Prudential 2012 Annual Report Download - page 54

(1) Decreases to contractholder liabilities due to asset value changes are limited by certain floors and therefore do not reflect cumulative declinesin
recorded asset values of $3 million, $7 million and $9 million as of December 31, 2012, 2011 and 2010, respectively. We have recovered and expect to
recover in future periods these declines in recorded asset values through subsequent increases in recorded asset values or reductions in crediting rates on
contractholder liabilities.
(2) Included in the amounts above related to the change in the liability to contractholders as a result of commercial mortgage and other loans are increases
of $18 million, $55 million and $108 million for the years ended December 31, 2012, 2011 and 2010, respectively. As prescribed by U.S. GAAP,
changes in the fair value of commercial mortgage and other loans held for investment in our general account, other than when associated with
impairments, are not recognized in income in the current period, while the impact of these changes in fair value are reflected as a change in the liability
to fully participating contractholders in the current period.
As shown in the table above, the net impacts for the Retirement segment of changes in experience-rated contractholder liabilities and
investment gains and losses on trading account assets supporting insurance liabilities and other related investments were net losses of $11
million, $51 million and $74 million for the years ended December 31, 2012, 2011 and 2010, respectively. These impacts primarily reflect
timing differences between the recognition of the mark-to-market adjustments and the recognition of the recovery of these adjustments in
future periods through subsequent increases in asset values or reductions in crediting rates on contractholder liabilities for partially
participating products. These impacts also reflect the difference between the fair value of the underlying commercial mortgage and other
loans and the amortized cost, less any valuation allowance, of these loans, as described above.
Valuation of Assets and Liabilities
Fair Value of Assets and Liabilities
The authoritative guidance related to fair value measurement establishes a framework that includes a three-level hierarchy used to
classify the inputs used in measuring fair value. The level in the hierarchy within which the fair value falls is determined based on the
lowest level input that is significant to the measurement. The fair values of assets and liabilities classified as Level 3 include at least one or
more significant unobservable input in the measurement. See Note 20 to the Consolidated Financial Statements for an additional
description of the valuation hierarchy levels.
The tables below present the balances of assets and liabilities measured at fair value on a recurring basis, as of the periods indicated,
split between the Financial Services Businesses and Closed Block Business, and the portion of such assets and liabilities that are classified
in Level 3 of the valuation hierarchy. See Note 20 to the Consolidated Financial Statements for the balances of assets and liabilities
measured at fair value on a recurring basis by hierarchy level presented on a consolidated basis.
As of December 31, 2012 As of December 31, 2011
Financial Services
Businesses
Closed Block
Business
Financial Services
Businesses
Closed Block
Business
Total at
Fair Value
Total
Level 3(1)
Total at
Fair Value
Total
Level 3(1)
Total at
Fair Value
Total
Level 3(1)
Total at
Fair Value
Total
Level 3(1)
(in millions)
Fixed maturities, available-for-sale ................. $254,917 $ 4,261 $46,419 $1,207 $208,132 $ 3,098 $46,516 $1,132
Trading account assets:
Fixed maturities ............................ 20,605 565 139 10 18,921 612 189 0
Equity securities ............................ 2,341 987 136 111 2,404 1,173 128 123
All other(2) ............................... 3,697 25 0 0 3,384 93 0 0
Subtotal .......................... 26,643 1,577 275 121 24,709 1,878 317 123
Equity securities, available-for-sale ................. 5,052 321 3,225 9 4,413 333 3,122 27
Commercial mortgage and other loans .............. 162 48 0 0 600 86 0 0
Other long-term investments ...................... 1,478 1,053 (95) 0 1,107 1,110 185 0
Short-term investments .......................... 5,130 0 1,260 0 8,232 0 528 0
Cash equivalents ............................... 13,063 0 537 0 8,392 0 1,037 0
Other assets ................................... 98 8 97 0 (13) 9 111 0
Subtotal excluding separate account assets ....... 306,543 7,268 51,718 1,337 255,572 6,514 51,816 1,282
Separate account assets .......................... 253,254 21,132 0 0 218,380 19,358 0 0
Total assets ............................ $559,797 $28,400 $51,718 $1,337 $473,952 $25,872 $51,816 $1,282
Future policy benefits ........................... $ 3,348 $ 3,348 $ 0 $ 0 $ 2,886 $ 2,886 $ 0 $ 0
Other liabilities and notes of consolidated VIEs(2) ..... 1,496 1,406 0 0 444 285 0 0
Total liabilities ......................... $ 4,844 $ 4,754 $ 0 $ 0 $ 3,330 $ 3,171 $ 0 $ 0
(1) The amount of Level 3 assets taken as a percentage of total assets measured at fair value on a recurring basis totaled 5.1% and 5.5% as of December 31,
2012 and 2011, respectively, for the Financial Services Businesses, and 2.6% and 2.5% as of December 31, 2012 and 2011, respectively, for the Closed
Block Business. The amount of Level 3 liabilities was immaterial to our balance sheet.
(2) “All other” and “Other liabilities” included within “Other liabilities and notes of consolidated VIEs” primarily include derivatives. The amounts
classified as Level 3 for the Financial Services Businesses exclude the impact of netting.
The determination of fair value, which for certain assets and liabilities is dependent on the application of estimates and assumptions,
can have a significant impact on our results of operations and may require the application of a greater degree of judgment depending on
market conditions, as the ability to value assets and liabilities can be significantly impacted by a decrease in market activity or a lack of
transactions executed in an orderly manner. The following sections provide information regarding certain assets and liabilities of our
Financial Services Businesses and our Closed Block Business which are valued using Level 3 inputs and could have a significant impact on
our results of operations.
Fixed Maturity and Equity Securities
Fixed maturity securities included in Level 3 in our fair value hierarchy are generally priced based on internally-developed valuations
or indicative broker quotes. For certain private fixed maturity and equity securities, the internally-developed valuation model uses
significant unobservable inputs and, accordingly, such securities are included in Level 3 in our fair value hierarchy. Level 3 fixed maturity
52 Prudential Financial, Inc. 2012 Annual Report