Prudential 2012 Annual Report Download - page 51

the Closed Block was established, we developed, as required by U.S. GAAP, an actuarial calculation of the timing of the maximum future
earnings from the policies included in the Closed Block. If actual cumulative earnings in any given period are greater than the cumulative
earnings we expected, we will record this excess as a policyholder dividend obligation. We will subsequently pay this excess to Closed
Block policyholders as an additional dividend unless it is otherwise offset by future Closed Block performance that is less favorable than
we originally expected. The policyholder dividends we charge to expense within the Closed Block Business will include any change in our
policyholder dividend obligation that we recognize for the excess of actual cumulative earnings in any given period over the cumulative
earnings we expected in addition to the actual policyholder dividends declared by the Board of Directors of Prudential Insurance.
As of December 31, 2012, the excess of actual cumulative earnings over the expected cumulative earnings was $885 million, which
was recorded as a policyholder dividend obligation. Actual cumulative earnings, as required by U.S. GAAP, reflect the recognition of
realized investment gains and losses in the current period, as well as changes in assets and related liabilities that support the Closed Block
policies. Additionally, the accumulation of net unrealized investment gains that have arisen subsequent to the establishment of the Closed
Block have been reflected as a policyholder dividend obligation of $5,478 million at December 31, 2012, to be paid to Closed Block
policyholders unless offset by future experience, with an offsetting amount reported in AOCI.
Operating Results
Management does not consider adjusted operating income to assess the operating performance of the Closed Block Business.
Consequently, results of the Closed Block Business for all periods are presented only in accordance with U.S. GAAP. The following table
sets forth the Closed Block Business U.S. GAAP results for the periods indicated.
Year ended December 31,
2012 2011 2010
(in millions)
U.S. GAAP results:
Revenues ....................................................................................... $6,257 $7,015 $7,086
Benefits and expenses ............................................................................. 6,193 6,801 6,340
Income from continuing operations before income taxes and equity in earnings of operating joint ventures .......... $ 64 $ 214 $ 746
Income from Continuing Operations Before Income Taxes and Equity in Earnings of Operating Joint Ventures
2012 to 2011 Annual Comparison. Income from continuing operations before income taxes and equity in earnings of operating joint
ventures decreased $150 million. Results for 2012 include $602 million of lower net realized investment gains, primarily due to lower
trading gains on fixed maturities and equity investments, as well as unfavorable changes in the value of derivatives. For a discussion of
Closed Block Business realized investment gains (losses), net, see “—Realized Investment Gains and Losses.” Also contributing to the
decline in results was a $61 million decrease in net investment income primarily reflecting the impact of lower reinvestment rates and
lower asset balances as the business runs off. As a result of the above and other variances, a $123 million policyholder dividend obligation
expense was recorded in 2012, compared to $636 million in 2011. As noted above, as of December 31, 2012, the excess of actual
cumulative earnings over the expected cumulative earnings was $885 million. If actual cumulative earnings fall below expected cumulative
earnings in future periods, earnings volatility in the Closed Block Business, which is primarily due to changes in investment results, may
not be offset by changes in the cumulative policyholder dividend obligation.
2011 to 2010 Annual Comparison. Income from continuing operations before income taxes and equity in earnings of operating joint
ventures decreased $532 million. Results for 2011 include a $40 million increase in reserves for estimated payments arising from use of
new Social Security Master Death File matching criteria to identify deceased policy and contract holders, as well as a decrease in net
investment income of $33 million primarily due to lower portfolio yields. These unfavorable items were partially offset by an increase of
$51 million in net realized investment gains primarily resulting from higher trading gains as part of a change in asset allocation of the
portfolios and lower impairment losses, partially offset by lower investment gains from the change in value of derivatives, including
interest rate swaps and futures. As a result of the above and other variances, a $636 million policyholder dividend obligation expense was
recorded in 2011, compared to $126 million in 2010.
Revenues, Benefits and Expenses
2012 to 2011 Annual Comparison. Revenues, as shown in the table above under “—Operating Results,” decreased $758 million
principally driven by the $602 million decrease in net realized investment gains, as discussed above. Premiums declined by $101 million,
with a related decrease in changes in reserves, primarily due to the expected in force decline as policies terminate. Also contributing to the
decline in revenues was a $61 million decrease in net investment income, as discussed above.
Benefits and expenses, as shown in the table above under “—Operating Results,” decreased $608 million primarily driven by a $550
million decline in dividends to policyholders including a $513 million decrease in the policyholder dividend obligation expense reflecting a
lower increase in cumulative earnings. In addition, policyholders’ benefits, including changes in reserves, decreased $37 million primarily
due to the expected in force decline as policies terminate, partially offset by an increase in reserves for estimated payments arising from use
of new Social Security Master Death File matching criteria to identify deceased policy and contract holders.
2011 to 2010 Annual Comparison. Revenues decreased $71 million principally driven by an $89 million decrease in premiums, with
a related decrease in changes in reserves, primarily due to the expected in force decline as policies terminate, as well as a $33 million
decrease in net investment income primarily due to lower portfolio yields, as discussed above. Partially offsetting these unfavorable items
was an increase of $51 million in net realized investment gains, as discussed above.
Benefits and expenses increased $461 million primarily driven by a $500 million increase in dividends to policyholders including a
$510 million increase in the policyholder dividend obligation expense reflecting an increase in cumulative earnings. This unfavorable item
was partially offset by a decrease in policyholders’ benefits, including changes in reserves of $30 million reflecting the expected in force
decline, partially offset by an increase in reserves for estimated payments arising from use of new Social Security Master Death File
matching criteria to identify deceased policy and contract holders, as discussed above.
Prudential Financial, Inc. 2012 Annual Report 49