1)	$	442		$	359
Gross realized investment losses:
Net OTTI recognized in earnings(2)	(8		)	(18		)
Gross losses on sales and maturities(1)	(41		)	(29		)
Credit related losses on sales	(8		)	0
Total gross realized investment losses	(57		)	(47		)
Realized investment gains (losses), net—Fixed Maturity Securities	$	385		$	312
Net gains (losses) on sales and maturities—Fixed Maturity Securities(1)	$	401		$	330

__________


(1)	Amounts exclude OTTI and credit-related losses through sales of investments due to expected near-term credit conditions of an underlying issuer. During 2016, fixed maturity prepayment gains were reclassified to “Net investment income.” Prior periods were not restated.

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

Net gains on sales and maturities of fixed maturity securities were $401 million and $330 million in the second quarter of 2016 and 2015, respectively, primarily due to net gains of $315 million and $274 million on sales and maturities of U.S. dollar-denominated securities within our International Insurance segment. See below for additional information regarding the OTTI of fixed maturity securities.

Net realized losses on equity securities were $20 million in the second quarter of 2016, primarily driven by OTTI of $27 million, partially offset by net gains on sales of equity securities of $7 million. Net realized gains on equity securities were $33 million in the second quarter of 2015 and included net gains on sales of equity securities of $42 million, partially offset by OTTI of $9 million in 2015. See below for additional information regarding OTTI of equity securities.

Net realized gains on commercial mortgage and other loans in the second quarter of 2016 were $4 million, primarily driven by servicing revenue of $11 million in our Asset Management business. These gains were partially offset by an increase in the loan loss reserve of $3 million. Net realized gains on commercial mortgage and other loans in the second quarter of 2015 were $20 million, primarily driven by servicing revenue of $10 million in our Asset Management business and a net decrease in the loan loss reserve of $6 million. For additional information regarding our commercial mortgage and other loan loss reserves, see “—General Account Investments—Commercial Mortgage and Other Loans—Commercial Mortgage and Other Loan Quality.”

Net realized gains on derivatives were $879 million in the second quarter of 2016, compared to net realized losses of $415 million in the second quarter of 2015. The net derivative gains in the second quarter of 2016 primarily reflect $592 million of gains on interest rate derivatives used to manage duration as swap rates decreased; $259 million of gains on product related embedded derivatives and related hedge positions mainly associated with certain variable annuity contracts; and $37 million of gains primarily representing the fees earned on fee-based GICs which are accounted for as derivatives. The net derivative losses in the second quarter of 2015 primarily reflect $520 million of losses on interest rate derivatives used to manage duration as swap rates increased and $300 million of losses on foreign currency derivatives used to hedge portfolio assets in our Japan business due to the weakening of the yen against the U.S. dollar and in our U.S. business due to the U.S. dollar weakening against euro. Partially offsetting these losses were net gains of $393 million on product related embedded derivatives and related hedge positions mainly associated with certain variable annuity contracts and $41 million of gains primarily representing fees earned on GICs.

Related adjustments include the portions of “Realized investment gains (losses), net” that are included in adjusted operating income and the portions of “Other income” and “Net investment income” that are excluded from adjusted operating income. These adjustments are made to arrive at “Realized investment gains (losses), net, and related adjustments” which are excluded from adjusted operating income. Results for the second quarter of 2016 include net negative related adjustments of $426 million driven by settlements on interest rate and currency derivatives, as well as the impact of foreign currency exchange rate movements on certain intercompany borrowings. Results for the second quarter of 2015 include net negative related adjustments of $24 million driven by settlements on interest rate and currency derivatives, partially offset by the impact of foreign currency exchange rate movements on certain non-yen denominated assets and liabilities within our Japan insurance operations.

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 2016 include a net related charge of $442 million , compared to a net related benefit of $346 million for the second quarter of 2015. Both periods’ results were driven by the impact of derivative activity on the amortization of DAC and other costs and certain policyholder reserves. For additional information, see Note 11 to the Unaudited Interim Consolidated Financial Statements.

The following tables set forth, for the periods indicated, the composition of OTTI recorded in earnings attributable to PFI excluding the Closed Block division by asset type, and for fixed maturity securities, by reason.

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	Three Months Ended June 30,
	2016		2015
	(in millions)
Public fixed maturity securities	$	2	$	3
Private fixed maturity securities	6		15
Total fixed maturity securities	8		18
Equity securities	27		9
Other invested assets(1)	16		7
Total(2)	$	51	$	34

__________


(1)	Includes OTTI related to investments in joint ventures and partnerships.


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



	Three Months Ended June 30,
	2016		2015
	(in millions)
Due to credit events or adverse conditions of the respective issuer(1)	$	7	$	17
Due to other accounting guidelines(2)	1		1
Total(3)	$	8	$	18

__________

(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)	Primarily represents circumstances where securities are being actively marketed for sale by the company, and securities with losses from foreign currency exchange rate movements approach maturity.


(3)	Excludes the portion of OTTI recorded in “Other comprehensive income (loss),” representing any difference between the fair value of the impaired debt security and the net present value of its projected future cash flows at the time of impairment.

Fixed maturity security OTTI in the second quarter of 2016 were concentrated in the energy, industrial and other, and capital goods sectors within corporate securities. Fixed maturity security OTTI in the second quarter of 2015 were concentrated in the industrial other, utility, and consumer non-cyclical sectors within corporate securities. In both periods, these OTTI were primarily related to securities with liquidity concerns, downgrades in credit, bankruptcy or other adverse financial conditions of the respective issuers.

Equity security OTTI in both the second quarter of 2016 and 2015 were primarily driven by the extent and duration of declines in values.

Other invested assets OTTI in both the second quarter of 2016 and 2015 were primarily driven by the extent and duration of declines in values of investments in limited partnerships.

Closed Block Division

The following table sets forth net realized gains (losses) on fixed maturity securities as of the dates indicated.

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	Three Months Ended June 30,
	2016			2015
	(in millions)
Gross realized investment gains:
Gross gains on sales and maturities(1)	$	57		$	82
Gross realized investment losses:
Net OTTI recognized in earnings(2)	(3		)	(11		)
Gross losses on sales and maturities(1)	(5		)	(12		)
Credit related losses on sales	(1		)	0
Total gross realized investment losses	(9		)	(23		)
Realized investment gains (losses), net—Fixed Maturity Securities	$	48		$	59
Net gains (losses) on sales and maturities—Fixed Maturity Securities(1)	$	52		$	70

__________


(1)	Amounts exclude OTTI and credit related losses through sales of investments due to expected near-term credit conditions of an underlying issuer. During 2016, fixed maturity prepayment gains were reclassified to “Net investment income.” Prior periods were not restated.


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

Net realized gains on equity securities were $91 million and $194 million in the second quarter of 2016 and 2015, respectively, primarily driven by net gains on sales. See below for additional information regarding OTTI of equity securities.

Net realized gains on derivatives were $72 million in the second quarter of 2016, compared to net realized losses of $88 million in the second quarter of 2015. Derivative gains in the second quarter of 2016 primarily reflect $74 million of gains on currency derivatives used to hedge foreign denominated investments as the U.S. dollar strengthened against the euro and other currencies. Derivative losses in the second quarter of 2015 primarily reflect net losses of $66 million on currency derivatives used to hedge foreign denominated investments as the U.S. dollar weakened against the euro and net losses of $20 million on interest rate derivatives primarily used to manage duration as interest rates increased.

The following tables set forth, for the periods indicated, the composition of OTTI recorded in earnings attributable to the Closed Block division by asset type, and for fixed maturity securities, by reason.



	Three Months Ended June 30,
	2016		2015
	(in millions)
Public fixed maturity securities	$	3	$	2
Private fixed maturity securities	0		9
Total fixed maturity securities	3		11
Equity securities	4		2
Other invested assets(1)	5		5
Total(2)	$	12	$	18

__________


(1)	Includes OTTI related to investments in joint ventures and partnerships.


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



	Three Months Ended June 30,
	2016		2015
	(in millions)
Due to credit events or adverse conditions of the respective issuer(1)	$	2	$	11
Due to other accounting guidelines	1		0
Total(2)	3		11

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__________

(1)


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

Fixed maturity security OTTI in the second quarter of 2016 were concentrated in the communication, finance, and energy sectors within corporate securities. Fixed maturity security OTTI in the second quarter of 2015 were concentrated in the industrial other, utility, and consumer non-cyclical sectors within corporate securities. In both periods these OTTI primarily reflect adverse financial conditions of the respective issuers.

Equity security OTTI in both the second quarter of 2016 and 2015 were primarily due to the extent and duration of declines in values.

Other invested assets OTTI in both the second quarter of 2016 and 2015 were primarily due to the extent and duration of declines in values of investments in limited partnerships.

2016 to 2015 Six Month Comparison

PFI excluding Closed Block Division

The following table sets forth net realized gains (losses) on fixed maturity securities as of the dates indicated.



	Six Months Ended June 30,
	2016			2015
	(in millions)
Gross realized investment gains:
Gross gains on sales and maturities(1)	$	695		$	766
Gross realized investment losses:
Net OTTI recognized in earnings(2)	(85		)	(22		)
Gross losses on sales and maturities(1)	(246		)	(69		)
Credit related losses on sales	(11		)	(3		)
Total gross realized investment losses	(342		)	(94		)
Realized investment gains (losses), net—Fixed Maturity Securities	$	353		$	672
Net gains (losses) on sales and maturities—Fixed Maturity Securities(1)	$	449		$	697

__________


(1)	Amounts exclude OTTI and credit-related losses through sales of investments due to expected near-term credit conditions of an underlying issuer. During 2016, fixed maturity prepayment gains were reclassified to “Net investment income.” Prior periods were not restated.


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

Net gains on sales and maturities of fixed maturity securities were $449 million in the first six months of 2016 primarily due to net gains of $501 million on sales and maturities of U.S. dollar-denominated securities within our International Insurance segment. The net gains in the first six months of 2016 were partially offset by net trading losses of approximately $190 million on sales of securities within the energy sector and OTTI of $85 million. Net gains on sales and maturities of fixed maturity securities were $697 million in the first six months of 2015 were primarily due to sales and maturities of U.S. dollar-denominated securities within our International Insurance segment. See below for additional information regarding the OTTI of fixed maturity securities in the first six months of 2016 and 2015.

Net realized losses on equity securities were $25 million in the first six months of 2016 primarily driven by OTTI of $35 million partially offset by net gains on sales of equity securities of $10 million. Net realized gains on equity securities were $78 million in the first six months of 2015 and included net gains on sales of equity securities of $92 million partially offset by OTTI of $14 million. See below for additional information regarding OTTI of equity securities.

Net realized gains on commercial mortgage and other loans were $29 million and $30 million in the first six months of 2016 and 2015 respectively, primarily driven by servicing revenue of $22 million and $19 million in our Asset Management business and a net decrease in the loan loss reserve of $12 million and $9 million. For additional information regarding our commercial

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mortgage and other loan loss reserves, see “—General Account Investments—Commercial Mortgage and Other Loans—Commercial Mortgage and Other Loan Quality.”

Net realized gains on derivatives were $2,906 million and $1,129 million in the first six months of 2016 and 2015, respectively. The net derivative gains in the first six months of 2016 primarily reflect $1,382 million of gains on interest rate derivatives used to manage duration as swap rates decreased; $1,351 million of gains on product related embedded derivatives and related hedge positions mainly associated with certain variable annuity contracts; and $76 million of gains primarily representing the fees earned on fee-based GICs which are accounted for as derivatives. The net derivative gains in the first six months of 2015 primarily reflect net gains of $1,117 million on product related embedded derivatives and related hedge positions mainly associated with certain variable annuity contracts .

Related adjustments for the first six months of 2016 include net negative related adjustments of $987 million compared to net negative related adjustments of $350 million for the first six months of 2015. Results for the first six months of 2016 were driven by the impact of foreign currency exchange rate movements on certain non-yen denominated assets and liabilities within our Japan insurance operations, for which the majority of the foreign currency exposure is hedged and offset in “Realized investment gains (losses), net.” The net negative related adjustment also reflects the impact of foreign currency exchange rate movements on certain intercompany borrowings. Results for the first six months of 2015 were driven by settlements on interest rate and currency derivatives, partially offset by the impact of foreign currency exchange rate movements on certain non-yen denominated assets and liabilities within our Japan insurance operations.

Related charges include net related charges of $1,522 million for the first six months of 2016 compared to net related charges of $265 million for the first six months of 2015. Both periods’ results were driven by the impact of derivative activity on the amortization of DAC and other costs and certain policyholder reserves.



	Six Months Ended June 30,
	2016		2015
	(in millions)
Public fixed maturity securities	$	38	$	6
Private fixed maturity securities	47		16
Total fixed maturity securities	85		22
Equity securities	35		14
Other invested assets(1)	40		26
Total(2)	$	160	$	62

__________


(1)	Includes OTTI related to investments in joint ventures and partnerships.


