Prudential 2012 Annual Report Download - page 56

• prepayment premiums received on private fixed maturity securities
• net changes in the allowance for losses, certain restructurings and foreclosures on commercial mortgage and other loans
• fair value changes on commercial mortgage loans carried at fair value
• fair value changes on embedded derivatives and free-standing derivatives that do not qualify for hedge accounting treatment (except
those derivatives used in our capacity as a broker or dealer).
The level of other-than-temporary impairments generally reflects economic conditions and is expected to increase when economic
conditions worsen and to decrease when economic conditions improve. Historically, the causes of other-than-temporary impairments have
been specific to each individual issuer and have not directly resulted in impairments to other securities within the same industry or
geographic region. We may also realize additional credit and interest rate related losses through sales of investments pursuant to our credit
risk and portfolio management objectives. For a discussion of our policies regarding other-than-temporary impairments see “—General
Account Investments—Fixed Maturity Securities—Other-Than-Temporary Impairments of Fixed Maturity Securities” and “—General
Account Investments—Equity Securities—Other-Than-Temporary Impairments of Equity Securities” below.
We use interest rate and currency swaps and other derivatives to manage interest and currency exchange rate exposures arising from
mismatches between assets and liabilities, including duration mismatches. We use derivative contracts to mitigate the risk that unfavorable
changes in currency exchange rates will materially affect U.S. dollar equivalent earnings generated by certain of our non-U.S. businesses.
We also use equity-based and interest rate derivatives to hedge a portion of the risks embedded in some of our annuity products. Derivative
contracts also include forward purchases and sales of to-be-announced mortgage-backed securities primarily related to our dollar roll
program. Many of these derivative contracts do not qualify for hedge accounting, and consequently, we recognize the changes in fair value
of such contracts from period to period in current earnings, although we do not necessarily account for the related assets or liabilities the
same way. Accordingly, realized investment gains and losses from our derivative activities can contribute significantly to fluctuations in
net income. For a further discussion of optional living benefit guarantees and related hedge positions in our Individual Annuities segment,
see “—Results of Operations for Financial Services Businesses by Segment—U.S. Retirement Solutions and Investment Management
Division—Individual Annuities.”
Adjusted operating income generally excludes “Realized investment gains (losses), net,” subject to certain exceptions. These
exceptions primarily include realized investment gains or losses within certain of our businesses for which such gains or losses are a
principal source of earnings, gains or losses associated with terminating hedges of foreign currency earnings and current period yield
adjustments, and related charges and adjustments.Other-than-temporary impairments, interest rate related losses and credit related losses
on sales (other than those related to certain of our businesses which primarily originate investments for sale or syndication to unrelated
investors) are excluded from adjusted operating income.
The following tables set forth “Realized investment gains (losses), net,” by investment type for the Financial Services Businesses and
Closed Block Business, as well as related charges and adjustments associated with the Financial Services Businesses, for the periods
indicated. For additional details regarding adjusted operating income, which is our measure of performance for the segments of our
Financial Services Businesses, see Note 22 to the Consolidated Financial Statements.
Year Ended December 31,
2012 2011 2010
(in millions)
Realized investment gains (losses), net:
Financial Services Businesses ..................................................................... $(1,684) $ 1,986 $ 256
Closed Block Business .......................................................................... 243 845 794
Consolidated realized investment gains (losses), net ............................................... $(1,441) $ 2,831 $1,050
Financial Services Businesses:
Realized investment gains (losses), net:
Fixed maturity securities ..................................................................... $ (140) $ (125) $ (361)
Equity securities ........................................................................... (54) (120) 11
Commercial mortgage and other loans .......................................................... 92 89 35
Derivative instruments ...................................................................... (1,552) 2,095 601
Other .................................................................................... (30) 47 (30)
Total ........................................................................................ $(1,684) $ 1,986 $ 256
Related adjustments ........................................................................ (1,982) 517 (104)
Realized investment gains (losses), net, and related adjustments .......................................... (3,666) 2,503 152
Related charges ............................................................................ 857 (1,656) (179)
Realized investment gains (losses), net, and related charges and adjustments ................................ $(2,809) $ 847 $ (27)
Closed Block Business:
Realized investment gains (losses), net:
Fixed maturity securities ..................................................................... $ 103 $ 355 $ 117
Equity securities ........................................................................... 78 265 174
Commercial mortgage and other loans .......................................................... 2 33 18
Derivative instruments ...................................................................... 52 199 489
Other .................................................................................... 8 (7) (4)
Total ........................................................................................ $ 243 $ 845 $ 794
2012 to 2011 Annual Comparison
Financial Services Businesses
The Financial Services Businesses’ net realized investment losses in 2012 were $1,684 million, compared to net realized investment
gains of $1,986 million in 2011.
54 Prudential Financial, Inc. 2012 Annual Report