UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2012

OR

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

For the Transition Period from            to            

Commission File Number 001-16707

Prudential Financial, Inc.

(Exact Name of Registrant as Specified in its Charter)

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

751 Broad Street

Newark, New Jersey 07102

(973) 802-6000

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

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

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

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

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

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

As of July 31, 2012, 464 million shares of the registrant’s Common Stock (par value $0.01) were outstanding. In addition, 2 million shares of the registrant’s Class B Stock, for which there is no established public trading market, were outstanding.

TABLE OF CONTENTS

			Page Number
PART I FINANCIAL INFORMATION
	Item 1.	Financial Statements:
		Unaudited Interim Consolidated Statements of Financial Position as of June 30, 2012 and December 31, 2011		1
		Unaudited Interim Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011		2
		Unaudited Interim Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and 2011		3
		Unaudited Interim Consolidated Statements of Equity for the six months ended June 30, 2012 and 2011		4
		Unaudited Interim Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011		5
		Notes to Unaudited Interim Consolidated Financial Statements		6
		Unaudited Interim Supplemental Combining Financial Information:
		Unaudited Interim Supplemental Combining Statements of Financial Position as of June 30, 2012 and December 31, 2011		131
		Unaudited Interim Supplemental Combining Statements of Operations for the three months ended June 30, 2012 and 2011		132
		Unaudited Interim Supplemental Combining Statements of Operations for the six months ended June 30, 2012 and 2011		133
		Notes to Unaudited Interim Supplemental Combining Financial Information		134
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		136
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		288
	Item 4.	Controls and Procedures		289
PART II OTHER INFORMATION
	Item 1.	Legal Proceedings		290
	Item 1A.	Risk Factors		291
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		291
	Item 6.	Exhibits		291
SIGNATURES				293

Forward-Looking Statements

Certain of the statements included in this Quarterly Report on Form 10-Q, including but not limited to those in Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Prudential Financial, Inc. and its subsidiaries. There can be no assurance that future developments affecting Prudential Financial, Inc. and its subsidiaries will be those anticipated by management. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (1) general economic, market and political conditions, including the performance and fluctuations of fixed income, equity, real estate and other financial markets; (2) the availability and cost of additional debt or equity capital or external financing for our operations; (3) interest rate fluctuations or prolonged periods of low interest rates; (4) the degree to which we choose not to hedge risks, or the potential ineffectiveness or insufficiency of hedging or risk management strategies we do implement, with regard to variable annuity or other product guarantees; (5) any inability to access our credit facilities; (6) reestimates of our reserves for future policy benefits and claims; (7) differences between actual experience regarding mortality, morbidity, persistency, surrender experience, interest rates or market returns and the assumptions we use in pricing our products, establishing liabilities and reserves or for other purposes; (8) changes in our assumptions related to deferred policy acquisition costs, value of business acquired or goodwill; (9) changes in assumptions for retirement expense; (10) changes in our financial strength or credit ratings; (11) statutory reserve requirements associated with term and universal life insurance policies under Regulation XXX and Guideline AXXX; (12) investment losses, defaults and counterparty non-performance; (13) competition in our product lines and for personnel; (14) difficulties in marketing and distributing products through current or future distribution channels; (15) changes in tax law; (16) economic, political, currency and other risks relating to our international operations; (17) fluctuations in foreign currency exchange rates and foreign securities markets; (18) regulatory or legislative changes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act; (19) inability to protect our intellectual property rights or claims of infringement of the intellectual property rights of others; (20) adverse determinations in litigation or regulatory matters and our exposure to contingent liabilities, including in connection with our divestiture or winding down of businesses; (21) domestic or international military actions, natural or man-made disasters including terrorist activities or pandemic disease, or other events resulting in catastrophic loss of life; (22) ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks; (23) effects of acquisitions, divestitures and restructurings, including possible difficulties in integrating and realizing the projected results of acquisitions, including risks associated with the acquisition of certain insurance operations in Japan; (24) interruption in telecommunication, information technology or other operational systems or failure to maintain the security, confidentiality or privacy of sensitive data on such systems; (25) changes in statutory or U.S. GAAP accounting principles, practices or policies; (26) Prudential Financial, Inc.’s primary reliance, as a holding company, on dividends or distributions from its subsidiaries to meet debt payment obligations and the ability of the subsidiaries to pay such dividends or distributions in light of our ratings objectives and/or applicable regulatory restrictions; and (27) risks due to the lack of legal separation between our Financial Services Businesses and our Closed Block Business. Prudential Financial, Inc. does not intend, and is under no obligation, to update any particular forward-looking statement included in this document. See “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2011 for discussion of certain risks relating to our businesses and investment in our securities.

i

Throughout this Quarterly Report on Form 10-Q, “Prudential Financial” and the “Registrant” refer to Prudential Financial, Inc., the ultimate holding company for all of our companies. “Prudential Insurance” refers to The Prudential Insurance Company of America, before and after its demutualization on December 18, 2001. “Prudential,” the “Company,” “we” and “our” refer to our consolidated operations before and after demutualization.

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Financial Position

June 30, 2012 and December 31, 2011 (in millions, except share amounts)

	June 30, 2012			December 31, 2011
ASSETS
Fixed maturities, available-for-sale, at fair value (amortized cost: 2012-$245,171; 2011- $240,424)(1)	$	264,165		$	254,648
Fixed maturities, held-to-maturity, at amortized cost (fair value: 2012-$5,041; 2011- $5,354)(1)		4,771			5,107
Trading account assets supporting insurance liabilities, at fair value(1)		19,729			19,481
Other trading account assets, at fair value(1)		5,636			5,545
Equity securities, available-for-sale, at fair value (cost: 2012-$6,654; 2011- $6,922)		7,703			7,535
Commercial mortgage and other loans (includes $345 and $603 measured at fair value under the fair value option at June 30, 2012 and December 31, 2011, respectively)(1)		36,443			35,431
Policy loans		11,456			11,559
Other long-term investments (includes $424 and $366 measured at fair value under the fair value option at June 30, 2012 and December 31, 2011, respectively)(1)		7,693			7,820
Short-term investments		8,969			9,121
Total investments		366,565			356,247
Cash and cash equivalents(1)		14,242			14,251
Accrued investment income(1)		2,784			2,793
Deferred policy acquisition costs		13,048			12,517
Other assets(1)		15,556			16,056
Separate account assets		235,268			218,380
TOTAL ASSETS	$	647,463		$	620,244
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits	$	174,715		$	170,671
Policyholders’ account balances		133,877			134,558
Policyholders’ dividends		6,601			5,797
Securities sold under agreements to repurchase		8,139			6,218
Cash collateral for loaned securities		3,103			2,973
Income taxes		8,566			6,558
Short-term debt		3,226			2,336
Long-term debt		24,299			24,622
Other liabilities (includes $295 and $282 measured at fair value under the fair value option at June 30, 2012 and December 31, 2011, respectively) (1)		11,039			13,290
Separate account liabilities		235,268			218,380
Total liabilities		608,833			585,403
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 15)
EQUITY
Preferred Stock ($.01 par value; 10,000,000 shares authorized; none issued)		0			0
Common Stock ($.01 par value; 1,500,000,000 shares authorized; 660,111,299 and 660,111,264 shares issued at June 30, 2012 and December 31, 2011, respectively)		6			6
Class B Stock ($.01 par value; 10,000,000 shares authorized; 2,000,000 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively)		0			0
Additional paid-in capital		24,318			24,293
Common Stock held in treasury, at cost (196,083,573 and 192,072,613 shares at June 30, 2012 and December 31, 2011, respectively)		(12,117	)		(11,920	)
Accumulated other comprehensive income (loss)		8,290			5,418
Retained earnings		17,524			16,456
Total Prudential Financial, Inc. equity		38,021			34,253
Noncontrolling interests		609			588
Total equity		38,630			34,841
TOTAL LIABILITIES AND EQUITY	$	647,463		$	620,244

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

See Notes to Unaudited Interim Consolidated Financial Statements

1

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Operations

Three and Six Months Ended June 30, 2012 and 2011 (in millions, except per share amounts)

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
REVENUES
Premiums	$	7,556		$	6,270		$	14,329		$	11,780
Policy charges and fee income		1,062			1,005			2,111			1,953
Net investment income		3,358			3,327			6,678			6,445
Asset management fees and other income		2,397			1,174			2,262			1,818
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities		(346	)		(629	)		(919	)		(1,204	)
Other-than-temporary impairments on fixed maturity securities transferred to Other Comprehensive Income		253			476			714			947
Other realized investment gains (losses), net		1,856			621			584			675
Total realized investment gains (losses), net		1,763			468			379			418
Total revenues		16,136			12,244			25,759			22,414
BENEFITS AND EXPENSES
Policyholders’ benefits		7,427			6,035			13,870			11,468
Interest credited to policyholders’ account balances		1,247			1,191			2,213			2,014
Dividends to policyholders		604			734			1,046			1,282
Amortization of deferred policy acquisition costs		1,237			511			1,012			865
General and administrative expenses		2,689			2,689			5,485			5,073
Total benefits and expenses		13,204			11,160			23,626			20,702
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURES		2,932			1,084			2,133			1,712
Income tax expense		732			292			903			452
INCOME FROM CONTINUING OPERATIONS BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURES		2,200			792			1,230			1,260
Equity in earnings of operating joint ventures, net of taxes		6			10			13			114
INCOME FROM CONTINUING OPERATIONS		2,206			802			1,243			1,374
Income from discontinued operations, net of taxes		7			16			14			30
NET INCOME		2,213			818			1,257			1,404
Less: Income attributable to noncontrolling interests		15			29			26			54
NET INCOME ATTRIBUTABLE TO PRUDENTIAL FINANCIAL, INC	$	2,198		$	789		$	1,231		$	1,350
EARNINGS PER SHARE (See Note 8)
Financial Services Businesses
Basic:
Income from continuing operations attributable to Prudential Financial, Inc. per share of Common Stock	$	4.68		$	1.56		$	2.57		$	2.65
Income from discontinued operations, net of taxes		0.02			0.04			0.04			0.06
Net income attributable to Prudential Financial, Inc. per share of Common Stock	$	4.70		$	1.60		$	2.61		$	2.71
Diluted:
Income from continuing operations attributable to Prudential Financial, Inc. per share of Common Stock	$	4.62		$	1.55		$	2.55		$	2.62
Income from discontinued operations, net of taxes		0.02			0.03			0.03			0.06
Net income attributable to Prudential Financial, Inc. per share of Common Stock	$	4.64		$	1.58		$	2.58		$	2.68
Closed Block Business
Basic and Diluted:
Income (loss) from continuing operations attributable to Prudential Financial, Inc. per share of Class B Stock	$	(6.00	)	$	1.00		$	0.50		$	7.50
Income (loss) from discontinued operations, net of taxes		(0.50	)		0.00			(0.50	)		0.00
Net income (loss) attributable to Prudential Financial, Inc. per share of Class B Stock	$	(6.50	)	$	1.00		$	0.00		$	7.50

