Prudential 2005 Annual Report Download - page 168

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 (together, 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 9 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 below and
in Note 11 to the consolidated financial statements) and related unamortized debt issuance costs, as well as 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 the Financial Services Businesses and the Closed Block 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 is subject to 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 holders 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 between the Financial Services Businesses and the Closed Block
Business based on the general and administrative expenses of each business as a percentage of the total general and administrative
expenses for all businesses.
PHLLC has outstanding IHC debt, of which net proceeds of $1.66 billion were allocated to the Financial Services Businesses
concurrent with the demutualization on December 18, 2001. The IHC debt is serviced by the cash flows of the Closed Block
Business, and the results of the Closed Block Business reflect interest expense associated with the IHC debt.
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 separate legal entity representing the Financial Services Businesses; holders of
the Class B Stock have no interest in a separate 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.
Prudential Financial 2005 Annual Report166