Prudential 2003 Annual Report Download - page 176

PRUDENTIAL FINANCIAL, INC.
Notes to Supplemental Combining Financial Information
1. BASIS OF PRESENTATION
The supplemental combining financial information presents the consolidated financial position and results of
operations for Prudential Financial, Inc. and its subsidiaries (the “Company”) separately reporting the Financial
Services Businesses and the Closed Block Business. The Financial Services Businesses and the Closed Block Business
are both fully integrated operations of the Company and are not separate legal entities. The supplemental combining
financial information presents the results of the Financial Services Businesses and the Closed Block Business as if they
were separate reporting entities and should be read in conjunction with the Consolidated Financial Statements.
The Company has outstanding two classes of common stock. The Common Stock reflects the performance of the
Financial Services Businesses and the Class B Stock reflects the performance of the Closed Block Business.
The Closed Block Business was established on the date of demutualization and includes the assets and liabilities
of the Closed Block (see Note 8 to the Consolidated Financial Statements for a description of the Closed Block). It also
includes assets held outside the Closed Block necessary to meet insurance regulatory capital requirements related to
products included within the Closed Block; deferred policy acquisition costs related to the Closed Block policies; the
principal amount of the IHC debt (as discussed in Note 10 to the Consolidated Financial Statements) and related
unamortized debt issuance costs and an interest rate swap related to the IHC debt; and certain other related assets and
liabilities. The Financial Services Businesses consist of the Insurance, Investment, and International Insurance and
Investments divisions and Corporate and Other operations.
2. ALLOCATION OF RESULTS
This supplemental combining financial information reflects the assets, liabilities, revenues and expenses directly
attributable to the Financial Services Businesses and the Closed Block Business, as well as allocations deemed
reasonable by management in order to fairly present the financial position and results of operations of each business on
a stand alone basis. While management considers the allocations utilized to be reasonable, management has the
discretion to make operational and financial decisions that may affect the allocation methods and resulting assets,
liabilities, revenues and expenses of each business. In addition, management has limited discretion over accounting
policies and the appropriate allocation of earnings between the two businesses. The Company has agreements which
provide that, in most instances, the Company may not change the allocation methodology or accounting policies for the
allocation of earnings between the Financial Services Businesses and Closed Block Business without the prior consent
of the Class B Stock investors or IHC debt bond insurer.
General corporate overhead not directly attributable to a specific business that has been incurred in connection
with the generation of the businesses’ revenues is generally allocated based on the historical general and administrative
expenses of each business as a percentage of the total for the Company.
Income taxes are allocated between the Financial Services Businesses and the Closed Block Business as if they
were separate companies based on the taxable income or losses and other tax characterizations of each business. If a
business generates benefits, such as net operating losses, it is entitled to record such tax benefits to the extent they are
expected to be utilized on a consolidated basis.
Holders of Common Stock have no interest in a legal entity representing the Financial Services Businesses;
holders of the Class B Stock have no interest in a legal entity representing the Closed Block Business and holders of
each class of common stock are subject to all of the risks associated with an investment in the Company.
In the event of a liquidation, dissolution or winding-up of the Company, holders of Common Stock and holders of
Class B Stock would be entitled to receive a proportionate share of the net assets of the Company that remain after
paying all liabilities and the liquidation preferences of any preferred stock.
The results of the Financial Services Businesses are subject to certain risks pertaining to the Closed Block. These
include any expenses and liabilities from litigation affecting the Closed Block policies as well as the consequences of
certain potential adverse tax determinations. In connection with the sale of the Class B Stock and IHC debt, the cost of
indemnifying the investors with respect to certain matters will be borne by the Financial Services Businesses.
Growing and Protecting Your Wealth174