Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2009

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from              to             

 

Commission File Number 001-16707

 

 

 

Prudential Financial, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

New Jersey   22-3703799
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification Number)

 

751 Broad Street

Newark, New Jersey 07102

(973) 802-6000

(Address and Telephone Number of Registrant’s Principal Executive Offices)

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of the Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x   Accelerated filer  ¨   Non-accelerated filer  ¨   Smaller reporting company  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

As of July 31, 2009, 461 million shares of the registrant’s Common Stock (par value $0.01) were outstanding. In addition, 2 million shares of the registrant’s Class B Stock, for which there is no established public trading market, were outstanding.

 

 

 


TABLE OF CONTENTS

 

               Page
Number

PART I    FINANCIAL INFORMATION

  
   Item 1.   

Financial Statements:

  
     

Unaudited Interim Consolidated Statements of Financial Position as of June 30, 2009 and December 31, 2008

  

1

     

Unaudited Interim Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008

  

2

     

Unaudited Interim Consolidated Statement of Equity for the six months ended June 30, 2009 and 2008

  

3

     

Unaudited Interim Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008

  

4

     

Notes to Unaudited Interim Consolidated Financial Statements

   5
     

Unaudited Interim Supplemental Combining Financial Information:

  
     

Unaudited Interim Supplemental Combining Statements of Financial Position as of June 30, 2009 and December 31, 2008

  

92

     

Unaudited Interim Supplemental Combining Statements of Operations for the three months ended June 30, 2009 and 2008

  

93

     

Unaudited Interim Supplemental Combining Statements of Operations for the six months ended June 30, 2009 and 2008

  

94

     

Notes to Unaudited Interim Supplemental Combining Financial Information

  

95

   Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

97

   Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

   267
   Item 4.   

Controls and Procedures

   267
PART II    OTHER INFORMATION   
   Item 1.   

Legal Proceedings

   268
   Item 1A.   

Risk Factors

   269
   Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

   288
   Item 4.   

Submission of Matters to a Vote of Security Holders

   289
   Item 6.   

Exhibits

   290
SIGNATURES    291

 

i


FORWARD-LOOKING STATEMENTS

 

Certain of the statements included in this Quarterly Report on Form 10-Q, including but not limited to those in Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Prudential Financial, Inc. and its subsidiaries. There can be no assurance that future developments affecting Prudential Financial, Inc. and its subsidiaries will be those anticipated by management. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (1) general economic, market and political conditions, including the performance and fluctuations of fixed income, equity, real estate and other financial markets, particularly in light of ongoing severe economic conditions and the severe stress experienced by the global financial markets since the second half of 2007; (2) the availability and cost of external financing for our operations, which has been affected by the stress experienced by the global financial markets; (3) interest rate fluctuations; (4) reestimates of our reserves for future policy benefits and claims; (5) differences between actual experience regarding mortality, morbidity, persistency, surrender experience, interest rates or market returns and the assumptions we use in pricing our products, establishing liabilities and reserves or for other purposes; (6) changes in our assumptions related to deferred policy acquisition costs, valuation of business acquired or goodwill; (7) changes in our claims-paying or credit ratings; (8) investment losses, defaults and counterparty non-performance; (9) competition in our product lines and for personnel; (10) changes in tax law; (11) economic, political, currency and other risks relating to our international operations; (12) fluctuations in foreign currency exchange rates and foreign securities markets; (13) regulatory or legislative changes, including government actions in response to the stress experienced by the global financial markets; (14) adverse determinations in litigation or regulatory matters and our exposure to contingent liabilities, including in connection with our divestiture or winding down of businesses; (15) domestic or international military actions, natural or man-made disasters including terrorist activities or pandemic disease, or other events resulting in catastrophic loss of life; (16) ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks; (17) effects of acquisitions, divestitures and restructurings, including possible difficulties in integrating and realizing the projected results of acquisitions; (18) changes in statutory or U.S. GAAP accounting principles, practices or policies; (19) changes in assumptions for retirement expense; (20) Prudential Financial, Inc.’s primary reliance, as a holding company, on dividends or distributions from its subsidiaries to meet debt payment obligations and the ability of the subsidiaries to pay such dividends or distributions in light of our ratings objectives and/or applicable regulatory restrictions; and (21) risks due to the lack of legal separation between our Financial Services Businesses and our Closed Block Business. As noted above, the period since the second half of 2007 has been characterized by extreme adverse market and economic conditions. The foregoing risks are even more pronounced in these unprecedented market and economic conditions. Prudential Financial, Inc. does not intend, and is under no obligation, to update any particular forward-looking statement included in this document. See “Risk Factors” included in this Quarterly Report on Form 10-Q for discussion of certain risks relating to our businesses and investment in our securities.

 

ii


Throughout this Quarterly Report on Form 10-Q, “Prudential Financial” and the “Registrant” refer to Prudential Financial, Inc., the ultimate holding company for all of our companies. “Prudential Insurance” refers to The Prudential Insurance Company of America, before and after its demutualization on December 18, 2001. “Prudential,” the “Company,” “we” and “our” refer to our consolidated operations before and after demutualization.

