Prudential 2011 Annual Report Download - page 63

2010 to 2009 Annual Comparison. The loss from Corporate and Other operations, on an adjusted operating income basis, increased
$144 million, from $779 million in 2009 to $923 million in 2010. Capital debt interest expense increased $59 million due to a greater level
of capital debt, which includes the issuance in September 2009 of $500 million of exchangeable surplus notes, and reflects the use of a
portion of the proceeds from prior sales of retail medium-term notes for general corporate purposes beginning in the second quarter of
2009, as well as the deployment of additional corporate borrowings for capital purposes. Investment income, net of interest expense,
excluding capital debt interest expense, decreased $9 million. Net investment income, net of interest expense, excluding capital debt
interest expense was also impacted by our repurchase of substantially all of our convertible senior notes during 2009. Also contributing to
the greater loss from corporate operations in 2010 compared to the prior year are greater net charges from other corporate activities,
primarily reflecting less favorable results from corporate hedging activities, increased corporate advertising expenses and other retained
corporate expenses.
Results from Corporate and Other operations pension income and employee benefits decreased $7 million. The decrease reflects
increases in employee benefits costs partially offset by an increase in income from our qualified pension plan. Income from our qualified
pension plan increased $13 million, from $308 million in 2009 to $321 million in 2010.
Capital Protection Framework
Corporate and Other operations includes the results of our Capital Protection Framework, which includes, among other things, the
capital hedge program. The capital hedge program broadly addresses the equity market exposure of the statutory capital of the Company as
a whole, under stress scenarios, as described under “—Liquidity and Capital Resources—Liquidity and Capital Resources of
Subsidiaries—Domestic Insurance Subsidiaries.” This hedge program resulted in charges for amortization of derivative costs of $21
million and $8 million for the years ended December 31, 2011 and 2010, respectively. The market value changes of these derivatives
included in “Realized investment gains (losses), net and related adjustments” was a gain of $9 million and a loss of $7 million for the years
ended December 31, 2011 and 2010, respectively.
In addition, we manage certain risks associated with our variable annuity products through our living benefit hedging program, which
is described under “—U.S. Retirement Solutions and Investment Management Division—Individual Annuities.” We evaluate hedge levels
versus our hedge target based on the overall capital considerations of the Company and prevailing capital market conditions. The GAAP/
capital markets valuation framework underlying our hedge target assumes that current interest rate levels remain for the full projection
period with no reversion to longer term averages. Due to the recent low interest rate environment, we decided to temporarily hedge to an
amount that differs from our hedge target definition to be consistent with our long-term economic view. Because this decision was based on
the overall capital considerations of the Company as a whole, the impact on results from temporarily hedging to an amount that differs
from our hedge target definition is reported within Corporate and Other operations. For the years ended December 31, 2011 and 2010,
“Realized investment gains (losses), net, and related adjustments” includes a loss of $1,662 million and a gain of $306 million,
respectively, resulting from our decision to temporarily hedge to a different target and the change in interest rates during the years. Through
our Capital Protection Framework, we have access to on-balance sheet capital and contingent sources of capital that is available to meet
capital needs arising from our decision to temporarily hedge to an amount that differs from our hedge target definition, including funding of
the after-tax realized investment losses incurred in 2011. For more information on the Company’s Capital Protection Framework, see
“—Liquidity and Capital Resources.”
We assess the composition of our hedging program on an ongoing basis, and we may change it from time to time based on our
evaluation of the Company’s risk position or other factors.
Results of Operations of Closed Block Business
We established the Closed Block Business effective as of the date of demutualization. The Closed Block Business includes our in
force traditional domestic participating life insurance and annuity products and assets that are used for the payment of benefits and
policyholder dividends on these policies, as well as other assets and equity and related liabilities that support these policies. We no longer
offer these traditional domestic participating policies. See “—Overview—Closed Block Business” for additional details.
Each year, the Board of Directors of Prudential Insurance determines the dividends payable on participating policies for the following
year based on the experience of the Closed Block, including investment income, net realized and unrealized investment gains, mortality
experience and other factors. Although Closed Block experience for dividend action decisions is based upon statutory results, at the time
the Closed Block was established, we developed, as required by U.S. GAAP, an actuarial calculation of the timing of the maximum future
earnings from the policies included in the Closed Block. If actual cumulative earnings in any given period are greater than the cumulative
earnings we expected, we will record this excess as a policyholder dividend obligation. We will subsequently pay this excess to Closed
Block policyholders as an additional dividend unless it is otherwise offset by future Closed Block performance that is less favorable than
we originally expected. The policyholder dividends we charge to expense within the Closed Block Business will include any change in our
policyholder dividend obligation that we recognize for the excess of actual cumulative earnings in any given period over the cumulative
earnings we expected in addition to the actual policyholder dividends declared by the Board of Directors of Prudential Insurance.
As of December 31, 2011, the excess of actual cumulative earnings over the expected cumulative earnings was $762 million, which
was recorded as a policyholder dividend obligation. Actual cumulative earnings, as required by U.S. GAAP, reflect the recognition of
realized investment gains and losses in the current period, as well as changes in assets and related liabilities that support the Closed Block
policies. Additionally, the accumulation of net unrealized investment gains that have arisen subsequent to the establishment of the Closed
Block have been reflected as a policyholder dividend obligation of $3,846 million at December 31, 2011, to be paid to Closed Block
policyholders unless offset by future experience, with an offsetting amount reported in “Accumulated other comprehensive income (loss).”
Prudential Financial, Inc. 2011 Annual Report 61