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



	Six Months Ended June 30,
	2016		2015
	(in millions)
Due to credit events or adverse conditions of the respective issuer(1)	$	59	$	21
Due to other accounting guidelines(2)	26		1
Total(3)	$	85	$	22

__________

(1)


(2)	Primarily represents circumstances where securities are being actively marketed for sale by the company, and securities with losses from foreign currency exchange rate movements approach maturity.


(3)	Excludes the portion of OTTI recorded in “Other comprehensive income (loss),” representing any difference between the fair value of the impaired debt security and the net present value of its projected future cash flows at the time of impairment.

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Fixed maturity security OTTI in the first six months of 2016 were concentrated in the energy, consumer cyclical, and industrial other sectors within corporate securities. Fixed maturity security OTTI in the first six months of 2015 were concentrated in the industrial other, consumer cyclical, and utility sectors within corporate securities. In both periods, these OTTI were primarily related to securities with liquidity concerns, downgrades in credit, bankruptcy or other adverse financial conditions of the respective issuers.

Equity security OTTI in both the first six months of 2016 and 2015 were primarily due to the extent and duration of declines in values.

Other invested assets OTTI in both the first six months of 2016 and 2015 were primarily due to the extent and duration of declines in values of investments in limited partnerships within the energy sector.

Closed Block Division

The following table sets forth net realized gains (losses) on fixed maturity securities as of the dates indicated.



	Six Months Ended June 30,
	2016			2015
	(in millions)
Gross realized investment gains:
Gross gains on sales and maturities(1)	$	99		$	208
Gross realized investment losses:
Net OTTI recognized in earnings(2)	(52		)	(15		)
Gross losses on sales and maturities(1)	(36		)	(25		)
Credit related losses on sales	(4		)	0
Total gross realized investment losses	(92		)	(40		)
Realized investment gains (losses), net—Fixed Maturity Securities	$	7		$	168
Net gains (losses) on sales and maturities—Fixed Maturity Securities(1)	$	63		$	183

__________


(1)	Amounts exclude OTTI and credit-related losses through sales of investments due to expected near-term credit conditions of an underlying issuer. During 2016, fixed maturity prepayment gains were reclassified to “Net investment income.” Prior periods were not restated.


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

Net gains on sales and maturities of fixed maturity securities were $63 million and $183 million in the first six months of 2016 and 2015, respectively. Net gains in the first six months of 2016 were partially offset by net trading losses on sales of securities within the energy sector.

Net realized gains on equity securities were $124 million and $269 million in the first six months of 2016 and 2015, respectively, resulting from net gains on sales. See below for additional information regarding the OTTI of equity securities in the first six months of 2016 and 2015.

Net realized losses on derivatives were $11 million in the first six months of 2016, compared to net realized gains of $106 million in the first six months of 2015. Derivative losses in the first six months of 2016 primarily reflect $30 million of losses on net-short treasury futures used to manage duration as treasury rates decreased offset by $16 million of gains on currency derivatives used to hedge foreign denominated investments as the U.S. dollar strengthened against the euro and other currencies. Derivative gains in the first six months of 2015 primarily reflect net gains of $110 million on currency derivatives used to hedge foreign denominated investments as the U.S. dollar strengthened against the euro.

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	Six Months Ended June 30,
	2016		2015
	(in millions)
Public fixed maturity securities	$	13	$	4
Private fixed maturity securities	39		11
Total fixed maturity securities	52		15
Equity securities	7		3
Other invested assets(1)	13		11
Total(2)	$	72	$	29

__________


(1)	Includes OTTI related to investments in joint ventures and partnerships.


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



	Six Months Ended June 30,
	2016		2015
	(in millions)
Due to credit events or adverse conditions of the respective issuer(1)	$	50	$	15
Due to other accounting guidelines	2		0
Total(2)	$	52	$	15

__________

(1)


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

Fixed maturity security OTTI in the first six months of 2016 were concentrated in the energy, transportation, and communications sectors within corporate securities. Fixed maturity security OTTI in the first six months of 2015 were concentrated in the industrial other, capital goods, and utility sectors within corporate securities. In both periods these OTTI reflect adverse financial conditions of the respective issuers.

Equity security OTTI in both the first six months of 2016 and 2015 were primarily due to the extent and duration of declines in values.

Other invested assets OTTI in both the first six months of 2016 and 2015 were primarily due to the extent and duration of declines in values of investments in limited partnerships primarily in the energy sector.

General Account Investments

Portfolio Composition

Our investment portfolio consists of public and private fixed maturity securities, commercial mortgage and other loans, policy loans and non-coupon investments, which include equity securities and other long-term investments such as joint ventures and limited partnerships, real estate held through direct ownership and seed money in separate accounts. The composition of our general account reflects, within the discipline provided by our risk management approach, our need for competitive results and the selection of diverse investment alternatives available primarily through our Asset Management segment. The size of our portfolio enables us to invest in asset classes that may be unavailable to the typical investor.

The following tables set forth the composition of the investments of our general account apportioned between PFI excluding the Closed Block division and the Closed Block division as of the dates indicated.

154



	June 30, 2016
	PFI Excluding Closed Block Division				Closed Block Division		Total
	($ in millions)
Fixed maturities:
Public, available-for-sale, at fair value	$	254,018	66.2	%	$	25,647	$	279,665
Public, held-to-maturity, at amortized cost	2,007		0.5		0		2,007
Private, available-for-sale, at fair value	37,798		9.8		14,602		52,400
Private, held-to-maturity, at amortized cost	478		0.1		0		478
Trading account assets supporting insurance liabilities, at fair value	21,702		5.7		0		21,702
Other trading account assets, at fair value	1,603		0.4		289		1,892
Equity securities, available-for-sale, at fair value	7,020		1.8		2,464		9,484
Commercial mortgage and other loans, at book value	41,058		10.7		9,747		50,805
Policy loans, at outstanding balance	7,201		1.9		4,729		11,930
Other long-term investments(1)	6,839		1.8		2,980		9,819
Short-term investments	4,050		1.1		816		4,866
Total general account investments	383,774		100.0	%	61,274		445,048
Invested assets of other entities and operations(2)	6,832				0		6,832
Total investments	$	390,606			$	61,274	$	451,880



	December 31, 2015
	PFI Excluding Closed Block Division				Closed Block Division		Total
	($ in millions)
Fixed maturities:
Public, available-for-sale, at fair value	$	216,628	63.1	%	$	23,505	$	240,133
Public, held-to-maturity, at amortized cost	1,834		0.5		0		1,834
Private, available-for-sale, at fair value	35,767		10.4		14,290		50,057
Private, held-to-maturity, at amortized cost	474		0.1		0		474
Trading account assets supporting insurance liabilities, at fair value	20,522		6.0		0		20,522
Other trading account assets, at fair value	1,561		0.5		288		1,849
Equity securities, available-for-sale, at fair value	6,537		1.9		2,726		9,263
Commercial mortgage and other loans, at book value	40,486		11.8		9,771		50,257
Policy loans, at outstanding balance	6,867		2.0		4,790		11,657
Other long-term investments(1)	6,549		1.9		2,921		9,470
Short-term investments	6,250		1.8		1,467		7,717
Total general account investments	343,475		100.0	%	59,758		403,233
Invested assets of other entities and operations(2)	13,959				0		13,959
Total investments	$	357,434			$	59,758	$	417,192

__________


(1)	Other long-term investments consist of real estate and non-real estate-related investments in joint ventures and partnerships, investment real estate held through direct ownership and other miscellaneous investments. For additional information regarding these investments, see “—Other Long-Term Investments” below.


(2)	Includes invested assets of our asset management and derivative operations. Excludes assets of our asset management operations that are managed for third parties and those assets classified as “Separate account assets” on our balance sheet. For additional information regarding these investments, see “—Invested Assets of Other Entities and Operations” below.

155

The increase in general account investments attributable to PFI excluding the Closed Block division in the first six months of 2016 was primarily due to a net increase in fair value driven by a decrease in interest rates in the U.S. and Japan, the translation impact of the yen strengthening against the U.S. dollar and the reinvestment of net investment income and net business inflows. The general account investments attributable to the Closed Block division increased in the first six months of 2016 , primarily due to a net increase in fair value driven by a decrease in interest rates in the U.S. For information regarding the methodology used in determining the fair value of our fixed maturities, see Note 13 to the Unaudited Interim Consolidated Financial Statements.

As of June 30, 2016 and December 31, 2015 , 44% and 41% , respectively, of our general account investments, other than those of the Closed Block division, related to our Japanese insurance operations.

The following table sets forth the composition related to the investments of our Japanese insurance operations’ general account as of the dates indicated.



	June 30, 2016		December 31, 2015
	(in millions)
Fixed maturities:
Public, available-for-sale, at fair value	$	133,008	$	109,257
Public, held-to-maturity, at amortized cost	2,007		1,834
Private, available-for-sale, at fair value	10,670		9,747
Private, held-to-maturity, at amortized cost	478		474
Trading account assets supporting insurance liabilities, at fair value	2,202		2,020
Other trading account assets, at fair value	587		647
Equity securities, available-for-sale, at fair value	2,811		2,660
Commercial mortgage and other loans, at book value	10,708		9,756
Policy loans, at outstanding balance	2,498		2,208
Other long-term investments(1)	2,094		1,742
Short-term investments	364		417
Total Japanese general account investments	$	167,427	$	140,762

__________


(1)	Other long-term investments consist of real estate and non-real estate-related investments in joint ventures and partnerships, investment real estate held through direct ownership, derivatives and other miscellaneous investments.

The increase in general account investments related to our Japanese insurance operations in the first six months of 2016 was primarily attributable to the translation impact of the yen strengthening against the U.S. dollar, a net increase in fair value driven by a decrease in interest rates in the U.S. and Japan and the reinvestment of net investment income and business inflows.

As of June 30, 2016, our Japanese insurance operations had $54.6 billion, at fair value, of investments denominated in U.S. dollars, including $4.7 billion that were hedged to yen through third-party derivative contracts and $36.0 billion that support liabilities denominated in U.S. dollars, with the remainder hedging our foreign currency exchange rate exposure on U.S. dollar-equivalent equity. As of December 31, 2015, our Japanese insurance operations had $50.2 billion, at fair value, of investments denominated in U.S. dollars, including $4.0 billion that were hedged to yen through third-party derivative contracts and $32.3 billion that support liabilities denominated in U.S. dollars, with the remainder hedging our foreign currency exchange rate exposure on U.S. dollar-equivalent equity. The $4.4 billion increase in the fair value of U.S. dollar-denominated investments from December 31, 2015, is primarily attributable to a net increase in fair value driven by the decrease in interest rates and portfolio growth as a result of net business inflows and the reinvestment of net investment income.

Our Japanese insurance operations had $10.7 billion and $10.0 billion, at fair value, of investments denominated in Australian dollars that support liabilities denominated in Australian dollars as of June 30, 2016 and December 31, 2015, respectively. The $0.7 billion increase in the fair value of Australian dollar-denominated investments from December 31, 2015, is primarily attributable to portfolio growth as a result of net business inflows and the reinvestment of net investment income, partially offset by the translation impact of the Australian dollar weakening against the U.S. dollar.

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 — International Insurance Division.”

156

Investment Results

The following tables set forth the income yield and investment income for each major investment category of our general account for the periods indicated. The yields are based on net investment income as reported under U.S. GAAP and as such do not include certain interest related items, such as settlements of duration management swaps which are included in realized gains (losses). Effective January 1, 2016, the Company classified fixed maturity prepayment fees and call premiums in “Net investment income” rather than “Realized investment gains (losses), net.” The impact of this change was immaterial.



