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PRU2014 Prudential
Financial, Inc.
Annual Report

Table of contents

  • Page 1
    PRU2014 Prudential Financial, Inc. Annual Report

  • Page 2
    ... value for shareholders, meet customer needs, attract and develop the best talent in our industry, offer an inclusive work environment where employees can develop to their full potential, and support the communities where we live and work. In 1987, Prudential launched its first life insurance...

  • Page 3
    ... description of AOI. ROE is based on after-tax AOI of Financial Services Businesses and excludes accumulated other comprehensive income and the impact of foreign currency exchange rate remeasurement on attributed equity. Prudential Financial, Inc. 2014 Annual Report "Our performance and actions...

  • Page 4
    ... an essential element of our overall strategy." In December 2014, we announced our intention to redeem the Intermediate Holding Company (IHC) debt and repurchase and cancel the Class B Stock related to our Closed Block Business, which was created at the time we converted from a mutual life insurance...

  • Page 5
    ... long history of investing our capital to generate more than just financial returns. Since we formally launched our impact investing program in 1976, we have invested nearly $2 billion in socially responsible investments like affordable housing, community banks, and companies creating quality jobs...

  • Page 6
    ... "Best for Vets Employers" Computerworld "Best Places to Work in IT" Points of Light & Bloomberg "The Civic 50" 14 years 13 years 8 years 5 years 5 years 6 years 1st year JOHN STRANGFELD Chairman of the Board, Chief Executive Officer and President 4 Prudential Financial, Inc. 2014 Annual Report

  • Page 7
    ... attributable to Prudential Financial, Inc. All facts and figures are as of or for the year ended December 31, 2014, unless otherwise noted. Life insurance and annuities issued by The Prudential Insurance Company of America, Newark, NJ, and its insurance affiliates. FORTUNE® and "The World's Most...

  • Page 8
    .... Financial Services Businesses Closed Block Business Consolidated net income (loss) attributable to Prudential Financial, Inc. FINANCIAL POSITION Invested assets Total assets Attributed equity: Financial Services Businesses Closed Block Business Total attributed equity Assets under management (in...

  • Page 9
    ... effect to the direct equity adjustment for earnings per share calculation. $0 2012 2013 2014 Assets Under Management (in billions) Financial Services Businesses Operating Return on Average Equity(B) and Return on Average Equity(B) Operating return on average equity $1,200 Return on average...

  • Page 10
    ... 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. 2014 Annual Report

  • Page 11
    ... Financial Information ...Market Price of and Dividends on Common Equity and Related Stockholder Matters ...Performance Graph ...Forward-Looking Statements ... 10 12 99 103 104 105 106 107 108 109 110 223 226 227 228 Throughout this Annual Report, "Prudential Financial" refers to Prudential...

  • Page 12
    ... markets. Subsequent to the acquisition, the Company renamed the acquired company Gibraltar BSN Life Berhad. On January 2, 2013, we acquired The Hartford Financial Services Group's ("The Hartford") individual life insurance business through a reinsurance transaction. Under the agreement, the Company...

  • Page 13
    ... 2014 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
    ... for payment of benefits, including policyholder dividends, expenses and taxes with respect to these products. See Note 12 to the Consolidated Financial Statements and "Business-Overview" included in Prudential Financial's 2014 Annual Report on Form 10-K for more information on the Closed Block...

  • Page 15
    ...Environment. See "Business-Competition," "Business-Financial Services Businesses-U.S. Retirement Solutions and Investment Management Division" and "Business-Financial Services Businesses -U.S. Individual Life and Group Insurance Division" included in Prudential Financial's 2014 Annual Report on Form...

  • Page 16
    ...-Financial Services Businesses-International Insurance Division" included in Prudential Financial's 2014 Annual Report on Form 10-K for a discussion of the competitive environment and the basis on which we compete. Impact of a Low Interest Rate Environment Domestic Financial Services Businesses...

  • Page 17
    ... receipt of regulatory approvals, is expected to close in the first half of 2015. This acquisition will enable us to participate in the growing Chilean pension market. On June 10, 2014, Prudential Financial's Board of Directors authorized the Company to repurchase at management's discretion up...

  • Page 18
    ... of certain variable annuity products and life insurance products. For a discussion of the impact of the agreement, see "Business-Regulation-Insurance Operations-State Insurance Regulation-Insurance Reserves and Regulatory Capital" included in Prudential Financial's 2014 Annual Report on Form 10...

  • Page 19
    ... reserve updates for guaranteed minimum death benefits, partially offset by lower integration costs associated with the acquisition of The Hartford Life Business, higher net contributions from investment results and more favorable mortality experience, net of reinsurance. Group Insurance. Segment...

  • Page 20
    ..., before taxes, from adjustments to deferred policy acquisition and other costs as well as reserves, reflecting updates to the estimated profitability of our businesses. This excludes the impact associated with the variable annuity hedging program (see "-Results of Operations for Financial Services...

  • Page 21
    ...earnings benefited from business growth, including the impact from higher account values, particularly within our U.S. Retirement Solutions and Investment Management Division, growth of in force in our International Insurance Division, contributions from our acquisition of the Hartford Life Business...

  • Page 22
    ... 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, costs for policy administration, changes in reserves, and dividends to policyholders. We evaluate...

  • Page 23
    .... The changes in future expected gross profits are used to recognize a cumulative adjustment to all prior periods' amortization. The near-term future equity rate of return assumptions used in evaluating DAC and DSI for our domestic variable annuity and variable life insurance products are derived...

  • Page 24
    ... benefit features of our variable annuity products, or the impact that changes in such reserves may have on the DAC and DSI balances. December 31, 2014 Increase/ Increase/ (Decrease) in DAC (Decrease) in DSI (in millions) $(136) $(59) $ 120 $ 55 Decrease in future rate of return by 100 basis points...

  • Page 25
    ... and hence a company's cost of equity capital. CAPM is determined by beginning with the long-term risk-free rate of return then applying adjustments that consider the equity risk premium required for large company common stock investments as well as company specific adjustments to address volatility...

  • Page 26
    ... rates, withdrawal rates, and mortality rates. Capital market inputs and actual contractholders' account values are updated each quarter based on capital market conditions as of the end of the quarter, including interest rates, equity markets and 24 Prudential Financial, Inc. 2014 Annual Report

  • Page 27
    ...and Social Security offsets. Long-term disability claims and claim termination experience may be affected by the economic environment and internal factors such as our claims management process. The future policy benefit reserves for the traditional participating life insurance products of our Closed...

