XNYS:PRU Prudential Financial Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

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

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   

 


Table of Contents

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


Table of Contents

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

 

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Table of Contents

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

 

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Table of Contents

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

 

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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

 

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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

 

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PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements

 

1. BUSINESS AND BASIS OF PRESENTATION

 

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

 

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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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Table of Contents

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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Table of Contents

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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Table of Contents

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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PRUDENTIAL FINANCIAL, INC.

 

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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PRUDENTIAL FINANCIAL, INC.

 

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  

 

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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  

 

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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  

 

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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.

 

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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.

 

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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.

 

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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  
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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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.

 

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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


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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


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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


Table of Contents

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


Table of Contents

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


Table of Contents

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


Table of Contents

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


Table of Contents

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


Table of Contents

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.

 

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Table of Contents

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


Table of Contents

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.

 

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Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

     As of December 31, 2011  
     Recorded
Investment(1)