See Notes to Unaudited Interim Consolidated Financial Statements

2

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Comprehensive Income

Three and Six Months Ended June 30, 2012 and 2011 (in millions)

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
NET INCOME	$	2,213		$	818		$	1,257		$	1,404
Other comprehensive income, before tax:
Foreign currency translation adjustments		276			148			97			287
Net unrealized investment gains:
Unrealized investment gains for the period		1,278			2,302			4,169			1,301
Reclassification adjustment for (gains) losses included in net income		56			(269	)		149			(171	)
Total		1,334			2,033			4,318			1,130
Defined benefit pension and postretirement unrecognized net periodic benefit:
Impact of foreign currency changes and other		(2	)		(3	)		13			(6	)
Amortization included in net income		42			22			82			44
Total		40			19			95			38
Other comprehensive income, before tax:		1,650			2,200			4,510			1,455
Less: Income tax expense related to:
Foreign currency translation adjustments		93			31			59			51
Net unrealized investment gains		437			710			1,520			373
Defined benefit pension and postretirement unrecognized net periodic benefit		19			7			26			15
Total		549			748			1,605			439
Other comprehensive income, net of taxes:		1,101			1,452			2,905			1,016
Comprehensive Income		3,314			2,270			4,162			2,420
Comprehensive income attributable to noncontrolling interests		(52	)		(46	)		(59	)		(77	)
Comprehensive income attributable to Prudential Financial, Inc.	$	3,262		$	2,224		$	4,103		$	2,343

See Notes to Unaudited Interim Consolidated Financial Statements

3

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Equity(1)

Six Months Ended June 30, 2012 and 2011 (in millions)

	Prudential Financial, Inc. Equity
	Common Stock		Additional Paid-in Capital		Retained Earnings			Common Stock Held In Treasury			Accumulated Other Comprehensive Income (Loss)			Total Prudential Financial, Inc. Equity			Noncontrolling Interests			Total Equity
Balance December 31, 2011	$	6	$	24,293	$	16,456		$	(11,920	)	$	5,418		$	34,253		$	588		$	34,841
Common Stock acquired									(500	)					(500	)		0			(500	)
Contributions from noncontrolling interests																		2			2
Distributions to noncontrolling interests																		(40	)		(40	)
Consolidations/deconsolidations of noncontrolling interests				0											0			0			0
Stock-based compensation programs				25		(163	)		303						165						165
Comprehensive income:
Net income						1,231									1,231			26			1,257
Other comprehensive income, net of tax												2,872			2,872			33			2,905
Total comprehensive income															4,103			59			4,162
Balance, June 30, 2012	$	6	$	24,318	$	17,524		$	(12,117	)	$	8,290		$	38,021		$	609		$	38,630
	Prudential Financial, Inc. Equity
	Common Stock		Additional Paid-in Capital		Retained Earnings			Common Stock Held In Treasury			Accumulated Other Comprehensive Income (Loss)			Total Prudential Financial, Inc. Equity			Noncontrolling Interests			Total Equity
Balance, December 31, 2010	$	6	$	24,223	$	16,381		$	(11,173	)	$	2,978		$	32,415		$	513		$	32,928
Cumulative effect of adoption of accounting principle						(2,701	)					(179	)		(2,880	)					(2,880	)
Contributions from noncontrolling interests															0			8			8
Distributions to noncontrolling interests															0			(5	)		(5	)
Consolidations/deconsolidations of noncontrolling interests															0			0			0
Stock-based compensation programs				16		(16	)		146						146						146
Comprehensive income:
Net income						1,350									1,350			54			1,404
Other comprehensive income, net of tax												993			993			23			1,016
Total comprehensive income															2,343			77			2,420
Balance, June 30, 2011	$	6	$	24,239	$	15,014		$	(11,027	)	$	3,792		$	32,024		$	593		$	32,617

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

See Notes to Unaudited Interim Consolidated Financial Statements

4

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Cash Flows

Six Months Ended June 30, 2012 and 2011 (in millions)

	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,257		$	1,404
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment (gains) losses, net		(379	)		(418	)
Policy charges and fee income		(657	)		(625	)
Interest credited to policyholders’ account balances		2,213			2,014
Depreciation and amortization		203			167
Gains on trading account assets supporting insurance liabilities, net		(238	)		(157	)
Change in:
Deferred policy acquisition costs		(734	)		(647	)
Future policy benefits and other insurance liabilities		5,631			3,139
Other trading account assets		(10	)		290
Income taxes		335			190
Other, net		(1,585	)		(183	)
Cash flows from operating activities		6,036			5,174
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale		20,116			20,062
Fixed maturities, held-to-maturity		247			267
Trading account assets supporting insurance liabilities and other trading account assets		7,336			9,913
Equity securities, available-for-sale		2,100			1,614
Commercial mortgage and other loans		2,037			1,900
Policy loans		1,169			981
Other long-term investments		882			634
Short-term investments		14,858			9,046
Payments for the purchase/origination of:
Fixed maturities, available-for-sale		(26,266	)		(23,088	)
Fixed maturities, held-to-maturity		0			(38	)
Trading account assets supporting insurance liabilities and other trading account assets		(7,140	)		(10,345	)
Equity securities, available-for-sale		(1,816	)		(1,278	)
Commercial mortgage and other loans		(3,419	)		(2,708	)
Policy loans		(912	)		(852	)
Other long-term investments		(939	)		(539	)
Short-term investments		(13,944	)		(9,354	)
Acquisition of subsidiaries, net of cash acquired		0			(2,321	)
Other, net		182			(201	)
Cash flows used in investing activities		(5,509	)		(6,307	)
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholders’ account deposits		11,479			11,552
Policyholders’ account withdrawals		(12,389	)		(11,422	)
Net change in securities sold under agreements to repurchase and cash collateral for loaned securities		2,058			1,491
Cash dividends paid on Common Stock		(50	)		(49	)
Net change in financing arrangements (maturities 90 days or less)		(211	)		160
Common Stock acquired		(500	)		0
Common Stock reissued for exercise of stock options		94			69
Proceeds from the issuance of debt (maturities longer than 90 days)		1,311			1,036
Repayments of debt (maturities longer than 90 days)		(602	)		(565	)
Excess tax benefits from share-based payment arrangements		51			9
Change in bank deposits		(1,730	)		(50	)
Other, net		(5	)		(183	)
Cash flows from (used in) financing activities		(494	)		2,048
Effect of foreign exchange rate changes on cash balances		(42	)		79
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(9	)		994
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		14,251			12,915
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	14,242		$	13,909
NON-CASH TRANSACTIONS DURING THE PERIOD
Treasury Stock shares issued for stock-based compensation programs	$	206		$	58

See Notes to Unaudited Interim Consolidated Financial Statements

5

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements

1. BUSINESS AND BASIS OF PRESENTATION

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

Basis of Presentation

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

In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations have been made. All such adjustments are of a normal, recurring nature, except for the adjustment described below under “Out of Period Adjustments.” Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Company’s Audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

The Company’s Gibraltar Life Insurance Company, Ltd. (“Gibraltar Life”) consolidated operations, including the previously-acquired AIG Star Life Insurance Co., Ltd., AIG Edison Life Insurance Company, AIG Financial Assurance Japan K.K., and AIG Edison Service Co., Ltd. use a November 30 fiscal year end for purposes of inclusion in the Company’s Consolidated Financial Statements. Therefore, the Unaudited Interim Consolidated Financial Statements as of June 30, 2012, include the assets and liabilities of Gibraltar Life as of May 31, 2012 and the results of operations for Gibraltar Life for the three and six months ended May 31, 2012.

Use of Estimates

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

6

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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

Reclassifications

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

Out of Period Adjustments

In the second quarter of 2012, the Company recorded two out of period adjustments resulting in a decrease of $122 million to “Income from continuing operations before income taxes and equity in earnings of operating joint ventures” for the three and six months ended June 30, 2012.

The first adjustment related to a decline in the value of a real estate-related investment. Based on a review of the underlying collateral and a related guarantee, the Company determined that impairments of $75 million should be recognized, of which $61 million should have been recorded in prior years. The second adjustment consisted of an increase of $61 million in reserves for estimated payments arising from use of new Social Security Master Death File matching criteria to identify deceased policy and contract holders. During the initial calculation of the reserve in the third quarter of 2011, the Company excluded certain life policies in extended term status from the analysis used to identify potential claims.

