Prudential 2011 Annual Report Download - page 275

PRUDENTIAL FINANCIAL, INC.
Notes to Supplemental Combining Financial Information
1. BASIS OF PRESENTATION
The supplemental combining financial information presents the consolidated financial position and results of operations for Prudential
Financial, Inc. and its subsidiaries (together, the “Company”), separately reporting the Financial Services Businesses and the Closed Block
Business. The Financial Services Businesses and the Closed Block Business are both fully integrated operations of the Company and are
not separate legal entities. The supplemental combining financial information presents the results of the Financial Services Businesses and
the Closed Block Business as if they were separate reporting entities and should be read in conjunction with the Consolidated Financial
Statements.
The Company has outstanding two classes of common stock. The Common Stock reflects the performance of the Financial Services
Businesses and the Class B Stock reflects the performance of the Closed Block Business.
The Closed Block Business was established on the date of demutualization and includes the assets and liabilities of the Closed Block
(see Note 12 to the Consolidated Financial Statements for a description of the Closed Block). It also includes assets held outside the Closed
Block necessary to meet insurance regulatory capital requirements related to products included within the Closed Block; deferred policy
acquisition costs related to the Closed Block policies; the principal amount of the IHC debt (as discussed below and in Note 14 to the
Consolidated Financial Statements) and related unamortized debt issuance costs, as well as an interest rate swap related to the IHC debt;
and certain other related assets and liabilities. The Financial Services Businesses consist of the U.S. Retirement Solutions and Investment
Management, U.S. Individual Life and Group Insurance, and International Insurance divisions and Corporate and Other operations.
2. ALLOCATION OF RESULTS
This supplemental combining financial information reflects the assets, liabilities, revenues and expenses directly attributable to the
Financial Services Businesses and the Closed Block Business, as well as allocations deemed reasonable by management in order to fairly
present the financial position and results of operations of the Financial Services Businesses and the Closed Block Business on a stand-alone
basis. While management considers the allocations utilized to be reasonable, management has the discretion to make operational and
financial decisions that may affect the allocation methods and resulting assets, liabilities, revenues and expenses of each business. In
addition, management has limited discretion over accounting policies and the appropriate allocation of earnings between the two
businesses. The Company is subject to agreements which provide that, in most instances, the Company may not change the allocation
methodology or accounting policies for the allocation of earnings between the Financial Services Businesses and Closed Block Business
without the prior consent of the Class B Stock holders or IHC debt bond insurer.
General corporate overhead not directly attributable to a specific business that has been incurred in connection with the generation of
the businesses’ revenues is generally allocated between the Financial Services Businesses and the Closed Block Business based on the
general and administrative expenses of each business as a percentage of the total general and administrative expenses for all businesses.
PHLLC has outstanding IHC debt, of which net proceeds of $1.66 billion were allocated to the Financial Services Businesses
concurrent with the demutualization on December 18, 2001. The IHC debt is serviced by the cash flows of the Closed Block Business, and
the results of the Closed Block Business reflect interest expense associated with the IHC debt.
Income taxes are allocated between the Financial Services Businesses and the Closed Block Business as if they were separate
companies based on the taxable income or losses and other tax characterizations of each business. If a business generates benefits, such as
net operating losses, it is entitled to record such tax benefits to the extent they are expected to be utilized on a consolidated basis.
Holders of Common Stock have no interest in a separate legal entity representing the Financial Services Businesses; holders of the
Class B Stock have no interest in a separate legal entity representing the Closed Block Business; and holders of each class of common
stock are subject to all of the risks associated with an investment in the Company.
In the event of a liquidation, dissolution or winding-up of the Company, holders of Common Stock and holders of Class B Stock
would be entitled to receive a proportionate share of the net assets of the Company that remain after paying all liabilities and the liquidation
preferences of any preferred stock.
The results of the Financial Services Businesses are subject to certain risks pertaining to the Closed Block. These include any
expenses and liabilities from litigation affecting the Closed Block policies as well as the consequences of certain potential adverse tax
determinations. In connection with the sale of the Class B Stock and IHC debt, the cost of indemnifying the investors with respect to
certain matters will be borne by the Financial Services Businesses.
Prudential Financial, Inc. 2011 Annual Report 273