 

PART I—FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Financial Position

June 30, 2009 and December 31, 2008 (in millions, except share amounts)

 

     June 30,
2009
    December 31,
2008
 

ASSETS

    

Fixed maturities, available for sale, at fair value (amortized cost: 2009—$166,075; 2008—$168,691)

   $ 158,913      $ 158,056   

Fixed maturities, held to maturity, at amortized cost (fair value: 2009—$4,938; 2008—$3,832)

     4,935        3,808   

Trading account assets supporting insurance liabilities, at fair value

     14,766        13,875   

Other trading account assets, at fair value

     3,715        4,336   

Equity securities, available for sale, at fair value (cost: 2009—$6,019; 2008—$7,288)

     5,917        6,065   

Commercial mortgage and other loans (includes $508 measured at fair value at June 30, 2009)

     32,694        33,114   

Policy loans

     9,856        9,703   

Securities purchased under agreements to resell

     —          480   

Other long-term investments

     5,716        7,012   

Short-term investments

     7,137        5,576   
                

Total investments

     243,649        242,025   

Cash and cash equivalents

     13,491        15,028   

Accrued investment income

     2,231        2,266   

Deferred policy acquisition costs

     14,474        15,126   

Deferred income taxes, net

     —          1,106   

Other assets

     19,605        22,365   

Separate account assets

     151,266        147,095   
                

TOTAL ASSETS

   $ 444,716      $ 445,011   
                

LIABILITIES AND EQUITY

    

LIABILITIES

    

Future policy benefits

   $ 121,394      $ 121,951   

Policyholders’ account balances

     101,277        99,613   

Policyholders’ dividends

     1,667        1,670   

Securities sold under agreements to repurchase

     7,168        7,900   

Cash collateral for loaned securities

     3,662        4,168   

Income taxes

     777        459   

Short-term debt

     3,643        10,535   

Long-term debt (includes $1,167 measured at fair value at June 30, 2009)

     20,981        20,290   

Other liabilities

     14,206        17,544   

Separate account liabilities

     151,266        147,095   
                

Total liabilities

     426,041        431,225   
                

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 15)

    

EQUITY

    

Preferred Stock ($.01 par value; 10,000,000 shares authorized; none issued)

     —          —     

Common Stock ($.01 par value; 1,500,000,000 shares authorized; 641,761,510 and 604,902,444 shares issued as of June 30, 2009 and December 31, 2008, respectively)

     6        6   

Class B Stock ($.01 par value; 10,000,000 shares authorized; 2,000,000 shares issued and outstanding as of June 30, 2009 and December 31, 2008, respectively)

     —          —     

Additional paid-in capital

     23,325        22,001   

Common Stock held in treasury, at cost (181,278,929 and 183,582,565 shares as of June 30, 2009 and December 31, 2008, respectively)

     (11,494     (11,655

Accumulated other comprehensive loss

     (5,002     (7,343

Retained earnings

     11,238        10,426   
                

Total Prudential Financial, Inc. equity

     18,073        13,435   
                

Noncontrolling interests

     602        351   
                

Total equity

     18,675        13,786   
                

TOTAL LIABILITIES AND EQUITY

   $ 444,716      $ 445,011   
                

 

See Notes to Unaudited Interim Consolidated Financial Statements

 

1


PRUDENTIAL FINANCIAL, INC.

 

Unaudited Interim Consolidated Statements of Operations

Three and Six Months Ended June 30, 2009 and 2008 (in millions, except per share amounts)

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
        2009             2008             2009             2008      

REVENUES

       

Premiums

  $ 4,187      $ 3,927      $ 8,221      $ 7,885   

Policy charges and fee income

    713        824        1,439        1,649   

Net investment income

    2,835        3,026        5,690        6,052   

Asset management fees and other income

    1,446        824        2,245        1,485   

Realized investment gains (losses), net:

       

Other-than-temporary impairments on fixed maturity securities

    (1,312     (661     (3,167     (1,200

Other-than-temporary impairments on fixed maturity securities transferred to Other Comprehensive Income

    813        —          2,063        —     

Other realized investment gains (losses), net

    (1,776     (237     (1,026     (610
                               

Total realized investment gains (losses), net

    (2,275     (898     (2,130     (1,810
                               

Total revenues

    6,906        7,703        15,465        15,261   
                               

BENEFITS AND EXPENSES

       

Policyholders’ benefits

    3,886        4,011        8,227        8,046   

Interest credited to policyholders’ account balances

    1,099        745        2,268        1,382   

Dividends to policyholders

    277        158        276        717   

General and administrative expenses

    1,652        2,161        4,690        4,426   
                               

Total benefits and expenses

    6,914        7,075        15,461        14,571   
                               

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURES

    (8     628        4        690   
                               

Income tax expense (benefit)

    (162     60        (158     83   
                               

INCOME FROM CONTINUING OPERATIONS BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURES

    154        568        162        607   

Equity in earnings of operating joint ventures, net of taxes

    5        24        (1     67   
                               

INCOME FROM CONTINUING OPERATIONS

    159        592        161        674   

Income (loss) from discontinued operations, net of taxes

    21        (3     22        (1
                               

NET INCOME

    180        589        183        673   

Less: Income attributable to noncontrolling interests

    17        8        6        32   
                               

NET INCOME ATTRIBUTABLE TO PRUDENTIAL FINANCIAL, INC.

  $ 163      $ 581      $ 177      $ 641   
                               

EARNINGS PER SHARE (See Note 8)

       

Financial Services Businesses

       

Basic:

       

Income from continuing operations attributable to Prudential Financial, Inc. per share of Common Stock

  $ 1.21      $ 1.34      $ 1.23      $ 1.50   

Income (loss) from discontinued operations, net of taxes

    0.04        (0.01     0.05        —     
                               

Net income attributable to Prudential Financial, Inc. per share of Common Stock

  $ 1.25      $ 1.33      $ 1.28      $ 1.50   
                               

Diluted:

       

Income from continuing operations attributable to Prudential Financial, Inc. per share of Common Stock

  $ 1.20      $ 1.33      $ 1.23      $ 1.49   

Income (loss) from discontinued operations, net of taxes

    0.05        (0.01     0.05        —     
                               

Net income attributable to Prudential Financial, Inc. per share of Common Stock

  $ 1.25      $ 1.32      $ 1.28      $ 1.49   
                               

Closed Block Business

       

Basic and Diluted:

       

Income (loss) from continuing operations attributable to Prudential Financial, Inc. per share of Class B Stock

  $ (193.00   $ 0.50      $ (189.00   $ (9.50

Income from discontinued operations, net of taxes

    —          —          —          —     
                               

Net income (loss) attributable to Prudential Financial, Inc. per share of Class B Stock

  $ (193.00   $ 0.50      $ (189.00   $ (9.50
                               

 

See Notes to Unaudited Interim Consolidated Financial Statements

 

2


PRUDENTIAL FINANCIAL, INC.

