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PRUDENTIAL FINANCIAL, INC.

Table of contents

  • Page 1
    PRUDENTIAL FINANCIAL, INC.

  • Page 2
    ... where employees can develop to their full potential, and support the communities where we live and work. The cover features Prudential Tower, our new building in our headquarters city of Newark, N.J., as seen from the recently revitalized Military Park. Officially opened in July 2015, this...

  • Page 3
    ... actions reï¬,ect an increasing level of capital generation in our businesses. For 2015, on an after-tax adjusted operating income (AOI)* basis, Prudential earned $4.649 billion, or $10.04 per Common share, compared to $4.355 billion, or $9.21 per Common share, for the company's Financial Services...

  • Page 4
    ... Our strategic business mix, purposefully focused on Protection, Retirement and Asset Management, which drives our performance and differentiates us as a company. Our focus on these three areas is the result of numerous actions taken over several years, including acquisitions in key markets and the...

  • Page 5
    ...reported, in December 2014 and January 2015, we completed the redemption of the Intermediate Holding Company (IHC) debt and repurchased and canceled the Class B Stock related to our Closed Block Business, which was created at the time we converted from a mutual life insurance company to a stock life...

  • Page 6
    ... part of our talent management efforts. With the 2014 opening of our Business and Technology Solutions Center in El Paso, Texas, we have broadened these efforts to encompass training and support for military spouses and other family members of active military members, particularly through our...

  • Page 7
    ... the year ended December 31, 2015, unless otherwise noted. Life insurance and annuities issued by The Prudential Insurance Company of America, Newark, NJ, and its insurance affiliates. Retirement products and services are provided by Prudential Retirement Insurance and Annuity Company, Hartford, CT...

  • Page 8
    ...operating income before income taxes Operating return on average equity (C) GAAP RESULTS (B) Revenues Benefits and expenses Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures Return on average equity (C) EARNINGS PER SHARE OF COMMON STOCK...

  • Page 9
    ... operations after-tax attributable to Prudential Financial, Inc., by average total attributed equity. For the years ended December 31, 2014 and 2013, return on average equity is calculated by dividing income from continuing operations aftertax for the Financial Services Businesses attributable to...

  • Page 10
    ... U.S Private Securities Reform Act of 1995. Please see page 228 for a description of certain risks and uncertainties that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements. 8 Prudential Financial, Inc. 2015 Annual...

  • Page 11
    ... 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...

  • Page 12
    ... Premiums ...Policy charges and fee income ...Net investment income ...Asset management and service fees ...Other income ...Realized investment gains (losses), net ...Total revenues ...Benefits and expenses: Policyholders' benefits ...Interest credited to policyholders' account balances ...Dividends...

  • Page 13
    ... 2015 Balance Sheet Data: Total investments excluding policy loans ...Separate account assets ...Total assets ...Future policy benefits and policyholders' account balances ...Separate account liabilities ...Short-term debt ...Long-term debt ...Total liabilities ...Prudential Financial, Inc. equity...

  • Page 14
    .... Closed Block Business results were associated with the Company's Class B Stock for periods prior to January 1, 2015. Revenues and Expenses We earn our revenues principally from insurance premiums; mortality, expense, asset management and administrative fees from insurance and investment products...

  • Page 15
    ... denominated products. Regulatory Environment. See "Business-Regulation" and "Risk Factors-Regulatory and Legal Risks" included in Prudential Financial's 2015 Annual Report on Form 10-K for a discussion of regulatory developments that may impact the Company and associated risks. Demographics. Japan...

  • Page 16
    ...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...

  • Page 17
    ... Life business, we expect to continue to work with regulators on long-term solutions to finance new statutory reserve requirements for our term and universal life policies. We will also seek to capitalize on opportunities for additional voluntary life purchases in the group insurance market...

  • Page 18
    ... Businesses and the Closed Block Business for each period. (9) Reflects the existence of two classes of common stock and the separate reporting of the Company's former Financial Services Businesses and the Closed Block Business for the years ended December 31, 2014 and 2013. Results for 2015...

  • Page 19
    ... employee benefits income and higher levels of corporate expenses. Closed Block division. Closed Block division results for 2015 increased in comparison to Closed Block Business results for 2014 primarily driven by the absence of costs associated with the early redemption in 2014 of senior secured...

  • Page 20
    ...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...

  • Page 21
    ... Annuities-Variable Annuity Hedging Program Results." DAC associated with the traditional participating products of our Closed Block is amortized over the expected lives of those contracts in proportion to estimated gross margins. Gross margins consider premiums, investment returns, benefit claims...

  • Page 22
    ...life policies are dependent upon the total rate of return on assets held in separate account investment options. This rate of return influences the fees we earn, costs we incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity...

  • Page 23
    ... the years ended December 31, 2015, 2014 and 2013, see "-Results of Operations by Segment-U.S. Individual Life and Group Insurance Division-Individual Life." For the variable annuity contracts of our Individual Annuities segment, DAC and DSI are more sensitive to changes in our future rate of return...

  • Page 24
    ... CAPM is a generally accepted method for estimating an equity investor's return requirement, and hence a company's cost of equity capital. The calculation using the CAPM begins with the long-term risk-free rate of return, then applies a market risk premium for large company common stock, as well as...

  • Page 25
    ...of our total future policy benefit reserves, primarily relate to our non-participating life contingent group annuity and structured settlement products. These reserves are generally determined as the present value of expected future benefits and expenses. For these reserves, we utilize best estimate...

  • Page 26
    ...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 returns used to grow the contractholders' account values. The Company's discount rate assumption is...

  • Page 27
    ... changes in our optional living benefit features for the years ended December 31, 2015, 2014 and 2013, see "-Results of Operations by Segment-U.S. Retirement Solutions and Investment Management Division-Individual Annuities." Unearned revenue reserve Our unearned revenue reserve ("URR"), reported...

  • Page 28
    ... significant effect on our net period costs associated with these plans. We determine our expected rate of return on plan assets based upon a building block approach that considers inflation, real return, term premium, credit spreads, equity risk premium and capital appreciation as well as expenses...

  • Page 29
    ...tax benefits and interest that relate to tax years still subject to review by the Internal Revenue Service ("IRS") or other taxing authorities. See Note 19 to the Consolidated Financial Statements for a discussion of the impact in 2015, 2014 and 2013 of changes to our total unrecognized tax benefits...