The adjustments resulted in a decrease in adjusted operating income, the Company’s measure of segment performance, of $106 million for the current quarter, including a reduction of $61 million to the Asset Management segment and a reduction of $45 million to the Corporate and Other operations of the Financial Services Businesses. In addition, the adjustments resulted in a reduction of $16 million to the Closed Block Business. The adjustments are not material to any previously reported quarterly or annual financial statements.

In addition to the two out of period adjustments discussed above, in the first quarter of 2011, the Company recorded an out of period adjustment that decreased “Income from continuing operations before income taxes and equity in earnings of operating joint ventures” by $95 million. This adjustment had no impact on adjusted operating income, the Company’s measure of segment performance, and was not material to any previously reported quarterly or annual financial statements. For additional information regarding this out of period adjustment, see Note 1 to the Company’s Consolidated Financial Statements included in its 2011 Annual Report on Form 10-K.

For further information on the presentation of segment results and a definition of adjusted operating income, see Note 11.

2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS

Investments in Debt and Equity Securities and Commercial Mortgage and Other Loans

The Company’s investments in debt and equity securities include fixed maturities; equity securities; and short-term investments. The accounting policies related to these, as well as commercial mortgage and other loans, are as follows:

Fixed maturities are comprised of bonds, notes and redeemable preferred stock. Fixed maturities classified as “available-for-sale” are carried at fair value. See Note 13 for additional information regarding the

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

determination of fair value. Fixed maturities for which the Company has asserted the positive intent and ability to hold to maturity are carried at amortized cost and classified as “held-to-maturity.” The amortized cost of fixed maturities is adjusted for amortization of premiums and accretion of discounts to maturity. Interest income, as well as the related amortization of premium and accretion of discount, is included in “Net investment income” under the effective yield method. For mortgage-backed and asset-backed securities, the effective yield is based on estimated cash flows, including interest rate and prepayment assumptions based on data from widely accepted third-party data sources or internal estimates. In addition to interest rate and prepayment assumptions, cash flow estimates also vary based on other assumptions regarding the underlying collateral, including default rates and changes in value. These assumptions can significantly impact income recognition and the amount of other-than-temporary impairments recognized in earnings and other comprehensive income. For high credit quality mortgage-backed and asset-backed securities (those rated AA or above), cash flows are updated quarterly, and the amortized cost and effective yield of the security are adjusted as necessary to reflect historical prepayment experience and changes in estimated future prepayments. The adjustments to amortized cost are recorded as a charge or credit to net investment income in accordance with the retrospective method. For mortgage-backed and asset-backed securities rated below AA or those for which an other than temporary impairment has been recorded, the effective yield is adjusted prospectively for any changes in estimated cash flows. See the discussion below on realized investment gains and losses for a description of the accounting for impairments. Unrealized gains and losses on fixed maturities classified as “available-for-sale,” net of tax, and the effect on deferred policy acquisition costs, value of business acquired, unearned revenue reserves, deferred sales inducements, future policy benefits and policyholders’ dividends that would result from the realization of unrealized gains and losses, are included in “Accumulated other comprehensive income (loss).”

“Trading account assets supporting insurance liabilities, at fair value” includes invested assets that support certain products included in the Retirement segment, as well as certain products included in the International Insurance segment, which are experience rated, meaning that the investment results associated with these products are expected to ultimately accrue to contractholders. Realized and unrealized gains and losses for these investments are reported in “Asset management fees and other income.” Interest and dividend income from these investments is reported in “Net investment income.”

“Other trading account assets, at fair value” consist primarily of fixed maturities, equity securities, including certain perpetual preferred stock, and certain derivatives, including those used by the Company in its capacity as a broker-dealer and derivative hedging positions used in a non-broker-dealer capacity primarily to hedge the risks related to certain products. These instruments are carried at fair value. Realized and unrealized gains and losses on these investments and on derivatives used by the Company in its capacity as a broker-dealer are reported in “Asset management fees and other income” and, for those related to the Company’s former global commodities group, in “Income from discontinued operations, net of taxes.” Interest and dividend income from these investments is reported in “Net investment income” and, for those related to the Company’s former global commodities group, in “Income from discontinued operations, net of taxes.”

Equity securities available-for-sale are comprised of common stock, mutual fund shares, non-redeemable preferred stock, and certain perpetual preferred stock, and are carried at fair value. The associated unrealized gains and losses, net of tax, and the effect on deferred policy acquisition costs, value of business acquired, unearned revenue reserves, deferred sales inducements, future policy benefits and policyholders’ dividends that would result from the realization of unrealized gains and losses, are included in “Accumulated other comprehensive income (loss).” The cost of equity securities is written down to fair value when a decline in value is considered to be other-than-temporary. See the discussion below on realized investment gains and losses for a description of the accounting for impairments. Dividends from these investments are recognized in “Net investment income” when earned.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Commercial mortgage and other loans consist of commercial mortgage loans, agricultural loans, loans backed by residential properties, as well as certain other collateralized and uncollateralized loans. Commercial mortgage loans are broken down by class which is based on property type (industrial properties, retail, office, multi-family/apartment, hospitality, and other). Loans backed by residential properties primarily include recourse loans held by the Company’s international insurance businesses. Other collateralized loans primarily include senior loans made by the Company’s international insurance businesses and loans made to the Company’s former real estate franchisees. Uncollateralized loans primarily represent reverse dual currency loans and corporate loans held by the Company’s international insurance businesses.

Commercial mortgage and other loans originated and held for investment are generally carried at unpaid principal balance, net of unamortized deferred loan origination fees and expenses and net of an allowance for losses. Commercial mortgage loans originated within the Company’s commercial mortgage operations include loans held for sale which are reported at the lower of cost or fair value; loans held for investment which are reported at amortized cost net of unamortized deferred loan origination fees and expenses and net of an allowance for losses; and loans reported at fair value under the fair value option. Commercial mortgage and other loans acquired, including those related to the acquisition of a business, are recorded at fair value when purchased, reflecting any premiums or discounts to unpaid principal balances.

Interest income, as well as prepayment fees and the amortization of the related premiums or discounts, related to commercial mortgage and other loans, are included in “Net investment income.”

Impaired loans include those loans for which it is probable that amounts due will not be collected according to the contractual terms of the loan agreement. The Company defines “past due” as principal or interest not collected at least 30 days past the scheduled contractual due date. Interest received on loans that are past due, including impaired and non-impaired loans as well as loans that were previously modified in a troubled debt restructuring, is either applied against the principal or reported as net investment income based on the Company’s assessment as to the collectability of the principal. See Note 4 for additional information about the Company’s past due loans.

The Company discontinues accruing interest on loans after the loans become 90 days delinquent as to principal or interest payments, or earlier when the Company has doubts about collectability. When the Company discontinues accruing interest on a loan, any accrued but uncollectible interest on the loan and other loans backed by the same collateral, if any, is charged to interest income in the same period. Generally, a loan is restored to accrual status only after all delinquent interest and principal are brought current and, in the case of loans where the payment of interest has been interrupted for a substantial period, or the loan has been modified, a regular payment performance has been established.

The Company reviews the performance and credit quality of the commercial mortgage and other loan portfolio on an on-going basis. Loans are placed on watch list status based on a predefined set of criteria and are assigned one of three categories. Loans are placed on “early warning” status in cases where, based on the Company’s analysis of the loan’s collateral, the financial situation of the borrower or tenants or other market factors, it is believed a loss of principal or interest could occur. Loans are classified as “closely monitored” when it is determined that there is a collateral deficiency or other credit events that may lead to a potential loss of principal or interest. Loans “not in good standing” are those loans where the Company has concluded that there is a high probability of loss of principal, such as when the loan is delinquent or in the process of foreclosure. As described below, in determining the allowance for losses, the 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.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Loan-to-value and debt service coverage ratios are measures commonly used to assess the quality of commercial mortgage loans. The loan-to-value ratio compares the amount of the loan to the fair value of the underlying property collateralizing the loan, and is commonly expressed as a percentage. Loan-to-value ratios greater than 100% indicate that the loan amount exceeds the collateral value. A smaller loan-to-value ratio indicates a greater excess of collateral value over the loan amount. The debt service coverage ratio compares a property’s net operating income to its debt service payments. Debt service coverage ratios less than 1.0 times indicate that property operations do not generate enough income to cover the loan’s current debt payments. A larger debt service coverage ratio indicates a greater excess of net operating income over the debt service payments. The values utilized in calculating these ratios are developed as part of the Company’s periodic review of the commercial mortgage loan and agricultural loan portfolio, which includes an internal appraisal of the underlying collateral value. The Company’s periodic review also includes a quality re-rating process, whereby the internal quality rating originally assigned at underwriting is updated based on current loan, property and market information using a proprietary quality rating system. The loan-to-value ratio is the most significant of several inputs used to establish the internal credit rating of a loan which in turn drives the allowance for losses. Other key factors considered in determining the internal credit rating include debt service coverage ratios, amortization, loan term, estimated market value growth rate and volatility for the property type and region. See Note 4 for additional information related to the loan-to-value ratios and debt service coverage ratios related to the Company’s commercial mortgage and agricultural loan portfolios.

Loans backed by residential properties, other collateralized loans, and uncollateralized loans are also reviewed periodically. Each loan is assigned an internal or external credit rating. Internal credit ratings take into consideration various factors including financial ratios and qualitative assessments based on non-financial information. In cases where there are personal or third party guarantors, the credit quality of the guarantor is also reviewed. These factors are used in developing the allowance for losses. Based on the diversity of the loans in these categories and their immateriality, the Company has not disclosed the credit quality indicators related to these loans in Note 4.