 

Unaudited Interim Consolidated Statement of Equity

Six Months Ended June 30, 2009 and 2008 (in millions)

 

    Prudential Financial, Inc. Equity   Noncontrolling
Interests
    Total
Equity
 
    Common
Stock
  Class B
Stock
  Additional
Paid-in
Capital
    Retained
Earnings
    Common
Stock
Held in
Treasury
    Accumulated
Other
Comprehensive
Loss
    Total
Prudential
Financial, Inc.
Equity
   

Balance, December 31, 2008

  $ 6   $ —     $ 22,001      $ 10,426      $ (11,655   $ (7,343   $ 13,435   $ 351      $ 13,786   

Common Stock issued

    —       —       1,391        —          —          —          1,391     —          1,391   

Contributions from noncontrolling interests

    —       —       —          —          —          —          —       278        278   

Distributions to noncontrolling interests

    —       —       —          —          —          —          —       (8     (8

Stock-based compensation programs

    —       —       (67     (29     161        —          65     —          65   

Impact of adoption of FSP FAS 115-2 and FAS 124-2, net of taxes

    —       —       —          664        —          (664     —       —          —     

Comprehensive income:

                 

Net income

    —       —       —          177        —          —          177     6        183   

Other comprehensive income (loss), net of tax

    —       —       —          —          —          3,005        3,005     (25     2,980   
                                 

Total comprehensive income (loss)

    —       —       —          —          —          —          3,182     (19     3,163   
                                                                 

Balance, June 30, 2009

  $ 6   $ —     $ 23,325      $ 11,238      $ (11,494   $ (5,002   $ 18,073   $ 602      $ 18,675   
                                                                 

 

    Prudential Financial, Inc. Equity     Noncontrolling
Interests
    Total
Equity
 
    Common
Stock
  Class B
Stock
  Additional
Paid-in
Capital
  Retained
Earnings
    Common
Stock
Held in
Treasury
    Accumulated
Other
Comprehensive
Loss
    Total
Prudential
Financial, Inc.
Equity
     

Balance, December 31, 2007

  $ 6   $ —     $ 20,945   $ 11,809      $ (9,693   $ 447      $ 23,514      $ 409      $ 23,923   

Common Stock acquired

    —       —       —       —          (1,750     —          (1,750     —          (1,750

Contributions from noncontrolling interests

    —       —       —       —          —          —          —          5        5   

Distributions to noncontrolling interests

    —       —       —       —          —          —          —          (152     (152

Stock-based compensation programs

    —       —       —       (13     128        —          115        —          115   

Impact of Company’s investment in Wachovia Securities due to addition of AG Edwards business, net of tax

    —       —       977     —          —          —          977       —          977  

Cumulative effect of changes in accounting principles, net of taxes

    —       —       —       3        —          —          3        —          3   

Comprehensive income:

                 

Net income

    —       —       —       641        —          —          641        32        673   

Other comprehensive loss, net of tax

    —       —       —       —          —          (1,892     (1,892     (1     (1,893
                                   

Total comprehensive income (loss)

    —       —       —       —          —          —          (1,251     31        (1,220
                                                                 

Balance, June 30, 2008

  $ 6   $ —     $ 21,922   $ 12,440      $ (11,315   $ (1,445   $ 21,608      $ 293      $ 21,901   
                                                                 

 

See Notes to Unaudited Interim Consolidated Financial Statements

 

3


PRUDENTIAL FINANCIAL, INC.

 

Unaudited Interim Consolidated Statements of Cash Flows

Six Months Ended June 30, 2009 and 2008 (in millions)

 

     2009     2008  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 183      $ 673   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Realized investment (gains) losses, net

     2,130        1,810   

Policy charges and fee income

     (786     (537

Interest credited to policyholders’ account balances

     2,268        1,382   

Depreciation and amortization

     192        208   

(Gains) losses on trading account assets supporting insurance liabilities, net

     (840     375   

Change in:

    

Deferred policy acquisition costs

     (133     (513

Future policy benefits and other insurance liabilities

     (1,033     1,751   

Other trading account assets

     1,977        302   

Income taxes

     (152     (465

Other, net

     (47     (1,364
                

Cash flows from operating activities

     3,759        3,622   
                

CASH FLOWS FROM INVESTING ACTIVITIES

    

Proceeds from the sale/maturity/prepayment of:

    

Fixed maturities, available for sale

     25,410        46,923   

Fixed maturities, held to maturity

     168        111   

Trading account assets supporting insurance liabilities and other trading account assets

     14,969        11,952   

Equity securities, available for sale

     840        1,899   

Commercial mortgage and other loans

     1,628        1,162   

Policy loans

     844        716   

Other long-term investments

     672        525   

Short-term investments

     12,887        16,159   

Payments for the purchase/origination of:

    

Fixed maturities, available for sale

     (22,270     (45,610

Fixed maturities, held to maturity

     (952     (24

Trading account assets supporting insurance liabilities and other trading account assets