  • Page 28
    ...domestic postretirement benefit plans that was 100 basis points higher or 100 basis points lower than the rates we assumed, the change in our net periodic costs would have been as shown in the table below. The information provided in the table below 26 Prudential Financial, Inc. 2014 Annual Report

  • Page 29
    ... rate of return by 100 basis points would result in an increase in net periodic pension costs of $6 million. We determine our discount rate, used to value the pension and postretirement benefit obligations, based upon rates commensurate with current yields on high quality corporate bonds. See...

  • Page 30
    ... account value information for the periods indicated. Year ended December 31, 2014 2013 2012 (in millions) Total Individual Annuities(1): Beginning total account value ...Sales ...Surrenders and withdrawals ...Net sales ...Benefit payments ...Net flows ...Change in market value, interest credited...

  • Page 31
    ... to 2013 Annual Comparison. Our account values are significantly impacted by net sales and the impact of market performance. The increase in account values during 2014 was largely driven by favorable changes in the market value of contractholder funds, primarily reflecting equity market appreciation...

  • Page 32
    ... on a long-term goal of accumulating assets that could be used to pay claims under these benefits irrespective of market path. For additional information regarding this program see "-Variable Annuities Hedging Program Results" below. For our optional living benefits features, claims will primarily...

  • Page 33
    ... 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 assumptions are adjusted to remove risk margins and...

  • Page 34
    ...are not limited to, interest rate swaps, swaptions, floors and caps as well as equity options, total return swaps and equity futures. The following table sets forth the market and notional values of these instruments as of the periods indicated. As of December 31, 2014 As of December 31, 2013 Equity...

  • Page 35
    ...in the third and fourth quarter of 2014, market appreciation and higher average investment-only stable value account values. The more favorable reserve impact from case experience reflected the impact of reserve updates for certain legacy group annuity contracts and favorable mortality for longevity...

  • Page 36
    ... our institutional investment products business and the impact of crediting rate reductions on full service general account stable value account values. The amortization of DAC decreased $23 million, reflecting amortization related to the significant pension risk transfer transactions that closed in...

  • Page 37
    ... externally-managed accounts. 2014 to 2013 Annual Comparison. The increase in full service account values primarily reflects the impact of equity market appreciation in 2014 on the market value of customer funds. The decrease in net additions was primarily due to net participant withdrawals in 2014...

  • Page 38
    ... 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...

  • Page 39
    ... for the year ended December 31, 2013 from the acquisition of the Hartford Life Business on January 2, 2013 and $31.0 billion from two significant pension risk transfer transactions in the Retirement segment for the year ended December 31, 2012. Prudential Financial, Inc. 2014 Annual Report 37

  • Page 40
    ...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. December 31, 2014 2013 (in millions) Co-Investments: Real estate ...Fixed income ...Seed Investments: Real estate...

  • Page 41
    ...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 the discontinuation of the Hartford Life Business products. 2013 to 2012 Annual Comparison. Annualized new business premiums increased...

  • Page 42
    ..., as defined under "-Segment Measures" above, for the periods indicated. Year ended December 31, 2014 2013 2012 (in millions) Annualized new business premiums(1): Group life ...Group disability ...Total ...$189 67 $256 $240 73 $313 $304 135 $439 40 Prudential Financial, Inc. 2014 Annual Report

  • Page 43
    ...premiums on group universal life insurance that build cash value but do not purchase face amounts. 2014 to 2013 Annual Comparison. Total annualized new business premiums decreased $57 million reflecting our continued pricing discipline for both group life and group disability products. 2013 to 2012...

  • Page 44
    ...ended December 31, 2014 2013 2012 (in millions) International Insurance Segment: Impact of intercompany arrangement(1) ...Corporate and Other operations: Impact of intercompany arrangement(1) ...Settlement gains (losses) on forward currency contracts ...Net benefit (detriment) to Corporate and Other...

  • Page 45
    ... 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...

  • Page 46
    ..., including changes in reserves, decreased $2,350 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. 2013 to 2012 Annual Comparison...

  • Page 47
    ... and short-term limited pay products generally have less death benefit protection per premium paid than longer-term recurring premium products. Annualized new business premiums, on a constant exchange rate basis, from our Life Planner operations increased $71 million. Results reflected higher sales...

  • Page 48
    ... premiums, excluding annuity products, for the year ended December 31, 2012. Single pay and short-term limited pay products generally have less death benefit protection per premium paid than longer-term recurring premium products. Annualized new business premiums, on a constant exchange rate basis...

  • Page 49
    ... benefit expenses. Income from our qualified pension plan decreased $21 million driven by the net impact of changes in the discount rate to 4.05% in 2013 from 4.85% in 2012 and the expected rate of return on plan assets to 6.25% in 2013 from 6.75% in 2012. Prudential Financial, Inc. 2014 Annual...

  • Page 50
    ... products through our living benefit hedging program, which is described under "-U.S. Retirement Solutions and Investment Management Division- Individual Annuities." In addition, we may choose to manage certain capital market related risk associated with various operations of the Financial Services...

  • Page 51
    ... 2014 and 2013 includes $53 million and $55 million, respectively, of an additional U.S. tax expense related to the realization of a portion of the local deferred tax assets existing on the opening day balance sheet for the Star and Edison Businesses and Prudential Gibraltar Financial Life Insurance...

  • Page 52
    ... 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. 50 Prudential Financial, Inc. 2014 Annual Report

  • Page 53
    ... 31, 2014 2013 2012 (in millions) Retirement Segment: Investment gains (losses) on: Trading account assets supporting insurance liabilities, net ...Derivatives ...Commercial mortgages and other loans ...Change in experience-rated contractholder liabilities due to asset value changes(1)(2) ...Net...

  • Page 54
    ... ...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 55
    ... Long-Term Investments." Separate account liabilities are reported at contract value and not fair value. Variable Annuity Optional Living Benefit Features Future policy benefits classified in Level 3 primarily include liabilities related to guarantees associated with the optional living benefit...

  • Page 56
    ... on sales of securities due to changes in interest rates subsequent to the acquisition of securities that were sold, partially offset by gains on sales within our International Insurance segment initiated for purposes of duration management as well as from surrenders of fixed annuities denominated...

  • Page 57
    ... the impaired debt security and the net present value of its projected future cash flows at the time of impairment. (2) Includes other-than-temporary impairments relating to investments in joint ventures and partnerships and real estate investments. Prudential Financial, Inc. 2014 Annual Report 55

  • Page 58
    ...updates. Net realized gains on commercial mortgage and other loans were $7 million for the year ended 2013, primarily related to a net decrease in the loan loss reserve. For additional information regarding our loan loss reserves, see "-General Account Investments-Commercial Mortgage and Other Loans...

