Prudential 2012 Annual Report Download - page 58

from adjusted operating income. Results for 2012 include net negative related adjustments of $1,982 million, compared to net positive
related adjustments of $517 million for 2011. This unfavorable variance is primarily driven by the comparative impact of foreign currency
exchange rate movements on certain non-yen denominated assets and liabilities within our Japanese insurance operations, for which the
foreign currency exposure is economically matched and offset in AOCI. For additional information, see “—Results of Operations for
Financial Services Businesses by Segment—International Insurance Division—Impact of foreign currency exchange rate movements on
earnings—U.S. GAAP earnings impact of products denominated in non-local currencies.”
Charges that relate to “Realized investment gains (losses), net” are also excluded from adjusted operating income. Results for 2012
include net positive related charges of $857 million, primarily driven by that portion of amortization of deferred policy acquisition and
other costs relating to net losses on embedded derivatives and related hedge positions associated with certain variable annuity contracts.
Results for 2011 include net negative related charges of $1,656 million, primarily driven by that portion of amortization of deferred policy
acquisition and other costs relating to net gains on embedded derivatives and related hedge positions associated with certain variable
annuity contracts. For additional information, see Note 22 to the Consolidated Financial Statements.
During 2012, we recorded other-than-temporary impairments of $441 million in earnings, compared to other-than-temporary
impairments of $558 million recorded in earnings in 2011. The following tables set forth, for the periods indicated, the composition of
other-than-temporary impairments recorded in earnings attributable to the Financial Services Businesses by asset type, and for fixed
maturity securities, by reason.
Year Ended December 31,
2012 2011
(in millions)
Other-than-temporary impairments recorded in earnings—Financial Services Businesses(1)
Public fixed maturity securities ....................................................................... $219 $314
Private fixed maturity securities ...................................................................... 44 117
Total fixed maturity securities ................................................................... 263 431
Equity securities .................................................................................. 104 94
Other invested assets(2) ............................................................................ 74 33
Total ....................................................................................... $441 $558
(1) Excludes the portion of other-than-temporary impairments recorded in “Other comprehensive income (loss),” representing any difference between the
fair value of the impaired debt security and the net present value of its projected future cash flows at the time of impairment.
(2) Includes other-than-temporary impairments relating to investments in joint ventures and partnerships and real estate investments.
Year Ended December 31, 2012
Asset-Backed Securities
Collateralized By
Sub-Prime Mortgages
All Other Fixed
Maturity
Securities
Total Fixed
Maturity
Securities
(in millions)
Other-than-temporary impairments on fixed maturity securities recorded in earnings—
Financial Services Businesses(1)
Due to credit events or adverse conditions of the respective issuer(2) ................ $ 54 $ 54 $108
Due to other accounting guidelines(3) ........................................ 2 153 155
Total .............................................................. $ 56 $207 $263
Year Ended December 31, 2011
Asset-Backed Securities
Collateralized By
Sub-Prime Mortgages
All Other Fixed
Maturity
Securities
Total Fixed
Maturity
Securities
(in millions)
Other-than-temporary impairments on fixed maturity securities recorded in earnings—
Financial Services Businesses(1)
Due to credit events or adverse conditions of the respective issuer(2) ................ $106 $117 $223
Due to other accounting guidelines(3) ........................................ 12 196 208
Total .............................................................. $118 $313 $431
(1) Excludes the portion of other-than-temporary impairment recorded in “Other comprehensive income (loss),” representing any difference between the
fair value of the impaired debt security and the net present value of its projected future cash flows at the time of impairment.
(2) Represents circumstances where we believe credit events or other adverse conditions of the respective issuers have caused, or will lead to, a deficiency
in the contractual cash flows related to the investment. The amount of the impairment recorded in earnings is the difference between the amortized cost
of the debt security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior
to impairment.
(3) Primarily represents circumstances where securities with losses from foreign currency exchange rate movements approach maturity.
During 2012, we recorded other-than-temporary impairments of $144 million in earnings related to securities with unrealized losses
from foreign currency exchange rate movements that are approaching maturity. Fixed maturity other-than-temporary impairments in 2012
were concentrated in the consumer non-cyclical, technology, and utility sectors of our corporate securities, and to a lesser extent within
asset-backed securities collateralized by sub-prime mortgages. These other-than-temporary impairments were primarily related to securities
with unrealized losses from foreign currency exchange rate movements that are approaching maturity or related to securities with liquidity
concerns, downgrades in credit, bankruptcy or other adverse financial conditions of the respective issuers, which have caused, or we
believe will lead to, a deficiency in the contractual cash flows related to the investment. Our Japanese insurance operations hold non-yen
denominated investments which in some cases, due primarily to the strengthening of the yen against the U.S. dollar, as of year end are in an
unrealized loss position. As the securities approach maturity and remain in an unrealized loss position, it becomes less likely that the
exchange rates will recover and more likely that losses will be realized upon maturity. Accordingly, additional impairments will be
recorded in earnings as they approach maturity. As of December 31, 2012, gross unrealized losses related to those securities maturing
56 Prudential Financial, Inc. 2012 Annual Report