For those loans not reported at fair value, the allowance for losses includes a loan specific reserve for each impaired loan that has a specifically identified loss and a portfolio reserve for probable incurred but not specifically identified losses. For impaired commercial mortgage and other loans the allowances for losses are determined based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or based upon the fair value of the collateral if the loan is collateral dependent. The portfolio reserves for probable incurred but not specifically identified losses in the commercial mortgage and agricultural loan portfolio segments considers the current credit composition of the portfolio based on an internal quality rating, (as described above). The portfolio reserves are determined using past loan experience, including historical credit migration, loss probability and loss severity factors by property type. These factors are reviewed each quarter and updated as appropriate.

The allowance for losses on commercial mortgage and other loans can increase or decrease from period to period based on the factors noted above. “Realized investment gains (losses), net” includes changes in the allowance for losses and changes in value for loans accounted for under the fair value option. “Realized investment gains (losses), net” also includes gains and losses on sales, certain restructurings, and foreclosures.

When a commercial mortgage or other loan is deemed to be uncollectible, any specific valuation allowance associated with the loan is reversed and a direct write down to the carrying amount of the loan is made. The carrying amount of the loan is not adjusted for subsequent recoveries in value.

Commercial mortgage and other loans are occasionally restructured in a troubled debt restructuring. These restructurings generally include one or more of the following: full or partial payoffs outside of the original

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

contract terms; changes to interest rates; extensions of maturity; or additions or modifications to covenants. Additionally, the Company may accept assets in full or partial satisfaction of the debt as part of a troubled debt restructuring. When restructurings occur, they are evaluated individually to determine whether the restructuring or modification constitutes a “troubled debt restructuring” as defined by authoritative accounting guidance. If the borrower is experiencing financial difficulty and the Company has granted a concession, the restructuring, including those that involve a partial payoff or the receipt of assets in full satisfaction of the debt is deemed to be a troubled debt restructuring. Based on the Company’s credit review process described above, these loans generally would have been deemed impaired prior to the troubled debt restructuring, and specific allowances for losses would have been established prior to the determination that a troubled debt restructuring has occurred.

In a troubled debt restructuring where the Company receives assets in full satisfaction of the debt, any specific valuation allowance is reversed and a direct write down of the loan is recorded for the amount of the allowance, and any additional loss, net of recoveries, or any gain is recorded for the difference between the fair value of the assets received and the recorded investment in the loan. When assets are received in partial settlement, the same process is followed, and the remaining loan is evaluated prospectively for impairment based on the credit review process noted above. When a loan is restructured in a troubled debt restructuring, the impairment of the loan is remeasured using the modified terms and the loan’s original effective yield, and the allowance for loss is adjusted accordingly. Subsequent to the modification, income is recognized prospectively based on the modified terms of the loans in accordance with the income recognition policy noted above. Additionally, the loan continues to be subject to the credit review process noted above.

In situations where a loan has been restructured in a troubled debt restructuring and the loan has subsequently defaulted, this factor is considered when evaluating the loan for a specific allowance for losses in accordance with the credit review process noted above.

See Note 4 for additional information about commercial mortgage and other loans that have been restructured in a troubled debt restructuring.

“Short-term investments” primarily consist of highly liquid debt instruments with a maturity of greater than three months and less than twelve months when purchased, other than those debt instruments meeting this definition that are included in “Trading account assets supporting insurance liabilities, at fair value.” These investments are generally carried at fair value and include certain money market investments, short-term debt securities issued by government sponsored entities and other highly liquid debt instruments. Short-term investments held in the Company’s former broker-dealer operations were marked-to-market through “Income from discontinued operations, net of taxes.”

Realized investment gains (losses) are computed using the specific identification method with the exception of some 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 and other types of investments, as well as adjustments to the cost basis of investments for net other-than-temporary impairments recognized 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 loans carried at fair value, and fair value changes on embedded derivatives and free-standing derivatives that do not qualify for hedge accounting treatment, except those derivatives used in the Company’s capacity as a broker or dealer.

The Company’s available-for-sale and held-to-maturity securities with unrealized losses are reviewed quarterly to identify other-than-temporary impairments in value. In evaluating whether a decline in value is

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

other-than-temporary, the Company considers several factors including, but not limited to the following: (1) the extent and the duration of the decline; (2) the reasons for the decline in value (credit event, currency or interest-rate related, including general credit spread widening); and (3) the financial condition of and near-term prospects of the issuer. With regard to available-for-sale equity securities, the Company also considers the ability and intent to hold the investment for a period of time to allow for a recovery of value. When it is determined that a decline in value of an equity security is other-than-temporary, the carrying value of the equity security is reduced to its fair value, with a corresponding charge to earnings.

Under the authoritative guidance for the recognition and presentation of other-than-temporary impairments for debt securities, an other-than-temporary impairment must be recognized in earnings for a debt security in an unrealized loss position when an entity either (a) has the intent to sell the debt security or (b) more likely than not will be required to sell the debt security before its anticipated recovery. For all debt securities in unrealized loss positions that do not meet either of these two criteria, the guidance requires that the Company analyze its ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security prior to impairment. The Company may use the estimated fair value of collateral as a proxy for the net present value if it believes that the security is dependent on the liquidation of collateral for recovery of its investment. If the net present value is less than the amortized cost of the investment, an other-than-temporary impairment is recognized. In addition to the above mentioned circumstances, the Company also recognizes an other-than-temporary impairment in earnings when a non-functional currency denominated security in an unrealized loss position due to currency exchange rates approaches maturity.

Under the authoritative guidance for the recognition and presentation of other-than-temporary impairments, when an other-than-temporary impairment of a debt security has occurred, the amount of the other-than-temporary impairment recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the debt security meets either of these two criteria or the foreign currency translation loss is not expected to be recovered before maturity, the other-than-temporary impairment recognized in earnings is equal to the entire difference between the security’s amortized cost basis and its fair value at the impairment measurement date. For other-than-temporary impairments of debt securities that do not meet these criteria, the net amount recognized in earnings is equal to the difference between the amortized cost of the debt security and its net present value calculated as described above. Any difference between the fair value and the net present value of the debt security at the impairment measurement date is recorded in “Other comprehensive income (loss).” Unrealized gains or losses on securities for which an other-than-temporary impairment has been recognized in earnings is tracked as a separate component of “Accumulated other comprehensive income (loss).”

For debt securities, the split between the amount of an other-than-temporary impairment recognized in other comprehensive income and the net amount recognized in earnings is driven principally by assumptions regarding the amount and timing of projected cash flows. For mortgage-backed and asset-backed securities, cash flow estimates consider the payment terms of the underlying assets backing a particular security, including interest rate and prepayment assumptions, based on data from widely accepted third-party data sources or internal estimates. In addition to interest rate and prepayment assumptions, cash flow estimates also include other assumptions regarding the underlying collateral including default rates and recoveries, which vary based on the asset type and geographic location, as well as the vintage year of the security. For structured securities, the payment priority within the tranche structure is also considered. For all other debt securities, cash flow estimates are driven by assumptions regarding probability of default and estimates regarding timing and amount of recoveries associated with a default. The Company has developed these estimates using information based on its

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Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

historical experience as well as using market observable data, such as industry analyst reports and forecasts, sector credit ratings and other data relevant to the collectability of a security, such as the general payment terms of the security and the security’s position within the capital structure of the issuer.

The new cost basis of an impaired security is not adjusted for subsequent increases in estimated fair value. In periods subsequent to the recognition of an other-than-temporary impairment, the impaired security is accounted for as if it had been purchased on the measurement date of the impairment. For debt securities, the discount (or reduced premium) based on the new cost basis may be accreted into net investment income in future periods, including increases in cash flow on a prospective basis. In certain cases where there are decreased cash flow expectations, the security is reviewed for further cash flow impairments.

Derivative Financial Instruments

Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices, values of securities or commodities, credit spreads, market volatility, expected returns, and liquidity. Values can also be affected by changes in estimates and assumptions, including those related to counterparty behavior 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 market. Derivative positions are carried at fair value, generally by obtaining quoted market prices or through the use of valuation models.

Derivatives are used in a non-broker-dealer capacity to manage the interest rate and currency characteristics of assets or liabilities and to mitigate volatility of expected non-U.S. earnings and net investments in foreign operations resulting from changes in currency exchange rates. Additionally, derivatives may be used to seek to reduce exposure to interest rate, credit, foreign currency and equity risks associated with assets held or expected to be purchased or sold, and liabilities incurred or expected to be incurred. As discussed in detail below and in Note 14, all realized and unrealized changes in fair value of non-broker-dealer related derivatives are recorded in current earnings, with the exception of the effective portion of cash flow hedges and effective hedges of net investments in foreign operations. Cash flows from derivatives are reported in the operating, investing, or financing activities sections in the Unaudited Interim Consolidated Statements of Cash Flows based on the nature and purpose of the derivative.

Derivatives were also used in a derivative broker-dealer capacity in the Company’s former global commodities group to meet the needs of clients by structuring transactions that allow clients to manage their exposure to interest rates, foreign exchange rates, indices and prices of securities and commodities. The Company’s global commodities group was sold on July 1, 2011. See Note 3 for further details. Realized and unrealized changes in fair value of derivatives used in these dealer related operations are included in “Income from discontinued operations, net of taxes” in the periods in which the changes occur. Cash flows from such derivatives are reported in the operating activities section of the Unaudited Interim Consolidated Statements of Cash Flows.

Derivatives are recorded either as assets, within “Other trading account assets, at fair value” or “Other long-term investments,” or as liabilities, within “Other liabilities,” except for embedded derivatives which are recorded with the associated host contract. The Company nets the fair value of all derivative financial instruments with counterparties for which a master netting arrangement has been executed.

The Company designates derivatives as either (1) a hedge of the fair value of a recognized asset or liability or unrecognized firm commitment (“fair value” hedge); (2) a hedge of a forecasted transaction or of the

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge); (3) a foreign-currency fair value or cash flow hedge (“foreign currency” hedge); (4) a hedge of a net investment in a foreign operation; or (5) a derivative that does not qualify for hedge accounting.