     (16,243     (13,148

Equity securities, available for sale

     (326     (2,151

Commercial mortgage and other loans

     (1,609     (3,404

Policy loans

     (785     (737

Other long-term investments

     (905     (1,477

Short-term investments

     (14,295     (17,807

Other, net

     158        (84
                

Cash flows from (used in) investing activities

     191        (4,995
                

CASH FLOWS FROM FINANCING ACTIVITIES

    

Policyholders’ account deposits

     15,513        16,995   

Policyholders’ account withdrawals

     (15,273     (11,013

Net change in securities sold under agreements to repurchase and cash collateral for loaned securities

     (974     (4,838

Proceeds from the issuance of Common Stock

     1,391        —     

Cash dividends paid on Common Stock

     (37     (83

Net change in financing arrangements (maturities 90 days or less)

     (3,386     (1,244

Common Stock acquired

     —          (1,717

Common Stock reissued for exercise of stock options

     22        56   

Proceeds from the issuance of debt (maturities longer than 90 days)

     2,868        5,788   

Repayments of debt (maturities longer than 90 days)

     (5,494     (3,444

Excess tax benefits from share-based payment arrangements

     —          15   

Other, net

     (64     (276
                

Cash flows from (used in) financing activities

     (5,434     239   
                

Effect of foreign exchange rate changes on cash balances

     (53     17   

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (1,537     (1,117

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

     15,028        11,060   
                

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 13,491      $ 9,943   
                

NON-CASH TRANSACTIONS DURING THE PERIOD

    

Impact on Company’s investment in Wachovia Securities due to addition of A.G. Edwards business, net of tax

   $ —        $ 977   

Treasury Stock shares issued for stock-based compensation programs

   $ 97      $ 87   

 

See Notes to Unaudited Interim Consolidated Financial Statements

 

4


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements

 

1. BUSINESS AND BASIS OF PRESENTATION

 

Prudential Financial, Inc. (“Prudential Financial”) and its subsidiaries (collectively, “Prudential” or the “Company”) provide a wide range of insurance, investment management, and other financial products and services to both individual and institutional customers throughout the United States and in many other countries. Principal products and services provided include life insurance, annuities, retirement-related services, mutual funds, investment management, and real estate services. The Company has organized its principal operations into the Financial Services Businesses and the Closed Block Business. The Financial Services Businesses operate through three operating divisions: U.S. Retirement Solutions and Investment Management, U.S. Individual Life and Group Insurance, and International Insurance and Investments. The Company’s real estate and relocation services business as well as businesses that are not sufficiently material to warrant separate disclosure and businesses to be divested, including the Company’s investment in the retail securities brokerage joint venture Wachovia Securities Financial Holdings, LLC (“Wachovia Securities”), are included in Corporate and Other operations within the Financial Services Businesses. The Closed Block Business, which includes the Closed Block (see Note 6), is managed separately from the Financial Services Businesses. The Closed Block Business was established on the date of demutualization and includes the Company’s in force participating insurance and annuity products and assets that are used for the payment of benefits and policyholders’ dividends on these products, as well as other assets and equity that support these products and related liabilities. In connection with the demutualization, the Company ceased offering these participating products.

 

Basis of Presentation

 

The Unaudited Interim Consolidated Financial Statements include the accounts of Prudential Financial, entities over which the Company exercises control, including majority-owned subsidiaries and minority-owned entities such as limited partnerships in which the Company is the general partner, and variable interest entities in which the Company is considered the primary beneficiary. The Unaudited Interim Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) on a basis consistent with reporting interim financial information in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Intercompany balances and transactions have been eliminated. The Company has evaluated subsequent events through August 7, 2009, the date these financial statements were issued as part of this Quarterly Report on Form 10-Q.

 

In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations have been made. All such adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Company’s Audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

The most significant estimates include those used in determining deferred policy acquisition costs and related amortization; measurement of goodwill and any related impairment; valuation of business acquired and its amortization; valuation of investments including derivatives and the recognition of other-than-temporary

 

5


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

impairments; future policy benefits including guarantees; pension and other postretirement benefits; provision for income taxes and valuation of deferred tax assets; reserves for contingent liabilities, including reserves for losses in connection with unresolved legal matters.

 

Reclassifications

 

Certain amounts in prior periods have been reclassified to conform to the current period presentation.

 

2. ACCOUNTING POLICIES AND PRONOUNCEMENTS

 

Share-Based Payments

 

The Company issues employee share-based compensation awards, under a plan authorized by the Board of Directors, that are subject to specific vesting conditions. Generally the awards vest ratably over a three-year period, “the nominal vesting period,” or at the date the employee retires (as defined by the plan), if earlier. The Company accounts for those awards granted between (a) the adoption of the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 “Accounting for Stock Based Compensation” on January 1, 2003, and (b) the adoption on January 1, 2006 of SFAS No. 123(R) which specify that an employee vests in the award upon retirement, using the nominal vesting period approach. Under this approach, the Company records compensation expense over the nominal vesting period. If the employee retires before the end of the nominal vesting period, any remaining unrecognized compensation cost is recognized at the date of retirement.

 

Upon the adoption of SFAS No. 123(R), the Company revised its approach to the recognition of compensation costs for awards granted to retirement-eligible employees and awards that vest when an employee becomes retirement-eligible to apply the non-substantive vesting period approach to all new share-based compensation awards granted after January 1, 2006. Under this approach, all compensation cost is recognized on the date of grant for awards issued to retirement-eligible employees, or over the period from the grant date to the date retirement eligibility is achieved, if that is expected to occur during the nominal vesting period.