	Three Months Ended June 30, 2016
	PFI Excluding Closed Block Division					Closed Block Division					Total
	Yield(1)		Amount			Yield(1)		Amount			Yield(1)		Amount
	($ in millions)
Fixed maturities	3.88	%	$	2,353		4.90	%	$	424		4.01	%	$	2,777
Trading account assets supporting insurance liabilities	3.40		182			0.00		0			3.40		182
Equity securities	7.11		93			3.99		17			6.33		110
Commercial mortgage and other loans	4.29		437			5.01		121			4.43		558
Policy loans	4.88		86			5.93		70			5.30		156
Short-term investments and cash equivalents	0.55		27			2.48		5			0.61		32
Other investments	2.66		57			4.99		41			3.30		98
Gross investment income before investment expenses	3.76		3,235			4.93		678			3.92		3,913
Investment expenses	(0.13	)	(107		)	(0.25	)	(39		)	(0.15	)	(146		)
Investment income after investment expenses	3.63	%	3,128			4.68	%	639			3.77	%	3,767
Investment results of other entities and operations(2)			22					0					22
Total investment income			$	3,150				$	639				$	3,789



	Three Months Ended June 30, 2015
	PFI Excluding Closed Block Division					Closed Block Division					Total
	Yield(1)		Amount			Yield(1)		Amount			Yield(1)		Amount
	($ in millions)
Fixed maturities	4.01	%	$	2,234		5.02	%	$	432		4.14	%	$	2,666
Trading account assets supporting insurance liabilities	3.50		178			0.00		0			3.50		178
Equity securities	6.31		75			1.10		5			4.68		80
Commercial mortgage and other loans	4.51		426			5.26		127			4.67		553
Policy loans	4.92		83			5.91		71			5.33		154
Short-term investments and cash equivalents	0.20		8			2.29		3			0.24		11
Other investments	4.20		89			4.54		36			4.29		125
Gross investment income before investment expenses	3.91		3,093			4.93		674			4.06		3,767
Investment expenses	(0.15	)	(97		)	(0.25	)	(35		)	(0.16	)	(132		)
Investment income after investment expenses	3.76	%	2,996			4.68	%	639			3.90	%	3,635
Investment results of other entities and operations(2)			36					0					36
Total investment income			$	3,032				$	639				$	3,671

157

__________

(1)

Yields are annualized, for interim periods, and are based on quarterly average carrying values except for fixed maturities, equity securities and securities lending activity. Yields for fixed maturities are based on amortized cost. Yields for equity securities are based on cost. Yields for fixed maturities and short-term investments and cash equivalents are calculated net of liabilities and rebate expenses corresponding to securities lending activity. Yields exclude investment income on assets other than those included in invested assets.


(2)	Includes investment income of our asset management operations and derivative operations.

See below for a discussion of the change in the yields for PFI excluding the Closed Block division. The net investment income yield attributable to the Closed Block division for the three months ended June 30, 2016 , was flat compared to the three months ended June 30, 2015 .

The following table sets forth the income yield and investment income for each major investment category of our general account investments for the periods indicated. The yields are based on net investment income as reported under U.S. GAAP and as such do not include certain interest related items, such as settlements of duration management swaps which are included in realized gains (losses).

158



	Six Months Ended June 30, 2016
	PFI Excluding Closed Block Division					Closed Block Division					Total
	Yield(1)		Amount			Yield(1)		Amount			Yield(1)		Amount
	($ in millions)
Fixed maturities	3.91	%	$	4,621		4.93	%	$	847		4.04	%	$	5,468
Trading account assets supporting insurance liabilities	3.52		370			0.00		0			3.52		370
Equity securities	6.15		157			3.72		33			5.52		190
Commercial mortgage and other loans	4.31		870			5.00		240			4.45		1,110
Policy loans	4.90		170			5.97		140			5.33		310
Short-term investments and cash equivalents	0.56		54			2.23		11			0.62		65
Other investments	2.92		122			3.67		59			3.13		181
Gross investment income before investment expenses	3.78		6,364			4.85		1,330			3.93		7,694
Investment expenses	(0.13	)	(203		)	(0.26	)	(79		)	(0.15	)	(282		)
Investment income after investment expenses	3.65	%	6,161			4.59	%	1,251			3.78	%	7,412
Investment results of other entities and operations(2)			47					0					47
Total investment income			$	6,208				$	1,251				$	7,459



	Six Months Ended June 30, 2015
	PFI Excluding Closed Block Division					Closed Block Division					Total
	Yield(1)		Amount			Yield(1)		Amount			Yield(1)		Amount
	($ in millions)
Fixed maturities	4.00	%	$	4,434		4.90	%	$	859		4.13	%	$	5,293
Trading account assets supporting insurance liabilities	3.62		365			0.00		0			3.62		365
Equity securities	5.80		136			3.77		40			5.16		176
Commercial mortgage and other loans	4.56		845			5.24		249			4.70		1,094
Policy loans	4.93		166			5.92		142			5.34		308
Short-term investments and cash equivalents	0.22		17			1.43		6			0.26		23
Other investments	6.10		258			7.72		120			6.53		378
Gross investment income before investment expenses	3.97		6,221			5.11		1,416			4.14		7,637
Investment expenses	(0.15	)	(190		)	(0.23	)	(68		)	(0.15	)	(258		)
Investment income after investment expenses	3.82	%	6,031			4.88	%	1,348			3.99	%	7,379
Investment results of other entities and operations(2)			61					0					61
Total investment income			$	6,092				$	1,348				$	7,440

__________

(1)


(2)	Includes investment income of our asset management operations and derivative operations.

159

See below for a discussion of the change in the yields for PFI excluding the Closed Block division. The net investment income yield attributable to the Closed Block division for the six months ended June 30, 2016 , decreased compared to the six months ended June 30, 2015 , due to lower income on non-coupon investments.

The following table sets forth the income yield and investment income for each major investment category of our general account investments, excluding both the Closed Block division and the Japanese insurance operations’ portion of the general account which is presented separately below, for the periods indicated. The yields are based on net investment income as reported under U.S. GAAP and as such do not include certain interest related items, such as settlements of duration management swaps which are included in realized gains (losses).



	Three Months Ended June 30, 2016					Three Months Ended June 30, 2015
	Yield(1)		Amount			Yield(1)		Amount
	($ in millions)
Fixed maturities	4.56	%	$	1,490		4.57	%	$	1,423
Trading account assets supporting insurance liabilities	3.64		176			3.77		173
Equity securities	7.97		73			6.60		55
Commercial mortgage and other loans	4.35		331			4.51		327
Policy loans	5.40		63			5.40		63
Short-term investments and cash equivalents	0.54		25			0.20		7
Other investments	(0.02	)	(1		)	3.78		56
Gross investment income before investment expenses	4.06		2,157			4.22		2,104
Investment expenses	(0.14	)	(67		)	(0.16	)	(56		)
Investment income after investment expenses	3.92	%	2,090			4.06	%	2,048
Investment results of other entities and operations(2)			22					36
Total investment income			$	2,112				$	2,084

__________

(1)


(2)	Includes investment income of our asset management operations and derivative operations.

The decrease in net investment income yield attributable to our general account investments, excluding both the Closed Block division and the Japanese operations’ portfolio, for the three months ended June 30, 2016 , compared to the three months ended June 30, 2015 , was primarily the result of lower income from non-coupon investments.

160



	Six Months Ended June 30, 2016					Six Months Ended June 30, 2015
	Yield(1)		Amount			Yield(1)		Amount
	($ in millions)
Fixed maturities	4.59	%	$	2,943		4.62	%	$	2,834
Trading account assets supporting insurance liabilities	3.70		351			3.81		348
Equity securities	6.89		123			6.31		102
Commercial mortgage and other loans	4.33		656			4.58		654
Policy loans	5.40		125			5.42		125
Short-term investments and cash equivalents	0.55		50			0.21		15
Other investments	1.73		48			5.62		170
Gross investment income before investment expenses	4.12		4,296			4.31		4,248
Investment expenses	(0.14	)	(124		)	(0.16	)	(109		)
Investment income after investment expenses	3.98	%	4,172			4.15	%	4,139
Investment results of other entities and operations(2)			47					61
Total investment income			$	4,219				$	4,200

__________

(1)


(2)	Includes investment income of our asset management operations and derivative operations.

The decrease in net investment income yield attributable to our general account investments, excluding both the Closed Block division and the Japanese operations’ portfolio, for the six months ended June 30, 2016 , compared to the six months ended June 30, 2015 , was primarily the result of lower income from non-coupon investments and lower fixed income reinvestment rates.

The following table sets forth the income yield and investment income for each major investment category of our Japanese insurance operations’ general account for the periods indicated. The yields are based on net investment income as reported under U.S. GAAP and as such do not include certain interest related items, such as settlements of duration management swaps which are included in realized gains (losses).



	Three Months Ended June 30, 2016					Three Months Ended June 30, 2015
	Yield(1)		Amount			Yield(1)		Amount
	($ in millions)
Fixed maturities	3.09	%	$	863		3.29	%	$	811
Trading account assets supporting insurance liabilities	1.21		6			1.06		5
Equity securities	5.17		20			5.64		20
Commercial mortgage and other loans	4.11		106			4.54		99
Policy loans	3.89		23			3.87		20
Short-term investments and cash equivalents	0.82		2			0.26		1
Other investments	8.07		58			5.19		33
Gross investment income before investment expenses	3.26		1,078			3.40		989
Investment expenses	(0.12	)	(40		)	(0.14	)	(41		)
Total investment income	3.14	%	$	1,038		3.26	%	$	948

__________

(1)

161

The decrease in net investment income yield on the Japanese insurance portfolio for the three months ended June 30, 2016, compared to the three months ended June 30, 2015, was primarily attributable to lower fixed income reinvestment rates partially offset by higher income from non-coupon investments.

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 $36.4 billion and $35.5 billion, for the three months ended June 30, 2016 and 2015, 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 $9.3 billion and $9.0 billion, for the three months ended June 30, 2016 and 2015, respectively. The Australian dollar-denominated fixed maturities support liabilities that are denominated in Australian dollars.



	Six Months Ended June 30, 2016					Six Months Ended June 30, 2015
	Yield(1)		Amount			Yield(1)		Amount
	($ in millions)
Fixed maturities	3.11	%	$	1,678		3.23	%	$	1,600
Trading account assets supporting insurance liabilities	1.87		19			1.78		17
Equity securities	4.44		34			4.67		34
Commercial mortgage and other loans	4.26		214			4.51		191
Policy loans	3.90		45			3.87		41
Short-term investments and cash equivalents	0.81		4			0.26		2
Other investments	5.37		74			7.28		88
Gross investment income before investment expenses	3.24		2,068			3.39		1,973
Investment expenses	(0.12	)	(79		)	(0.14	)	(81		)
Total investment income	3.12	%	$	1,989		3.25	%	$	1,892

__________

(1)

The decrease in net investment income yield on the Japanese insurance portfolio for the six months ended June 30, 2016, compared to the six months ended June 30, 2015, was primarily attributable to lower fixed income 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 $36.0 billion and $35.5 billion, for the six months ended June 30, 2016, and 2015, 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 $9.3 billion and $9.4 billion for the six months ended June 30, 2016, and 2015, respectively. The Australian dollar-denominated fixed maturities support liabilities that are denominated in Australian dollars.

For additional information regarding U.S. and Australian dollar investments held in our Japanese insurance operations see, “—Results of Operations by Segment—International Insurance Division.”

162

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 6 to the Unaudited Interim Consolidated Financial Statements for further information on the Closed Block.

Energy Related Exposure

As of June 30, 2016 , PFI excluding the Closed Block division had direct and indirect energy and related exposure with a market value of approximately $12.3 billion, and a net unrealized gain of approximately $0.5 billion, which is reflected in AOCI. Of this exposure, $10.7 billion represented investments in public and private corporate fixed maturity securities and was concentrated primarily in midstream (31%), independent energy (30%), integrated energy (19%), and oil field services (13%). As of June 30, 2016 , the credit quality of energy sector fixed maturity securities was 82% investment grade. The remaining exposure of $1.6 billion was comprised of trading assets, equity securities and private equity investments. Energy investment realized losses were approximately $7 million from sales and $8 million from OTTI for the three months ended June 30, 2016 . Our investments in the energy sector could experience future valuation declines or impairments if energy prices remain at current or lower levels for an extended period of time.

United Kingdom / European Union Exposure

As of June 30, 2016 , PFI excluding the Closed Block had direct and indirect United Kingdom exposure with a market value of approximately $10.6 billion. Net unrealized gains were approximately $0.8 billion, which is reflected in AOCI. Of this exposure, $7.3 billion represented public and private corporate fixed maturity securities across a range of sectors, 94% of which was investment grade. In addition, $1.1 billion represented commercial mortgage loans with a weighted average loan to value ratio of 60% and a weighted average debt service coverage ratio of 2.65 times. The remaining United Kingdom exposure of $2.2 billion was comprised of trading assets, equity securities, private equity investments and real estate held through direct ownership. Of the total exposure, 40% was denominated in pound sterling, substantially all of which is hedged back to U.S. dollars.

As of June 30, 2016 , PFI excluding the Closed Block had direct and indirect European Union exposure excluding the United Kingdom, with a market value of approximately $17.1 billion. Net unrealized gains were approximately $1.9 billion, which is reflected in AOCI. Of this exposure, $14.4 billion represented public and private corporate fixed maturity securities, 96% of which was investment grade. The remaining European Union exposure excluding the United Kingdom of $2.7 billion was comprised of trading assets, commercial mortgages, equity securities, private equity investments and real estate held through direct ownership. Of the total exposure, 41% was denominated in foreign currencies, substantially all of which is hedged back to U.S. dollars. The total exposure was concentrated primarily in The Netherlands (27%), France (19%), Italy (13%), Germany (10%), Luxembourg (7%), Ireland (5%) and Sweden (5%).

