Prudential 2012 Annual Report Download - page 27

Adoption of New Accounting Pronouncements
Effective January 1, 2012, the Company adopted, retrospectively, new authoritative guidance to address which costs relating to the
acquisition of new or renewal insurance contracts qualify for deferral. All prior period financial information has been revised to reflect the
retrospective adoption of the amended guidance. The impact of the retrospective adoption of this guidance on previously reported
December 31, 2011 balances was a reduction in deferred policy acquisition costs by $4.1 billion for the Financial Services Businesses and
by $0.2 billion for the Closed Block Business, an increase in policy reserves for certain limited pay contracts by $0.2 billion for the
Financial Services Businesses, and a reduction in total equity by $2.8 billion for the Financial Services Businesses and $0.2 billion for the
Closed Block Business. The impact of the retrospective adoption of this guidance on previously reported income from continuing
operations before income taxes for the years ended December 31, 2011 and 2010 was a decrease of $262 million and $282 million for the
Financial Services Businesses, respectively, and an increase of $17 million and $21 million for the Closed Block Business, respectively.
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 will have no impact on the Company’s cash flows.
See Note 2 to the Consolidated Financial Statements for a complete discussion of newly issued accounting pronouncements, including
further discussion of the new authoritative guidance addressing which costs relating to the acquisition of new or renewal insurance
contracts qualify for deferral, as well as our retrospective adoption of a change in method of applying an accounting principle for the
Company’s pension plans.
Consolidated Results of Operations
The following table summarizes net income for the Financial Services Businesses and the Closed Block Business for the periods
presented.
Year ended December 31,
2012 2011 2010
(in millions)
Financial Services Businesses:
Revenues ....................................................................................... $78,558 $42,015 $31,131
Benefits and expenses ............................................................................. 77,946 37,320 27,737
Income from continuing operations before income taxes and equity in earnings of operating joint ventures for Financial
Services Businesses ................................................................................ 612 4,695 3,394
Income tax expense ........................................................................... 183 1,420 991
Income from continuing operations before equity in earnings of operating joint ventures for Financial Services
Businesses ........................................................................................ 429 3,275 2,403
Equity in earnings of operating joint ventures, net of taxes ............................................ 60 182 82
Income from continuing operations for Financial Services Businesses ........................................... 489 3,457 2,485
Income from discontinued operations, net of taxes ...................................................... 17 35 32
Net income—Financial Services Businesses ............................................................... 506 3,492 2,517
Less: Income attributable to noncontrolling interests ......................................................... 78 72 11
Net income of Financial Services Businesses attributable to Prudential Financial, Inc. .............................. $ 428 $ 3,420 $ 2,506
Closed Block Business:
Revenues ....................................................................................... $ 6,257 $ 7,015 $ 7,086
Benefits and expenses ............................................................................. 6,193 6,801 6,340
Income from continuing operations before income taxes for Closed Block Business ................................ 64 214 746
Income tax expense ................................................................................... 21 68 252
Income from continuing operations for Closed Block Business ................................................. 43 146 494
Income (loss) from discontinued operations, net of taxes ...................................................... (2) 0 1
Net income—Closed Block Business ..................................................................... 41 146 495
Less: Income attributable to noncontrolling interests .........................................................000
Net income of Closed Block Business attributable to Prudential Financial, Inc. .................................... $ 41 $ 146 $ 495
Consolidated:
Net income attributable to Prudential Financial, Inc. ......................................................... $ 469 $ 3,566 $ 3,001
Results of Operations—Financial Services Businesses
2012 to 2011 Annual Comparison. Income from continuing operations for the Financial Services Businesses decreased $2,968
million from 2011 to 2012. Results for 2012 compared to 2011 reflect the following:
• Lower pre-tax earnings of $2,377 million resulting from the impact of foreign currency exchange rate movements on certain non-
yen denominated assets and liabilities within our Japanese insurance operations which are economically matched and offset in
AOCI, driven by the weakening of the Japanese yen (see “—Results of Operations for Financial Services Businesses by Segment—
International Insurance Division—Impact of foreign currency exchange rate movements on earnings—U.S. GAAP earnings impact
of products denominated in non-local currencies” for additional information);
• A $666 million unfavorable variance, before income taxes, reflecting the net impact from market value changes on our embedded
derivatives and related hedge positions associated with certain variable annuities, primarily driven by the impact of non-
performance risk, partially offset by the impact of amortization of deferred policy acquisition and other costs as well as market
value changes associated with certain derivatives under our capital hedge program (see “—Results of Operations for Financial
Services Businesses by Segment—U.S. Retirement Solutions and Investment Management Division—Individual Annuities—
Variable Annuity Living Benefits Hedging Program Results” for additional information);
Prudential Financial, Inc. 2012 Annual Report 25