Prudential 2012 Annual Report Download - page 53

Long-Term Care. Results for the year ended December 31, 2012, as presented in the table above, include a $639 million net charge,
before taxes, from an increase in reserves for our long-term care products and adjustments to deferred policy acquisition and other costs,
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. We have factored into our assumptions our best estimate of the timing and amount of
anticipated and yet-to-be-filed premium increases which will require state approval. Our actual experience obtaining pricing increases
could be materially different than what we have assumed, resulting in further policy liability increases which could be material.
Real Estate and Relocation Services. Results for the year ended December 31, 2011 include a pre-tax gain of $49 million reflecting
the sale of our real estate brokerage franchise and relocation services business. We retained ownership of a financing subsidiary with debt
and equity investments in a limited number of real estate brokerage franchises. The results of these operations are reflected in the table
above. For additional information on the sale of our real estate brokerage franchise and relocation services business, see Note 3 to the
Consolidated Financial Statements.
Experience-Rated Contractholder Liabilities,
Trading Account Assets Supporting Insurance Liabilities and Other Related Investments
Certain products included in the Retirement and International Insurance segments are experience-rated in that investment results
associated with these products are expected to ultimately accrue to contractholders. The majority of investments supporting these
experience-rated products are classified as trading and are carried at fair value. These trading investments are reflected on the statements of
financial position as “Trading account assets supporting insurance liabilities, at fair value” (“TAASIL”). Realized and unrealized gains and
losses for these investments are reported in “Asset management fees and other income.” Interest and dividend income for these investments
is reported in “Net investment income.” To a lesser extent, these experience-rated products are also supported by derivatives and
commercial mortgage and other loans. The derivatives that support these experience-rated products are reflected on the statement of
financial position as “Other long-term investments” and are carried at fair value, and the realized and unrealized gains and losses are
reported in “Realized investment gains (losses), net.” The commercial mortgage and other loans that support these experience-rated
products are carried at unpaid principal, net of unamortized discounts and an allowance for losses, and are reflected on the statements of
financial position as “Commercial mortgage and other loans.” Gains and losses on sales and changes in the valuation allowance for
commercial mortgage and other loans are reported in “Realized investment gains (losses), net.”
Our Retirement segment has two types of experience-rated products that are supported by TAASIL and other related investments.
Fully participating products are those for which the entire return on underlying investments is passed back to the policyholders through a
corresponding adjustment to the related liability. The adjustment to the liability is based on changes in the fair value of all of the related
assets, including commercial mortgage and other loans, which are carried at amortized cost, less any valuation allowance. Partially
participating products are those for which only a portion of the return on underlying investments is passed back to the policyholders over
time through changes to the contractual crediting rates. The crediting rates are typically reset semiannually, often subject to a minimum
crediting rate, and returns are required to be passed back within ten years.
In our International Insurance segment, the experience-rated products are fully participating. As a result, the entire return on the
underlying investments is passed back to policyholders through a corresponding adjustment to the related liability.
Adjusted operating income excludes net investment gains and losses on TAASIL, related derivatives and commercial mortgage and
other loans. This is consistent with the exclusion of realized investment gains and losses with respect to other investments supporting
insurance liabilities managed on a consistent basis. In addition, to be consistent with the historical treatment of charges related to realized
investment gains and losses on investments, adjusted operating income also excludes the change in contractholder liabilities due to asset
value changes in the pool of investments (including changes in the fair value of commercial mortgage and other loans) supporting these
experience-rated contracts, which are reflected in “Interest credited to policyholders’ account balances.” The result of this approach is that
adjusted operating income for these products includes net fee revenue and interest spread we earn on these experience-rated contracts, and
excludes changes in fair value of the pool of investments, both realized and unrealized, that we expect will ultimately accrue to the
contractholders.
The following tables set forth the impact of these items on results that are excluded from adjusted operating income for the periods
indicated:
Year ended December 31,
2012 2011 2010
(in millions)
Retirement Segment:
Investment gains (losses) on:
Trading account assets supporting insurance liabilities, net ............................................ $406 $383 $468
Derivatives ................................................................................. (86) (160) 50
Commercial mortgages and other loans ........................................................... 5 9 6
Change in experience-rated contractholder liabilities due to asset value changes(1)(2) .............................. (336) (283) (598)
Net gains (losses) ................................................................................ $ (11) $ (51) $ (74)
International Insurance Segment:
Investment gains (losses) on trading account assets supporting insurance liabilities, net ............................. $204 $(160) $ 33
Change in experience-rated contractholder liabilities due to asset value changes ................................... (204) 160 (33)
Net gains (losses) ................................................................................ $ 0 $ 0 $ 0
Total:
Investment gains (losses) on:
Trading account assets supporting insurance liabilities, net ........................................ $610 $223 $501
Derivatives ............................................................................. (86) (160) 50
Commercial mortgages and other loans ....................................................... 5 9 6
Change in experience-rated contractholder liabilities due to asset value changes(1)(2) .......................... (540) (123) (631)
Net gains (losses) ............................................................................ $ (11) $ (51) $ (74)
Prudential Financial, Inc. 2012 Annual Report 51