Prudential 2012 Annual Report Download - page 62

Charges that relate to “Realized investment gains (losses), net” are also excluded from adjusted operating income. 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.
Results for 2010 include net negative related charges of $179 million, primarily driven by payments associated with the market value
adjustment features related to certain variable annuity products we sell. For additional information, see Note 22 to the Consolidated
Financial Statements.
During 2011 we recorded other-than-temporary impairments of $558 million in earnings, compared to total other-than-temporary
impairments of $672 million recorded in earnings in 2010. 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,
2011 2010
(in millions)
Other-than-temporary impairments recorded in earnings—Financial Services Businesses(1)
Public fixed maturity securities ........................................................................ $314 $422
Private fixed maturity securities ....................................................................... 117 142
Total fixed maturity securities .................................................................... 431 564
Equity securities ................................................................................... 94 78
Other invested assets(2) ............................................................................. 33 30
Total ........................................................................................ $558 $672
(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, 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
Year Ended December 31, 2010
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) ................ $140 $185 $325
Due to other accounting guidelines(3) ........................................ 69 170 239
Total .............................................................. $209 $355 $564
(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) 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 or where we intend
to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis.
During 2011, we recorded other-than-temporary impairments of $184 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 2011
were concentrated in the utility, finance, and consumer non-cyclical sectors of our corporate securities, asset-backed securities
collateralized by sub-prime mortgages, and Japanese commercial mortgage-backed securities. 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, 2011, gross unrealized losses related to
those securities maturing between January 1, 2012 and December 31, 2014 are $625 million. Absent a change in currency rates,
impairments of approximately $191 million would be recorded in 2012. Fixed maturity other-than-temporary impairments in 2010 were
concentrated in the finance, consumer cyclical, and communications sectors of our corporate securities, asset-backed securities
collateralized by sub-prime mortgages that reflect adverse financial conditions of the respective issuers, the impact of the rising forward
60 Prudential Financial, Inc. 2012 Annual Report