 

If the Company had accounted for all share-based compensation awards granted after January 1, 2003 under the non-substantive vesting period approach, net income of the Financial Services Businesses for the three and six months ended June 30, 2008 would have been increased by $0.2 million and $1 million, respectively, with no reportable impact to the earnings per share of Common Stock, on both a basic and diluted basis. There is no impact to net income for 2009, as all compensation expense relating to share-based compensation awards accounted for under the nominal vesting period approach had been recognized in net income by December 31, 2008.

 

Investments in Debt and Equity Securities

 

Fixed maturities are comprised of bonds, notes and redeemable preferred stock. Fixed maturities classified as “available for sale” are carried at fair value. See Note 12 for additional information regarding the determination of fair value. Fixed maturities that the Company has both the positive intent and ability to hold to maturity are carried at amortized cost and classified as “held to maturity.” The amortized cost of fixed maturities is adjusted for amortization of premiums and accretion of discounts to maturity. Interest income, as well as the related amortization of premium and accretion of discount is included in “Net investment income” under the effective yield method. For mortgage-backed and asset-backed securities, the effective yield is based on estimated cash flows, including prepayment assumptions based on data from widely accepted third-party data sources or internal estimates. In addition to prepayment assumptions, cash flow estimates vary based on assumptions regarding the underlying collateral including default rates and changes in value. These assumptions

 

6


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

can significantly impact income recognition and the amount of other-than-temporary impairments recognized in other comprehensive income. For high credit quality mortgage-backed and asset-backed securities (those rated AA or above), cash flows are provided quarterly, and the amortized cost and effective yield of the security are adjusted as necessary to reflect historical prepayment experience and changes in estimated future prepayments. The adjustments to amortized cost are recorded as a charge or credit to net investment income in accordance with the retrospective method. For asset-backed and mortgage-backed securities rated below AA, the effective yield is adjusted prospectively for any changes in estimated cash flows. See the discussion below on realized investment gains and losses for a description of the accounting for impairments as well as the impact of the Company’s adoption of FASB Staff Position (“FSP”) FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” Unrealized gains and losses on fixed maturities classified as “available for sale,” net of tax, and the effect on deferred policy acquisition costs, valuation of business acquired, future policy benefits and policyholders’ dividends that would result from the realization of unrealized gains and losses, are included in “Accumulated other comprehensive income (loss).”

 

“Trading account assets supporting insurance liabilities, at fair value” includes invested assets that support certain products included in the Retirement segment, as well as certain products included in the International Insurance segment, which are experience rated, meaning that the investment results associated with these products are expected to ultimately accrue to contractholders. Realized and unrealized gains and losses for these investments are reported in “Asset management fees and other income.” Interest and dividend income from these investments is reported in “Net investment income.”

 

“Other trading account assets, at fair value” consist primarily of investments and certain derivatives used by the Company either in its capacity as a broker-dealer or for asset and liability management activities. These instruments are carried at fair value. Realized and unrealized gains and losses on other trading account assets are reported in “Asset management fees and other income.” Interest and dividend income from these investments is reported in “Net investment income.”

 

Equity securities available for sale are comprised of common stock, mutual fund shares, non-redeemable preferred stock, and perpetual preferred stock, and are carried at fair value. The associated unrealized gains and losses, net of tax, and the effect on deferred policy acquisition costs, valuation of business acquired, future policy benefits and policyholders’ dividends that would result from the realization of unrealized gains and losses, are included in “Accumulated other comprehensive income (loss).” The cost of equity securities is written down to fair value when a decline in value is considered to be other-than-temporary. See the discussion below on realized investment gains and losses for a description of the accounting for impairments. Dividends from these investments are recognized in “Net investment income” when declared.

 

Short-term investments primarily consist of highly liquid debt instruments with a maturity of greater than three months and less than twelve months when purchased, other than those debt instruments meeting this definition that are included in “Trading account assets supporting insurance liabilities, at fair value.” These investments are generally carried at fair value and include money market investments, short-term debt securities issued by government sponsored entities and other highly liquid debt instruments.

 

Realized investment gains (losses) are computed using the specific identification method with the exception of some of the Company’s International Insurance businesses’ portfolios, where the average cost method is used. Realized investment gains and losses are generated from numerous sources, including the sale of fixed maturity securities, equity securities, investments in joint ventures and limited partnerships and other types of investments, as well as adjustments to the cost basis of investments for net other-than-temporary impairments recognized in earnings. Realized investment gains and losses are also generated from prepayment premiums received on private fixed maturity securities, recoveries of principal on previously impaired securities, provisions for losses

 

7


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

on commercial mortgage and other loans, fair value changes on commercial mortgage loans carried at fair value, gains on commercial mortgage loans in connection with securitization transactions, and fair value changes on embedded derivatives and derivatives that do not qualify for hedge accounting treatment, except those derivatives used in the Company’s capacity as a broker or dealer.

 

The Company’s available-for-sale and held-to-maturity securities with unrealized losses are reviewed quarterly to identify other-than-temporary impairments in value. In evaluating whether a decline in value is other-than-temporary, the Company considers several factors including, but not limited to the following: (1) the extent and the duration of the decline; (2) the reasons for the decline in value (credit event, currency or interest-rate related, including general credit spread widening); and (3) the financial condition of and near-term prospects of the issuer. With regard to available-for-sale equity securities, the Company also considers the ability and intent to hold the investment for a period of time to allow for a recovery of value. When it is determined that a decline in value of an equity security is other-than-temporary, the carrying value of the equity security is reduced to its fair value, with a corresponding charge to earnings.