  • Page 59
    ... corporate securities. Equity security other-than-temporary impairments in 2014 and 2013 were primarily due to circumstances where the decline in value was maintained for one year or greater or due to the extent and duration of declines in values. 2013 to 2012 Annual Comparison Financial Services...

  • Page 60
    ... related benefits of $857 million in 2012. The impacts in both years reflect the portion of amortization of deferred policy acquisition and other costs relating to changes in value of embedded derivatives and related hedge positions associated with certain variable annuity contracts. During 2013, we...

  • Page 61
    ... by net losses of $16 million on credit default swaps as credit spreads tightened and net losses of $42 million on currency derivatives used to hedge foreign denominated investments as the U.S. dollar weakened against the euro and other currencies. Prudential Financial, Inc. 2014 Annual Report 59

  • Page 62
    ... be reported as the Closed Block division. The Class B share repurchase did not change the investment objectives of the Closed Block and the assets of the Closed Block division will continue to be managed separately from the assets of our other businesses. 60 Prudential Financial, Inc. 2014 Annual...

  • Page 63
    ... and private corporate bonds and structured securities, and commercial mortgage loans. In addition, we hold allocations of non-coupon assets, which include equity securities and other long-term investments such as joint ventures and limited partnerships, real estate held through direct ownership...

  • Page 64
    ... 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 investments(1) ...Short-term investments...

  • Page 65
    ... 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 investments(1) ...Short-term investments...

  • Page 66
    ... ...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...

  • Page 67
    ... ...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 ...Total investment...

  • Page 68
    ... country representing more than 10% and 9%, respectively, of the balance. (4) Includes securities collateralized by sub-prime mortgages. See "-Asset-Backed Securities" below. (5) Includes securities related to the Build America Bonds program. 66 Prudential Financial, Inc. 2014 Annual Report

  • Page 69
    ..., the Company has direct and indirect energy exposure of approximately $18 billion on a market value basis with a carrying value of approximately $17 billion, primarily through public and private corporate bonds, substantially all of which are investment grade. The Company could be exposed to future...

  • Page 70
    ... weaker credit scores, as well as mortgages with higher loan-to-value ratios or limited documentation. On an amortized cost basis, asset-backed securities collateralized by sub-prime mortgages attributable to the Financial Services Businesses decreased from $1.882 billion as of December 31, 2013, to...

  • Page 71
    ......Total residential mortgage-backed securities ...Portion rated AA or higher(2) ...$5,118 629 $5,747 $5,672 89.1% 10.9 100.0% 98.7% $731 90 $821 $731 89.0% 11.0 100.0% 89.0% December 31, 2013(3) Financial Services Businesses Closed Block Business Amortized Amortized Cost % of Total Cost % of Total...

  • Page 72
    ... value of our commercial mortgage-backed securities attributable to the Financial Services Businesses as of the dates indicated, by credit quality and by year of issuance (vintage). Commercial Mortgage-Backed Securities at Amortized Cost-Financial Services Businesses December 31, 2014 Lowest Rating...

  • Page 73
    ..., as of December 31, 2014, are agency commercial mortgage-backed securities with fair value of $326 million in 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...

  • Page 74
    ... Reflects equivalent ratings for investments of the international insurance operations. (2) Includes, as of December 31, 2014 and 2013, 825 securities with amortized cost of $3,993 million (fair value, $4,291 million) and 306 securities with amortized cost of $806 million (fair value, $831 million...

  • Page 75
    ... instruments and swap rates at the time the agreement is executed. Credit derivative contracts are recorded at fair value with changes in fair value, including the premium received, recorded in "Realized investment gains (losses), net." As of December 31, 2014, the Financial Services Business had...

  • Page 76
    ...BB and below credit ratings. There were no asset-backed securities included in the $186 million of fixed maturities attributable to the Closed Block Business, on an amortized cost basis, as of December 31, 2014. Commercial Mortgage and Other Loans Investment Mix As of December 31, 2014 and 2013, we...

  • Page 77
    ... gross carrying values of our general account investments in commercial and agricultural mortgage loans by geographic region and property type as of the dates indicated. December 31, 2013 December 31, 2014 Financial Services Closed Block Financial Services Closed Block Businesses Business Businesses...

  • Page 78
    ...Financial Services Businesses were fixed rate loans. As of December 31, 2014, our general account investments in commercial and agricultural mortgage loans attributable to the Closed Block Business had a weighted average debt service coverage ratio of 2.19 times, and a weighted average loan-to-value...

  • Page 79
    ... table sets forth the breakdown of our commercial and agricultural mortgage loans by year of origination as of December 31, 2014. December 31, 2014 Financial Services Businesses Closed Block Business Gross Gross Carrying Carrying % of Value % of Total Value Total ($ in millions) $ 7,713 22.1% $1,470...

  • Page 80
    ... driven by the impact of assumption updates. Equity Securities Investment Mix The equity securities attributable to the Financial Services Businesses consist principally of investments in common and preferred stock of publicly-traded companies, as well as mutual fund shares. The following table...

  • Page 81
    ...-for-sale, at fair value ...Private, available-for-sale, 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(1) ...Other long-term investments ...Short-term investments ...Total...

  • Page 82
    ... 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...

  • Page 83
    ... living benefit guarantees for certain variable annuity products, as well as the impact of lower interest rates, reflecting our management of interest rate risk through our Capital Protection Framework. Insurance Regulatory Capital We manage Prudential Insurance, Prudential of Japan, Gibraltar Life...

  • Page 84
    ... quarter of 2014, we reached an agreement with the NY DFS on reserving methodologies for New York financial reporting purposes in respect of certain variable annuity products and life insurance products. We evaluate the regulatory capital of our domestic and international insurance operations under...

  • Page 85
    ... 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 86
    .... 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 Financial Services Agency ("FSA"). Dividends in excess of...

  • Page 87
    ...extent, timing and profitability impact of withdrawals of funds by customers. The following table sets forth the liabilities for future policy benefits and policyholders' account balances of certain of our domestic insurance subsidiaries as of the dates indicated. December 31, 2014 2013 (in billions...

  • Page 88
    ... risk because policyholders may incur surrender charges and must undergo a new underwriting process to obtain a new insurance policy. In addition, we utilize market value adjustment features to mitigate the profitability impact and timing of withdrawals of funds by customers. Gibraltar Life sells...

