Prudential 2012 Annual Report Download - page 50

arising from the use of new Social Security Master Death File matching criteria to identify deceased policy and contract holders and the
absence of a $20 million expense accrued in 2011 related to a voluntary contribution to be made to the insurance industry insolvency fund,
related to Executive Life Insurance.
Results from Corporate and Other operations pension income and employee benefits decreased $48 million primarily due to an
increase in recorded liabilities for certain employee benefits and higher postretirement costs. Income from our qualified pension plan
partially offset these unfavorable items reflecting better than expected growth in plan assets partially offset by a decrease in the expected
rate of return on plan assets from 7.00% in 2011 to 6.75% in 2012.
For purposes of calculating pension income from our own qualified pension plan for the year ended December 31, 2013, we will
decrease the discount rate to 4.05% from 4.85% in 2012. The expected rate of return on plan assets will decrease to 6.25% in 2013 from
6.75% in 2012, and the assumed rate of increase in compensation will remain unchanged at 4.5%. We determined our expected rate of
return on plan assets based upon a building block approach that considers inflation, real return, term premium, credit spreads, equity risk
premium and capital appreciation as well as expenses, expected asset manager performance and the effect of rebalancing for the equity,
debt and real estate asset mix applied on a weighted average basis to our pension asset portfolio. Giving effect to the foregoing assumptions
and other factors, we expect, on a consolidated basis, income from our own qualified pension plan will continue to contribute to adjusted
operating income in 2013, but at a level of about $15 million to $25 million lower than in 2012. Other postretirement benefit expenses will
decrease in a range of $5 million to $15 million. The decrease is driven primarily by favorable demographic updates and claims experience,
offset by a decrease in the discount rate to 3.85% from 4.60%. In 2013, pension and other postretirement benefit service costs related to
active employees will continue to be allocated to our business segments.
2011 to 2010 Annual Comparison. The loss from Corporate and Other operations, on an adjusted operating income basis, increased
$174 million. Corporate and Other operations recorded a $93 million increase in reserves for estimated payments arising from use of new
Social Security Master Death file criteria to identify deceased policy and contract holders. Corporate and Other operations also recorded a
$20 million charge related to a voluntary contribution to be made to an insurance industry insolvency fund, related to Executive Life
Insurance Company of New York. Greater net charges from other corporate activities, primarily reflecting increased retained corporate
expenses, including corporate advertising, contributed to the increased loss. The increase in net charges from other corporate activities was
partially offset by more favorable results from corporate foreign currency hedging activities and reduced charges compared to the prior
period for certain retained obligations relating to pre-demutualization policyholders to whom we had previously agreed to provide
insurance for reduced or no premium in accordance with contractual settlements related to prior individual life insurance sales practices
remediation. Capital debt interest expense increased $67 million due to a greater level of capital debt, which includes the issuance in
November 2010 of $1 billion of debt for the acquisition of the Star and Edison Businesses. Investment income, net of interest expense,
excluding capital debt interest expense, increased $37 million due to higher income in our corporate investment portfolio including higher
income on equity method investments.
Results from Corporate and Other operations pension income and employee benefits decreased $5 million primarily due to a decrease
in income from our qualified pension plan resulting from a decrease in the expected rate of return on plan assets from 7.50% in 2010 to
7.00% in 2011, partially offset by better than expected growth in plan assets.
Capital Protection Framework
Corporate and Other operations includes the results of our Capital Protection Framework, which includes, among other initiatives, the
capital hedge program. The capital hedge program broadly addresses the equity market exposure of the statutory capital of the Company as
a whole, under stress scenarios, as described under “—Liquidity and Capital Resources—Capital—Capital Protection Framework.” This
hedge program resulted in charges for amortization of derivative costs of $40 million, $21 million and $8 million for the years ended
December 31, 2012, 2011 and 2010, respectively. The impact of the market value changes of these derivatives included in “Realized
investment gains (losses), net and related adjustments” was a loss of $15 million, a gain of $9 million and a loss of $7 million for the years
ended December 31, 2012, 2011 and 2010, respectively.
In addition to hedging equity market exposure, we may choose to manage the interest rate risk associated with various operations of
the Financial Services Businesses by holding capital against a portion of the interest rate exposure rather than fully hedging the risk.
“Realized investment gains (losses), net and related adjustments” includes net gains of $184 million, net losses of $1,662 million and net
gains of $306 million for the years ended December 31, 2012, 2011 and 2010 respectively, resulting from our decision to utilize this
strategy to manage a portion of our interest rate risk. The $1,662 million net loss in 2011 was driven by significant declines in risk-free
interest rates during the year. The capital consequences associated with our decision to hold capital against a portion of our interest rate
exposure have been factored into our Capital Protection Framework.
In addition, we manage certain of the risks associated with our variable annuity products through our living benefit hedging program,
which is described under “—U.S. Retirement Solutions and Investment Management Division—Individual Annuities.” Through our
Capital Protection Framework, we maintain access to on-balance sheet capital and contingent sources of capital that are available to meet
capital needs that may arise related to this hedging program.
For more information on our Capital Protection Framework, see “—Liquidity and Capital Resources.”
Results of Operations of Closed Block Business
We established the Closed Block Business effective as of the date of demutualization. The Closed Block Business includes our in
force traditional domestic participating life insurance and annuity products and assets that are used for the payment of benefits and
policyholder dividends on these policies, as well as other assets and equity and related liabilities that support these policies. We no longer
offer these traditional domestic participating policies. See Note 12 to the Consolidated Financial Statements and “—Closed Block
Business” for additional details.
Each year, the Board of Directors of Prudential Insurance determines the dividends payable on participating policies for the following
year based on the experience of the Closed Block, including investment income, net realized and unrealized investment gains, mortality
experience and other factors. Although Closed Block experience for dividend action decisions is based upon statutory results, at the time
48 Prudential Financial, Inc. 2012 Annual Report