To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated risk of the hedged item. Effectiveness of the hedge is formally assessed at inception and throughout the life of the hedging relationship. Even if a derivative qualifies for hedge accounting treatment, there may be an element of ineffectiveness of the hedge. Under such circumstances, the ineffective portion is recorded in “Realized investment gains (losses), net.”

The Company formally documents at inception all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives designated as fair value, cash flow, or foreign currency hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. Hedges of a net investment in a foreign operation are linked to the specific foreign operation.

When a derivative is designated as a fair value hedge and is determined to be highly effective, changes in its fair value, along with changes in the fair value of the hedged asset or liability (including losses or gains on firm commitments), are reported on a net basis in the income statement, generally in “Realized investment gains (losses), net.” When swaps are used in hedge accounting relationships, periodic settlements are recorded in the same income statement line as the related settlements of the hedged items.

When a derivative is designated as a cash flow hedge and is determined to be highly effective, changes in its fair value are recorded in “Accumulated other comprehensive income (loss),” to the extent they are effective, until earnings are affected by the variability of cash flows being hedged (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings). At that time, the related portion of deferred gains or losses on the derivative instrument is reclassified and reported in the income statement line item associated with the hedged item.

When a derivative is designated as a foreign currency hedge and is determined to be highly effective, changes in its fair value are recorded either in current period earnings if the hedge transaction is a fair value hedge (e.g., a hedge of a recognized foreign currency asset or liability) or in “Accumulated other comprehensive income (loss)” if the hedge transaction is a cash flow hedge (e.g., a foreign currency denominated forecasted transaction). When a derivative is used as a hedge of a net investment in a foreign operation, its change in fair value, to the extent effective as a hedge, is recorded in the cumulative translation adjustment account within “Accumulated other comprehensive income (loss).”

If it is determined that a derivative no longer qualifies as an effective fair value or cash flow hedge or management removes the hedge designation, the derivative will continue to be carried on the balance sheet at its fair value, with changes in fair value recognized currently in “Realized investment gains (losses), net.” In this scenario, the hedged asset or liability under a fair value hedge will no longer be adjusted for changes in fair value and the existing basis adjustment is amortized to the income statement line associated with the asset or liability. The component of “Accumulated other comprehensive income (loss)” related to discontinued cash flow hedges is reclassified to the income statement line associated with the hedged cash flows consistent with the earnings impact of the original hedged cash flows.

When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, or because it is probable that the forecasted transaction will not occur by the end of the specified time period, the derivative will continue to be carried on the balance sheet at its fair value, with changes in fair

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

value recognized currently in “Realized investment gains (losses), net.” Any asset or liability that was recorded pursuant to recognition of the firm commitment is removed from the balance sheet and recognized currently in “Realized investment gains (losses), net.” Gains and losses that were in “Accumulated other comprehensive income (loss)” pursuant to the hedge of a forecasted transaction are recognized immediately in “Realized investment gains (losses), net.”

If a derivative does not qualify for hedge accounting, all changes in its fair value, including net receipts and payments, are included in “Realized investment gains (losses), net” without considering changes in the fair value of the economically associated assets or liabilities.

The Company is a party to financial instruments that contain derivative instruments that are “embedded” in the financial instruments. At inception, the Company assesses whether the economic characteristics of the embedded instrument are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the host contract) and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that (1) the embedded instrument possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and (2) a separate instrument with the same terms would qualify as a derivative instrument, the embedded instrument qualifies as an embedded derivative that is separated from the host contract, carried at fair value, and changes in its fair value are included in “Realized investment gains (losses), net.” For certain financial instruments that contain an embedded derivative that otherwise would need to be bifurcated and reported at fair value, the Company may elect to classify the entire instrument as a trading account asset and report it within “Other trading account assets, at fair value.”

Adoption of New Accounting Pronouncements

Effective January 1, 2012, the Company adopted, retrospectively, updated guidance regarding the presentation of comprehensive income. The updated guidance eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. Under the updated guidance, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The updated guidance does not change the items that are reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The Company opted to present the total of comprehensive income, the components of net income, and the components of other comprehensive income in two separate but consecutive statements. The Unaudited Interim Consolidated Financial Statements included herein reflect the adoption of this updated guidance.

Effective January 1, 2012, the Company adopted, prospectively, updated guidance regarding the fair value measurements and disclosure requirements. The updated guidance clarifies existing guidance related to the application of fair value measurement methods and requires expanded disclosures. The expanded disclosures required by this guidance are included in Note 13. Adoption of this guidance did not have a material effect on the Company’s consolidated financial position or results of operations.

Effective January 1, 2012, the Company adopted, prospectively, updated guidance regarding the assessment of effective control for repurchase agreements. The Company’s adoption of this guidance did not have a material effect on the Company’s consolidated financial position, results of operations, and financial statement disclosures.

Effective January 1, 2012, the Company adopted, retrospectively, new authoritative guidance to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal

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Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

insurance contracts qualify for deferral. Under the amended guidance, acquisition costs are to include only those costs that are directly related to the acquisition or renewal of insurance contracts by applying a model similar to the accounting for loan origination costs. An entity may defer incremental direct costs of contract acquisition with independent third parties or employees that are essential to the contract transaction, as well as the portion of employee compensation, including payroll fringe benefits and other costs directly related to underwriting, policy issuance and processing, medical inspection, and contract selling for successfully negotiated contracts. Prior period financial information presented in these financial statements has been adjusted to reflect the retrospective adoption of the amended guidance. The lower level of costs now qualifying for deferral will be only partially offset by a lower level of amortization of “Deferred policy acquisition costs”, and, as such, will initially result in lower earnings in future periods, primarily within the International Insurance and Individual Annuities segments. The impact to the International Insurance segment largely reflects lower deferrals of allocated costs of its proprietary distribution system, while the impact to the Individual Annuities segment mainly reflects lower deferrals of its wholesaler costs. While the adoption of this amended guidance changes the timing of when certain costs are reflected in the Company’s results of operations, it has no effect on the total acquisition costs to be recognized over time and has no impact on the Company’s cash flows.

The following tables present amounts as previously reported in 2011, the effect on those amounts of the change due to the retrospective adoption of the amended guidance related to the deferral of acquisition costs as described above, and the adjusted amounts that are reflected in the Unaudited Interim Consolidated Financial Statements, included herein.

Unaudited Interim Consolidated Statement of Financial Position:

	December 31, 2011
	As Previously Reported		Effect of Change			As Currently Reported
	(in millions)
Deferred policy acquisition costs	$	16,790	$	(4,273	)	$	12,517
Other assets		16,060		(4	)		16,056
TOTAL ASSETS		624,521		(4,277	)		620,244
Future policy benefits		170,459		212			170,671
Policyholders’ account balances		134,552		6			134,558
Income taxes		8,083		(1,525	)		6,558
Total liabilities		586,710		(1,307	)		585,403
Accumulated other comprehensive income (loss)		5,563		(145	)		5,418
Retained earnings		19,281		(2,825	)		16,456
Total Prudential Financial, Inc. equity		37,223		(2,970	)		34,253
Total equity		37,811		(2,970	)		34,841
TOTAL LIABILITIES AND EQUITY	$	624,521	$	(4,277	)	$	620,244

16

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Unaudited Interim Consolidated Statement of Operations:

	Three Months Ended June 30, 2011
	As Previously Reported			Effect of Change			As Currently Reported
	(in millions)
REVENUES
Premiums	$	6,279		$	(9	)	$	6,270
Asset management fees and other income		1,168			6			1,174
Total revenues		12,247			(3	)		12,244
BENEFITS AND EXPENSES
Amortization of deferred policy acquisition costs		643			(132	)		511
General and administrative expenses		2,472			217			2,689
Total benefits and expenses		11,075			85			11,160
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURES		1,172			(88	)		1,084
Income tax expense		332			(40	)		292
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURES		840			(48	)		792
Equity in earnings of operating joint ventures, net of tax		11			(1	)		10
INCOME (LOSS) FROM CONTINUING OPERATIONS		851			(49	)		802
NET INCOME (LOSS)		867			(49	)		818
NET INCOME (LOSS) ATTRIBUTABLE TO PRUDENTIAL FINANCIAL, INC.	$	838		$	(49	)	$	789
EARNINGS PER SHARE
Financial Services Businesses
Basic:
Income (loss) from continuing operations attributable to Prudential Financial, Inc. per share of Common Stock	$	1.67		$	(0.11	)	$	1.56
Net income (loss) attributable to Prudential Financial, Inc. per share of Common Stock	$	1.70		$	(0.10	)	$	1.60
Diluted:
Income (loss) from continuing operations attributable to Prudential Financial, Inc. per share of Common Stock	$	1.65		$	(0.10	)	$	1.55
Net income (loss) attributable to Prudential Financial, Inc. per share of Common Stock	$	1.68		$	(0.10	)	$	1.58
Closed Block Business
Basic and Diluted:
Income (loss) from continuing operations attributable to Prudential Financial, Inc. per share of Class B Stock	$	(0.50	)	$	1.50		$	1.00
Net income (loss) attributable to Prudential Financial, Inc. per share of Class B Stock	$	(0.50	)	$	1.50		$	1.00