 

In addition, in April 2009, the Financial Accounting Standards Board (“FASB”) issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” The Company early adopted this guidance on January 1, 2009. This guidance indicates that an other-than-temporary impairment must be recognized in earnings for a debt security in an unrealized loss position when an entity either (a) has the intent to sell the debt security or (b) more likely than not will be required to sell the debt security before its anticipated recovery. Prior to the adoption of this guidance the Company was required to record an other-than-temporary impairment for a debt security unless it could assert that it had both the intent and ability to hold the security for a period of time sufficient to allow for a recovery in its fair value to its amortized cost basis. For all debt securities in unrealized loss positions that do not meet either of these two criteria, FSP FAS 115-2 and FAS 124-2 requires that the Company analyze its ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security prior to impairment. The Company may use the estimated fair value of collateral as a proxy for the net present value if it believes that the security is dependent on the liquidation of collateral for recovery of its investment. If the net present value is less than the amortized cost of the investment, an other-than-temporary impairment is recorded.

 

Under FSP FAS 115-2 and FAS 124-2, when an other-than-temporary impairment of a debt security has occurred, the amount of the other-than-temporary impairment recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the debt security meets either of these two criteria, the other-than-temporary impairment recognized in earnings is equal to the entire difference between the security’s amortized cost basis and its fair value at the impairment measurement date. For other-than-temporary impairments of debt securities that do not meet these two criteria, the net amount recognized in earnings is equal to the difference between the amortized cost of the debt security and its net present value calculated as described above. Any difference between the fair value and the net present value of the debt security at the impairment measurement date is recorded in “Other comprehensive income (loss).” Unrealized gains or losses on securities for which an other-than-temporary impairment has been recognized in earnings is tracked as a separate component of “Accumulated other comprehensive income (loss).” Prior to the adoption of FSP FAS 115-2 and FAS 124-2, an other-than-temporary impairment recognized in earnings for debt securities was equal to the total difference between amortized cost and fair value at the time of impairment.

 

For debt securities, the split between the amount of an other-than-temporary impairment recognized in other comprehensive income and the net amount recognized in earnings is driven principally by assumptions regarding

 

8


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

the amount and timing of projected cash flows. For mortgage-backed and asset-backed securities, cash flow estimates including prepayment assumptions, are based on data from widely accepted third-party data sources or internal estimates. In addition to prepayment assumptions, cash flow estimates vary based on assumptions regarding the underlying collateral including default rates, recoveries and changes in value. For all other debt securities, cash flow estimates are driven by assumptions regarding probability of default and estimates regarding timing and amount of recoveries associated with a default. The Company has developed these estimates using information based on its historical experience as well as using market observable data, such as industry analyst reports and forecasts, sector credit ratings and other data relevant to the collectability of a security.

 

The new cost basis of an impaired security is not adjusted for subsequent increases in estimated fair value. In periods subsequent to the recognition of an other-than-temporary impairment, the impaired security is accounted for as if it had been purchased on the measurement date of the impairment. For debt securities, the discount (or reduced premium) based on the new cost basis may be accreted into net investment income in future periods based on prospective changes in cash flow estimates, to reflect adjustments to the effective yield.

 

Goodwill

 

The Company tests goodwill for impairment annually as of December 31 and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. A reporting unit is an operating segment or a unit one level below the operating segment.

 

The Company did not evaluate goodwill for impairment as of June 30, 2009, as no events occurred or circumstances changed that would have more likely than not reduced the fair value of a reporting unit below its carrying amount during the second quarter of 2009. The carrying value of goodwill was $706 million as of June 30, 2009.

 

Derivative Financial Instruments

 

Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices or the values of securities or commodities. Derivative financial instruments generally used by the Company include swaps, futures, forwards and options and may be exchange-traded or contracted in the over-the-counter market. Derivative positions are carried at fair value, generally by obtaining quoted market prices or through the use of valuation models. Values can be affected by changes in interest rates, foreign exchange rates, financial indices, values of securities or commodities, credit spreads, market volatility, expected returns and liquidity. Values can also be affected by changes in estimates and assumptions, including those related to counterparty behavior, used in valuation models.

 

Derivatives are used in a non-dealer capacity in insurance, investment and international businesses as well as treasury operations to manage the characteristics of the Company’s asset/liability mix, to manage the interest rate and currency characteristics of assets or liabilities and to mitigate the risk of a diminution, upon translation to U.S. dollars, of expected non-U.S. earnings and net investments in foreign operations resulting from unfavorable changes in currency exchange rates. Additionally, derivatives may be used to seek to reduce exposure to interest rate, credit, foreign currency and equity risks associated with assets held or expected to be purchased or sold, and liabilities incurred or expected to be incurred. As discussed in detail below and in Note 14, all realized and unrealized changes in fair value of non-dealer related derivatives, with the exception of the effective portion of cash flow hedges and effective hedges of net investments in foreign operations, are recorded in current earnings. Cash flows from these derivatives are reported in the operating, investing, or financing activities sections in the Consolidated Statements of Cash Flows.

 

9


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

Derivatives are also used in a derivative dealer or broker capacity in the Company’s securities operations to meet the needs of clients by structuring transactions that allow clients to manage their exposure to interest rates, foreign exchange rates, indices or prices of securities and commodities and similarly in a dealer or broker capacity through the operation of certain hedge portfolios. Realized and unrealized changes in fair value of derivatives used in these dealer related operations are included in “Asset management fees and other income” in the periods in which the changes occur. Cash flows from such derivatives are reported in the operating activities section of the Consolidated Statements of Cash Flows.

 

Derivatives are recorded either as assets, within “Other trading account assets,” or “Other long-term investments,” or as liabilities, within “Other liabilities,” in the Consolidated Statements of Financial Position, except for embedded derivatives which are recorded in the Consolidated Statements of Financial Position with the associated host contract. The Company nets the fair value of all derivative financial instruments with counterparties for which a master netting arrangement has been executed pursuant to FASB Interpretation (“FIN”) No. 39 and FSP No. 39-1.