  • Page 89
    ... as interest rates and equity index levels. For a full discussion of our living benefits hedging program, see "-Results of Operations for Financial Services Businesses by Segment-U.S. Retirement Solutions and Investment Management Division-Individual Annuities." Pruco Re requires access to liquidity...

  • Page 90
    ...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...

  • Page 91
    ...'s financial services, including the ability to obtain loans and to issue funding agreements as an alternative source of liquidity that are collateralized by qualifying mortgage-related assets or U.S. Treasury securities. Based on regulatory limitations, as of December 31, 2014, Prudential Insurance...

  • Page 92
    ... of December 31, 2014 and 2013. respectively (6) Limited and non-recourse borrowing represents outstanding debt of Prudential Holdings, LLC that is attributable to the Closed Block Business and mortgage debt of our insurance subsidiaries that has recourse only to real estate investment property. The...

  • Page 93
    ... 2014, Financial Assurance Japan, a subsidiary of Prudential Holdings of Japan, repaid ¥32.5 billion, or approximately $300 million, of external debt assumed during the Star and Edison acquisition. Financing of regulatory reserves associated with domestic life insurance products Term and Universal...

  • Page 94
    ... under "Business- Regulation" included in Prudential Financial's 2014 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 requirements for the...

  • Page 95
    ...Pruco Life Insurance Company of New Jersey ...Prudential Annuities Life Assurance Corporation ...Prudential Retirement Insurance and Annuity Company ...The Prudential Life Insurance Company Ltd. (Prudential of Japan) ...Gibraltar Life Insurance Company, Ltd...The Prudential Gibraltar Financial Life...

  • Page 96
    ... Financial's long-term senior debt rating at "a-" and short-term debt rating at "AMB1". A.M. Best also affirmed the "A+" financial strength ratings of Prudential Financial's core subsidiaries, including Prudential Insurance, Prudential Annuities Life Assurance Corporation, and Prudential Retirement...

  • Page 97
    ... of the investment function. The Investment Committee approves investment and market risk limits for Prudential Financial and for Prudential Insurance's general account based on asset class, issuer, credit quality and geography. • Compensation Committee: oversees our compensation programs so that...

  • Page 98
    ..., 2014, 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 Board of Directors. These limits are delineated into formal Investment Policy Statements which...

  • Page 99
    ...risk, or the risk that health claims from sickness or disability are greater than expected, primarily within our Group Insurance and International Insurance segments as well as from long term care policies within Divested Businesses; and • Policyholder behavior risk, or the risk that our customers...

  • Page 100
    ... of our Model Risk Oversight Committee which provides oversight and guidance on issues relating to model risk and the management of that risk. For further information on the risks to which the Company is exposed, see "Risk Factors" included in Prudential Financial's 2014 Annual Report on Form 10...

  • Page 101
    ... life insurance, annuity and other investment-type contracts, certain guaranteed benefit features accounted for as embedded derivatives, and outstanding short-term and long-term debt. Changes in interest rates create risk that the resulting changes in asset values will differ from the changes...

  • Page 102
    ...(2) ...Commercial mortgage and other loans ...Derivatives: Swaps ...Futures ...Options ...Forwards ...Synthetic GICs(3) ...Variable annuity and other living benefit feature embedded derivatives(4) ...Financial liabilities with interest rate risk(5): Short-term and long-term debt ...Limited recourse...

  • Page 103
    ... account value • Estimated total gross profits and the amortization of deferred policy acquisition and other costs • Net exposure to the guarantees provided under certain products We manage investment equity price risk against benchmarks in respective markets. We benchmark our return on equity...

  • Page 104
    ... benefit hedging program and other product design elements, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations for Financial Services Businesses by Segment-Individual Annuities" above. 102 Prudential Financial, Inc. 2014 Annual Report

  • Page 105
    ... the Company's assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk...

  • Page 106
    ...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 20, 2015 104 Prudential Financial, Inc. 2014 Annual Report

  • Page 107
    ... ASSETS ...LIABILITIES AND EQUITY LIABILITIES Future policy benefits ...Policyholders' account balances(1) ...Policyholders' dividends ...Securities sold under agreements to repurchase ...Cash collateral for loaned securities ...Income taxes ...Short-term debt ...Long-term debt ...Other liabilities...

  • Page 108
    PRUDENTIAL FINANCIAL, INC. Consolidated Statements of Operations Years Ended December 31, 2014, 2013 and 2012 (in millions, except per share amounts) 2014 REVENUES Premiums ...Policy charges and fee income ...Net investment income ...Asset management and service fees ...Other income ...Realized ...

  • Page 109
    PRUDENTIAL FINANCIAL, INC. Consolidated Statements of Comprehensive Income Years Ended December 31, 2014, 2013 and 2012 (in millions) 2014 2013 2012 NET INCOME (LOSS) ...Other comprehensive income (loss), before tax: Foreign currency translation adjustments for the period ...Net unrealized ...

  • Page 110
    PRUDENTIAL FINANCIAL, INC. Consolidated Statements of Equity(1) Years Ended December 31, 2014, 2013 and 2012 (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 Capital ...

  • Page 111
    ...maturity ...Trading account assets supporting insurance liabilities and other trading account assets ...Equity securities, available-for-sale ...Commercial mortgage and other loans ...Policy loans ...Other long-term investments ...Short-term investments ...Acquisitions, net of cash acquired ...Other...

  • Page 112
    ... the Financial Services Businesses and the Closed Block Business. The Financial Services Businesses operate through three operating divisions: U.S. Retirement Solutions and Investment Management, U.S. Individual Life and Group Insurance, and International Insurance. The Company's divested businesses...

  • Page 113
    ...limited pay business within the Gibraltar Life business; and 3) a charge of $35 million from an increase in reserves, net of related amortization of deferred policy acquisition costs, for certain variable annuities products with optional living benefit guarantees. Management has evaluated the impact...

  • Page 114
    ... maturities classified as "available-for-sale," net of tax, and the effect on deferred policy acquisition costs, value of business acquired, deferred sales inducements ("DSI"), future policy benefits, policyholders' account balances and policyholders' dividends that would result from the realization...

  • Page 115
    ... Company evaluates each loan on the watch list to determine if it is probable that amounts due will not be collected according to the contractual terms of the loan agreement. Loan-to-value and debt service coverage ratios are measures commonly used to assess the quality of commercial mortgage loans...