17

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

	Six Months Ended June 30, 2011
	As Previously Reported		Effect of Change			As Currently Reported
	(in millions)
REVENUES
Premiums	$	11,800	$	(20	)	$	11,780
Asset management fees and other income		1,817		1			1,818
Total revenues		22,433		(19	)		22,414
BENEFITS AND EXPENSES
Amortization of deferred policy acquisition costs		1,102		(237	)		865
General and administrative expenses		4,691		382			5,073
Total benefits and expenses		20,557		145			20,702
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURES		1,876		(164	)		1,712
Income tax expense		522		(70	)		452
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURES		1,354		(94	)		1,260
Equity in earnings of operating joint ventures, net of tax		116		(2	)		114
INCOME (LOSS) FROM CONTINUING OPERATIONS		1,470		(96	)		1,374
NET INCOME (LOSS)		1,500		(96	)		1,404
NET INCOME (LOSS) ATTRIBUTABLE TO PRUDENTIAL FINANCIAL, INC.	$	1,446	$	(96	)	$	1,350
EARNINGS PER SHARE
Financial Services Businesses
Basic:
Income (loss) from continuing operations attributable to Prudential Financial, Inc. per share of Common Stock	$	2.86	$	(0.21	)	$	2.65
Net income (loss) attributable to Prudential Financial, Inc. per share of Common Stock	$	2.92	$	(0.21	)	$	2.71
Diluted:
Income (loss) from continuing operations attributable to Prudential Financial, Inc. per share of Common Stock	$	2.83	$	(0.21	)	$	2.62
Net income (loss) attributable to Prudential Financial, Inc. per share of Common Stock	$	2.89	$	(0.21	)	$	2.68
Closed Block Business
Basic and Diluted:
Income from continuing operations attributable to Prudential Financial, Inc. per share of Class B Stock	$	4.50	$	3.00		$	7.50
Net income attributable to Prudential Financial, Inc. per share of Class B Stock	$	4.50	$	3.00		$	7.50

18

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Unaudited Interim Consolidated Statement of Cash Flows:

	Six Months Ended June 30, 2011
	As Previously Reported			Effect of Change			As Currently Reported
	(in millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,500		$	(96	)	$	1,404
Change in:
Deferred policy acquisition costs		(792	)		145			(647	)
Future policy benefits and other insurance liabilities		3,119			20			3,139
Other, net		(114	)		(69	)		(183	)
Cash flows from operating activities	$	5,174		$	0		$	5,174

Future Adoption of New Accounting Pronouncements

In July 2012, the FASB issued amended guidance on testing indefinite-lived intangible assets for impairment. Under the amended guidance, an entity can first assess qualitative factors to determine whether an indefinite-lived intangible asset may be impaired. If the entity concludes that it is not likely that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. But if the entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the asset’s fair value with its carrying amount in accordance with existing guidance. The entity may also bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. The entity will be able to resume performing the qualitative assessment in any subsequent period. The amended guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company is currently assessing the impact of this guidance on the Company’s consolidated financial position, results of operations, and financial statement disclosures, but does not expect it to impact its consolidated financial position or results of operations.

3. ACQUISITIONS AND DISPOSITIONS

Acquisition of AIG Star Life Insurance Co., Ltd., AIG Edison Life Insurance Company and Related Entities from AIG

On February 1, 2011, Prudential Financial completed the acquisition from American International Group, Inc. (“AIG”) of AIG Star Life Insurance Co., Ltd. (“Star”), AIG Edison Life Insurance Company (“Edison”), AIG Financial Assurance Japan K.K., and AIG Edison Service Co., Ltd. (collectively, the “Star and Edison Businesses”) pursuant to the stock purchase agreement dated September 30, 2010 between Prudential Financial and AIG. The total purchase price was $4,709 million, comprised of $4,213 million in cash and $496 million in assumed third party debt, substantially all of which is expected to be repaid, over time, with excess capital of the acquired entities. The acquisition of these businesses included the purchase by the Company of all of the shares of these entities, which became indirect wholly-owned subsidiaries of the Company. All acquired entities are Japanese corporations and their businesses are in Japan. On January 1, 2012, Star and Edison were merged into the Gibraltar Life Insurance Company, Ltd.

The Star and Edison Businesses primarily distribute individual life insurance, fixed annuities and certain accident and health products with fixed benefits through captive agents, independent agents, and banks. The addition of these operations to the Company’s existing businesses increases its scale in the Japanese insurance market and provides complementary distribution opportunities.

19

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Prudential Financial made a Section 338(g) election under the Internal Revenue Code with respect to the acquisition resulting in the acquired entities being treated for U.S. tax purposes as newly-incorporated companies. Under such election, the U.S. tax basis of the assets acquired and liabilities assumed of the Star and Edison Businesses were adjusted as of February 1, 2011 to reflect the consequences of the Section 338(g) election.

Although the acquisition of the Star and Edison Businesses included the acquisition of multiple entities, the Company views this as a single acquisition and reports it as such in the following disclosures.

Net Assets Acquired

The following table presents an allocation of the purchase price to assets acquired and liabilities assumed at February 1, 2011 (the “Acquisition Date”):

	(in millions)
Total invested assets at fair value(1)	$	43,103
Cash and cash equivalents		1,813
Accrued investment income		348
Value of business acquired(2)		3,769
Goodwill(2)		173
Other assets(1)(2)		880
Total assets acquired		50,086
Future policy benefits(2)(3)		22,202
Policyholders’ account balances(2)(3)(4)		22,785
Long-term debt		496
Other liabilities(2)		390
Total liabilities assumed		45,873
Net assets acquired	$	4,213

(1) Total invested assets, at fair value, include $55 million of related party assets. Other assets include $86 million of related party assets.

(2) Reflects revisions to prior period presentation for correction of treatment of certain acquired policies and refinements to certain data.

(3) Reflects reclassifications to prior period presentation for correction of classification of certain acquired policies.

(4) Includes investment contracts reported at fair value, which exceeded the account value by $646 million.

Value of Business Acquired

Value of business acquired (“VOBA”), which is established in accordance with purchase accounting guidance, is an intangible asset associated with the acquired in force insurance contracts representing the difference between the fair value and carrying value of the liabilities, determined as of the acquisition date. The fair value of the liabilities, and hence VOBA, reflects the cost of the capital attributable to the acquired insurance contracts. VOBA will be amortized over the expected life of the contracts in proportion to either gross premiums or gross profits, depending on the type of contract. Total gross profits will include both actual experience as it arises and estimates of gross profits for future periods. The Company will regularly evaluate and adjust the VOBA balance with a corresponding charge or credit to earnings for the effects of actual gross profits and changes in assumptions regarding estimated future gross profits. VOBA is reported as a component of “Other assets” and the amortization of VOBA is reported in “General and administrative expenses.” The proportion of the VOBA balance attributable to each of the product groups associated with this acquisition are as follows: 48% related to accident and health insurance products, 45% related to individual life insurance, and 7% related to fixed annuities.

20

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The following table provides estimated future amortization of VOBA, net of interest, assuming June 30, 2012 end of period foreign currency exchange rates remain constant, relating to the Star and Edison Businesses for the periods indicated.

	(in millions)
Remainder of 2012	$	197
2013	$	354
2014	$	308
2015	$	266
2016	$	234
2017 and thereafter	$	1,850

Information regarding the change in VOBA is as follows:

	(in millions)
Balance as of January 1, 2012	$	3,490
Amortization		(266	)
Interest		22
Foreign currency translation		(37	)
Balance as of June 30, 2012	$	3,209

Goodwill

As a result of the acquisition of the Star and Edison Businesses, the Company recognized an asset for goodwill representing the excess of the acquisition cost over the net fair value of the assets acquired and liabilities assumed. Goodwill resulting from the acquisition of the Star and Edison Businesses amounted to $173 million. Based on the Company’s final calculation of the 338(g) election the Company determined that none of the goodwill is tax deductible. In accordance with U.S. GAAP, goodwill will not be amortized but rather will be tested at least annually for impairment. The test will be performed at the reporting unit level which for this acquisition is the International Insurance segment’s Gibraltar Life and Other operations.

21

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Supplemental Unaudited Pro Forma Information

The following supplemental information presents selected unaudited pro forma information for the Company assuming the acquisition had occurred as of January 1, 2010. This pro forma information does not purport to represent what the Company’s actual results of operations would have been if the acquisition had occurred as of the date indicated or what such results would be for any future periods. The pro forma information does not reflect the impact of future events that may occur, including but not limited to, expense efficiencies arising from the acquisition and also does not give effect to certain one-time charges that the Company expects to incur, such as restructuring and integration costs.

	Six Months Ended June 30, 2011
	(in millions, except per share amounts)
Total revenues	$	23,734
Income from continuing operations		1,539
Net income attributable to Prudential Financial, Inc.		1,515
Earnings per share-Financial Services Businesses
Basic:
Income from continuing operations attributable to Prudential Financial, Inc. per share of Common Stock	$	2.99
Net income attributable to Prudential Financial, Inc. per share of Common Stock		3.05
Diluted:
Income from continuing operations attributable to Prudential Financial, Inc. per share of Common Stock	$	2.96
Net income attributable to Prudential Financial, Inc. per share of Common Stock		3.02
Earnings per share-Closed Block Business
Basic and Diluted:
Income from continuing operations attributable to Prudential Financial, Inc. per share of Class B Stock	$	7.50
Net income attributable to Prudential Financial, Inc. per share of Class B Stock		7.50

Discontinued Operations

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2012		2011			2012		2011
	(in millions)
Real estate investments sold or held for sale	$	12	$	4		$	22	$	18
Global commodities business		0		3			0		18
Other		0		(1	)		0		0
Income from discontinued operations before income taxes		12		6			22		36
Income tax expense (benefit)		5		(10	)		8		6
Income from discontinued operations, net of taxes	$	7	$	16		$	14	$	30

22

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

On April 6, 2011, the Company entered into a stock and asset purchase agreement with Jefferies Group, Inc. (“Jefferies”), pursuant to which the Company agreed to sell to Jefferies all of the issued and outstanding shares of capital stock of the Company’s subsidiaries that conducted its global commodities business (the “Global Commodities Business”) and certain assets that were primarily used in connection with the Global Commodities Business. Subsidiaries included in the sale were Prudential Bache Commodities, LLC, Prudential Bache Securities, LLC, Bache Commodities Limited, and Bache Commodities (Hong Kong) Ltd. On July 1, 2011, the Company completed the sale and received cash proceeds of $422 million. Included in the table above for the three and six months ended June 30, 2011, is an after-tax loss of $1 million recorded in connection with the sale of these operations. This consisted of a pre-tax loss of $12 million and income tax benefit of $11 million.