  • Page 30
    ... Variable Annuity ("PPI") and Prudential Defined Income Variable Annuity ("PDI") products, as a result of our product diversification strategy. 2014 to 2013 Annual Comparison. The increase in account values during 2014 was largely driven by changes in the market value of contractholder funds...

  • Page 31
    ... cancellations, as discussed above. 2014 to 2013 Annual Comparison. Revenues increased $245 million, primarily driven by a $311 million increase in policy charges and fee income, asset management and service fees and other income, due to growth in average variable annuity account values. Partially...

  • Page 32
    ... 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...

  • Page 33
    ...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 risk premiums. • Actuarial...

  • Page 34
    ...to hedge certain capital market risks present in our hedge target. The instruments include, but are not limited to, interest rate swaps, swaptions, floors and caps as well as equity options, total return swaps and equity futures. The following table sets forth the market and notional values of these...

  • Page 35
    .... Year ended December 31, 2015 2014 2013 (in millions) Operating results: Revenues ...Benefits and expenses ...Adjusted operating income ...Realized investment gains (losses), net, and related adjustments ...Related charges ...Investment gains (losses) on trading account assets supporting insurance...

  • Page 36
    ...of crediting rate reductions on full service general account stable value account values. 2014 to 2013 Annual Comparison. Revenues increased $6,049 million. Premiums increased $5,896 million primarily driven by two significant group annuity transactions in 2014. This increase in premiums resulted in...

  • Page 37
    ... drive revenue for the Retirement segment. For more information on internally-managed balances, see "- Asset Management." Year ended December 31, 2015 2014 2013 (in millions) Full Service: Beginning total account value ...Deposits and sales ...Withdrawals and benefits ...Change in market value...

  • Page 38
    ... distribution costs associated with higher retail sales and expenses relating to business growth initiatives. The decrease also reflected lower other related revenues, net of expenses, primarily related to lower strategic investing results. 2014 to 2013 Annual Comparison. Adjusted operating income...

  • Page 39
    ... 2013 (in billions) 2015 Assets Under Management (at fair market value): Institutional customers: Equity ...Fixed income ...Real estate ...Institutional customers(1) ...Retail customers: Equity ...Fixed income ...Real estate ...Retail customers(2) ...General account: Equity ...Fixed income ...Real...

  • Page 40
    ... market and currency risk) by asset class and source as of the dates indicated. December 31, 2015 2014 (in millions) Co-Investments: Real estate ...Fixed income ...Seed Investments: Real estate ...Public equity ...Fixed income ...Loans Secured by Investor Equity Commitments or Fund Assets: Private...

  • Page 41
    ... and diversify product sales. 2014 to 2013 Annual Comparison. Annualized new business premiums decreased $279 million primarily driven by pricing and other actions taken in 2013 to limit the concentration of sales of the universal life insurance product with secondary, or "no-lapse," guarantees and...

  • Page 42
    ... disability business reflected the impact of higher claim resolutions and fewer new claims for long-term contracts, while the less favorable underwriting results for our group life business reflected lower premiums due to lapsed business. 2014 to 2013 Annual Comparison. Adjusted operating income...

  • Page 43
    ... our claims management process, and other costs to support business initiatives. 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. Year ended December 31, 2015 2014 2013...

  • Page 44
    ... interest income. The amounts shown represent the present value of future U.S. dollar cash flows. The U.S. dollar-denominated investments that hedge the U.S. dollar-equivalent shareholder return on equity from our Japanese insurance operations are reported within yen-based entities and, as a result...

  • Page 45
    ... 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. Prudential Financial, Inc. 2015 Annual Report 43

  • Page 46
    ... operating income ...Realized investment gains (losses), net, and related adjustments(1) ...Related charges ...Investment gains (losses) on trading account assets supporting insurance liabilities, net ...Change in experience-rated contractholder liabilities due to asset value changes ...Equity in...

  • Page 47
    ...changes in reserves, decreased $2,446 million driven by the discontinuation of bank channel sales of yendenominated single premium reduced death benefit whole life products and pricing actions taken on certain retirement and protection products in 2013. Prudential Financial, Inc. 2015 Annual Report...

  • Page 48
    ...456 (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 5% and...

  • Page 49
    (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 7% and 57%,...

  • Page 50
    ... lower expected returns on plan assets due to lower than expected plan fixed income asset growth in 2015 as well as higher interest costs on the plan obligation due to the higher discount rate. For purposes of calculating postretirement benefit expenses for the year ended December 31, 2016, we will...

  • Page 51
    ... Long-Term Care ...Residential Real Estate Brokerage Franchise and Relocation Services ...Individual Health and Disability Insurance ...Other ...Total divested businesses income (loss) excluded from adjusted operating income ... Long-Term Care. Results for the year ended December 31, 2015 primarily...

  • Page 52
    ... the former Closed Block Business and lower income from non-coupon investments. Net insurance activity results declined $104 million primarily reflecting the runoff of policies in force and higher dividends to policyholders as a result of an increase in the 2015 and 2016 dividend scales. General and...

  • Page 53
    ... insurance companies with respect to post-2013 operating earnings and AOCI, except realized and unrealized capital gains and losses. On March 31, 2015, the government of Japan enacted an approximately two percentage points reduction in the Japanese tax rate, effective April 1, 2015. Our income tax...

  • Page 54
    ... 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...

  • Page 55
    ... ...Equity securities, available-for-sale ...Commercial mortgage and other loans ...Other long-term investments ...Short-term investments ...Cash equivalents ...Other assets ...Subtotal excluding separate account assets ...Separate account assets ...Total assets ...Future policy benefits ...Other...

  • Page 56
    ... and equity market volatility. Future policy benefits classified as Level 3 for PFI excluding the Closed Block division were a net liability of $8.4 billion as of December 31, 2015. For additional information, see "-Results of Operations by Segment-U.S. Retirement Solutions and Investment Management...

  • Page 57
    ... 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 Consolidated Financial Statements. We use interest rate and currency swaps and...

  • Page 58
    ... premiums, OTTI, and credit related losses through sales of investments pursuant to our credit risk objectives. (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...

  • Page 59
    ... See below for additional information regarding the OTTI of equity securities in 2015 and 2014. Net realized gains on commercial mortgage and other loans for the year ended 2015 were $36 million, primarily driven by servicing revenue of $31 million in our Asset Management business and a net decrease...

  • Page 60
    ... premiums, OTTI, and credit related losses through sales of investments pursuant to our credit risk objectives. (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...