Fixed Maturity Securities

Fixed Maturity Securities and Unrealized Gains (Losses) by Industry Category

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

163



	June 30, 2016								December 31, 2015
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	$	24,013	$	1,793	$	136	$	25,670	$	21,505	$	1,385	$	224	$	22,666
Consumer non-cyclical	22,897		2,811		135		25,573		20,732		2,073		408		22,397
Utility	18,258		2,363		118		20,503		17,369		1,423		393		18,399
Capital goods	11,391		1,271		134		12,528		10,503		978		241		11,240
Consumer cyclical	10,486		1,039		84		11,441		9,223		846		146		9,923
Foreign agencies	5,386		1,201		29		6,558		5,222		1,086		67		6,241
Energy	9,227		778		327		9,678		10,793		674		855		10,612
Communications	6,255		864		77		7,042		6,294		690		200		6,784
Basic industry	5,945		482		79		6,348		5,658		404		321		5,741
Transportation	7,057		841		73		7,825		6,536		605		105		7,036
Technology	3,676		298		45		3,929		3,459		278		72		3,665
Industrial other	3,615		371		32		3,954		3,547		245		73		3,719
Total corporate securities	128,206		14,112		1,269		141,049		120,841		10,687		3,105		128,423
Foreign government(3)	82,875		24,071		35		106,911		72,265		12,167		131		84,301
Residential mortgage-backed	4,590		372		1		4,961		4,861		353		6		5,208
Asset-backed	6,984		154		102		7,036		6,873		195		69		6,999
Commercial mortgage-backed	7,808		487		4		8,291		7,300		160		37		7,423
U.S. Government	13,195		4,170		1		17,364		11,479		2,900		11		14,368
State & Municipal(4)	7,899		1,334		3		9,230		7,661		675		39		8,297
Total(5)	$	251,557	$	44,700	$	1,415	$	294,842	$	231,280	$	27,137	$	3,398	$	255,019

__________


(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 $541 million of gross unrealized gains and less than $1 million of gross unrealized losses as of June 30, 2016 , compared to $316 million of gross unrealized gains and $0 million of gross unrealized losses as of December 31, 2015 , on securities classified as held-to-maturity.


(3)	As of June 30, 2016 and December 31, 2015 , based on amortized cost, 77% and 76% represent Japanese government bonds held by our Japanese insurance operations, respectively, with no other individual country representing more than 10% of the balance.


(4)	Includes securities related to the Build America Bonds program.

(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. Also excluded from the table above are fixed maturity securities classified as trading. See “—Trading Account Assets Supporting Insurance Liabilities” and “—Other Trading Account Assets” for additional information.

The increase in net unrealized gains from December 31, 2015 to June 30, 2016 , was primarily due to a decrease in interest rates in both the U.S. and Japan and credit spread tightening.

164

Asset-Backed Securities

The following tables set forth the amortized cost and fair value of our asset-backed securities attributable to PFI excluding the Closed Block division, by credit quality, as of the dates indicated.

Asset-Backed Securities at Amortized Cost



	June 30, 2016
	Lowest Rating Agency Rating										Total Amortized Cost		Total December 31, 2015
	AAA		AA		A		BBB		BB and below		Total Amortized Cost		Total December 31, 2015
	(in millions)
Collateralized by sub-prime mortgages(1)	$	0	$	1	$	56	$	77	$	605	$	739	$	1,141
Collateralized loan obligations	4,517		25		0		0		0		4,542		4,280
Collateralized by education loans(2)	23		372		0		0		0		395		392
Collateralized by credit cards	234		0		0		0		0		234		201
Collateralized by auto loans	795		0		0		0		0		795		518
Other asset-backed securities(3)	11		86		47		23		112		279		341
Total asset-backed securities(4)	$	5,580	$	484	$	103	$	100	$	717	$	6,984	$	6,873

__________


(1)	While there is no market standard definition for securities collateralized by sub-prime mortgages, we define sub-prime mortgages as residential mortgages that are originated to weaker-quality obligors as indicated by weaker credit scores, as well as mortgages with higher loan-to-value ratios or limited documentation.


(2)	All of the $395 million of education loans included above carry a Department of Education guaranty as of June 30, 2016 .


(3)	Includes asset-backed securities collateralized by bond obligations, aircraft, equipment leases, franchises and timeshares.


(4)	Excluded from the table above are asset-backed securities held outside the general account in other entities and operations. Also excluded from the table above are asset-backed securities classified as trading.

Asset-Backed Securities at Fair Value



	June 30, 2016
	Lowest Rating Agency Rating										Total Fair Value		Total December 31, 2015
	AAA		AA		A		BBB		BB and below		Total Fair Value		Total December 31, 2015
	(in millions)
Collateralized by sub-prime mortgages(1)	$	0	$	1	$	55	$	77	$	669	$	802	$	1,189
Collateralized loan obligations	4,473		25		0		0		0		4,498		4,317
Collateralized by education loans(2)	23		356		0		0		0		379		395
Collateralized by credit cards	240		0		0		0		0		240		206
Collateralized by auto loans	802		0		0		0		0		802		516
Other asset-backed securities(3)	22		88		52		23		130		315		376
Total asset-backed securities(4)	$	5,560	$	470	$	107	$	100	$	799	$	7,036	$	6,999

__________


(1)	While there is no market standard definition for securities collateralized by sub-prime mortgages, we define sub-prime mortgages as residential mortgages that are originated to weaker-quality obligors as indicated by weaker credit scores, as well as mortgages with higher loan-to-value ratios or limited documentation.


(2)	All of the $379 million of education loans included above carry a Department of Education guaranty as of June 30, 2016 .


(3)	Includes asset-backed securities collateralized by bond obligations, aircraft, equipment leases, franchises and timeshares.


(4)	Excluded from the table above are asset-backed securities held outside the general account in other entities and operations. Also excluded from the table above are asset-backed securities classified as trading.

The tables above provide ratings as assigned by nationally recognized rating agencies as of June 30, 2016 , including Standard & Poor’s, Moody’s and Fitch. In making our investment decisions, rather than relying solely on the rating agencies’ evaluations, we assign internal ratings to our asset-backed securities based upon our dedicated asset-backed securities unit’s independent evaluation of the underlying collateral and securitization structure, including any guarantees from monoline bond insurers.

165

Residential Mortgage-Backed Securities

The following tables set forth the amortized cost of our residential mortgage-backed securities attributable to PFI excluding the Closed Block division as of the dates indicated.



	June 30, 2016				December 31, 2015
	Amortized Cost		% of Total		Amortized Cost		% of Total
	($ in millions)
By security type:
Agency pass-through securities(1)	$	4,126	89.9	%	$	4,382	90.1	%
Collateralized mortgage obligations	464		10.1		479		9.9
Total residential mortgage-backed securities	$	4,590	100.0	%	$	4,861	100.0	%
Portion rated AA or higher(2)	$	4,525	98.6	%	$	4,791	98.6	%

__________


(1)	As of June 30, 2016 , of these securities, $2.959 billion are supported by U.S. government, and $1.167 billion are supported by foreign governments. As of December 31, 2015 , of these securities, $3.267 billion were supported by the U.S. government and $1.115 billion were supported by foreign governments.


(2)	Based on lowest external rating agency rating.

Commercial Mortgage-Backed Securities

The following tables set forth the amortized cost and fair value of our commercial mortgage-backed securities attributable to PFI excluding the Closed Block division as of the dates indicated, by credit quality and by year of issuance (vintage).

Commercial Mortgage-Backed Securities at Amortized Cost



	June 30, 2016												Total December 31, 2015
	Lowest Rating Agency Rating(1)										Total Amortized Cost
	AAA		AA		A		BBB		BB and below		Total Amortized Cost
Vintage	(in millions)
2016	$	774	$	273	$	0	$	0	$	0	$	1,047	$	0
2015	557		113		0		0		0		670		607
2014	2,513		1		2		0		0		2,516		2,420
2013	2,485		99		0		9		0		2,593		2,568
2012—2009	193		244		0		0		0		437		469
2008—2007	86		32		9		0		0		127		113
2006 & Prior	379		30		9		0		0		418		1,123
Total commercial mortgage-backed securities(2)(3)(4)	$	6,987	$	792	$	20	$	9	$	0	$	7,808	$	7,300

__________


(1)	The table above provides ratings as assigned by nationally recognized rating agencies as of June 30, 2016 .


(2)	Excluded from the table above are commercial mortgage-backed securities held outside the general account in other entities and operations. Also excluded from the table above are commercial mortgage-backed securities classified as trading.


(3)	Included in the table above, as of June 30, 2016 , are downgraded super senior securities with amortized cost of $35 million in AA and $15 million in A.


(4)	Included in the table above, as of June 30, 2016 , are agency commercial mortgage-backed securities with amortized cost of $755 million , all rated AA.

166

Commercial Mortgage-Backed Securities at Fair Value



	June 30, 2016												Total December 31, 2015
	Lowest Rating Agency Rating										Total Fair Value
	AAA		AA		A		BBB		BB and below		Total Fair Value
Vintage	(in millions)
2016	$	789	$	283	$	0	$	0	$	0	$	1,072	$	0
2015	585		120		0		0		0		705		601
2014	2,700		1		2		0		0		2,703		2,471
2013	2,685		107		0		8		0		2,800		2,621
2012—2009	195		262		0		0		0		457		480
2008—2007	85		35		9		0		0		129		115
2006 & Prior	386		30		9		0		0		425		1,135
Total commercial mortgage-backed securities(1)(2)	$	7,425	$	838	$	20	$	8	$	0	$	8,291	$	7,423

__________


(1)	Excluded from the table above are commercial mortgage-backed securities held outside the general account in other entities and operations. Also excluded from the table above are commercial mortgage-backed securities classified as trading


(2)	Included in the table above, as of June 30, 2016 , are agency commercial mortgage-backed securities with fair value of $800 million , all rated AA.

Fixed Maturity Securities Credit Quality

The Securities Valuation Office (“SVO”) of the NAIC, evaluates the investments of insurers for statutory reporting purposes and assigns fixed maturity securities to one of six categories called “NAIC Designations.” In general, NAIC Designations of “1” highest quality, or “2” high quality, include fixed maturities considered investment grade, which include securities rated Baa3 or higher by Moody’s or BBB- or higher by Standard & Poor’s. NAIC Designations of “3” through “6” generally include fixed maturities referred to as below investment grade, which include securities rated Ba1 or lower by Moody’s and BB+ or lower by Standard & Poor’s. The NAIC Designations for commercial mortgage-backed securities and non-agency residential mortgage-backed securities, including our asset-backed securities collateralized by sub-prime mortgages, are based on security level expected losses as modeled by an independent third-party (engaged by the NAIC) and the statutory carrying value of the security, including any purchase discounts or impairment charges previously recognized.

As a result of time lags between the funding of investments, the finalization of legal documents, and the completion of the SVO filing process, the fixed maturity portfolio generally includes securities that have not yet been 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, Standard & Poor’s, or rating equivalents based on ratings assigned by Japanese credit ratings agencies.

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

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	June 30, 2016								December 31, 2015
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	$	192,050	$	39,417	$	330	$	231,137	$	177,350	$	22,783	$	1,445	$	198,688
2	47,016		4,609		648		50,977		43,731		3,698		1,545		45,884
Subtotal High or Highest Quality Securities(5)	239,066		44,026		978		282,114		221,081		26,481		2,990		244,572
3	8,533		403		272		8,664		7,085		408		292		7,201
4	2,772		178		117		2,833		2,332		150		100		2,382
5	690		38		32		696		415		78		12		481
6	496		55		16		535		367		20		4		383
Subtotal Other Securities(6)(7)	12,491		674		437		12,728		10,199		656		408		10,447
Total Fixed Maturities	$	251,557	$	44,700	$	1,415	$	294,842	$	231,280	$	27,137	$	3,398	$	255,019

__________


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


(2)	Includes, as of June 30, 2016 and December 31, 2015 , 688 securities with amortized cost of $2,720 million (fair value, $2,820 million ) and 938 securities with amortized cost of $4,253 million (fair value, $4,325 million ), respectively, that have been categorized based on expected NAIC Designations pending receipt of SVO ratings.


(3)	Includes $541 million of gross unrealized gains and less than $1 million of gross unrealized losses as of June 30, 2016 , compared to $316 million of gross unrealized gains and $0 million of gross unrealized losses as of December 31, 2015 , on securities classified as held-to-maturity.


(4)	As of June 30, 2016 , includes gross unrealized losses of $231 million on public fixed maturities and $206 million on private fixed maturities considered to be other than high or highest quality and, as of December 31, 2015 , includes gross unrealized losses of $212 million on public fixed maturities and $196 million on private fixed maturities considered to be other than high or highest quality.


(5)	On an amortized cost basis, as of June 30, 2016 , includes $208,047 million of public fixed maturities and $31,019 million of private fixed maturities and, as of December 31, 2015 , includes $190,638 million of public fixed maturities and $30,443 million of private fixed maturities.


