Prudential 2012 Annual Report Download - page 29

earnings of operating joint ventures” or “net income” as determined in accordance with U.S. GAAP but is the measure of segment profit or
loss we use to evaluate segment performance and allocate resources, and consistent with authoritative guidance, is our measure of segment
performance. The adjustments to derive adjusted operating income are important to an understanding of our overall results of operations.
Adjusted operating income is not a substitute for income determined in accordance with U.S. GAAP, and our definition of adjusted
operating income may differ from that used by other companies. However, we believe that the presentation of adjusted operating income as
we measure it for management purposes enhances understanding of our results of operations by highlighting the results from ongoing
operations and the underlying profitability of the Financial Services Businesses.
See Note 22 to the Consolidated Financial Statements for further information on the presentation of segment results and our definition
of adjusted operating income.
Annualized New Business Premiums. In managing certain of our businesses, we analyze annualized new business premiums, which
do not correspond to revenues under U.S. GAAP. Annualized new business premiums measure the current sales performance of the
business, while revenues primarily reflect the renewal persistency of policies written in prior years and net investment income, in addition
to current sales. Annualized new business premiums include 10% of first year premiums or deposits from single pay products. No other
adjustments are made for limited pay contracts.
Assets Under Management. In managing our Asset Management business, we analyze assets under management, which do not
correspond to U.S. GAAP assets, because the principal source of revenues is fees based on assets under management. Assets under
management represents the fair market value or account value of assets which we manage directly in proprietary products, such as mutual
funds and variable annuities, in separate accounts, wrap-fee products and the general account, and assets invested in investment options
included in our products that are managed by third party sub-managers (i.e., the non-proprietary investment options in the Company’s
products).
Account Values. For our Individual Annuity and Retirement businesses, assets are reported at account value, which do not
correspond to U.S. GAAP assets. Net sales (redemptions) in our Individual Annuity business and net additions (withdrawals) in our
Retirement business do not correspond to revenues under U.S. GAAP, but are used as a relevant measure of business activity.
Results of Operations for Financial Services Businesses by Segment
U.S. Retirement Solutions and Investment Management Division
Individual Annuities
The Individual Annuities segment offers variable and fixed annuities that provide our customers with tax—deferred asset
accumulation together with a base death benefit and a suite of optional guaranteed death and living benefits. As the investment return on
the contractholder funds is generally attributed directly to the contractholder, we derive our revenue mainly from fee income generated on
variable annuity account values, investment income earned on fixed annuity account values, and certain other management fees. Our
expenses primarily consist of interest credited and other benefits to contractholders, amortization of deferred acquisition costs (“DAC”) and
other costs, expenses related to the selling and servicing of the various products we offer, costs of hedging our risk associated with these
products and the eventual payment of benefit guarantees and other general business expenses. These drivers of our business results are
generally included in adjusted operating income, with exceptions related to certain guarantees, as discussed below.
The U.S. GAAP accounting and our adjusted operating income treatment for our guarantees differs depending upon the specific feature.
The reserves for our guaranteed minimum death benefit (“GMDB”) and guaranteed minimum income benefit (“GMIB”) features are
calculated based on our best estimate of actuarial and capital markets return assumptions. The risks associated with these benefit features are
retained and results are included in adjusted operating income. In contrast, certain of our optional guaranteed living benefit features are
accounted for as embedded derivatives and reported at fair value. Under U.S. GAAP, the fair values of these benefit features are based on
assumptions a market participant would use in pricing these embedded derivative liabilities. We hedge or limit our exposure to certain risks
associated with these features through our living benefits hedging program and product design elements. Adjusted operating income, as
discussed below in “—Adjusted Operating Income” and “—Revenues, Benefits and Expenses” excludes amounts related to these changes in
the market value of the embedded derivatives and related hedge positions, and the related impact to amortization of DAC and other costs.
The items excluded from adjusted operating income are discussed below in “—Variable Annuity Living Benefits Hedging Program Results.”
Account Values
Account values are a significant driver of our operating results. Since most policy fees are determined by the level of separate account
assets, fee income varies according to the level of account values. Additionally, our fee income drives other items such as our pattern of
amortization of DAC and other costs. Account values are primarily driven by net flows from new business sales, surrenders and
withdrawals, and benefit payments, as well as the impact of market changes on account values. The following tables set forth account value
information for the periods indicated.
Year ended December 31,
2012 2011 2010
(in millions)
Total Individual Annuities(1):
Beginning total account value .................................................................... $113,535 $106,185 $ 83,971
Sales ....................................................................................... 20,032 20,293 21,754
Surrenders and withdrawals ..................................................................... (6,806) (7,232) (7,138)
Net sales ................................................................................ 13,226 13,061 14,616
Benefit payments ............................................................................. (1,450) (1,368) (1,248)
Net flows ................................................................................ 11,776 11,693 13,368
Change in market value, interest credited and other activity ............................................ 12,710 (2,104) 10,514
Policy charges ................................................................................ (2,679) (2,239) (1,668)
Ending total account value(2) ................................................................ $135,342 $113,535 $106,185
Prudential Financial, Inc. 2012 Annual Report 27