  • Page 61
    ... fixed maturity securities, by reason. Year Ended December 31, 2015 2014 (in millions) OTTI recorded in earnings-Closed Block Division(1) Public fixed maturity securities ...Private fixed maturity securities ...Total fixed maturity securities ...Equity securities ...Other invested assets(2) ...Total...

  • Page 62
    ... premiums, OTTI, and credit related losses through sales of investments pursuant to our credit risk objectives. (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...

  • Page 63
    ... and partnerships and real estate investments. Year Ended December 31, 2014 2013 (in millions) OTTI on fixed maturity securities recorded in earnings-PFI excluding Closed Block Division(1) Due to credit events or adverse conditions of the respective issuer(2) ...Due to other accounting guidelines...

  • Page 64
    ... premiums, OTTI, and credit related losses through sales of investments pursuant to our credit risk objectives. (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...

  • Page 65
    ... managing the market risk exposures associated with the corresponding product liabilities. We pursue our objective to optimize investment income yield for PFI excluding the Closed Block division over time through: (1) the investment of net operating cash flow, including new product premium inflows...

  • Page 66
    ...and agency securities, public and private corporate bonds and structured securities, and commercial mortgage loans. In addition, we hold allocations of non-coupon investments, which include equity securities and other long-term investments such as joint ventures and limited partnerships, real estate...

  • Page 67
    ... cost ...Trading account assets supporting insurance liabilities, at fair value ...Other trading account assets, at fair value ...Equity securities, available-for-sale, at fair value ...Commercial mortgage and other loans, at book value ...Policy loans, at outstanding balance ...Other long-term...

  • Page 68
    ......Trading account assets supporting insurance liabilities ...Equity securities ...Commercial mortgage and other loans ...Policy loans ...Short-term investments and cash equivalents ...Other investments ...Gross investment income before investment expenses ...Investment expenses ...Investment income...

  • Page 69
    ......Trading account assets supporting insurance liabilities ...Equity securities ...Commercial mortgage and other loans ...Policy loans ...Short-term investments and cash equivalents ...Other investments ...Gross investment income before investment expenses ...Investment expenses ...Investment income...

  • Page 70
    ......Trading account assets supporting insurance liabilities ...Equity securities ...Commercial mortgage and other loans ...Policy loans ...Short-term investments and cash equivalents ...Other investments ...Gross investment income before investment expenses ...Investment expenses ...Investment income...

  • Page 71
    ... operations see, "-Results of Operations by Segment-International Insurance Division." 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...

  • Page 72
    ... ...Capital goods ...Consumer cyclical ...Foreign agencies ...Energy ...Communications ...Basic industry ...Transportation ...Technology ...Industrial other ...Total corporate securities ...Foreign government(3) ...Residential mortgage-backed ...Asset-backed securities(4) ...Commercial mortgage...

  • Page 73
    ...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 December 31, 2015 Lowest Rating Agency Rating Total BB and Amortized BBB...

  • Page 74
    ... 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...

  • Page 75
    ...agency commercial mortgage-backed securities with fair value of $508 million, all rated AA. Fixed Maturity Securities Credit Quality The Securities Valuation Office ("SVO") of the National Association of Insurance Commissioners ("NAIC"), evaluates the investments of insurers for statutory reporting...

  • Page 76
    ...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...

  • Page 77
    ...186 $20,263 Short-term investments and cash equivalents ...Fixed maturities: Corporate securities ...Commercial mortgage-backed securities ...Residential mortgage-backed securities ...Asset-backed securities ...Foreign government bonds ...U.S. government authorities and agencies and obligations of...

  • Page 78
    ... loan portfolio strategy emphasizes diversification by property type and geographic location. The following tables set forth the breakdown of the gross carrying values of our general account investments in commercial and agricultural mortgage loans attributable to PFI excluding the Closed Block...

  • Page 79
    ... value of our general account investments in commercial and agricultural mortgage loans attributable to PFI excluding the Closed Block division as of the dates indicated by loan-to-value and debt service coverage ratios. Commercial and Agricultural Mortgage Loans by Loan-to-Value and Debt Service...

  • Page 80
    ...(2) $95 $ 0 $95 $ 99 $ 5 $ 94 Allowance, beginning of year ...Addition to (release of) allowance for losses ...Charge-offs, net of recoveries ...Change in foreign exchange ...Allowance, end of period ...Loan specific reserve ...Portfolio reserve ... 78 Prudential Financial, Inc. 2015 Annual Report

  • Page 81
    ...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...

  • Page 82
    ... 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...

  • Page 83
    ... in Prudential Financial's 2015 Annual Report on Form 10-K. During 2015, we took the following significant actions that impacted our liquidity and capital position: • On January 2, 2015, we repurchased and canceled all of the outstanding shares of our Class B Stock for a cash purchase price of...

  • Page 84
    ...the invested assets, insurance-related risks associated with an insurer's products and liabilities, interest rate risks and general business risks. RBC ratio calculations are intended to assist insurance regulators in measuring an insurer's solvency and ability to pay future claims. The reporting of...

  • Page 85
    ... Model Regulation," commonly known as "Guideline AXXX". The regulation and supporting guideline require insurers to establish statutory reserves for term and universal life insurance policies with long-term premium guarantees at a level that exceeds what our actuarial assumptions for this business...

  • Page 86
    ... to Prudential Financial, the parent holding company, are dividends and returns of capital from subsidiaries, repayments of operating loans from subsidiaries and cash and short-term investments. These sources of funds may be supplemented by Prudential Financial's access to the capital markets as...

  • Page 87
    ... 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 Financial Services Agency ("FSA"). Dividends in excess of these amounts and other forms of capital distribution require...

  • Page 88
    ...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...

  • Page 89
    ... interest rates increase in Japan. As of December 31, 2015, yen-denominated single premium reduced death benefit whole life products represented $7.8 billion of our Japan operations' insurance-related liabilities. Liquid Assets Liquid assets include cash and cash equivalents, short-term investments...

  • Page 90
    ...rates, equity markets, mortality and policyholder behavior. Currently, we fund these liquidity needs with a combination of Pruco Re's available resources and loans from Prudential Financial and other affiliates. In 2016, we expect to recapture the risks related to our variable annuity living benefit...

  • Page 91
    ... ...Total(1) ...Portion of above securities that may be returned to the Company overnight requiring immediate return of the cash collateral(2) ...Weighted average maturity, in days(3) ... $5,574 8 $2,117 17 $ 7,691 $6,610 23 $1,975 52 $ 8,585 Prudential Financial, Inc. 2015 Annual Report 89

  • Page 92
    ... to those accounts, and the remaining $3.3 billion relating to the Closed Block division. Membership in the Federal Home Loan Banks 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...