  • Page 116
    ... in earnings. Realized investment gains and losses are also generated from prepayment premiums received on private fixed maturity securities, allowance for losses on commercial mortgage and other loans, fair value changes on commercial mortgage 114 Prudential Financial, Inc. 2014 Annual Report

  • Page 117
    ...related directly to the successful acquisition of new and renewal insurance and annuity business are deferred to the extent such costs are deemed recoverable from future profits. Such DAC primarily includes commissions, costs of policy issuance and Prudential Financial, Inc. 2014 Annual Report 115

  • Page 118
    ... Hartford's individual life insurance business. Separate Account Assets and Liabilities Separate account assets are reported at fair value and represent segregated funds that are invested for certain policyholders, pension funds and other customers. The assets consist primarily of equity securities...

  • Page 119
    ...Management is required to make significant estimates in determining the fair value of a reporting unit including, but not limited to: projected earnings, comparative market multiples, and the risk rate at which future net cash flows are discounted. In accordance with accounting guidance, the Company...

  • Page 120
    ... rate assumptions applied are those used to calculate the policies' guaranteed cash surrender values. For life insurance, other than individual traditional participating life insurance, and annuity and disability products, expected mortality and morbidity are generally based on Company experience...

  • Page 121
    ... received as payment for interest-sensitive or variable group and individual life contracts, deferred fixed or variable annuities, structured settlements and other contracts without life contingencies, and participating group annuities are reported as deposits to "Policyholders' account balances"and...

  • Page 122
    ...and non-performance risk used in valuation models. Derivative financial instruments generally used by 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...

  • Page 123
    ... 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 124
    ... or financial statement disclosures. In July 2013, the FASB issued updated guidance regarding the presentation of unrecognized tax benefits when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. This new guidance became effective for interim or annual reporting...

  • Page 125
    ... Statements 2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS (continued) In January 2014, the FASB issued updated guidance regarding investments in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit...

  • Page 126
    ... election. Acquisition of The Hartford's Individual Life Insurance Business On January 2, 2013, the Company acquired The Hartford Financial Services Group's ("The Hartford") individual life insurance business through a reinsurance transaction. Under the agreement, the Company paid The Hartford cash...

  • Page 127
    ... subdivisions ...Foreign government bonds ...Corporate securities ...Asset-backed securities(1) ...Commercial mortgage-backed securities ...Residential mortgage-backed securities(2) ...Total fixed maturities, available-for-sale ...Equity securities, available-for-sale ... Fair Value $ 15,807 5,720...

  • Page 128
    ...-than-temporary impairments recorded in "Other comprehensive income (loss)," representing any difference between the fair value of the impaired debt security and the net present value of its projected future cash flows at the time of impairment. 126 Prudential Financial, Inc. 2014 Annual Report

  • Page 129
    ... ...Equity securities ...Total trading account assets supporting insurance liabilities ... (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...

  • Page 130
    ... 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 equivalents ...Total ...December 31, 2013 Amortized Fair Cost Value...

  • Page 131
    ..., INC. Notes to Consolidated Financial Statements 4. INVESTMENTS (continued) The Company's commercial mortgage and other loans are comprised as follows, as of the dates indicated: December 31, 2014 Amount % of (in millions) Total Commercial and agricultural mortgage loans by property type: Office...

  • Page 132
    ...Consolidated Financial Statements 4. INVESTMENTS (continued) The following tables set forth the allowance for credit losses and the recorded investment in commercial mortgage and other loans as of the dates indicated: Commercial Mortgage Loans Allowance for Credit Losses: Individually evaluated for...

  • Page 133
    PRUDENTIAL FINANCIAL, INC. Notes to Consolidated Financial Statements 4. INVESTMENTS (continued) Impaired loans include those loans for which it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. Impaired commercial mortgage and other ...

  • Page 134
    ... set forth certain key credit quality indicators as of December 31, 2014, based upon the recorded investment gross of allowance for credit losses. Commercial mortgage loans Debt Service Coverage Ratio-December 31, 2014 Greater than Less than 1.2X 1.0X to

  • Page 135
    ... 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. December 31, 2014 Greater Greater Than 90 Than 90 30-59 Days 60-89 Days Days - Days - Not Total Past Past Due Past Due Accruing Accruing...

  • Page 136
    ...Real estate held through direct ownership ...Other ...Total other long-term investments ...$ 1,018 6,527 7,545 2,235 1,141 $10,921 $ 1,104 6,141 7,245 2,051 1,032 $10,328 In certain investment structures, the Company's asset management business invests with other co-investors in an investment fund...

  • Page 137
    ... following sources: 2014 Fixed maturities, available-for-sale ...Fixed maturities, held-to-maturity ...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...

  • Page 138
    ... subdivisions ...Foreign government bonds ...Corporate securities ...Commercial mortgage-backed securities ...Asset-backed securities ...Residential mortgage-backed securities ...Total ...Equity securities, available-for-sale ...2014 Twelve months or more Gross Unrealized Fair Value Losses (in...

  • Page 139
    ...certain policyholders and to fund certain employee benefits. Securities restricted as to sale amounted to $164 million and $186 million at December 31, 2014 and 2013, respectively. These amounts include member and activity-based stock associated with memberships in the Federal Home Loan Banks of New...

  • Page 140
    ...-term notes secured by funding agreements issued to the trust by Prudential Insurance with the proceeds of such notes. The trust is the beneficiary of an indemnity agreement with the Company that provides that the Company is responsible for costs related to the notes issued with limited exception...

  • Page 141
    ... financial or other support that was not contractually required to these structures. The Company has determined that it is not the primary beneficiary of these structures due to the fact that it does not control these entities. 6. DEFERRED POLICY ACQUISITION COSTS The balances of and changes...

  • Page 142
    ...by product. The interest rates for 2014 were 6.40%, 6.10%, 1.28% to 2.87%, 2.60%, 3.00% to 6.17%, and 4.07% to 5.51% for the VOBA related to CIGNA, Prudential Annuities Holding Co., Gibraltar Life, Aoba Life, The Hartford, and Gibraltar BSN Life Berhad, respectively. The interest rates for 2013 were...

  • Page 143
    ...direct individual life insurance premiums for 2014, 2013 and 2012, respectively. Future policy benefits for individual non-participating traditional life insurance policies, group and individual long-term care policies and individual health insurance policies are generally equal to the present value...

  • Page 144
    ..., non-participating annuities; structured settlements; single premium immediate annuities with life contingencies; long-term care; and for certain individual health policies. Unpaid claims and claim adjustment expenses primarily reflect the Company's estimate of future disability claim payments and...

