Prudential 2012 Annual Report Download - page 28

• A $639 million unfavorable variance, before taxes, from adjustments to deferred policy acquisition and other costs and the reserves
for our long-term care products, reflecting updates to the estimated profitability of the business, driven by changes to our long-term
interest rate and morbidity assumptions, partially offset by expected future premium increases;
• Lower net pre-tax realized gains of $432 million, excluding the impact of the hedging program associated with certain variable
annuities as described above, primarily reflecting lower gains from changes in the market value of derivatives used to manage
duration in our general account investment portfolios as a result of changes in interest rates. Also contributing to the decline is the
comparative impact of changes in the market value of currency derivatives used to hedge portfolio assets due to foreign currency
exchange rate movements;
• The comparative impact of a $237 million pre-tax benefit in 2011 compared to a pre-tax benefit of $60 million in 2012 reflecting
partial sales of our indirect interest in China Pacific Insurance Group; and
• The absence of a $96 million pre-tax gain in 2011 reflecting the sale of our investment in Afore XXI, an operating joint venture in
our Asset Management segment.
Partially offsetting these decreases in income from continuing operations were the following items:
• A decrease in income tax expense of $1,237 million primarily reflecting the decrease in pre-tax income from continuing operations;
• A $303 million favorable variance, before taxes, from adjustments to deferred policy acquisition and other costs and the reserves for
guaranteed minimum death and income benefit features of our variable annuity products, reflecting updates to the estimated
profitability of the business, primarily resulting from market performance and the impact of an annual review and update of
assumptions; and
• The absence of a $93 million pre-tax charge recorded in 2011 for estimated payments arising from use of new Social Security
Master Death File matching criteria to identify deceased policy and contract holders.
In addition to the items above, premiums increased $41,154 million, primarily driven by higher premiums in our Retirement segment
reflecting two significant pension risk transfer transactions in 2012 as well as higher premiums in our International Insurance segment
reflecting sales growth in Gibraltar’s bank distribution channel. These increases are largely offset by corresponding increases in
policyholder benefits, including changes in reserves.
2011 to 2010 Annual Comparison. Income from continuing operations for the Financial Services Businesses increased $972 million
from 2010 to 2011. Results for 2011 compared to 2010 reflect the following:
• Higher net pre-tax gains of $717 million associated with our general account portfolio, excluding the impact of the hedging program
associated with certain variable annuities as discussed below, primarily reflecting higher gains from changes in the market value of
derivatives used to manage the investment portfolio duration resulting from declining interest rates in 2011, and higher gains from
changes in the market value of currency derivatives used to hedge portfolio assets due to foreign currency exchange rate
movements;
• Higher net pre-tax earnings of $686 million reflecting the impact of foreign currency exchange rate movements on certain non-yen
denominated assets and insurance liabilities within our Japanese insurance operations which are economically matched and the
offset is included in “Other Comprehensive Income (loss)”, driven by the strengthening of the yen during 2011;
• A $237 million pre-tax benefit in 2011 compared to a $66 million pre-tax benefit in 2010 on sales of portions of our indirect interest
in China Pacific Insurance (Group) Co., Ltd;
• A $96 million pre-tax gain on the sale of our investment in Afore XXI, an operating joint venture in our Asset Management
segment; and
• A net increase in premiums and policy charges and fee income, net of an increase in policyholders’ benefits, including changes in
reserves, reflecting business growth, as well as the impact of favorable currency fluctuations.
Partially offsetting these increases in income from continuing operations were the following items:
• A $588 million unfavorable variance, before taxes, reflecting the net impact from market value changes on our embedded
derivatives, including the impact of non-performance risk, and related hedge positions associated with certain variable annuities, the
impact on amortization of deferred policy acquisition and other costs and the impact of temporarily hedging to an amount that
differs from our hedge target definition;
• A $558 million unfavorable variance, before taxes, from adjustments to deferred policy acquisition and other costs and the reserves
for guaranteed minimum death and income benefit features of our variable annuity products, reflecting updates to the estimated
profitability of the business primarily resulting from market performance and the impact of an annual review and update of
assumptions;
• Higher income tax expense of $429 million primarily reflecting the increase in pre-tax income from continuing operations; and
• A $93 million pre-tax expense for estimated payments arising from use of new Social Security Master Death File matching criteria
to identify deceased policy and contract holders.
Results of Operations—Closed Block Business
For a discussion of the results of operations for the Closed Block Business, see “—Results of Operations of Closed Block Business”
below.
Segment Measures
Adjusted Operating Income. In managing our business, we analyze operating performance separately for our Financial Services
Businesses and our Closed Block Business. For the Financial Services Businesses, we analyze our segments’ operating performance using
“adjusted operating income.” Results of the Closed Block Business for all periods are evaluated and presented only in accordance with U.S.
GAAP. Adjusted operating income does not equate to “income (loss) from continuing operations before income taxes and equity in
26 Prudential Financial, Inc. 2012 Annual Report