Real estate investments sold or held for sale reflects the income or loss from discontinued real estate investments.

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

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

	June 30, 2012		December 31, 2011
	(in millions)
Total assets	$	71	$	464
Total liabilities	$	1	$	7

4. INVESTMENTS

Fixed Maturities and Equity Securities

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

	June 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Other-than- temporary Impairments in AOCI(3)
	(in millions)
Fixed maturities, available-for-sale
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	11,951	$	3,520	$	11	$	15,460	$	0
Obligations of U.S. states and their political subdivisions		2,895		530		1		3,424		0
Foreign government bonds		74,770		6,230		138		80,862		0
Corporate securities		122,796		11,159		2,100		131,855		(6	)
Asset-backed securities(1)		12,132		169		1,455		10,846		(1,121	)
Commercial mortgage-backed securities		11,780		703		60		12,423		11
Residential mortgage-backed securities(2)		8,847		500		52		9,295		(12	)
Total fixed maturities, available-for-sale	$	245,171	$	22,811	$	3,817	$	264,165	$	(1,128	)
Equity securities, available-for-sale	$	6,654	$	1,240	$	191	$	7,703

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

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

23

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

(3) Represents the amount of other-than-temporary impairment losses in “Accumulated other comprehensive income (loss),” or “AOCI,” which were not included in earnings. Amount excludes $359 million of net unrealized gains on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.

	June 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Other-than- temporary Impairments in AOCI(4)
	(in millions)
Fixed maturities, held-to-maturity
Foreign government bonds	$	1,213	$	131	$	0	$	1,344	$	0
Corporate securities(1)		1,134		28		76		1,086		0
Asset-backed securities(2)		1,138		72		0		1,210		0
Commercial mortgage-backed securities		376		55		0		431		0
Residential mortgage-backed securities(3)		910		60		0		970		0
Total fixed maturities, held-to-maturity(1)	$	4,771	$	346	$	76	$	5,041	$	0

(1) Excludes notes with amortized cost of $750 million (fair value, $785 million) which have been offset with the associated payables under a netting agreement.

(2) Includes credit tranched securities primarily collateralized by non-sub-prime mortgages.

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

(4) Represents the amount of other-than-temporary impairment losses in AOCI, which were not included in earnings. Amount excludes $1 million of net unrealized losses on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.

	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Other-than- temporary Impairments in AOCI(3)
	(in millions)
Fixed maturities, available-for-sale
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	12,249	$	2,873	$	18	$	15,104	$	0
Obligations of U.S. states and their political subdivisions		2,664		393		2		3,055		0
Foreign government bonds		72,442		4,754		209		76,987		0
Corporate securities		119,800		10,088		3,015		126,873		(22	)
Asset-backed securities(1)		12,346		172		1,825		10,693		(1,199	)
Commercial mortgage-backed securities		11,519		669		108		12,080		8
Residential mortgage-backed securities(2)		9,404		531		79		9,856		(13	)
Total fixed maturities, available-for-sale	$	240,424	$	19,480	$	5,256	$	254,648	$	(1,226	)
Equity securities, available-for-sale	$	6,922	$	1,061	$	448	$	7,535

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

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

(3) Represents the amount of other-than-temporary impairment losses in AOCI, which were not included in earnings. Amount excludes $223 million of net unrealized gains on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.

24

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Other-than- temporary Impairments in AOCI(4)
	(in millions)
Fixed maturities, held-to-maturity
Foreign government bonds	$	1,260	$	128	$	0	$	1,388	$	0
Corporate securities(1)		1,157		21		98		1,080		0
Asset-backed securities(2)		1,213		62		0		1,275		0
Commercial mortgage-backed securities		428		69		0		497		0
Residential mortgage-backed securities(3)		1,049		65		0		1,114		0
Total fixed maturities, held-to-maturity(1)	$	5,107	$	345	$	98	$	5,354	$	0

(1) Excludes notes with amortized cost of $500 million (fair value, $519 million) which have been offset with the associated payables under a netting agreement.

(2) Includes credit tranched securities primarily collateralized by non-sub-prime mortgages.

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

(4) Represents the amount of other-than-temporary impairment losses in AOCI, which were not included in earnings.

The amortized cost and fair value of fixed maturities by contractual maturities at June 30, 2012 are as follows:

	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Due in one year or less	$	14,398	$	14,569	$	0	$	0
Due after one year through five years		45,276		46,568		66		68
Due after five years through ten years		53,953		58,122		403		410
Due after ten years(1)		98,785		112,342		1,878		1,952
Asset-backed securities		12,132		10,846		1,138		1,210
Commercial mortgage-backed securities		11,780		12,423		376		431
Residential mortgage-backed securities		8,847		9,295		910		970
Total(1)	$	245,171	$	264,165	$	4,771	$	5,041

(1) Excludes notes with amortized cost of $750 million (fair value, $785 million) which have been offset with the associated payables under a netting agreement.

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

25

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
	(in millions)
Fixed maturities, available-for-sale
Proceeds from sales	$	3,795		$	7,788		$	9,458		$	10,929
Proceeds from maturities/repayments		5,296			5,327			10,285			9,258
Gross investment gains from sales, prepayments, and maturities		141			244			268			442
Gross investment losses from sales and maturities		(80	)		(112	)		(158	)		(181	)
Fixed maturities, held-to-maturity
Gross investment gains from prepayments	$	0		$	0		$	0		$	0
Proceeds from maturities/repayments		124			131			247			270
Equity securities, available-for-sale
Proceeds from sales	$	1,068		$	1,206		$	2,150		$	1,686
Gross investment gains from sales		92			212			214			309
Gross investment losses from sales		(75	)		(57	)		(161	)		(70	)
Fixed maturity and equity security impairments
Net writedowns for other-than-temporary impairment losses on fixed maturities recognized in earnings(1)	$	(93	)	$	(153	)	$	(205	)	$	(257	)
Writedowns for impairments on equity securities		(41	)		(37	)		(90	)		(59	)

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

As discussed in Note 2, a portion of certain other-than-temporary impairment (“OTTI”) losses on fixed maturity securities are recognized in “Other comprehensive income (loss)” (“OCI”). For these securities, the net amount recognized in earnings (“credit loss impairments”) represents the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. Any remaining difference between the fair value and amortized cost is recognized in OCI. The following tables set forth the amount of pre-tax credit loss impairments on fixed maturity securities held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized in OCI, and the corresponding changes in such amounts.

26

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Credit losses recognized in earnings on fixed maturity securities held by the Company for which a portion of the OTTI loss was recognized in OCI

	Three Months Ended June 30, 2012			Six Months Ended June 30, 2012
	(in millions)
Balance, beginning of period	$	1,465		$	1,475
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period		(67	)		(85	)
Credit loss impairments previously recognized on securities impaired to fair value during the period(1)		0			(59	)
Credit loss impairment recognized in the current period on securities not previously impaired		6			30
Additional credit loss impairments recognized in the current period on securities previously impaired		21			58
Increases due to the passage of time on previously recorded credit losses		16			29
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected		(8	)		(15	)
Balance, end of period	$	1,433		$	1,433

	Three Months Ended June 30, 2011			Six Months Ended June 30, 2011
	(in millions)
Balance, beginning of period	$	1,392		$	1,493
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period		(69	)		(237	)
Credit loss impairments previously recognized on securities impaired to fair value during the period(1)		(30	)		(31	)
Credit loss impairment recognized in the current period on securities not previously impaired		9			26
Additional credit loss impairments recognized in the current period on securities previously impaired		112			158
Increases due to the passage of time on previously recorded credit losses		13			27
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected		(8	)		(17	)
Balance, end of period	$	1,419		$	1,419

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

27

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Trading Account Assets Supporting Insurance Liabilities

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

	June 30, 2012				December 31, 2011
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Short-term investments and cash equivalents	$	270	$	270	$	951	$	951
Fixed maturities:
Corporate securities		11,260		12,086		10,297		11,036
Commercial mortgage-backed securities		1,987		2,110		2,157		2,247
Residential mortgage-backed securities(1)		1,825		1,891		1,786		1,844
Asset-backed securities(2)		1,308		1,204		1,504		1,367
Foreign government bonds		706		725		644		655
U.S. government authorities and agencies and obligations of U.S. states		412		459		440		470
Total fixed maturities		17,498		18,475		16,828		17,619
Equity securities		1,029		984		1,050		911
Total trading account assets supporting insurance liabilities	$	18,797	$	19,729	$	18,829	$	19,481

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

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

The net change in unrealized gains and losses from trading account assets supporting insurance liabilities still held at period end, recorded within “Asset management fees and other income” included $17 million and $152 million of gains during the three months ended June 30, 2012 and 2011, respectively, and $280 million and $108 million of gains during the six months ended June 30, 2012 and 2011, respectively.

28

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Other Trading Account Assets

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

	June 30, 2012				December 31, 2011
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Short-term investments and cash equivalents	$	1	$	1	$	4	$	3
Fixed maturities:
Asset-backed securities		356		316		698		652
Residential mortgage-backed securities		164		86		186		96
Corporate securities		797		799		557		555
Commercial mortgage-backed securities		134		97		155		110
U.S. government authorities and agencies and obligations of U.S. states		51		41		41		31
Foreign government bonds		49		49		47		47
Total fixed maturities		1,551		1,388		1,684		1,491
Other		3		5		15		19
Equity securities		1,583		1,581		1,682		1,621
Subtotal	$	3,138	$	2,975	$	3,385	$	3,134
Derivative instruments				2,661				2,411
Total other trading account assets	$	3,138	$	5,636	$	3,385	$	5,545

The net change in unrealized gains and losses from other trading account assets, excluding derivative instruments, still held at period end, recorded within “Asset management fees and other income” included $49 million of losses and $52 million of gains during the three months ended June 30, 2012 and 2011, respectively, and $88 million and $103 million of gains during the six months ended June 30, 2012 and 2011, respectively.