(6)	On an amortized cost basis, as of June 30, 2016 , includes $7,203 million of public fixed maturities and $5,288 million of private fixed maturities and, as of December 31, 2015 , includes $5,836 million of public fixed maturities and $4,363 million of private fixed maturities.


(7)	On an amortized cost basis, as of June 30, 2016 , securities considered below investment grade based on lowest of external rating agency ratings, total $13,906 million , or 5% of the total fixed maturities, and include securities considered high or highest quality by the NAIC based on the rules described above.

Credit Derivative Exposure to Public Fixed Maturities

In addition to the credit exposure from public fixed maturities noted above, we sell credit derivatives to enhance the return on our investment portfolio by creating credit exposure similar to an investment in public fixed maturity cash instruments.

In a credit derivative, we may sell credit protection on an identified name or a broad based index, and in return receive a quarterly premium. The majority of the underlying reference names in single name and index credit derivatives where we have sold credit protection, as well as all the counterparties to these agreements, are investment grade credit quality and our credit derivatives have a remaining term to maturity of forty-three years or less. The premium or credit spread generally corresponds to the difference between the yield on the reference name’s (or index’s underlying reference names) public fixed maturity cash instruments and swap rates at the time the agreement is executed. Credit derivative contracts are recorded at fair value with changes in fair value, including the premiums received, recorded in “Realized investment gains (losses), net.”

As of June 30, 2016 and December 31, 2015 , PFI excluding the Closed Block division had $1,160 million and $807 million of notional amounts of exposure, where we have sold credit protection through credit derivatives, reported at fair value as a liability of $49 million and $27 million, respectively. “Realized investment gains (losses), net” from credit derivatives we sold were a gain of $3 million and $2 million for the three months ended June 30, 2016 and 2015 , and a gain of $5 million and $3 million for the six months ended June 30, 2016 and 2015 , respectively. This excludes a credit derivative related to surplus notes issued by a subsidiary of Prudential Insurance. See Note 14 to the Unaudited Interim Consolidated Financial Statements for additional information regarding this derivative.

In addition to selling credit protection, we have purchased credit protection using credit derivatives in order to hedge specific credit exposures in our investment portfolio. As of June 30, 2016 and December 31, 2015 , PFI excluding the Closed Block division had $240 million and $409 million of notional amounts reported at fair value as a liability of $5 million and $4 million, respectively.

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“Realized investment gains (losses), net” from credit derivatives we purchased were a loss of $2 million for both the three months ended June 30, 2016 and 2015, and a loss of $3 million and $5 million for the six months ended June 30, 2016 and 2015 , respectively. See Note 14 to the Unaudited Interim Consolidated Financial Statements for additional information regarding credit derivatives and an overall description of our derivative activities.

OTTI of Fixed Maturity Securities

We maintain separate monitoring processes for public and private fixed maturities and create watch lists to highlight securities that require special scrutiny and management. Our public fixed maturity asset managers formally review all public fixed maturity holdings on a quarterly basis and more frequently when necessary to identify potential credit deterioration whether due to ratings downgrades, unexpected price variances, and/or company or industry specific concerns.

For private placements, our credit and portfolio management processes help ensure prudent controls over valuation and management. We have separate pricing and authorization processes to establish “checks and balances” for new investments. We apply consistent standards of credit analysis and due diligence for all transactions, whether they originate through our own in-house origination staff or through agents. Our regional offices closely monitor the portfolios in their regions. We set all valuation standards centrally, and we assess the fair value of all investments quarterly. Our private fixed maturity asset managers formally review all private fixed maturity holdings on a quarterly basis and more frequently when necessary to identify potential credit deterioration whether due to ratings downgrades, unexpected price variances, and/or company or industry specific concerns. For additional information regarding our policies regarding OTTI for fixed maturity securities, 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, 2015 .

OTTI of general account fixed maturity securities attributable to PFI excluding the Closed Block division that were recognized in earnings were $8 million and $18 million for the three months ended June 30, 2016 and 2015 , respectively, and $85 million and $22 million for the six months ended June 30, 2016 and 2015 , respectively.

Trading Account Assets Supporting Insurance Liabilities

The following table sets forth the composition of the TAASIL portfolio attributable to PFI excluding the Closed Block division as of the dates indicated.



	June 30, 2016				December 31, 2015
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Short-term investments and cash equivalents	$	614	$	614	$	765	$	765
Fixed maturities:
Corporate securities	13,422		13,872		12,797		12,851
Commercial mortgage-backed securities	1,899		1,985		1,860		1,862
Residential mortgage-backed securities	1,289		1,334		1,411		1,428
Asset-backed securities	1,343		1,353		1,295		1,299
Foreign government bonds	803		847		680		694
U.S. government authorities and agencies and obligations of U.S. states	405		452		326		369
Total fixed maturities	19,161		19,843		18,369		18,503
Equity securities	1,194		1,245		1,030		1,254
Total trading account assets supporting insurance liabilities	$	20,969	$	21,702	$	20,164	$	20,522

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As a percentage of amortized cost, 79% and 77% of the portfolio was publicly traded as of June 30, 2016 and December 31, 2015 , respectively. As of both June 30, 2016 and December 31, 2015 , 91% of the fixed maturity portfolio was considered high or highest quality based on NAIC or equivalent rating, respectively. As of June 30, 2016 , $1.266 billion of the residential mortgage-backed securities were publicly traded agency pass-through securities, which are supported by U.S. and foreign government securities, of which more than 99% have credit ratings of A or higher. Collateralized mortgage obligations, including approximately $17 million secured by “ALT-A” mortgages, represented the remaining $23 million of residential mortgage-backed securities, of which 52% have credit ratings of A or better and 48% are BBB and below. For a discussion of this portfolio and changes in the fair value, see “—Experience-Rated Contractholder Liabilities, Trading Account Assets Supporting Insurance Liabilities and Other Related Investments,” above.

Other Trading Account Assets

Other trading account assets consist primarily of certain financial instruments that contain an embedded derivative where we elected to classify the entire instrument as a trading account asset rather than bifurcate. These instruments are carried at fair value, with realized and unrealized gains (losses) reported in “Other income,” and excluded from adjusted operating income. Interest and dividend income from these investments is reported in “Net investment income,” and is included in adjusted operating income.

The following table sets forth the composition of our other trading account assets attributable to PFI excluding the Closed Block division as of the dates indicated.



	June 30, 2016				December 31, 2015
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Short-term investments and cash equivalents	$	2	$	2	$	1	$	1
Fixed maturities	1,130		1,025		1,016		964
Equity securities(1)	516		576		537		596
Total other trading account assets	$	1,648	$	1,603	$	1,554	$	1,561

__________


(1)	Included in equity securities are perpetual preferred stock securities that have characteristics of both debt and equity securities.

Commercial Mortgage and Other Loans

Investment Mix

As of June 30, 2016 and December 31, 2015 , we held approximately 11% and 12% of our general account investments attributable to PFI excluding the Closed Block division in commercial mortgage and other loans, respectively. These percentages are net of $84 million and $95 million allowance for losses as of June 30, 2016 and December 31, 2015 , respectively.

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



	June 30, 2016		December 31, 2015
	(in millions)
Commercial mortgage and agricultural property loans	$	40,094	$	39,002
Uncollateralized loans	728		966
Residential property loans	310		301
Other collateralized loans	10		312
Total commercial mortgage and other loans(1)	$	41,142	$	40,581

__________


(1)	Excluded from the table above are commercial mortgage and other loans held outside the general account in other entities and operations. For additional information regarding commercial mortgage and other loans held outside the general account, see “—Invested Assets of Other Entities and Operations” below.

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We originate commercial mortgage and agricultural property loans using a dedicated investment 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 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 collateralized structured loans and 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 our general account investments in 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.



	June 30, 2016				December 31, 2015
	Gross Carrying Value		% of Total		Gross Carrying Value		% of Total
	($ in millions)
Commercial mortgage and agricultural property loans by region:
U.S. Regions:
Pacific	$	13,063	32.5	%	$	12,285	31.5	%
South Atlantic	7,807		19.5		7,764		19.9
Middle Atlantic	5,454		13.5		5,271		13.5
East North Central	2,410		6.0		2,704		6.9
West South Central	4,198		10.5		3,945		10.1
Mountain	1,664		4.2		1,697		4.4
New England	1,760		4.4		1,752		4.5
West North Central	664		1.7		608		1.6
East South Central	564		1.4		533		1.4
Subtotal-U.S.	37,584		93.7		36,559		93.8
Europe	1,544		3.9		1,608		4.1
Asia	535		1.3		406		1.0
Other	431		1.1		429		1.1
Total commercial mortgage and agricultural property loans	$	40,094	100.0	%	$	39,002	100.0	%

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	June 30, 2016				December 31, 2015
	Gross Carrying Value		% of Total		Gross Carrying Value		% of Total
	($ in millions)
Commercial mortgage and agricultural property loans by property type:
Industrial	$	6,508	16.2	%	$	6,510	16.7	%
Retail	6,521		16.3		6,813		17.5
Office	8,908		22.2		8,498		21.8
Apartments/Multi-Family	10,824		27.0		10,079		25.8
Other	3,425		8.5		3,133		8.0
Agricultural properties	2,152		5.4		2,130		5.5
Hospitality	1,756		4.4		1,839		4.7
Total commercial mortgage and agricultural property loans	$	40,094	100.0	%	$	39,002	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. Loan-to-value ratios greater than 100% indicate that the loan amount is greater than the collateral value. A smaller loan-to-value ratio indicates a greater excess of collateral value over the loan amount. The debt service coverage ratio compares a property’s net operating income to its debt service payments. Debt service coverage ratios less than 1.0 times indicate that property operations do not generate enough income to cover the loan’s current debt payments. A larger debt service coverage ratio indicates a greater excess of net operating income over the debt service payments.

As of June 30, 2016 , our general account investments in commercial mortgage and agricultural property loans attributable to PFI excluding the Closed Block division had a weighted average debt service coverage ratio of 2.50 times and a weighted average loan-to-value ratio of 56% . As of June 30, 2016 , approximately 95% of commercial mortgage and agricultural property loans were fixed rate loans. For those general account commercial mortgage and agricultural property loans that were originated in 2016 , the weighted average debt service coverage ratio was 2.52 times and the weighted average loan-to-value ratio was 63% .

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 loan losses.

For loans with collateral under construction, renovation or lease-up, a stabilized value and projected net operating income are used in the calculation of the loan-to-value and debt service coverage ratios. Our commercial mortgage and agricultural property loan portfolio included approximately $1.6 billion and $1.4 billion of such loans as of June 30, 2016 and December 31, 2015 . All else being equal, these loans are inherently more risky than those collateralized by properties that have already stabilized. As of June 30, 2016 , there are 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. For information regarding similar loans we hold as part of our commercial mortgage and agricultural property operations, see “—Invested Assets of Other Entities and Operations” below.

The following tables set forth the gross carrying value of our general account investments in commercial mortgage and agricultural property loans attributable to PFI excluding the Closed Block division as of the dates indicated by loan-to-value and debt service coverage ratios.

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Commercial Mortgage and Agricultural Property Loans by Loan-to-Value and Debt Service Coverage Ratios



	June 30, 2016
	Debt Service Coverage Ratio
	Greater than 1.2x		1.0x to < 1.2x		Less than 1.0x		Total Commercial Mortgage and Agricultural Property Loans
Loan-to-Value Ratio	(in millions)
0%-59.99%	$	22,313	$	391	$	328	$	23,032
60%-69.99%	10,791		310		106		11,207
70%-79.99%	5,234		275		119		5,628
Greater than 80%	89		121		17		227
Total commercial mortgage and agricultural property loans	$	38,427	$	1,097	$	570	$	40,094

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 June 30, 2016 .



Year of Origination	Gross Carrying Value		% of Total
	($ in millions)
2016	$	3,050	7.6	%
2015	8,024		19.9
2014	7,332		18.3
2013	7,750		19.4
2012	4,041		10.1
2011	3,703		9.2
2010	2,299		5.8
2009 & Prior	3,895		9.7
Total commercial mortgage and agricultural property loans	$	40,094	100.0	%

Commercial Mortgage and Other Loan Quality

Ongoing review of the portfolio is performed and loans are placed on watch list status based on a predefined set of criteria, where they are assigned to one of the following categories. We classify loans as closely monitored when we determine there is a collateral deficiency or other credit events that may lead to a potential loss of principal or interest. Loans not in good standing are those loans where we have concluded that there is a high probability of loss of principal, such as when the loan is in the process of foreclosure or the borrower is in bankruptcy. Our workout and special servicing professionals manage the loans on the watch list. As described below, in determining our allowance for losses we evaluate each loan on the watch list to determine if it is probable that amounts due according to the contractual terms of the loan agreement will not be collected.

