Prudential 2012 Annual Report Download - page 113

PRUDENTIAL FINANCIAL, INC.
Notes to 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 12),
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.
Demutualization
On December 18, 2001 (the “date of demutualization”), The Prudential Insurance Company of America (“Prudential Insurance”)
converted from a mutual life insurance company to a stock life insurance company and became an indirect, wholly-owned subsidiary of
Prudential Financial. At the time of demutualization Prudential Financial issued two classes of common stock, both of which remain
outstanding. The Common Stock, which is publicly traded, reflects the performance of the Financial Services Businesses, and the Class B
Stock, which was issued through a private placement, reflects the performance of the Closed Block Business.
Basis of Presentation
The 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 Consolidated Financial Statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (“U.S. GAAP”). Intercompany balances and transactions have
been eliminated.
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. (collectively the “Star and Edison Businesses”) use a November 30 fiscal year end for purposes of inclusion in the Company’s
Consolidated Financial Statements. Therefore, the Consolidated Financial Statements as of December 31, 2012 and 2011 include the assets
and liabilities of Gibraltar Life as of November 30, 2012 and 2011, respectively, and for the years ended December 31, 2012, 2011 and
2010, include Gibraltar Life’s results of operations for the twelve months ended November 30, 2012, 2011 and 2010, respectively.
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.
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.
Out of Period Adjustments
During 2012, the Company recorded out of period adjustments resulting in an aggregate net decrease of $170 million to “Income from
continuing operations before income taxes and equity in earnings of operating joint ventures” for the year ended December 31, 2012. Such
adjustments primarily resulted from two items previously disclosed in the second quarter and one item identified in the fourth quarter.
These adjustments were 1) a decline in the value of a real estate-related investment, where, 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; 2) 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 which should have been reflected in the third quarter
of 2011; and 3) an increase of $54 million in recorded liabilities for certain employee benefits based on a review of the consistency of
recognition of such liabilities across the Company which should have been recorded in prior years. Management has evaluated the
adjustments and concluded they were not material to any previously reported quarterly or annual financial statements or to the current year.
For additional information on the impact of these adjustments to our operating segments, see Note 22.
Reclassifications
Certain amounts in prior years have been reclassified to conform to the current year presentation.
Prudential Financial, Inc. 2012 Annual Report 111