Prudential 2011 Annual Report Download - page 64

Operating Results
Management does not consider adjusted operating income to assess the operating performance of the Closed Block Business.
Consequently, results of the Closed Block Business for all periods are presented only in accordance with U.S. GAAP. The following table
sets forth the Closed Block Business U.S. GAAP results for the periods indicated.
Year ended December 31,
2011 2010 2009
(in millions)
U.S. GAAP results:
Revenues .......................................................................................... $7,015 $7,086 $5,245
Benefits and expenses ................................................................................ 6,818 6,361 5,725
Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures ........ $ 197 $ 725 $ (480)
Income (Loss) from Continuing Operations Before Income Taxes and Equity in Earnings of Operating Joint Ventures
2011 to 2010 Annual Comparison. Income from continuing operations before income taxes and equity in earnings of operating joint
ventures decreased $528 million from $725 million in 2010 to $197 million in 2011. Results for 2011 include a $636 million policyholder
dividend obligation expense as actual cumulative earnings were higher than expected cumulative earnings. This expense was $510 million
higher than the policyholder dividend obligation expense of $126 million in 2010. As noted above, as of December 31, 2011, the excess of
actual cumulative earnings over the expected cumulative earnings was $762 million. If actual cumulative earnings fall below expected
cumulative earnings in future periods, earnings volatility in the Closed Block Business, which is primarily due to changes in investment
results, may not be offset by changes in the cumulative earnings policyholder dividend obligation. Results also included a $40 million
increase in reserves for estimated payments arising from use of new Social Security Master Death File matching criteria to identify
deceased policy and contract holders. See Note 23 to the Notes to Consolidated Financial Statements for further details regarding this
matter. Partially offsetting these items, was an increase of $51 million in net realized investment gains, from $794 million in 2010 to $845
million in 2011, primarily resulting from higher trading gains as part of a change in asset allocation of the portfolios and lower impairment
losses, partially offset by lower investment gains from the change in value of derivatives, including interest rate swaps and futures. For a
discussion of Closed Block Business realized investment gains (losses), net, see “—Realized Investment Gains and Losses and General
Account Investments—Realized Investment Gains and Losses.”
2010 to 2009 Annual Comparison. Income (loss) from continuing operations before income taxes and equity in earnings of operating
joint ventures increased $1,205 million, from a loss of $480 million in 2009 to income of $725 million in 2010. Results for 2010 include an
increase of $2,079 million in net realized investment gains (losses), from losses of $1,285 million in 2009 to gains of $794 million in 2010,
primarily due to lower impairments and credit losses, as well as a net increase in the market value of derivatives used in duration
management programs. For a discussion of Closed Block Business realized investment gains (losses), net, see “—Realized Investment
Gains and Losses and General Account Investments—Realized Investment Gains and Losses.” Net investment income, net of interest
expense, increased $67 million, primarily due to an increase in income on joint ventures and limited partnership investments accounted for
under the equity method, partially offset by lower portfolio yields. In addition, dividends paid and accrued to policyholders decreased
primarily due to a decrease in the 2010 dividend scale. The impact of these items contributed to the actual cumulative earnings which,
when compared to the expected cumulative earnings, resulted in an increase in the cumulative earnings policyholder dividend obligation
expense of $977 million, from 2009 compared to 2010. As of December 31, 2010, the excess of actual cumulative earnings over the
expected cumulative earnings was $126 million.
Revenues
2011 to 2010 Annual Comparison. Revenues, as shown in the table above under “—Operating Results,” decreased $71 million, from
$7,086 million in 2010 to $7,015 million in 2011, principally driven by a $89 million decrease in premiums, with a related decrease in
changes in reserves, primarily due to the expected in force decline as policies terminate and the $33 million decrease in net investment
income primarily due to lower portfolio yields. Partially offsetting these items was an increase of $51 million in net realized investment
gains, as discussed above.
2010 to 2009 Annual Comparison. Revenues, as shown in the table above under “—Operating Results,” increased $1,841 million,
from $5,245 million in 2009 to $7,086 million in 2010, principally driven by the $2,079 million increase in net realized investment gains
(losses) and an increase of $69 million in net investment income, as discussed above. Partially offsetting these items was a decline in
premiums, with a related decrease in changes in reserves, primarily due to a lower amount of dividends available for policyholders to
purchase additional insurance, as a result of the 2010 dividend scale reduction, and to a lesser extent, the expected in force decline as
policies terminate.
Benefits and Expenses
2011 to 2010 Annual Comparison. Benefits and expenses, as shown in the table above under “—Operating Results,” increased $457
million, from $6,361 million in 2010 to $6,818 million in 2011. This increase included a $500 million increase in dividends to
policyholders reflecting an increase in the policyholder dividend obligation expense of $510 million, from $126 million in 2010 to $636
million in 2011, partially offset by a decrease in dividends paid and accrued to policyholders of $10 million, primarily due to a decline in
policies in force. Partially offsetting this increase was a decrease in policyholders’ benefits, including changes in reserves of $30 million
62 Prudential Financial, Inc. 2011 Annual Report