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We establish an allowance for losses to provide for the risk of credit losses inherent in the lending process. The allowance includes loan specific reserves for loans that are determined to be impaired as a result of our loan review process, and a portfolio reserve for probable incurred but not specifically identified losses for loans which are not on the watch list. We define an impaired loan as a loan for which we estimate it is probable that amounts due according to the contractual terms of the loan agreement will not be collected. The loan specific portion of the loss allowance is based on our assessment as to ultimate collectability of loan principal and interest. Valuation allowances for an impaired loan are recorded based on the present value of expected future cash flows discounted at the loan’s effective interest rate or based on the fair value of the collateral if the loan is collateral dependent. The portfolio reserve for incurred but not specifically identified losses considers the current credit composition of the portfolio based on the internal quality ratings mentioned above. The portfolio reserves are determined using past loan experience, including historical credit migration, loss probability, and loss severity factors by property type. These factors are reviewed and updated as appropriate. The valuation allowance for commercial mortgage and other loans can increase or decrease from period to period based on these factors.

Our general account investments in commercial mortgage and other loans attributable to PFI excluding the Closed Block division, based upon the recorded investment gross of allowance for credit losses, were $41,142 million and $40,581 million as of June 30, 2016 and December 31, 2015 , respectively. As a percentage of recorded investment gross of allowance, more than 99% of these assets were current as of both June 30, 2016 and December 31, 2015 .

The following table sets forth the change in valuation allowances for our commercial mortgage and other loan portfolio as of the dates indicated.



	June 30, 2016			December 31, 2015
	(in millions)
Allowance, beginning of year	$	95		$	99
Addition to (release of) allowance for losses	(11		)	(4		)
Charge-offs, net of recoveries	0			0
Change in foreign exchange	0			0
Allowance, end of period	$	84		$	95
Loan specific reserve	$	4		$	0
Portfolio reserve	$	80		$	95

The decrease in the allowance for losses for the six months ended June 30, 2016 , was primarily driven by improved credit quality of the portfolio.

Equity Securities

Investment Mix

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 (losses) as of the dates indicated.



	June 30, 2016								December 31, 2015
	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in millions)
Non-redeemable preferred stocks	$	8	$	0	$	1	$	7	$	21	$	1	$	1	$	21
Mutual fund common stocks(1)	3,072		412		16		3,468		2,918		333		76		3,175
Other common stocks	2,263		1,324		42		3,545		2,033		1,339		31		3,341
Total equity securities(2)	$	5,343	$	1,736	$	59	$	7,020	$	4,972	$	1,673	$	108	$	6,537

__________


(1)	Includes mutual fund shares representing our interest in the underlying assets of certain investments supporting corporate-owned life insurance. These mutual funds invest primarily in high yield bonds.


(2)	Amounts presented exclude investments in private equity and hedge funds and other investments which are reported in “Other long-term investments.”

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OTTI of Equity Securities

For those equity securities classified as available-for-sale, we record unrealized gains (losses) to the extent cost is different from estimated fair value. All securities with unrealized losses are subject to our review to identify OTTI in value. For additional information regarding our policies regarding OTTI for equity securities, 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, 2015 .

OTTI of equity securities attributable to PFI excluding the Closed Block division were $27 million and $9 million for the three months ended June 30, 2016 and 2015 , respectively, and $35 million and $14 million for the six months ended June 30, 2016 and 2015 , respectively. For a further discussion of OTTI, see “—Realized Investment Gains (Losses)” above.

Other Long-Term Investments

The following table sets forth the composition of “Other long-term investments,” which primarily consists of investments in joint ventures and limited partnerships, other than operating joint ventures, as well as wholly-owned investment real estate and other investments attributable to PFI excluding the Closed Block division, as of the dates indicated.



	June 30, 2016		December 31, 2015
	(in millions)
Joint ventures and limited partnerships:
Private equity	$	2,609	$	2,927
Hedge funds	1,418		1,160
Real estate-related	432		285
Real estate held through direct ownership	1,682		1,456
Other(1)	698		721
Total other long-term investments	$	6,839	$	6,549

__________


(1)	Primarily includes derivatives and member and activity stock held in the Federal Home Loan Banks of New York and Boston. For additional information regarding our holdings in the Federal Home Loan Banks of New York and Boston, see Note 9 to the Unaudited Interim Consolidated Financial Statements.

OTTI of Other Long-Term Investments

For joint ventures and limited partnerships, 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.

OTTI on joint ventures and limited partnerships attributable to PFI excluding the Closed Block division were $16 million and $7 million for the three months ended June 30, 2016 and 2015 , respectively, and $40 million and $26 million for the six months ended June 30, 2016 and 2015 , respectively. For a further discussion of OTTI, see “—Realized Investment Gains (Losses)” above.

For additional information regarding our policies regarding OTTI for joint ventures and limited partnerships, other than operating joint ventures, as well as wholly-owned investment real estate and other investments, 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, 2015 .

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 asset 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 asset management operations that are managed for third parties and those assets classified as “Separate account assets” on our balance sheet are not included below.

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	June 30, 2016		December 31, 2015
	(in millions)
Fixed Maturities:
Public, available-for-sale, at fair value	$	202	$	94
Private, available-for-sale, at fair value	3		39
Other trading account assets, at fair value	5,376		12,609
Equity securities, available-for-sale, at fair value	12		11
Commercial mortgage and other loans, at book value(1)	642		302
Other long-term investments	428		516
Short-term investments	169		388
Total investments	$	6,832	$	13,959

__________


(1)	Book value is generally based on unpaid principal balance net of any allowance for losses, the lower of cost or fair value, or fair value, depending on the loan.

The decrease in investments related to the invested assets of other entities and operations in the first six months of 2016 was primarily attributable to a $7 billion decrease in other trading account assets due to adoption of the consolidation accounting standard update effective January 1, 2016.

Other Trading Account Assets

Other trading account assets are primarily related to assets associated with consolidated variable interest entities for which the Company is the investment manager, as well as our derivative operations used to manage interest rate, foreign currency, credit and equity exposures. The assets of the consolidated variable interest entities are generally offset by liabilities for which the fair value option has been elected. For further information on these consolidated variable interest entities, see Note 5 to the Unaudited Interim Consolidated Financial Statements.

Commercial Mortgage and Other Loans

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

The mortgage loans of our commercial mortgage operations are included in “Commercial mortgage and other loans,” with related derivatives and other hedging instruments primarily included in “Other trading account assets” and “Other long-term investments.”

Other Long-Term Investments

Other long-term investments primarily include strategic investments made as part of our asset management operations. We make these strategic investments in real estate, as well as fixed income, public equity and real estate securities, including controlling interests. Certain of these investments are made primarily for purposes of co-investment in our managed funds and structured products. Other strategic investments are made with the intention to sell or syndicate to investors, including our general account, or for placement in funds and structured products that we offer and manage (seed investments). As part of our asset management operations, we also make loans to our managed funds that are secured by equity commitments from investors or assets of the funds. Other long-term investments also include certain assets in consolidated investment funds where the Company is deemed to exercise control over the funds.

Liquidity and Capital Resources

This section supplements, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” included in our Annual Report on Form 10-K for the year ended December 31, 2015 .

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Table of Contents

Overview

Liquidity refers to the ability to generate sufficient cash resources to meet the payment obligations of the Company. Capital refers to the long-term financial resources available to support the operations of our businesses, fund business growth, and provide a cushion to withstand adverse circumstances. Our ability to generate and maintain sufficient liquidity and capital depends on the profitability of our businesses, general economic conditions and our access to the capital markets and the alternate sources of liquidity and capital described herein.

Effective and prudent liquidity and capital management is a priority across the organization. Management monitors the liquidity of Prudential Financial and its subsidiaries on a daily basis and projects borrowing and capital needs over a multi-year time horizon through our 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 competitive risk-based capital (“RBC”) ratios and solvency margins for our insurance subsidiaries under various stress scenarios.

Prudential Financial is a non-bank financial company (a “Designated Financial Company”) under Dodd-Frank. As a Designated Financial Company, Prudential Financial is subject to supervision and examination by the Federal Reserve Bank of Boston and to stricter prudential regulatory standards, which include or will include requirements and limitations (many of which are the subject of ongoing rule-making) relating to capital, leverage, liquidity, stress-testing, overall risk management, resolution and recovery plans, credit exposure reporting, early remediation, management interlocks and credit concentration. They may also include additional standards regarding enhanced public disclosure, short-term debt limits and other related subjects. In addition, the FSB has identified the Company as a G-SII. For information on these actions and their potential impact on us, see “—Executive Summary—Regulatory Developments” above and “Business—Regulation” and “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2015 .

During the six months ended June 30, 2016 , we took the following significant actions that impacted our liquidity and capital position:


•	We executed the Variable Annuities Recapture, which enabled the Individual Annuities segment to distribute $1.0 billion of highly liquid assets to Prudential Financial and is expected to reduce future capital volatility associated with our variable annuities business. See “—Executive Summary—Variable Annuities Recapture” for further details;


•	We repurchased $750 million of shares of our Common Stock and declared aggregate Common Stock dividends of $629 million ;


•	We retired $750 million of our outstanding senior debt through maturities;


•	We repurchased $500 million of our outstanding senior debt through a tender offer; and


•	We obtained additional financing for Guideline AXXX and Regulation XXX reserves by increasing the amounts outstanding under captive financing facilities by $140 million and $77 million, respectively.

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, 2016 , the Company had $42.1 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, 2016		December 31, 2015(1)
	(in millions)
Equity(2)	$	30,482	$	29,605
Junior subordinated debt (i.e., hybrid securities)	5,814		5,811
Other capital debt	5,822		6,069
Total capital	$	42,118	$	41,485

__________


(1)	Prior period has been revised to conform to current period presentation due to the adoption ASU 2015-03 regarding debt issuance costs. For more information, see Note 2 to the Unaudited Interim Consolidated Financial Statements.


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

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The decrease in other capital debt from December 31, 2015 , primarily reflects a senior debt maturity, which was previously utilized to meet capital requirements of our businesses.

We manage Prudential Insurance, Prudential of Japan, Gibraltar Life, and our other domestic and international insurance subsidiaries to regulatory capital levels consistent with our “AA” ratings targets. We utilize the 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 international insurance subsidiaries.

The table below presents the RBC ratios of our most significant domestic insurance subsidiaries as of December 31, 2015 , the most recent statutory fiscal year-end and RBC reporting date for these subsidiaries.



	Ratio(1)
Prudential Insurance(2)	484	%
PALAC	550	%

__________


(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”), a subsidiary of Pruco Life, and Prudential Legacy Insurance Company of New Jersey (“PLIC”).

The table below presents the solvency margin ratios of our most significant international insurance subsidiaries as of March 31, 2016, their most recent statutory fiscal year end.



	Ratio
Prudential of Japan consolidated(1)	801	%
Gibraltar Life consolidated(2)	928	%

__________


(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.

We evaluate the regulatory capital of our domestic and international insurance operations under reasonably foreseeable stress scenarios and believe we have adequate resources to maintain our capital levels comfortably above regulatory requirements under these scenarios. For further information on the calculation of RBC and solvency margin ratios, as well as regulatory minimums, see Note 15 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 .

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 and competitive RBC ratios and solvency margins 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 addresses the potential capital consequences, under stress scenarios, of certain of these net risks and the strategies we use to mitigate them, including the following:


•	Equity market exposure affecting the statutory capital of the Company as a whole, which we manage through our equity hedge program and on-balance sheet and contingent sources of capital;

•

Our decision to manage a portion of our interest rate risk internally, on a net basis, at an enterprise level. In implementing this strategy, we execute intercompany derivative transactions between our Corporate and Other operations and certain business segments. We limit our exposure to the resulting net interest rate risk at the enterprise level through options embedded in our hedging strategy that may be exercised if interest rates decline below certain thresholds. During the first six months of 2016, we replaced a significant portion of these intercompany derivatives with external derivatives and expect to manage most of this interest rate risk within the business segments in the future. The results of this strategy are described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Corporate and Other”; and

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•	Activities of our business segments, including those for which specific risk mitigation strategies have been implemented, such as our living benefits hedging program that covers certain risks associated with our variable annuity products.

We periodically recalibrate our hedging strategies in response to changing market conditions. 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, derivatives, and contingent sources of capital. Although we continue to enhance our approach, we believe we currently have access to sufficient resources to maintain adequate capitalization and competitive RBC ratios and solvency margins under a range of potential stress scenarios.

Captive Reinsurance Companies

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, 2015 , for a discussion of our use of captive reinsurance companies.

As a result of the Variable Annuities Recapture described under “—Executive Summary—Variable Annuities Recapture”, the risks and associated hedging program related to certain variable annuity and retirement products no longer reside within our captive reinsurance company, Pruco Re.

Shareholder Distributions

Share Repurchase Program and Shareholder Dividends

In December 2015, our Board of Directors (“the Board”) authorized the Company to repurchase at management’s discretion up to $1.5 billion of its outstanding Common Stock during the period from January 1, 2016 through December 31, 2016. Effective January 1, 2016, this authorization superseded the Company’s previous $1.0 billion share repurchase authorization that was announced in June 2015, covering the period from July 1, 2015 through June 30, 2016. In August 2016, the Board authorized a $500 million increase to this authorization for calendar year 2016. As a result, the Company’s aggregate share repurchase authorization for the full year 2016 is $2.0 billion.