  • Page 145
    ... Includes income and withdrawal benefits as described herein. December 31, 2014 2013 In the Event of Death ($ in millions) Variable Life, Variable Universal Life and Universal Life Contracts No lapse guarantees Separate account value ...General account value ...Net amount at risk ...Average attained...

  • Page 146
    ... Financial Statements 11. CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS (continued) withdrawal benefits ("GMWB"), and guaranteed minimum income and withdrawal benefits ("GMIWB") features are considered to be bifurcated embedded derivatives and are recorded at fair value within "Future policy...

  • Page 147
    ... transactions have no impact on the guaranteed benefits, premiums or dividends for Closed Block policyholders. See Note 1 and Note 25 for additional information. The policies included in the Closed Block are specified individual life insurance policies and individual annuity contracts that were in...

  • Page 148
    ... Closed Block liabilities ...Closed Block assets Fixed maturities, available-for-sale, at fair value ...Other 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...

  • Page 149
    ...from large risks and in acquiring or disposing of businesses. On January 2, 2013, the Company acquired The Hartford's individual life insurance business through a reinsurance transaction. Under the agreement, the Company provided reinsurance for approximately 700,000 life insurance policies with net...

  • Page 150
    .... The mortality risk that is reinsured under yearly renewable term arrangements represents the difference between the stated death benefits in the underlying reinsured contracts and the corresponding reserves or account value carried by the Company on those same contracts. The premiums paid to the...

  • Page 151
    ..., 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 FHLBNY. Membership allows Prudential Insurance access to the FHLBNY's financial services...

  • Page 152
    ... FINANCIAL, INC. Notes to Consolidated Financial Statements 14. SHORT-TERM AND LONG-TERM DEBT (continued) 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...

  • Page 153
    ... a private placement in 2009 with an interest rate of 5.36% per annum and due September 2019. The surplus notes became exchangeable at the option of the holder, in whole but not in part, for shares of Prudential Financial Common Stock beginning as of September 18, 2014. The initial exchange rate for...

  • Page 154
    ... intends to hold the credit linked notes as assets supporting reserves required to be held by the Company's domestic insurance subsidiaries under Regulation XXX in connection with the reinsurance through the captive of term life insurance policies. This financing facility replaced the $3.0 billion...

  • Page 155
    ... the scheduled payment date. Funding Agreement Notes Issuance Program. The Company maintains a FANIP in which a statutory trust issues medium-term notes secured by funding agreements issued to the trust by Prudential Insurance. These obligations are included in "Policyholders' account balances" and...

  • Page 156
    ...million was distributed to Prudential Financial through a dividend on the date of demutualization for use in the Financial Services Businesses. In addition, $72 million was used to purchase a guaranteed investment contract to fund a portion of the financial guarantee insurance premium related to the...

  • Page 157
    ...of demutualization, Prudential 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 is a separate class of common stock not publicly traded, which has reflected the performance of the Closed Block Business...

  • Page 158
    ... require the prior approval of the Japan Financial Services Agency ("FSA"). Additionally, Prudential of Japan and Gibraltar Life must give prior notification to the FSA of their intent to pay any dividend or distribution. Prudential of Japan's and 156 Prudential Financial, Inc. 2014 Annual Report

  • Page 159
    ...charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions as well as valuing investments and certain assets and accounting for deferred taxes on a different basis. Statutory net income (loss) of Prudential Insurance...

  • Page 160
    ...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 18 for information on employee benefit plans. 158 Prudential Financial, Inc. 2014 Annual Report

  • Page 161
    ... Policy Acquisition Costs, Accumulated Deferred Other Sales Comprehensive Inducements, Future Policy Deferred Income (Loss) and Benefits and Income Related To Net Value of Policyholders' Tax Unrealized Net Unrealized Policyholders' (Liability) Business Account Investment Gains (Losses) Dividends...

  • Page 162
    ... policy acquisition costs, deferred sales inducements and value of business acquired ...Impact of net unrealized investment (gains) losses on future policy benefits and policyholders' account balances ...Impact of net unrealized investment (gains) losses on policyholders' dividends ...Balance...

  • Page 163
    ...had two separate classes of common stock. The Common Stock has reflected the performance of the Financial Services Businesses and the Class B Stock has reflected the performance of the Closed Block Business. On December 1, 2014, Prudential Financial entered into a Share Repurchase Agreement with the...

  • Page 164
    ... earnings per share. Stock options are considered antidilutive based on application of the treasury stock method or in the event of loss from continuing operations available to holders of Common Stock after direct equity adjustment. Shares related to deferred and long-term compensation programs are...

  • Page 165
    ...9 34 17 $60 Income Tax Benefit $16 30 9 $55 Compensation costs for all stock based compensation plans capitalized in deferred acquisition costs for the years ended December 31, 2014, 2013 and 2012 were de minimis. Stock Options Each stock option granted has an exercise price no less than the fair...

  • Page 166
    ..., 2013 is the closing stock price of Prudential Financial's common stock on those dates. (3) Represents the difference between the target units granted and the actual units awarded based upon the attainment of performance goals for the Company's Financial Services Businesses. The fair market value...

  • Page 167
    ... 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...

  • Page 168
    ... for settlements ...Benefits paid ...Foreign currency changes and other ...Effect of Section 420 transfer ...Fair value of plan assets at end of period ...Funded status at end of period ...Amounts recognized in the Statements of Financial Position Prepaid benefit cost ...Accrued benefit liability...

  • Page 169
    ... value of U.S Equities, International Equities, Real Estate and Other Assets are recognized over a five year period. However, the fair value for Fixed Maturity assets (including short term investments) are recognized immediately for the purposes of market related value. Net periodic (benefit) cost...

  • Page 170
    ... of the allocation of plan assets during the measurement period of 2014. Expected returns are estimated by asset class as noted in the discussion of investment policies and strategies below. Expected returns on asset classes are developed using a 168 Prudential Financial, Inc. 2014 Annual Report

  • Page 171
    ...benefit. The postretirement plan risk management practices include guidelines for asset concentration, credit rating, liquidity, and tax efficiency. The postretirement plan does not invest in leveraged derivatives. Derivatives such as futures contracts are used to reduce transaction costs and change...

  • Page 172
    ... held in group and individual variable life insurance policies issued by Prudential Insurance. Group policies are invested 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...