  • Page 93
    ...funding for institutional and insurance company portfolio cash flow timing differences. Our remaining borrowings are utilized for business funding to meet specific purposes, including funding new business acquisition costs associated with our individual annuities business, operating needs associated...

  • Page 94
    .... As discussed under "Business-Regulation" included in Prudential Financial's 2015 Annual Report on Form 10-K, in December 2014, the NAIC adopted a new actuarial guideline, known as "AG 48," that governs the reinsurance of term and universal life insurance business to captives by prescribing...

  • Page 95
    .... AG 48 will require 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. While we continue to work with regulators and industry participants on potential long-term solutions, we expect to...

  • Page 96
    ...payment of financial commitments, to "D (default)." Investment grade ratings range between "AAA" and "BBB." Short-term ratings range from "F1+ (highest credit quality)" to "C (high default risk)." (5) This rating for Prudential Life Insurance Company of Taiwan, Inc. was affirmed on December 10, 2015...

  • Page 97
    ... due by period for insurance liabilities reflect future estimated cash payments to be made to policyholders and others for future policy benefits, policyholders' account balances, policyholder's dividends, reinsurance payables and separate account liabilities, net of premium receipts and reinsurance...

  • Page 98
    ...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...

  • Page 99
    ...maturities of $322 billion as of December 31, 2015, Prudential Financial is exposed to significant credit risk. To manage this risk, we have a set of risk limits in place, including enterprise-level risk limits set by the Investment Committee of the Prudential Financial, Inc. 2015 Annual Report 97

  • Page 100
    ... product. We provide corporate oversight of the material insurance risk assumptions utilized in pricing and valuation. Operational Risk Management Operational risk is defined as the risk of direct or indirect loss resulting from inadequate or failed internal processes and systems, employee actions...

  • Page 101
    ... risks on a regular basis. Model Risk Management Models are utilized by our businesses and corporate functions primarily in projecting future cash flows associated with pricing products, calculating reserves and valuing assets, as well as in evaluating risk and determining capital requirements...

  • Page 102
    ..., our investment policies for our general account portfolios generally require hedging currency risk for cash flows not offset by similarly denominated liabilities. • Management of portfolio concentration risk. For example, ongoing monitoring and management at the enterprise level of key rate...

  • Page 103
    ...Swaps ...Futures ...Options ...Forwards ...Synthetic GICs ...Variable annuity and other living benefit feature embedded derivatives(2) ...Financial liabilities with interest rate risk(3): Short-term and long-term debt ...Limited recourse notes issued by consolidated VIEs(4) ...Policyholders' account...

  • Page 104
    ... than trading" activities in our segments that offer insurance, retirement and annuities products. (2) The notional and fair value of equity-based derivatives and the fair value of variable annuity and other living benefit feature embedded derivatives are also reflected in amounts under "Market Risk...

  • Page 105
    ...in fair value of these embedded derivatives are provided under "Market Risk Related to Interest Rates" and "Market Risk Related to Equity Prices" above. For additional information regarding our risk management strategies, including our living benefit hedging program and other product design elements...

  • Page 106
    ... framework, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2015. Our internal control over financial reporting is a process designed by or under the supervision of our principal executive and principal financial officers to provide...

  • Page 107
    ...of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. New York, New York February 19, 2016 Prudential Financial, Inc. 2015 Annual Report 105

  • Page 108
    ... Future policy benefits ...$224,384 $217,766 Policyholders' account balances(1) ...136,784 136,150 Policyholders' dividends ...5,578 7,661 Securities sold under agreements to repurchase ...7,882 9,407 Cash collateral for loaned securities ...3,496 4,241 Income taxes ...8,714 9,881 Short-term...

  • Page 109
    PRUDENTIAL FINANCIAL, INC. Consolidated Statements of Operations Years Ended December 31, 2015, 2014 and 2013 (in millions, except per share amounts) 2015 2014 2013 REVENUES Premiums ...Policy charges and fee income ...Net investment income ...Asset management and service fees ...Other income (loss...

  • Page 110
    ... 2015, 2014 and 2013 (in millions) 2015 2014 2013 NET INCOME (LOSS) ...Other comprehensive income (loss), before tax: Foreign currency translation adjustments for the period ...Net unrealized investment gains (losses) ...Defined benefit pension and postretirement unrecognized periodic benefit (cost...

  • Page 111
    ... Statements of Equity Years Ended December 31, 2015, 2014 and 2013 (in millions) Common Class B Accumulated Total Additional Stock Stock Other Prudential Common Paid-in Retained Held In Held in Comprehensive Financial, Inc. Noncontrolling Total Stock Capital Earnings Treasury Treasury Income...

  • Page 112
    ......Change in: Deferred policy acquisition costs ...Future policy benefits and other insurance liabilities ...Other trading account assets ...Income taxes ...Derivatives, net ...Other, net ...Cash flows from (used in) operating activities ...CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from the sale...

  • Page 113
    ... 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...

  • Page 114
    ...stock method, the excess tax benefits that would be recognized in additional paid-in capital upon exercise or release of the award. Investments and Investment-Related Liabilities The Company's principal investments are fixed maturities; equity securities; commercial mortgage and other loans; policy...

  • Page 115
    ... securities available-for-sale, at fair value" are comprised of common stock, mutual fund shares and non-redeemable preferred stock, and are carried at fair value. The associated unrealized gains and losses, net of tax, and the effect on DAC, VOBA, DSI, future policy benefits, policyholders' account...

  • Page 116
    .... Interest income on policy loans is recognized in net investment income at the contract interest rate when earned. Policy loans are fully collateralized by the cash surrender value of the associated insurance policies. "Other long-term investments" consist of the Company's non-coupon investments in...

  • Page 117
    ...of the Company's International Insurance businesses' portfolios, where the average cost method is used. Realized investment gains and losses are generated from numerous sources, including the sale of fixed maturity securities, equity securities, investments in joint ventures and limited partnerships...

  • Page 118
    ..., the security is reviewed for further cash flow impairments. Unrealized investment gains and losses are also considered in determining certain other balances, including DAC, VOBA, DSI, certain future policy benefits, policyholders' account balances, policyholders' dividends and deferred tax assets...