The timing and amount of share repurchases will be determined by management based on market conditions and other considerations, including any increased capital needs of our businesses due to, among other things, changes in regulatory capital requirements and opportunities for growth and acquisitions. Repurchases may be effected in the open market, through derivative, accelerated repurchase and other negotiated transactions and through plans designed to comply with Rule 10b5-1(c) under the Exchange Act. The following table sets forth information about declarations of Common Stock dividends, as well as repurchases of shares of Prudential Financial’s Common Stock, for the six months ended June 30, 2016 .



	Dividend Amount				Shares Repurchased
Three months ended:	Per Share		Aggregate		Shares	Total Cost
	(in millions, except per share data)
March 31, 2016	$	0.70	$	316	5.4	$	375
June 30, 2016	$	0.70	$	313	5.0	$	375

As a Designated Financial Company under Dodd-Frank, Prudential Financial expects to be subject to stricter requirements and limitations regarding capital, leverage and liquidity. Our compliance with these and other requirements under Dodd-Frank could limit our ability to pay Common Stock dividends and repurchase shares in the future.

Liquidity

The principles of our liquidity management framework are described in an enterprise-wide Liquidity 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. A minimum cash balance of at least $1.3 billion is targeted to ensure that adequate liquidity is available at Prudential Financial to cover fixed expenses in the event that we experience reduced cash flows from our operating subsidiaries at a time when access to capital markets is also not available. This targeted minimum balance is reviewed and approved annually by the Board.

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We seek to mitigate the risk of having limited or no access to financing due to stressed market conditions by generally pre-funding capital debt in advance of maturity. We mitigate the refinancing risk associated with our debt that is used to fund operating needs by matching the term of debt with the assets financed. To ensure 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 and returns of capital from subsidiaries, repayments of operating loans from subsidiaries and highly liquid assets. These sources of funds may be supplemented by Prudential Financial’s access to the capital markets as well as the “—Alternative Sources of Liquidity” described below.

The primary uses of funds at Prudential Financial include servicing debt, paying operating expenses, making capital contributions and loans to subsidiaries, paying declared shareholder dividends and repurchasing outstanding shares of Common Stock executed under authority from the Board.

As of June 30, 2016 , Prudential Financial had highly liquid assets consisting of cash, short-term investments and U.S. Treasury fixed maturities with a carrying value totaling $4,715 million, a decrease of $6,389 million from December 31, 2015 . We maintain an intercompany liquidity account that is designed to optimize the use of cash by facilitating the lending and borrowing of funds between Prudential Financial and its subsidiaries on a daily basis. Excluding net borrowings from this intercompany liquidity account, Prudential Financial had highly liquid assets of $4,012 million as of June 30, 2016 , a decrease of $1,054 million from December 31, 2015 .

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, 2016
	(in millions)
Sources:
Dividends and/or returns of capital from subsidiaries(1)	$	1,770
Net distributions from subsidiaries associated with the Variable Annuities Recapture	1,042
Proceeds from stock-based compensation and exercise of stock options	136
Interest income from subsidiaries on intercompany agreements, net of interest paid	18
Total sources	2,966
Uses:
Maturities of long-term senior debt, excluding retail medium-term notes	750
Share repurchases(2)	733
Common stock dividends(3)	631
Repurchase of medium-term notes through a tender offer	500
Interest paid on external debt	467
Capital contributions to subsidiaries(4)	240
Net payments under intercompany loan agreements(5)	207
Net income tax payments	63
Other, net	429
Total uses	4,020
Net increase (decrease) in highly liquid assets	$	(1,054	)

__________


(1)	Includes dividends and/or returns of capital of $900 million from Prudential Insurance, $534 million from asset management subsidiaries, $278 million from international insurance subsidiaries, $47 million from Prudential Annuities Holding Company and $11 million from other subsidiaries. Excludes dividends and/or returns of capital associated with the Variable Annuities Recapture.


(2)	Excludes $17 million related to trades that settled in July 2016.


(3)	Includes cash payments made on dividends declared in prior periods.


(4)	Includes capital contributions of $199 million to international insurance subsidiaries ($159 million of which was related to our indirect investment in AFP Habitat), $36 million to Pruco Re and $5 million to other subsidiaries. Excludes capital contributions associated with the Variable Annuities Recapture.


(5)	Includes net receipts from subsidiaries of $356 million from the issuance of notes to international insurance subsidiaries and $494 million from Pruco Life, offset by net borrowings of $704 million by asset management subsidiaries, $350 million by Prudential Universal Reinsurance Company and $3 million from other subsidiaries.

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Restrictions on Dividends and Returns of Capital from Subsidiaries

Our insurance companies are subject to limitations on the payment of dividends and other transfers of funds to Prudential Financial and other affiliates under applicable insurance law and regulation. In the United States, dividends above thresholds calculated under applicable insurance laws are considered “extraordinary” and require the approval of the relevant state insurance regulator. Also, more generally, the payment of dividends by any of our subsidiaries is subject to declaration by their Board of Directors and can be affected by market conditions and other factors. See Note 15 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 , for details on specific dividend restrictions.

Domestic insurance subsidiaries. Prudential Insurance is permitted to pay ordinary dividends based on calculations specified under New Jersey insurance law, subject to prior notification to the New Jersey Department of Banking and Insurance (“NJDOBI”). Any distributions above this amount in any twelve month period are considered to be “extraordinary” dividends, and the approval of NJDOBI is required prior to payment. The laws regulating dividends of the states where our other domestic insurance companies are domiciled are similar, but not identical, to New Jersey’s. During the second quarter of 2016, Prudential Insurance paid aggregate dividends of $3.0 billion ($1.0 billion as an ordinary dividend and $2.0 billion as an extraordinary dividend) to Prudential Financial. This amount consisted of a $2.1 billion dividend associated with the Variable Annuities Recapture, which was subsequently contributed to PALAC to support the risks of that business, and a $900 million dividend relating to the operations of Prudential Insurance.

International insurance subsidiaries. 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. In addition to paying common stock dividends, International Insurance operations may return capital to Prudential Financial through other means, such as the repayment of subordinated debt or preferred stock obligations held by Prudential Financial or other affiliates. During the first six months of 2016 , Prudential of Korea paid a dividend of ₩35.0 billion, or approximately $30 million, to its parent, Prudential International Insurance Holdings Ltd., which was ultimately sent to Prudential Financial.

Other subsidiaries. The ability of our asset management subsidiaries and the majority of our other operating subsidiaries to pay dividends is largely unrestricted from a regulatory standpoint.

Liquidity of Insurance Subsidiaries

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, and investment maturities and sales associated with our insurance and annuity operations, as well as internal and external borrowings. The principal uses of that liquidity include benefits, claims 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 include commissions, general and administrative expenses, purchases of investments, the payment of dividends to the parent holding company, hedging 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.

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	June 30, 2016
	Prudential Insurance		PLIC		PRIAC		PALAC		Pruco Life		Total		December 31, 2015
	(in billions)
Cash and short-term investments	$	6.1	$	1.9	$	0.7	$	11.4	$	0.4	$	20.5	$	10.3
Fixed maturity investments(1):
High or highest quality	96.2		34.3		19.1		8.9		5.0		163.5		147.5
Other than high or highest quality	6.8		4.0		1.8		0.4		0.4		13.4		12.3
Subtotal	103.0		38.3		20.9		9.3		5.4		176.9		159.8
Public equity securities	0.2		2.6		0.0		0.0		0.0		2.8		3.2
Total	$	109.3	$	42.8	$	21.6	$	20.7	$	5.8	$	200.2	$	173.3

__________


(1)	Excludes fixed maturities designated as held-to-maturity. Classified by 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.



	June 30, 2016
	Prudential of Japan		Gibraltar Life(1)		All Other(2)		Total		December 31, 2015
	(in billions)
Cash and short-term investments	$	0.7	$	1.9	$	1.6	$	4.2	$	3.5
Fixed maturity investments(3):
High or highest quality(4)	40.3		90.9		17.1		148.3		123.8
Other than high or highest quality	0.7		2.5		1.0		4.2		3.3
Subtotal	41.0		93.4		18.1		152.5		127.1
Public equity securities	1.8		2.4		0.6		4.8		4.6
Total	$	43.5	$	97.7	$	20.3	$	161.5	$	135.2

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(1)	Includes PGFL.


(2)	Represents our international insurance operations, excluding Japan.


(3)	Excludes fixed maturities designated as held-to-maturity. Classified by NAIC or equivalent rating.


(4)	As of June 30, 2016 , $ 108.0 billion , or 73% , were invested in government or government agency bonds.

Liquidity associated with other activities

Hedging activities associated with living benefit guarantees

As part of the living benefit hedging program, we enter into a range of exchange-traded, cleared and other OTC equity and interest rate derivatives to hedge certain living benefit features accounted for as embedded derivatives against changes in certain capital market conditions such as interest rates and equity index levels. For a full discussion of our living benefits hedging program, see “—Results of Operations by Segment—U.S. Retirement Solutions and Investment Management Division—Individual Annuities.” The living benefit hedging program requires access to liquidity to meet its payment obligations, 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. Through March 31, 2016, the living benefit hedging program was executed in Pruco Re. Effective April 1, 2016, following the Variable Annuities Recapture, the living benefit hedging program resides in certain of our domestic life insurance subsidiaries. Future liquidity needs may be funded with available resources within these subsidiaries and from other resources of Prudential Financial and its affiliates.

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The living benefits hedging activity may also result in collateral postings on derivatives to or from counterparties. The net collateral position depends on changes in interest rates and equity markets related to the amount of the exposures hedged. Depending on market conditions, the collateral posting requirements can result in material liquidity needs. Also, certain derivatives entered into on or after June 10, 2013, are subject to mandatory clearing requirements under Dodd-Frank and, as a result, typically have additional collateral requirements. As of June 30, 2016 , the living benefit hedging derivatives were in a net receive position of $11.1 billion compared to a net receive position of $4.8 billion as of December 31, 2015 . The change in collateral position was primarily driven by a decrease in interest rates and the inclusion of collateral from certain of our domestic statutory life insurance entities as a result of the Variable Annuities Recapture.

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, 2016 , we have hedged 100%, 92%, 50% and 8% of expected international-based earnings for 2016, 2017, 2018 and 2019, respectively.

Equity Hedges—We hold both internal and external hedges primarily to hedge our U.S. dollar-equivalent equity. These hedges also mitigate volatility in the solvency margins of yen-based subsidiaries resulting from changes in the market value of their U.S. dollar-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 by Segment—International Insurance Division.”

Cash settlements from these hedging activities result in cash flows between subsidiaries of Prudential Financial and either yen-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.



	Six Months Ended June 30,
Cash Settlements:	2016			2015
	(in millions)
Income Hedges (External)(1)	$	43		$	161
Equity Hedges:
Internal	(30		)	615
External	324			(151		)
Total Equity Hedges	294			464
Total Cash Settlements	$	337		$	625

	As of
	June 30,			December 31,
Assets (Liabilities):	2016			2015
	(in millions)
Income Hedges (External)(2)	$	(172	)	$	162
Equity Hedges:
Internal	(817		)	964
External	295			699
Total Equity Hedges(3)	(522		)	1,663
Total Assets (Liabilities)	$	(694	)	$	1,825

__________


(1)	Includes Korean won related cash settlements of $10 million and $(4) million for the six months ended June 30, 2016 and 2015 , respectively.


(2)	Includes a Korean won related asset of $9 million and $29 million as of June 30, 2016 and December 31, 2015 , respectively.

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(3)	As of June 30, 2016 , approximately $270 million, $(320) million, and $(470) million of the net market value is scheduled to settle in 2016, 2017, 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.

Asset Management operations

The principal sources of liquidity for our fee-based asset management businesses include asset management fees and commercial mortgage origination and servicing fees. The principal uses of liquidity include general and administrative expenses and distributions of dividends and returns of capital to Prudential Financial. The primary liquidity risks for our fee-based asset management businesses relate to their profitability, which is impacted by market conditions and our investment management performance. We believe the cash flows from our fee-based asset management businesses are adequate to satisfy the current liquidity requirements of these operations, as well as requirements that could arise under reasonably foreseeable stress scenarios, which are monitored through the use of internal measures.

The principal sources of liquidity for our strategic investments held in our asset management businesses are cash flows from investments, the ability to liquidate investments, and available borrowing lines from internal sources, including Prudential Financial and Prudential Funding, LLC (“Prudential Funding”), a wholly-owned subsidiary of Prudential Insurance. The primary liquidity risks include the inability to sell assets in a timely manner, declines in the value of assets and credit defaults. There have been no material changes to the liquidity position of our asset management operations since December 31, 2015 .