  • Page 173
    ...: ...Corporate bonds(8) ...Asset-backed ...Collateralized Mortgage Obligations(9) ...Interest rate swaps (Notional amount: $1,536) ...Guaranteed investment contract ...Other(10) ...Unrealized gain (loss) on investment of securities lending collateral(11) ...Subtotal ...Short-term Investments: Pooled...

  • Page 174
    ... objective is to outperform an index. (13) The contractual net value of the investment of securities lending collateral invested in primarily short-term bond funds is $701 million and the liability for securities lending collateral is $740 million. 172 Prudential Financial, Inc. 2014 Annual Report

  • Page 175
    ...the period ...Purchases, sales and settlements ...Transfers in and /or out of Level 3 ...Fair Value, end of period ...$32 0 0 0 0 $32 Fixed Maturities- Corporate Debt- Fixed Corporate Maturities- Bonds Other (in millions) $12 $58 0 0 4 0 $16 0 0 8 0 $66 Real Estate- Pooled Separate Accounts $322 46...

  • Page 176
    ... Debt: Corporate bonds(6) ...Asset-Backed ...Collateralized Mortgage Obligations(7) ...Interest rate swaps (Notional amount: $1,024) ...Other(8) ...Unrealized gain (loss) on investment of securities lending collateral(9) ...Subtotal ...Short-term Investments: Variable Life Insurance Policies...

  • Page 177
    ...Corporate Debt: Corporate bonds(6) ...Asset-Backed ...Collateralized Mortgage Obligations(7) ...Interest rate swaps (Notional amount: $861) ...Other(8) ...Unrealized gain (loss) on investment of securities lending collateral(10) ...Subtotal ...Short-term Investments: Variable Life Insurance Policies...

  • Page 178
    ...Equities ...International Equities ...Fixed Maturities ...Short-term Investments ...Real Estate ...Other ...Total ...7% 5 69 0 6 13 100% 2013 10% 4 67 1 6 12 100% Postretirement Percentage of Plan Assets 2014 57% 5 34 4 0 0 100% 2013 50% 5 39 6 0 0 100% The expected benefit payments for the Company...

  • Page 179
    ... in calculating the DRD related to variable life insurance and annuity contracts. In September 2007, the IRS released Revenue Ruling 2007-61. Revenue Ruling 2007-61 suspended Revenue Ruling 2007-54 and informed taxpayers that the U.S. Treasury Department and the IRS intend to address through new...

  • Page 180
    ... in the Statement of Financial Position as of the acquisition date for Prudential Gibraltar Financial Life Insurance Company, Ltd. ("Prudential Gibraltar") and AIG Star Life Insurance Co., Ltd, AIG Edison Life Insurance Company, AIG Financial Assurance Japan K.K., and AIG Edison Service Co., Ltd...

  • Page 181
    ... review by the Internal Revenue Service ("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. Prudential Financial, Inc. 2014 Annual Report 179

  • Page 182
    ...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. 180 Prudential Financial, Inc. 2014...

  • Page 183
    ... public and private bonds, most government securities, certain asset-backed and mortgage-backed securities, etc.), certain equity securities (mutual funds, which do not actively trade and are priced based on a net asset value), certain commercial mortgage loans, short-term investments and certain...

  • Page 184
    ...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 185
    ... 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 186
    ... 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...

  • Page 187
    ... 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...

  • Page 188
    ... in fair value, although the interrelationships between these inputs depend on specific market conditions. (4) Future policy benefits primarily represent general account liabilities for the optional living benefit features of the Company's variable annuity contracts which are accounted for as...

  • Page 189
    ...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...

  • Page 190
    ... pricing sources and fair value hierarchy coding within the financial reporting system. For variable annuity product changes or new launches of optional living benefit features, the actuarial valuation unit validates input logic and new product features and agrees new input data directly to source...

  • Page 191
    ... ...Fair Value, end of period ...Unrealized gains (losses) for assets still held(3): Included in earnings: Realized investment gains (losses), net ...Other income ... Year Ended December 31, 2014 Equity Commercial Securities Mortgage Other Availableand Other Long-term For-Sale Loans Investments (in...

  • Page 192
    ......Transfers out of Level 3(2) ...Fair Value, end of period ...Unrealized gains (losses) for assets/liabilities still held(3): Included in earnings: Realized investment gains (losses), net ...Interest credited to policyholders' account ...Year Ended December 31, 2014 Future Notes issued Policy Other...

  • Page 193
    ... ...Fair Value, end of period ...Unrealized gains (losses) for assets 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 (in...

  • Page 194
    ...investment gains (losses), net ...Interest credited to policyholders' account ... $ 0 $ 1,652 $ 3,647 $ 0 $(3) $0 $ $ 17 0 Year Ended December 31, 2012(5) Fixed Maturities Available-For-Sale Commercial Residential U.S. U.S. Foreign Asset- Mortgage- MortgageGovernment States Government Corporate...

  • Page 195
    ... 2012 Commercial Mortgage Other and Other Long-term Short-term Loans Investments Investments (in millions) $ 86 $1,110 $0 2 0 0 0 0 0 0 (40) 0 0 0 0 $ 48 1 126 0 6 186 (25) 0 (296) 2 7 0 (64) $1,053 (9) 0 0 0 9 0 0 0 0 0 0 0 $0 $ (1) $ 0 $ 1 $ 0 $ $ 1 56 $(9) $0 Prudential Financial, Inc. 2014...

  • Page 196
    ... or accretion of premiums and discounts. 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 197
    PRUDENTIAL FINANCIAL, INC. Notes to Consolidated Financial Statements 20. FAIR VALUE OF ASSETS AND LIABILITIES (continued) Derivative Fair Value Information The following tables present the balance of derivative assets and liabilities measured at fair value on a recurring basis, as of the date ...

  • Page 198
    ...December 31, 2013 and 2012, respectively, on certain commercial mortgage loans. The carrying value of these loans as of December 31, 2013 was $27 million. The reserve adjustments were based on discounted cash flows utilizing market rates or the fair value of the underlying real estate collateral and...

  • Page 199
    ... presents information regarding changes in fair values recorded in earnings for commercial mortgage and other loans, other long-term investments and notes issued by consolidated variable interest entities ("VIEs"), where the fair value option has been elected. Years Ended December 31, 2014 2013 2012...

  • Page 200
    ... 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 under agreements...

  • Page 201
    ... strength ratings, and hence reflect the Company's own NPR. For guaranteed investment contracts, funding agreements, structured settlements without life contingencies and other similar products, fair values are derived using discounted projected cash flows based on interest rates being offered for...