Concentrations of Financial Instruments

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

29

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

As of June 30, 2012 and December 31, 2011, the Company was not exposed to any concentrations of credit risk of any single issuer greater than 10% of the Company’s stockholders’ equity, other than securities of the U.S. government, certain U.S. government agencies and certain securities guaranteed by the U.S. government, as well as the securities disclosed below.

	June 30, 2012				December 31, 2011
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Investments in Japanese government and government agency securities:
Fixed maturities, available-for-sale	$	61,855	$	66,608	$	60,323	$	63,846
Fixed maturities, held-to-maturity		1,213		1,344		1,260		1,388
Trading account assets supporting insurance liabilities		537		552		471		483
Other trading account assets		40		41		40		40
Short-term investments		0		0		0		0
Cash equivalents		1,521		1,521		0		0
Total	$	65,166	$	70,066	$	62,094	$	65,757

	June 30, 2012				December 31, 2011
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Investments in South Korean government and government agency securities:
Fixed maturities, available-for-sale	$	5,078	$	5,786	$	4,678	$	5,240
Fixed maturities, held-to-maturity		0		0		0		0
Trading account assets supporting insurance liabilities		17		18		17		18
Other trading account assets		4		4		2		2
Short-term investments		0		0		0		0
Cash equivalents		0		0		0		0
Total	$	5,099	$	5,808	$	4,697	$	5,260

30

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Commercial Mortgage and Other Loans

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

	June 30, 2012						December 31, 2011
	Amount (in millions)			% of Total			Amount (in millions)			% of Total
Commercial and agricultural mortgage loans by property type:
Office	$	6,477			19.2	%	$	6,391			19.8	%
Retail		8,389			24.8			7,309			22.7
Apartments/Multi-Family		5,013			14.8			5,277			16.4
Industrial		7,302			21.6			7,049			21.8
Hospitality		1,576			4.7			1,486			4.6
Other		2,861			8.5			2,707			8.4
Total commercial mortgage loans		31,618			93.6			30,219			93.7
Agricultural property loans		2,160			6.4			2,046			6.3
Total commercial and agricultural mortgage loans by property type		33,778			100.0	%		32,265			100.0	%
Valuation allowance		(299	)					(313	)
Total net commercial and agricultural mortgage loans by property type		33,479						31,952
Other loans
Uncollateralized loans		1,927						2,323
Residential property loans		927						1,034
Other collateralized loans		157						176
Total other loans		3,011						3,533
Valuation allowance		(47	)					(54	)
Total net other loans		2,964						3,479
Total commercial mortgage and other loans(1)	$	36,443					$	35,431

(1) Includes loans held at fair value.

The commercial mortgage and agricultural property loans are geographically dispersed throughout the United States, Canada and Asia with the largest concentrations in California (26%), New York (11%) and Texas (8%) at June 30, 2012.

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

	June 30, 2012
	Commercial Mortgage Loans			Agricultural Property Loans		Residential Property Loans			Other Collateralized Loans			Uncollateralized Loans		Total
	(in millions)
Allowance for losses, beginning of year	$	294		$	19	$	16		$	18		$	20	$	367
Addition to / (release of) allowance of losses		1			1		(3	)		(3	)		0		(4	)
Charge-offs, net of recoveries		(15	)		0		0			(1	)		0		(16	)
Change in foreign exchange		(1	)		0		0			0			0		(1	)
Total Ending Balance	$	279		$	20	$	13		$	14		$	20	$	346

31

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

	December 31, 2011
	Commercial Mortgage Loans			Agricultural Property Loans		Residential Property Loans			Other Collateralized Loans			Uncollateralized Loans			Total
	(in millions)
Allowance for losses, beginning of year	$	497		$	8	$	17		$	20		$	33		$	575
Addition to / (release of) allowance of losses		(94	)		11		(2	)		13			1			(71	)
Charge-offs, net of recoveries		(109	)		0		0			(15	)		(15	)		(139	)
Change in foreign exchange		0			0		1			0			1			2
Total Ending Balance	$	294		$	19	$	16		$	18		$	20		$	367

The following tables set forth the allowance for credit losses and the recorded investment in commercial mortgage and other loans as of the dates indicated:

	June 30, 2012
	Commercial Mortgage Loans		Agricultural Property Loans		Residential Property Loans		Other Collateralized Loans		Uncollateralized Loans		Total
	(in millions)
Allowance for Credit Losses:
Ending balance: individually evaluated for impairment	$	109	$	12	$	0	$	14	$	0	$	135
Ending balance: collectively evaluated for impairment		170		8		13		0		20		211
Ending balance: loans acquired with deteriorated credit quality		0		0		0		0		0		0
Total ending balance	$	279	$	20	$	13	$	14	$	20	$	346
Recorded Investment:(1)
Ending balance gross of reserves: individually evaluated for impairment	$	1,534	$	49	$	0	$	100	$	8	$	1,691
Ending balance gross of reserves: collectively evaluated for impairment		30,084		2,111		927		57		1,919		35,098
Ending balance gross of reserves: loans acquired with deteriorated credit quality		0		0		0		0		0		0
Total ending balance, gross of reserves	$	31,618	$	2,160	$	927	$	157	$	1,927	$	36,789

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

32

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

	December 31, 2011
	Commercial Mortgage Loans		Agricultural Property Loans		Residential Property Loans		Other Collateralized Loans		Uncollateralized Loans		Total
	(in millions)
Allowance for Credit Losses:
Ending balance: individually evaluated for impairment	$	120	$	11	$	0	$	18	$	0	$	149
Ending balance: collectively evaluated for impairment		174		8		16		0		20		218
Ending balance: loans acquired with deteriorated credit quality		0		0		0		0		0		0
Total ending balance	$	294	$	19	$	16	$	18	$	20	$	367
Recorded Investment:(1)
Ending balance gross of reserves: individually evaluated for impairment	$	1,903	$	45	$	0	$	110	$	92	$	2,150
Ending balance gross of reserves: collectively evaluated for impairment		28,316		2,001		1,034		66		2,231		33,648
Ending balance gross of reserves: loans acquired with deteriorated credit quality		0		0		0		0		0		0
Total ending balance, gross of reserves	$	30,219	$	2,046	$	1,034	$	176	$	2,323	$	35,798

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

33

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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

	As of June 30, 2012
	Recorded Investment(1)		Unpaid Principal Balance		Related Allowance		Average Recorded Investment Before Allowance(2)		Interest Income Recognized(3)
	(in millions)
With no related allowance recorded:
Commercial mortgage loans:
Industrial	$	15	$	15	$	0	$	11	$	1
Retail		6		6		0		2		0
Office		1		83		0		6		0
Apartments/Multi-Family		0		0		0		7		0
Hospitality		11		74		0		25		3
Other		20		20		0		18		0
Total commercial mortgage loans		53		198		0		69		4
Agricultural property loans		0		0		0		0		0
Residential property loans		0		0		0		0		0
Other collateralized loans		0		0		0		0		0
Uncollateralized loans		5		13		0		6		0
Total with no related allowance	$	58	$	211	$	0	$	75	$	4
With an allowance recorded:
Commercial mortgage loans:
Industrial	$	23	$	23	$	19	$	35	$	0
Retail		73		73		15		69		2
Office		33		33		4		34		1
Apartments/Multi-Family		41		41		5		81		1
Hospitality		90		90		55		103		1
Other		78		78		11		100		2
Total commercial mortgage loans		338		338		109		422		7
Agricultural property loans		17		17		12		15		0
Residential property loans		0		0		0		0		0
Other collateralized loans		20		20		14		21		0
Uncollateralized loans		0		0		0		0		0
Total with related allowance	$	375	$	375	$	135	$	458	$	7
Total:
Commercial mortgage loans	$	391	$	536	$	109	$	491	$	11
Agricultural property loans		17		17		12		15		0
Residential property loans		0		0		0		0		0
Other collateralized loans		20		20		14		21		0
Uncollateralized loans		5		13		0		6		0
Total	$	433	$	586	$	135	$	533	$	11

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

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

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

34

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

	As of December 31, 2011
	Recorded Investment(1)		Unpaid Principal Balance		Related Allowance		Average Recorded Investment Before Allowance(2)		Interest Income Recognized(3)
	(in millions)
With no related allowance recorded:
Commercial mortgage loans:
Industrial	$	0	$	0	$	0	$	0	$	0
Retail		0		0		0		0		0
Office		2		84		0		1		0
Apartments/Multi-Family		0		0		0		0		0
Hospitality		0		0		0		23		0
Other		17		17		0		11		1
Total commercial mortgage loans		19		101		0		35		1
Agricultural property loans		0		0		0		1		0
Residential property loans		0		0		0		0		0
Other collateralized loans		0		0		0		0		0
Uncollateralized loans		6		13		0		6		0
Total with no related allowance	$	25	$	114	$	0	$	42	$	1
With an allowance recorded:
Commercial mortgage loans:
Industrial	$	54	$	54	$	19	$	36	$	1
Retail		89		89		11		114		3
Office		47		47		3		49		0
Apartments/Multi-Family		102		102		19		197		4
Hospitality		129		129		55		178		0
Other		92		92		13		100		2
Total commercial mortgage loans		513		513		120		674		10