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 membership in the Federal Home Loan Banks, commercial paper programs, a committed credit facility and a put option agreement. See Note 9 to our Unaudited Interim Consolidated Financial Statements for details on these programs.

Asset-based Financing

We conduct asset-based or secured financing within our insurance and other subsidiaries, including transactions such as securities lending, repurchase agreements and mortgage dollar rolls, to earn spread income, to borrow funds, or to facilitate trading activity. These programs are primarily driven by portfolio holdings of securities that are lendable based on counterparty demand for these securities in the marketplace. The collateral received in connection with these programs is primarily used to purchase securities in the short-term spread portfolios of our insurance entities. Investments held in the short-term spread portfolios include cash and cash equivalents, short-term investments, mortgage loans and fixed maturities, including mortgage- and asset-backed securities, with a weighted average life at time of purchase by the short-term portfolios of four years or less. Floating rate assets comprise the majority of our short-term spread portfolio. These short-term portfolios are subject to specific investment policy statements, which among other things, do not allow for significant asset/liability interest rate duration mismatch.

The following table sets forth our liabilities under asset-based or secured financing programs as of the dates indicated.



	June 30, 2016						December 31, 2015
	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	$	5,380	$	1,955	$	7,335	$	5,421	$	2,461	$	7,882
Cash collateral for loaned securities	2,842		1,801		4,643		2,095		1,401		3,496
Securities sold but not yet purchased	5		0		5		2		0		2
Total(1)	$	8,227	$	3,756	$	11,983	$	7,518	$	3,862	$	11,380
Portion of above securities that may be returned to the Company overnight requiring immediate return of the cash collateral(2)	$	3,117	$	2,426	$	5,543	$	5,574	$	2,117	$	7,691
Weighted average maturity, in days(3)	8		25				8		17

__________


(1)	The daily weighted average outstanding balance for the three and six months ended June 30, 2016 , was $8,454 million and $8,231 million , respectively, for PFI excluding the Closed Block division, and $4,703 million and $4,666 million , respectively, for the Closed Block division.


(2)	Amount for PFI excluding the Closed Block division as of December 31, 2015, includes $2,256 million of securities that had a term greater than one day due to the timing of the January 1, 2016, holiday.


(3)	Excludes securities that may be returned to the Company overnight.

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As of June 30, 2016 , our domestic insurance entities had assets eligible for the asset-based or secured financing programs of $164.5 billion, of which $11.9 billion were on loan. Taking into account market conditions and outstanding loan balances as of June 30, 2016 , we believe approximately $19.5 billion of the remaining eligible assets are readily lendable, including approximately $15.3 billion relating to PFI excluding the Closed Block division, of which $5.5 billion relates to certain separate accounts and may only be used for financing activities related to those accounts, and the remaining $4.2 billion relating to the Closed Block division.

Financing Activities

As of June 30, 2016 , total short-term and long-term debt of the Company on a consolidated basis was $19.7 billion , a decrease of $1.1 billion from December 31, 2015 . The following table sets forth total consolidated borrowings of the Company as of the dates indicated. We may, from time to time, seek to redeem or repurchase our outstanding debt securities through open market purchases, individually negotiated transactions or otherwise. Any such repurchases will depend on prevailing market conditions, our liquidity position and other factors.



	June 30, 2016						December 31, 2015(1)
Borrowings:	Prudential Financial		Subsidiaries		Consolidated		Prudential Financial		Subsidiaries		Consolidated
	(in millions)
General obligation short-term debt:
Commercial paper	$	60	$	434	$	494	$	80	$	384	$	464
Current portion of long-term debt (2)	109		73		182		751		1		752
Subtotal	169		507		676		831		385		1,216
General obligation long-term debt:
Senior debt	9,931		1,328		11,259		10,543		1,323		11,866
Junior subordinated debt	5,814		0		5,814		5,811		0		5,811
Surplus notes	0		1,338		1,338		0		1,352		1,352
Subtotal	15,745		2,666		18,411		16,354		2,675		19,029
Total general obligations	15,914		3,173		19,087		17,185		3,060		20,245
Limited recourse borrowing(3)(4):
Long-term debt	0		575		575		0		565		565
Total limited recourse borrowings	0		575		575		0		565		565
Total borrowings	$	15,914	$	3,748	$	19,662	$	17,185	$	3,625	$	20,810

__________


(1)	Prior period has been revised to conform to current period presentation due to the adoption ASU 2015-03 regarding debt issuance costs. For more information, see Note 2 to the Unaudited Interim Consolidated Financial Statements.


(2)	Includes $73 million at June 30, 2016, of limited and non-recourse borrowing mortgage debt.


(3)	Amounts are net of assets under set-off arrangements of $5,117 million and $4,889 million as of June 30, 2016 and December 31, 2015 , respectively.


(4)	Limited and non-recourse borrowing primarily represents mortgage debt of our subsidiaries that has recourse only to real estate investment property.

As of June 30, 2016 and December 31, 2015 , we were in compliance with all debt covenants related to the borrowings in the table above. For further information on our short- and long-term debt obligations, see Note 9 to our Unaudited Interim Consolidated Financial Statements contained herein and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” included in our Annual Report on Form 10-K for the year ended December 31, 2015 .

Prudential Financial’s borrowings decreased $ 1,271 million from December 31, 2015 , primarily driven by the maturity of $750 million of senior debt and our repurchase of $500 million of senior debt through a tender offer. Borrowings of our subsidiaries increased $123 million from December 31, 2015 , primarily driven by the issuance of $80 million of mortgage debt and a $50 million increase in commercial paper outstanding.

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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 on the surplus notes may only be made with prior insurance regulatory approval.

To date, we have entered into agreements with external counterparties providing for the issuance of up to an aggregate of $8,850 million of surplus notes by our captive reinsurers in return for the receipt of credit-linked notes (“Credit-Linked Note Structures”). 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. As of June 30, 2016 , an aggregate of $6,717 million of surplus notes was outstanding under our Credit-Linked Note Structures, reflecting an increase of $217 million since December 31, 2015 . 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, 2015 .

The following table summarizes our Credit-Linked Note Structures, which are reported on a net basis, as of June 30, 2016 .



	Surplus Notes
Credit-Linked Note Structures:	Original Issue Dates	Maturity Dates	Outstanding as of June 30, 2016			Facility Size
	($ in millions)
XXX	2011-2014	2021-2024	$	1,750	(1)	$	2,000
AXXX	2013	2033	2,240			3,500
XXX	2014-2015	2027-2034	1,600		(2)	1,600
XXX	2014	2024	1,127			1,750
Total Credit-Linked Note Structures			$	6,717		$	8,850

__________


(1)	Prudential Financial has agreed to reimburse any amounts paid under the credit-linked notes issued in this structure.


(2)	The $1.6 billion surplus note 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, 2016 , we also had outstanding an aggregate of $3.4 billion of debt issued for the purpose of financing Regulation XXX and Guideline AXXX non-economic reserves, of which approximately $1.5 billion relates to Regulation XXX reserves and approximately $1.9 billion relates to Guideline AXXX reserves, all of which was issued directly by or guaranteed by Prudential Financial. Under certain of the financing arrangements pursuant to which this debt was issued, Prudential Financial has agreed to make capital contributions to the applicable captive reinsurance subsidiary to reimburse it for investment losses or to maintain its capital above prescribed minimum levels. In addition, as of June 30, 2016 , for purposes of financing Guideline AXXX reserves, our captives had outstanding approximately $4.0 billion of surplus notes that were issued to affiliates.

In December 2014, the NAIC adopted a new actuarial guideline, known as “AG 48”, that requires us to hold cash and rated securities in greater amounts than we previously held to support economic reserves for certain of our term and universal life policies. The additional asset requirement for 2015 of approximately $400 million was funded during the first quarter of 2016 with a combination of existing assets and newly purchased assets sourced from affiliated financing. While we continue to work with regulators and industry participants on potential long-term solutions, we believe we have sufficient internal resources to finance the additional asset requirement through 2016.

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, 2015 , for a discussion of our financial strength and credit ratings and their impact on our business. There have been no significant changes or actions in our ratings or rating outlooks since January 1, 2016, through the date of this filing.

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Off-Balance Sheet Arrangements

Guarantees and Other Contingencies

In the course of our business, we provide certain guarantees and indemnities to third parties pursuant to which we may be contingently required to make payments in the future. See “Commitments and Guarantees” within Note 15 to the Unaudited Interim Consolidated Financial Statements for additional information.

Other Contingent Commitments

We also have other commitments, some of which are contingent upon events or circumstances not under our control, including those at the discretion of our counterparties. See “Commitments and Guarantees” within Note 15 to the Unaudited Interim Consolidated Financial Statements for additional information regarding these commitments. For further discussion of certain of these commitments that relate to our separate accounts, also see “—Liquidity—Liquidity associated with other activities—Asset Management operations.”

Other Off-Balance Sheet Arrangements

In November 2013, we entered into a put option agreement with a Delaware trust that gives Prudential Financial the right, at any time over a ten-year period, to issue up to $1.5 billion of senior notes to the trust in return for principal and interest strips of U.S. Treasury securities that are held by the trust. See Note 9 to our Unaudited Interim Consolidated Financial Statements for more information on this put option agreement. In 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, 2016, 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, 2016 , there have been no material changes in our economic exposure to market risk from December 31, 2015 , a description of which may be found in our Annual Report on Form 10-K, for the year ended December 31, 2015 , 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, 2015 , 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, 2016 . Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2016 , 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, 2016 , that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 15 to the Unaudited Interim Consolidated Financial Statements under “—Litigation and Regulatory Matters” for a description of material pending litigation and regulatory matters affecting us, and certain risks to our businesses presented by such matters, which is incorporated herein by reference.

ITEM 1A. RISK FACTORS

You should carefully consider the risks described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015 . These risks could materially affect our business, results of operations or financial condition, cause the trading price of our Common Stock to decline materially or cause our actual results to differ materially from those expected or those expressed in any forward looking statements made by or on behalf of the Company. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” above and the risks of our businesses described elsewhere in this Quarterly Report on Form 10-Q.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c) The following table provides information about purchases by the Company during the three months ended June 30, 2016, 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, 2016 through April 30, 2016	1,661,363	$	75.37	1,658,565
May 1, 2016 through May 31, 2016	1,623,730	$	77.36	1,615,634
June 1, 2016 through June 30, 2016	1,708,748	$	73.49	1,700,698
Total	4,993,841	$	75.37	4,974,897	$1,250,000,000

__________

(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 that was adopted by the Company’s Board of Directors in March 2003 (as subsequently amended and restated).

(2)

In December 2015, Prudential Financial’s Board of Directors authorized the Company to repurchase at management’s discretion up to $1.5 billion of its outstanding Common Stock during the period from January 1, 2016 through December 31, 2016. Effective January 1, 2016, this authorization superseded the Company’s previous $1.0 billion share repurchase authorization that was announced in June 2015, covering the period from July 1, 2015 through June 30, 2016. In August 2016, the Board of Directors authorized a $500 million increase to this authorization for calendar year 2016. As a result, the Company’s aggregate share repurchase authorization for the full year 2016 is $2.0 billion.

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ITEM 6. EXHIBITS

See accompanying Exhibit Index.

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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 / R OBERT M. F ALZON
			Robert M. Falzon Executive Vice President and Chief Financial Officer (Authorized signatory and principal financial officer)

Date: August 5, 2016

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EXHIBIT INDEX



10.1	Prudential Financial, Inc. 2016 Omnibus Incentive Plan (incorporated herein by reference to Appendix A to the Company’s proxy statement for the 2016 Annual Meeting of Shareholders filed with the Securities and Exchange Commission on March 22, 2016).

12.1	Statement of Ratio of Earnings to Fixed Charges.

31.1	Section 302 Certification of the Chief Executive Officer.

31.2	Section 302 Certification of the Chief Financial Officer.

32.1	Section 906 Certification of the Chief Executive Officer.

32.2	Section 906 Certification of the Chief Financial Officer.



101.INS - XBRL	Instance Document.

101.SCH - XBRL	Taxonomy Extension Schema Document.

101.CAL - XBRL	Taxonomy Extension Calculation Linkbase Document.

101.LAB - XBRL	Taxonomy Extension Label Linkbase Document.

101.PRE - XBRL	Taxonomy Extension Presentation Linkbase Document.

101.DEF - XBRL	Taxonomy Extension Definition Linkbase Document.

Prudential Financial, Inc. will furnish upon request a copy of any exhibit listed above upon the payment of a reasonable fee covering the expense of furnishing the copy. Requests should be directed to:

Shareholder Services

Prudential Financial, Inc.

751 Broad Street, 21st Floor

Newark, New Jersey 07102

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Part I - Financial Information Item 1. Financial Statements Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II Other Information Part II Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 6. Exhibits

PRU 10-Q Quarter ended June 30, 2016