 

For non-dealer related derivatives the Company designates derivatives as either (1) a hedge of the fair value of a recognized asset or liability or unrecognized firm commitment (“fair value” hedge); (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge); (3) a foreign-currency fair value or cash flow hedge (“foreign currency” hedge); (4) a hedge of a net investment in a foreign operation; or (5) a derivative that does not qualify for hedge accounting.

 

To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated risk of the hedged item. Effectiveness of the hedge is formally assessed at inception and throughout the life of the hedging relationship. Even if a derivative qualifies for hedge accounting treatment, there may be an element of ineffectiveness of the hedge. Under such circumstances, the ineffective portion is recorded in “Realized investment gains (losses), net.”

 

The Company formally documents at inception all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives designated as fair value, cash flow, or foreign currency hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. Hedges of a net investment in a foreign operation are linked to the specific foreign operation.

 

When a derivative is designated as a fair value hedge and is determined to be highly effective, changes in its fair value, along with changes in the fair value of the hedged asset or liability (including losses or gains on firm commitments), are reported on a net basis in the income statement, generally in “Realized investment gains (losses), net.” When swaps are used in hedge accounting relationships, periodic settlements are recorded in the same income statement line as the related settlements of the hedged items.

 

When a derivative is designated as a cash flow hedge and is determined to be highly effective, changes in its fair value are recorded in “Accumulated other comprehensive income (loss)” until earnings are affected by the variability of cash flows being hedged (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings). At that time, the related portion of deferred gains or losses on the derivative instrument is reclassified and reported in the income statement line item associated with the hedged item.

 

When a derivative is designated as a foreign currency hedge and is determined to be highly effective, changes in its fair value are recorded in either current period earnings or “Accumulated other comprehensive

 

10


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

income (loss),” depending on whether the hedge transaction is a fair value hedge (e.g., a hedge of a recognized foreign currency asset or liability) or a cash flow hedge (e.g., a foreign currency denominated forecasted transaction). When a derivative is used as a hedge of a net investment in a foreign operation, its change in fair value, to the extent effective as a hedge, is recorded in the cumulative translation adjustment account within “Accumulated other comprehensive income (loss).”

 

If it is determined that a derivative no longer qualifies as an effective fair value or cash flow hedge or management removes the hedge designation, the derivative will continue to be carried on the balance sheet at its fair value, with changes in fair value recognized currently in “Realized investment gains (losses), net.” The asset or liability under a fair value hedge will no longer be adjusted for changes in fair value and the existing basis adjustment is amortized to the income statement line associated with the asset or liability. The component of “Accumulated other comprehensive income (loss)” related to discontinued cash flow hedges is amortized to the income statement line associated with the hedged cash flows consistent with the earnings impact of the original hedged cash flows.

 

When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, or because it is probable that the forecasted transaction will not occur by the end of the specified time period, the derivative will continue to be carried on the balance sheet at its fair value, with changes in fair value recognized currently in “Realized investment gains (losses), net.” Any asset or liability that was recorded pursuant to recognition of the firm commitment is removed from the balance sheet and recognized currently in “Realized investment gains (losses), net.” Gains and losses that were in “Accumulated other comprehensive income (loss)” pursuant to the hedge of a forecasted transaction are recognized immediately in “Realized investment gains (losses), net.”

 

If a derivative does not qualify for hedge accounting, all changes in its fair value, including net receipts and payments, are included in “Realized investment gains (losses), net” without considering changes in the fair value of the economically associated assets or liabilities.

 

The Company is a party to financial instruments that contain derivative instruments that are “embedded” in the financial instruments. At inception, the Company assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the host contract) and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and (2) a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and changes in its fair value are included in “Realized investment gains (losses), net.” For certain financial instruments that contain an embedded derivative that otherwise would need to be bifurcated and reported at fair value, the Company may elect to classify the entire instrument as a trading account asset and report it within “Other trading account assets,” at fair value.

 

Income Taxes

 

The Company’s liability for income taxes includes the liability for unrecognized tax benefits and interest and penalties which relate to tax years still subject to review by the Internal Revenue Service (“IRS”) or other taxing jurisdictions. Audit periods remain open for review until the statute of limitations has passed. Generally, for tax years which produce net operating losses, capital losses or tax credit carryforwards (“tax attributes”), the statute of limitations does not close, to the extent of these tax attributes, until the expiration of the statute of

 

11


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

limitations for the tax year in which they are fully utilized. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the liability for income taxes. The statute of limitations for the 2002 tax year expired on April 30, 2009. The statute of limitations for the 2003 tax year expired on July 31, 2009. The statute of limitations for the 2004 and 2005 tax years is set to expire in June 2010. Tax years 2006 through 2008 are still open for IRS examination. The Company does not anticipate any significant changes within the next 12 months to its total unrecognized tax benefits related to tax years for which the statute of limitations has not expired.

 

As discussed above, the completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the liability for income taxes. As such, the second quarter of 2009 benefited from a reduction to the liability for unrecognized tax benefits and interest of $147 million primarily related to tax years prior to 2002 as a result of the expiration of the statute of limitations for the 2002 tax year, additional interest on a tax refund received related to the 1997 through 2001 tax years, and changes in estimates. Also as discussed above, the statute of limitations for the 2003 tax year expired on July 31, 2009. As a result, the Company’s income tax provision for the third quarter of 2009 will include a reduction to the liability for unrecognized tax benefits and interest of approximately $165 million related to tax years prior to 2002.