  • Page 119
    ..., real estate-related investments, real estate mortgage loans, short-term investments and derivative instruments. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company. Investment risks associated with market value changes...

  • Page 120
    ... as market conditions and expected investment returns. Although mortality and morbidity and interest rate assumptions are "locked-in" upon the issuance of new insurance or annuity business with fixed and guaranteed terms, significant changes in experience or assumptions may require the Company to...

  • Page 121
    ... year by the Board of Directors of the Prudential Insurance Company of America ("Prudential Insurance") based on its statutory results, capital position, ratings, and the emerging experience of the Closed Block. The policyholder dividend obligation represents amounts expected to be paid to Closed...

  • Page 122
    ... products include claims in excess of related account balances, expenses of contract administration, interest credited to policyholders' account balances and amortization of DAC, DSI and VOBA. For group life, other than universal and variable group life contracts, and disability insurance, premiums...

  • Page 123
    ...the Company include swaps, futures, forwards and options and may be exchange-traded or contracted in the over-the-counter ("OTC") market. Derivative positions are carried at fair value, generally by obtaining quoted market prices or through the use of valuation models. Derivatives are used to manage...

  • Page 124
    ... on a long-term basis in the near-term. See Note 14 for additional information regarding short-term and long-term debt. Income Taxes The Company and its includible domestic subsidiaries file a consolidated federal income tax return that includes both life insurance companies and non-life insurance...

  • Page 125
    ...-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...

  • Page 126
    ... January 1, 2016, 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 124 Prudential Financial, Inc. 2015 Annual Report

  • Page 127
    ... 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...

  • Page 128
    ... associated with the acquisition. Sale of Wealth Management Solutions Business In April 2013, the Company signed a definitive agreement to sell its wealth management solutions business to Envestnet Inc. The transaction, which did not have a material impact to the Company's financial results, closed...

  • Page 129
    ...(5) $1,355 $ $(605) Amortized Cost Fixed maturities, held-to-maturity Foreign government bonds ...Foreign corporate public securities ...Foreign corporate private securities(5) ...Commercial mortgage-backed securities ...Residential mortgage-backed securities(3) ...Total fixed maturities, held-to...

  • Page 130
    ... $20,263 Short-term investments and cash equivalents ...Fixed maturities: Corporate securities ...Commercial mortgage-backed securities ...Residential mortgage-backed securities(1) ...Asset-backed securities(2) ...Foreign government bonds ...U.S. government authorities and agencies and obligations...

  • Page 131
    ... Value Cost Value (in millions) Investments in Japanese government and government agency securities: Fixed maturities, available-for-sale ...Fixed maturities, held-to-maturity ...Trading account assets supporting insurance liabilities ...Other trading account assets ...Short-term investments ...Cash...

  • Page 132
    ... Financial Statements Commercial Mortgage and Other Loans The Company's commercial mortgage and other loans are comprised as follows, as of the dates indicated: December 31, 2015 Amount % of (in millions) Total Commercial mortgage and agricultural property loans by property type: Office ...Retail...

  • Page 133
    PRUDENTIAL FINANCIAL, INC. Notes to Consolidated Financial Statements 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: December 31, 2015 Commercial Agricultural Residential Other Mortgage ...

  • Page 134
    ...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: December 31, 2015 Average Recorded Investment Before Allowance...

  • Page 135
    ... that it will sell the loan to an investor. As of both December 31, 2015 and 2014, 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...

  • Page 136
    ... Company's commercial mortgage and other loans may occasionally be involved in a troubled debt restructuring. As of both December 31, 2015 and 2014, the Company had no significant commitments to borrowers that have been involved in a troubled debt 134 Prudential Financial, Inc. 2015 Annual Report

  • Page 137
    ... ...Real estate held through direct ownership ...Other ...Total other long-term investments ...$6,447 1,085 7,532 1,464 990 $9,986 $ 6,527 1,018 7,545 2,235 1,141 $10,921 In certain investment structures, the Company's asset management business invests with other co-investors in an investment fund...

  • Page 138
    ...-maturity(1) ...Equity securities, available-for-sale ...Trading account assets ...Commercial mortgage and other loans ...Policy loans ...Short-term investments and cash equivalents ...Other long-term investments ...Gross investment income ...Less: investment expenses ...Net investment income ...$10...

  • Page 139
    ... government bonds ...U.S. corporate public securities ...U.S. corporate private securities ...Foreign corporate public securities ...Foreign corporate private securities ...Commercial mortgage-backed securities ...Asset-backed securities ...Residential mortgage-backed securities ...Total ...Equity...

  • Page 140
    ... government bonds ...U.S. corporate public securities ...U.S. corporate private securities ...Foreign corporate public securities ...Foreign corporate private securities ...Asset-backed securities ...Commercial mortgage-backed securities ...Residential mortgage-backed securities ...Equity securities...

  • Page 141
    ...dividends to certain policyholders and to fund certain employee benefits. Securities restricted as to sale amounted to $109 million and $164 million at December 31, 2015 and 2014, respectively. These amounts include member and activity-based stock associated with memberships in the Federal Home Loan...

  • Page 142
    ...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...

  • Page 143
    ..., available-for-sale ...Fixed maturities, held-to-maturity ...Trading account assets supporting insurance liabilities ...Other trading account assets ...Commercial mortgage and other loans ...Other long-term investments ...Cash and cash equivalents ...Accrued investment income ...Other assets...

  • Page 144
    ...a pre-tax gain of $66 million from the sale of this investment. The Company has made investments in operating joint ventures as part of its Asset Management and International Insurance segments and its Corporate and Other operations. For the years ended December 31, 2015, 2014 and 2013, the Company...

  • Page 145
    ... 12, 5, 8, 6, 10, and 13 years for the VOBA related to CIGNA, Prudential Annuities Holding Co., Gibraltar Life., Aoba Life, The Hartford Life Business, and Gibraltar BSN Life Berhad, respectively. (2) The interest accrual rates vary by product. The interest rates for 2015 were 6.40%, 6.05%, 1.28% to...

  • Page 146
    ... certain other reserves for group, annuities and individual life and health products. Future policy benefits for individual participating traditional life insurance are based on the net level premium method, calculated using the guaranteed mortality and nonforfeiture interest rates which range from...

  • Page 147
    ... expected future policy benefits and expenses. Premium deficiency reserves have been recorded for the group single premium annuity business, which consists of limited-payment, long-duration traditional, non-participating annuities; structured settlements; single premium immediate annuities with life...