  • Page 202
    ... deposits less withdrawals and fees; therefore, carrying value approximates fair value. 21. 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...

  • Page 203
    ... that is intended to economically hedge the risks related to the above products' features. The derivatives may include, but are not limited to equity options, total return swaps, interest rate swaptions, caps, floors, and other instruments. Prudential Financial, Inc. 2014 Annual Report 201

  • Page 204
    ... contain multiple underlyings. The fair value of these embedded derivatives was a net liability of $8,162 million as of December 31, 2014 and a net liability of $430 million as of December 31, 2013, primarily included in "Future policy benefits." 202 Prudential Financial, Inc. 2014 Annual Report

  • Page 205
    ... 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. Prudential Financial, Inc. 2014 Annual Report 203

  • Page 206
    ... 31, 2014 Interest Credited Accumulated Realized Net To Policyholders' Other Investment Investment Other Interest Account Comprehensive Gains (Losses) Income Income Expense Balances Income (Loss)(1) (in millions) Derivatives Designated as Hedge Accounting Instruments: Fair value hedges Interest Rate...

  • Page 207
    ... variable cash flows are hedged is 29 years. Income amounts deferred in "Accumulated other comprehensive income (loss)" as a result of cash flow hedges are included in "Net unrealized investment gains (losses)" in the Consolidated Statements of Equity. Prudential Financial, Inc. 2014 Annual Report...

  • Page 208
    ... 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...

  • Page 209
    ... services for qualified and non-qualified retirement plans and offers innovative pension risk transfer solutions, investment-only stable value products, guaranteed investment contracts, funding agreements, institutional and retail notes, structured settlement annuities and other group annuities...

  • Page 210
    ... profitability factors of the Financial Services Businesses. For reporting periods commencing after December 31, 2014, the Closed Block division will be accounted for as a divested business under the Company's definition of adjusted operating income. Both the current reporting of the Closed Block...

  • Page 211
    PRUDENTIAL FINANCIAL, INC. Notes to Consolidated Financial Statements 22. SEGMENT INFORMATION (continued) 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...

  • Page 212
    ... 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...

  • Page 213
    ... 31, 2014 2013 (in millions) Financial Services Businesses: Individual Annuities ...Retirement ...Asset Management ...Total U.S. Retirement Solutions and Investment Management Division ...Individual Life ...Group Insurance ...Total U.S. Individual Life and Group Insurance Division ...International...

  • Page 214
    PRUDENTIAL FINANCIAL, INC. Notes to Consolidated Financial Statements 22. SEGMENT INFORMATION (continued) Year Ended December 31, 2014 Interest Amortization Credited to of Deferred Net Policyholders' Policy Investment Policyholders' Account Dividends to Interest Acquisition Revenues Income Benefits ...

  • Page 215
    ...' Policy Investment Policyholders' Account Dividends to Interest Acquisition Revenues Income Benefits Balances Policyholders Expense Costs (in millions) Financial Services Businesses: Individual Annuities ...$ 3,983 Retirement(1) ...36,595 Asset Management ...2,376 Total U.S. Retirement Solutions...

  • Page 216
    ... to mutual fund and separate account clients for securities lending ...Fair value of related collateral associated with above indemnifications ...Accrued liability associated with guarantee ...(in millions) $14,334 $15,598 $14,740 $15,965 $ 0 $ 0 214 Prudential Financial, Inc. 2014 Annual Report

  • Page 217
    ... in Note 21, 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 As of December 31, 2014 2013 (in millions) $74,707...

  • Page 218
    ...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...

  • Page 219
    ... actions were filed challenging the use of retained asset accounts to settle death benefit claims of beneficiaries of a group life insurance contract owned by the United States Department of Veterans Affairs that covers the lives of members and veterans of the U.S. armed forces. In 2011, the cases...

  • Page 220
    .... In August 2012, a purported class action lawsuit, City of Sterling Heights General Employees' Retirement System v. Prudential Financial, Inc., et al., was filed in the United States District Court for the District of New Jersey, alleging violations of federal securities law. The complaint names as...

  • Page 221
    ... Financial Corp., et al.; and The Prudential Insurance Company of America, et al. v. UBS Securities LLC., et al. Additionally, two actions were filed in the United States District Court for the District of New Jersey: The Prudential Insurance Company of America v. Credit Suisse Securities (USA) LLC...

  • Page 222
    ...'s request. 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...

  • Page 223
    ... calculate the impact of the market's perception of our own non-performance risk on the reserves for certain annuities with guaranteed benefits. This item impacted only the third and fourth quarters of 2013 and had no impact to full year 2013 reported results. Prudential Financial, Inc. 2014 Annual...

  • Page 224
    ... have no impact on the guaranteed benefits, premiums or dividends for Closed Block policyholders. Inter-Business Transfer and Allocation Policies In connection with the Class B Repurchase and the resulting elimination of the distinction between the Company's Financial Services Businesses and...

  • Page 225
    ... 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 ...Policy loans ...Other long-term investments ...Short-term investments...

  • Page 226
    PRUDENTIAL FINANCIAL, INC. Supplemental Combining Statements of Operations Years Ended December 31, 2014 and 2013 (in millions) 2014 Financial Services Businesses REVENUES Premiums ...Policy charges and fee income ...Net investment income ...Asset management and service fees ...Other income ......

  • Page 227
    ...of the U.S. Retirement Solutions and Investment Management, U.S. Individual Life and Group Insurance, and International Insurance divisions and Corporate and Other operations. On January 2, 2015, Prudential Financial repurchased and cancelled 2.0 million shares of the Class B Stock, representing all...

  • Page 228
    ... such other factors as the Board of Directors may deem relevant. Dividends payable by Prudential Financial are limited to the amount that would be legally available for payment under New Jersey corporate law. For additional information on dividends and related regulatory restrictions, see Note 15 to...

  • Page 229
    ... into shares of common stock and an initial investment of $100 at the closing prices on December 31, 2009. ANNUAL RETURN PERCENTAGE Years Ending Dec11 Dec12 Dec13 -12.19 2.11 -25.37 9.67 16.00 27.97 77.17 32.39 52.43 Company / Index Prudential Financial, Inc ...S&P 500 Index ...Financial Services...

  • 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
    ... Newark, NJ 07102 973-802-6000 Stock Exchange Listing The Common Stock of Prudential Financial, Inc. is traded on the New York Stock Exchange under the symbol "PRU." Shareholder Services at Computershare Computershare Trust Company, N.A., the transfer agent for Prudential Financial, Inc., can assist...

  • Page 232
    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.