  • Page 148
    ...guarantees were invested in separate account investment options as follows: December 31, 2015 2014 (in millions) $ 88,992 $ 94,473 46,642 45,159 843 753 6,355 8,335 $142,832 $148,720 Equity funds ...Bond funds ...Balanced funds ...Money market funds ...Total ... 146 Prudential Financial, Inc. 2015...

  • Page 149
    ... the changes in general account liabilities for guarantees. The liabilities for guaranteed minimum death benefits ("GMDB"), and guaranteed minimum income benefits ("GMIB") are included in "Future policy benefits" and the related changes in the liabilities are included in "Policyholders' benefits...

  • Page 150
    ... support the Closed Block's liabilities, policyholder dividend scales or the methodology for determining policyholder dividends, or impact the guaranteed benefits, premiums or dividends for Closed Block policyholders. The policies included in the Closed Block are specified individual life insurance...

  • Page 151
    ...trading account assets, at fair value ...Equity securities, available-for-sale, at fair value ...Commercial mortgage and other loans ...Policy loans ...Other long-term investments ...Short-term investments ...Total investments ...Cash and cash equivalents ...Accrued investment income ...Other Closed...

  • Page 152
    ...% of the Prudential Premier® Retirement Variable Annuity with Highest Daily Lifetime Income ("HDI") v.3.0 business, a guaranteed benefit feature. 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...

  • Page 153
    ... Financial Statements The international business primarily uses reinsurance to obtain experience with respect to certain new product offerings and to a lesser extent, to manage risk and volatility as necessary. Reinsurance ceded arrangements do not discharge the Company as the primary insurer. Ceded...

  • Page 154
    ... 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 FHLBNY. Membership allows Prudential Insurance access to the FHLBNY's financial services, including the ability to...

  • Page 155
    ... Financial Statements 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...

  • Page 156
    ... surplus notes if certain statutory capital requirements are not met. At December 31, 2015 and 2014, the Company met these statutory capital requirements. Prudential Insurance's fixed-rate surplus notes include $500 million of exchangeable surplus notes issued in a private placement in 2009 with an...

  • Page 157
    ..., by up to five years. The captive holds the credit-linked notes as assets supporting non-economic reserves required to be held by the Company's domestic insurance subsidiaries under Regulation XXX in connection with the reinsurance of term life insurance policies through the captive. The principal...

  • Page 158
    ...Prudential Financial's junior subordinated notes outstanding are considered hybrid securities that receive enhanced equity treatment from the rating agencies. Junior subordinated notes outstanding, along with their key terms, are as follows: Initial Optional Interest Rate Principal Interest Investor...

  • Page 159
    ... Financial completed the sale, through a private placement, of 2.0 million shares of Class B Stock at a price of $87.50 per share. The Class B Stock was a separate class of common stock not publicly- traded, which reflected the performance of the Company's former Closed Block Business. As part of...

  • Page 160
    ...loans to subsidiaries, the payment of declared shareholder dividends and repurchases of outstanding shares of Common Stock if executed under Board authority. As of December 31, 2015, Prudential Financial had cash and short-term investments, excluding amounts held in an intercompany liquidity account...

  • Page 161
    ... prior year statutory after-tax earnings may be paid, after reserving thresholds are met. Dividends in excess of these amounts and other forms of capital distribution require the prior approval of the Japan Financial Services Agency ("FSA"). Additionally, Prudential of Japan and Gibraltar Life must...

  • Page 162
    ... risk amount, which is calculated in a similar manner to RBC. As of December 31, 2015, Prudential of Japan and Gibraltar Life both had solvency margin capital in excess of 3.5 times the regulatory required minimums that would require corrective action. All of the Company's domestic and international...

  • Page 163
    ... Securities on which an OTTI loss has been recognized Accumulated Other Comprehensive Future Policy Deferred Income (Loss) Benefits and Income Related To Net Policyholders' Tax Unrealized Net Unrealized Account Policyholders' (Liability) Investment Gains (Losses) DAC, DSI, Balances Dividends Benefit...

  • Page 164
    ... cash flows between the businesses related to these expenses. Accordingly, earnings per share of Common Stock presented below for the years ended December 31, 2014 and 2013, reflect earnings attributable to the former Financial Services Businesses. 162 Prudential Financial, Inc. 2015 Annual Report

  • Page 165
    ... the separation of the former Financial Services Businesses and Closed Block Business. As a result, there was no direct equity adjustment recorded for the year ended December 31, 2015. Earnings per share of the Class B Stock for the years ended December 31, 2014 and 2013, is not presented herein as...

  • Page 166
    ..., 2013, all potential stock options and compensation programs were considered antidilutive. Unvested share-based payment awards that contain nonforfeitable rights to dividends are participating securities and included in the computation of earnings per share pursuant to the two-class method. Under...

  • Page 167
    ... plans capitalized in deferred acquisition costs for the years ended December 31, 2015, 2014 and 2013 were de minimis. Stock Options Each stock option granted has an exercise price no less than the fair market value of the Company's Common Stock on the date of grant and has a maximum term...

  • Page 168
    ... 31, 2015, 2014 and 2013 was $58 million, $51 million and $38 million, respectively. Settlement of Awards The Company's policy is to issue shares from Common Stock held in treasury upon exercise of stock options, the release of restricted stock units and performance shares. The Company uses cash to...

  • Page 169
    PRUDENTIAL FINANCIAL, INC. Notes to Consolidated Financial Statements 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...

  • Page 170
    ...Periodic Benefit Cost The Company uses market related value to determine components of net periodic (benefit) cost. Market related value recognizes certain changes in fair value of plan assets over a period of five years. Changes in the fair value of U.S Equities, International Equities, Real Estate...

  • Page 171
    ... value of a portfolio of Aa investments whose cash flows would be available to pay the benefit obligation's cash flows when due. The December 31, 2015 portfolio is selected from a compilation of approximately 720 Aa-rated bonds across the full range of Prudential Financial, Inc. 2015 Annual Report...

  • Page 172
    ... return on a diversified portfolio of stocks, bonds, and other investments, while meeting the cash requirements for the postretirement obligation that includes a medical benefit including prescription drugs, a dental benefit and a life benefit. The postretirement plan risk management practices...

  • Page 173
    ... in Insurance Company Pooled Separate Accounts. Individual policies are invested in Registered Investment Companies (Mutual Funds). The value of interest in these policies is the cash surrender value of the policies based on the underlying investments. Prudential Financial, Inc. 2015 Annual Report...

  • Page 174
    ...International Equities: Pooled separate accounts(2) ...Common/collective trusts(3) ...United Kingdom insurance pooled funds(4) ...Subtotal ...Fixed Maturities: Pooled separate accounts(5) ...Common/collective trusts(6) ...U.S. government securities (federal): Mortgage-backed ...Other U.S. government...

  • Page 175
    ... new market leaders with sustainable competitive advantage. (4) This category invests in an international equity fund whose objective is to track an index. (5) This category invests in bond funds, primarily highly rated private placement securities. (6) This category invests in bond funds, primarily...

  • Page 176
    PRUDENTIAL FINANCIAL, INC. Notes to Consolidated Financial Statements Changes in Fair Value of Level 3 Pension Assets Year Ended December 31, 2015 Fixed Maturities- Pooled Separate Accounts Fair Value, beginning of period ...Actual Return on Assets: Relating to assets still held at the reporting ...

  • Page 177
    ... Life Insurance Policies(1) ...Common trusts(2) ...Equities ...Subtotal ...International Equities: Variable Life Insurance Policies(3) ...Common trusts(4) ...Subtotal ...Fixed Maturities: Variable Life Insurance Policies(5) ...Common trusts(5) ...U.S. government securities (federal): Mortgage...

  • Page 178
    ... in large cap international equity fund whose objective is to outperform an index. (5) This category invests in U.S. government and corporate bond funds. (6) This category invests in highly rated corporate bonds. (7) This category invests in highly rated Collateralized Mortgage Obligations. (8) Cash...

  • Page 179
    ... covered by the Hedging IDD beginning with 2009. As a result of applying such accounting method in 2014, the Company's U.S. current tax benefit includes an additional tax benefit of $475 million and a corresponding reduction of deferred tax assets. Prudential Financial, Inc. 2015 Annual Report 177

  • Page 180
    ... for the following reasons: 2015 Expected federal income tax expense (benefit) ...Non-taxable investment income ...Foreign taxes at other than U.S. rate ...Low-income housing and other tax credits ...Reversal of acquisition opening balance sheet deferred tax items ...Change in repatriation assertion...

  • Page 181
    ... Income. Deferred tax assets and liabilities at December 31 resulted from the items listed in the following table: 2014 2015 (in millions) Deferred tax assets(1) Insurance reserves ...Policyholders' dividends ...Net operating and capital loss carryforwards ...Employee benefits ...Investments...

  • Page 182
    ... to tax years still subject to review by the IRS or other taxing authorities. The completion of review or the expiration of the Federal statute of limitations for a given audit period could result in an adjustment to the liability for income taxes. 180 Prudential Financial, Inc. 2015 Annual Report

  • Page 183
    ... 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...

  • Page 184
    ...(corporate public and private bonds, most government securities, certain asset-backed and mortgage-backed securities, etc.), certain equity securities (mutual funds, which do not actively trade and are priced based on a NAV), certain commercial mortgage loans, short-term investments and certain cash...

  • Page 185
    ...Subtotal ...Equity securities, available-for-sale ...Commercial mortgage and other loans ...Other long-term investments ...Short-term investments ...Cash equivalents ...Other assets ...Subtotal excluding separate account assets ...Separate account assets(4) ...Total assets ...Future policy benefits...

  • Page 186
    ... 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...

  • Page 187
    ..., 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...

  • Page 188
    ... 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...

  • Page 189
    ... 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. Prudential Financial, Inc. 2015 Annual Report 187

  • Page 190
    ... rental income and expense amounts, related growth rates, discount rates and capitalization rates. In cases where real estate investments are made through indirect investments, fair value is generally determined by the Company's equity in net assets of the entities. The debt associated with real...

  • Page 191
    ... 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...

  • Page 192
    PRUDENTIAL FINANCIAL, INC. Notes to Consolidated Financial Statements Year Ended December 31, 2015 Trading Account Assets Commercial Residential All Foreign AssetMortgage- MortgageOther Government Corporate Backed(6) Backed Backed Equity Activity (in millions) Fair Value, beginning of period ...$21 ...

  • Page 193
    .../liabilities still held(3): Included in earnings: Realized investment gains (losses), net ...Other income ...Interest credited to policyholders' account balances ...Year Ended December 31, 2015 Future Notes Issued Policy Other by Consolidated Benefits Liabilities VIEs (in millions) $24,662 $(8,182...

  • Page 194
    ...43 0 0 0 0 0 0 (12) (18) (55) 0 0 $253 $ 2 $ 0 $ 0 Year Ended December 31, 2014 Trading Account Assets Commercial Residential All Foreign AssetMortgage- MortgageOther Government Corporate Backed(6) Backed Backed Equity Activity (in millions) Fair Value, beginning of period ...$ 0 $ 115 $ 395...

  • Page 195
    PRUDENTIAL FINANCIAL, INC. Notes to Consolidated Financial Statements Year Ended December 31, 2014 Equity Commercial Securities Mortgage Other Availableand Other Long-term For-Sale Loans Investments (in millions) $304 $0 $1,396 Other Assets $4 Fair Value, beginning of period ...Total gains (losses...

  • Page 196
    PRUDENTIAL FINANCIAL, INC. Notes to Consolidated Financial Statements Year Ended December 31, 2013(5) Fixed Maturities Available-For-Sale U.S. U.S. Foreign Foreign Corporate Corporate Corporate Corporate U.S. U.S. Foreign Public Private Public Private Government States Government Securities ...

  • Page 197
    ... Value, end of period ...Unrealized gains (losses) for assets/liabilities still held(3): Included in earnings: Realized investment gains (losses), net ...Other income ... Year Ended December 31, 2013 Equity Commercial Securities Mortgage Other Availableand Other Long-term For-Sale Loans Investments...

  • Page 198
    ... or accretion of premiums and discounts. (4) Separate account assets represent segregated funds that are invested for certain customers. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to...

  • Page 199
    ...Fair Value, end of period ...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 ...Other income ... $20 $ 0 $2 $0 Prudential Financial, Inc. 2015 Annual Report 197

  • Page 200
    .... 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...

  • Page 201
    ...-maturity ...Commercial mortgage and other loans ...Policy loans ...Other long-term investments ...Short-term investments ...Cash and cash equivalents ...Accrued investment income ...Other assets ...Total assets ...Liabilities: Policyholders' account balances-investment contracts ...Securities sold...

  • Page 202
    ... 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...

  • Page 203
    ..., management may adjust the NAV by a premium or discount when it has sufficient evidence to support applying such adjustments. No such adjustments were made as of December 31, 2015 and 2014. Short-Term Investments, Cash and Cash Equivalents, Accrued Investment Income and Other Assets The Company...

  • Page 204
    ... 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 202 Prudential Financial, Inc. 2015 Annual Report

  • Page 205
    ... not limited to equity options, total return swaps, interest rate swaptions, caps, floors and other instruments. Synthetic Guarantees. The Company sells synthetic Guaranteed Investment Contracts ("GICs"), through both full service and investment-only sales channels, to investment vehicles primarily...

  • Page 206
    ... 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...

  • Page 207
    ...Year Ended December 31, 2015 Interest Credited To Policyholders' Account Balances Realized Investment Gains (Losses) Derivatives Designated as Hedge Accounting Instruments: Fair value hedges Interest Rate ...Currency ...Total fair value hedges ...Cash...Prudential Financial, Inc. 2015 Annual Report ...

  • Page 208
    ... of time for which these variable cash flows are hedged is 30 years. Income amounts deferred in AOCI as a result of cash flow hedges are included in "Net unrealized investment gains (losses)" in the Consolidated Statements of Comprehensive Income. 206 Prudential Financial, Inc. 2015 Annual Report

  • Page 209
    ... 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...

  • Page 210
    ... markets. The Individual Life segment also includes the results of the Hartford Life Business acquired on January 2, 2013. The Group Insurance segment manufactures and distributes a full range of group life, long-term and short-term group disability, and group corporate-, bank- and trust-owned life...

  • Page 211
    ... 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...

  • Page 212
    ... 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...

  • Page 213
    ...) on trading account assets supporting insurance liabilities and changes in experience-rated contractholder liabilities due to asset value changes Certain products included in the Retirement and International Insurance segments are experience-rated in that investment results associated with these...

  • Page 214
    ... Closed Block Business for each period. (3) Reflects the existence of two classes of common stock and the separate reporting of the Company's former Financial Services Businesses and the Closed Block Business for the years ended December 31, 2014 and 2013. The Individual Annuities segment results...

  • Page 215
    ...Retirement Solutions and Investment Management division ...Individual Life ...Group Insurance ...Total U.S. Individual Life and Group Insurance division ...International Insurance ...Total International Insurance division ...Corporate and Other operations ...Total Corporate and Other ...Closed Block...

  • Page 216
    ... Year Ended December 31, 2015 Interest Credited to Net Policyholders' Investment Policyholders' Account Dividends to Interest Amortization Revenues Income Benefits Balances Policyholders Expense of DAC (in millions) Individual Annuities ...$ 4,695 $ 603 $ 314 $ 363 $ 0 $ 69 $ 465 Retirement...

  • Page 217
    ... Statements of Operations ...$54,105 (1) Reflects the existence of two classes of common stock and the separate reporting of the Company's former Financial Services Businesses and the Closed Block Business for the year ended December 31, 2014. Prudential Financial, Inc. 2015 Annual Report...

  • Page 218
    ... two classes of common stock and the separate reporting of the Company's former Financial Services Businesses and the Closed Block Business for the year ended December 31, 2013. Revenues, calculated in accordance with U.S. GAAP, for the years ended December 31, include the following associated with...

  • Page 219
    ...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 Prudential Financial, Inc. 2015 Annual Report 217

  • Page 220
    ... portion of above ...Accrued liability associated with guarantees ... 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...

  • Page 221
    ... permit member insurers to recover assessments paid through full or partial premium tax offsets. In addition, Japan has established the Japan Policyholders Protection Corporation as a contingency to protect policyholders against the insolvency of life insurance companies in Japan through assessments...

  • Page 222
    ...2010, Huffman v. The Prudential Insurance Company of America, a purported nationwide class action brought on behalf of beneficiaries of group life insurance contracts owned by the Employee Retirement Income Security Act ("ERISA")-governed employee welfare benefit plans was filed in the United States...

  • Page 223
    ...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 that PRIAC's internal rate of return. North Valley GI Medical Group v. Prudential Investments LLC In October 2015...

  • Page 224
    ... City of Sterling Heights General Employees' Retirement System v. Prudential Financial, Inc., et al. In August 2012, a purported class action lawsuit, was filed in the United States District Court for the District of New Jersey, alleging violations of federal securities law. The complaint names as...

  • Page 225
    ... and sales of RMBS, the complaints asserted claims of common law fraud, negligent misrepresentation, breaches of the New Jersey Civil RICO statute, and, in some lawsuits, federal securities claims. The complaints sought unspecified damages. Four actions settled in 2015 and 2016 were filed in New...

  • Page 226
    ...et al. In May 2014, Prudential Investment Portfolios 2, on behalf of the Prudential Core Short-Term Bond Fund and the Prudential Core Taxable Money Market Fund (the "Funds"), filed an action against ten banks in the United States District Court for the District of New Jersey asserting that the banks...

  • Page 227
    ...with optional living benefit guarantees. 25. SUBSEQUENT EVENTS Common Stock Dividend Declaration On February 9, 2016, Prudential Financial's Board of Directors declared a cash dividend of $0.70 per share of Common Stock, payable on March 17, 2016. Prudential Financial, Inc. 2015 Annual Report 225

  • Page 228
    ...'s Board of Directors currently intends to continue to declare and pay dividends on the Common Stock. Future dividend decisions will be based on, and affected by, a number of factors including the financial performance of our businesses, our overall financial condition, results of operations, cash...

  • Page 229
    ... the S&P 500 Life & Health Insurance and S&P 500 Diversified Financials indices. The figures presented below assume the reinvestment of all dividends into shares of common stock and an initial investment of $100 at the closing prices on December 31, 2010. ANNUAL RETURN PERCENTAGE Years Ending Dec12...

  • Page 230
    ...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...

  • Page 231
    ... Trust Company, N.A., the transfer agent for Prudential Financial, Inc., can assist registered shareholders with a variety of services, including: Convenient liquidation of shares Direct deposit of dividends Consolidating your shares into your brokerage account Changing the ownership of your shares...

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    PRINTED ON RECYCLED PAPER WITH 10% POST-CONSUMER WASTE. PAPERS PRODUCED UNDER A SUSTAINABLE FOREST MANAGEMENT PROGRAM. PRINTED USING VEGETABLE-BASED INKS AND RENEWABLE ENERGY.