 

The dividends received deduction (“DRD”) reduces the amount of dividend income subject to U.S. tax and is a significant component of the difference between the Company’s effective tax rate and the federal statutory tax rate of 35%. The DRD for the current period was estimated using information from 2008, current year results, and was adjusted to take into account the current year’s equity market performance. The actual current year DRD can vary from the estimate based on factors such as, but not limited to, changes in the amount of dividends received that are eligible for the DRD, changes in the amount of distributions received from mutual fund investments, changes in the account balances of variable life and annuity contracts, and the Company’s taxable income before the DRD.

 

In August 2007, the IRS released Revenue Ruling 2007-54, which included, among other items, guidance on the methodology to be followed in calculating the DRD related to variable life insurance and annuity contracts. In September 2007, the IRS released Revenue Ruling 2007-61. Revenue Ruling 2007-61 suspends Revenue Ruling 2007-54 and informs taxpayers that the U.S. Treasury Department and the IRS have indicated that they intend to address through new regulations the issues considered in Revenue Ruling 2007-54, including the methodology to be followed in determining the DRD related to variable life insurance and annuity contracts. On May 11, 2009, the Obama Administration released the “General Explanations of the Administration’s Revenue Proposals.” Although the Administration has not released proposed statutory language, one proposal would change the method used to determine the amount of the DRD. A change in the DRD, including the possible retroactive or prospective elimination of this deduction through regulation or legislation, could increase actual tax expense and reduce the Company’s consolidated net income. These activities had no impact on the Company’s 2008 or 2009 results.

 

In December 2006, the IRS completed all fieldwork with respect to its examination of the consolidated federal income tax returns for tax years 2002 and 2003. The final report was initially submitted to the Joint Committee on Taxation for their review in April 2007. The final report was resubmitted in March 2008 and again in April 2008. The Joint Committee returned the report to the IRS for additional review of an industry issue regarding the methodology for calculating the DRD related to variable life insurance and annuity contracts. The IRS completed its review of the issue and proposed an adjustment with respect to the calculation of the DRD. In order to expedite receipt of an income tax refund related to the 2002 and 2003 tax years, the Company has agreed to such adjustment. The report, with the adjustment to the DRD, was submitted to the Joint Committee on Taxation in October 2008. The Company was advised on January 2, 2009 that the Joint Committee completed its

 

12


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

consideration of the report and has taken no exception to the conclusions reached by the IRS. Accordingly, the final report was processed and a $157 million refund was received in February 2009. The Company believes that its return position with respect to the calculation of the DRD is technically correct. Therefore, the Company intends to file a protective refund claim within six months of the expiration of the respective statutes of limitations to recover the taxes associated with the agreed upon adjustment and to pursue such other actions as appropriate. These activities had no impact on the Company’s 2008 or 2009 results.

 

In January 2007, the IRS began an examination of tax years 2004 through 2006. For tax years 2007, 2008 and 2009, the Company participated in the IRS’s Compliance Assurance Program (“CAP”). Under CAP, the IRS assigns an examination team to review completed transactions contemporaneously during these tax years in order to reach agreement with the Company on how they should be reported in the tax returns. If disagreements arise, accelerated resolutions programs are available to resolve the disagreements in a timely manner before the tax returns are filed. It is management’s expectation this program will shorten the time period between the filing of the Company’s federal income tax returns and the IRS’s completion of its examination of the returns.

 

The Company’s affiliates in Japan file separate tax returns and are subject to audits by the local taxing authority. The general statute of limitations is 5 years from when the return is filed. During 2009, the Tokyo Regional Taxation Bureau concluded a routine tax audit of the tax returns of Prudential Life Insurance Company Ltd. for its tax years ending March 31, 2004 to March 31, 2008. These activities had no material impact on the Company’s 2008 and 2009 results.

 

Accounting Pronouncements Adopted

 

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events.” This statement addresses the accounting for and disclosure of subsequent events not addressed in other applicable GAAP, including disclosure of the date through which subsequent events have been evaluated. This guidance is effective for interim or annual periods ending after June 15, 2009. The Company’s adoption of this guidance effective with the interim period ending June 30, 2009 did not have a material effect on the Company’s consolidated financial position or results of operations. The required disclosure of the date through which subsequent events have been evaluated is provided in Note 1.

 

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” This FSP requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends the disclosure requirements. This FSP is effective for interim reporting periods ending after June 15, 2009. The Company adopted this guidance effective with the interim period ending June 30, 2009. The required disclosures are provided in Note 12.

 

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” This FSP amends the other-than-temporary impairment guidance for debt securities and expands the presentation and disclosure requirements of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP also requires that the required annual disclosures for debt and equity securities be made for interim reporting periods. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company early adopted this guidance effective January 1, 2009, which resulted in a net after-tax increase to retained earnings and decrease to Accumulated other comprehensive income (loss) of $664 million. The disclosures required by this FSP are provided in Note 4. See “Investments in Debt and Equity Securities” above for more information.

 

13


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This FSP amends FASB Statement No. 157, “Fair Value Measurements”, to provide guidance on (1) estimating the fair value of an asset or liability if there was a significant decrease in the volume and level of trading activity for these assets or liabilities, and (2) identifying transactions that are not orderly. Further, FSP 157-4 requires additional disclosures about fair value measurements in interim and annual periods and supersedes FSP FAS 157-3, “Determining the Fair Value of a Financial Asset in a Market That Is Not Active”. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. The Company’s early adoption of this guidance effective January 1, 2009 did not have a material effect on the Company’s consolidated financial position or results of operations. The disclosures required by this FSP are provided in Note 12.

 

In April 2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” This FSP requires an asset acquired or liability assumed in a business combination that arises from a contingency to be recognized at fair value at the acquisition date, if the acquisition date fair value of that asset or liability can be determined during the measurement period. If the acquisition date fair value of an asset acquired or liability assumed in a business combination that arises from a contingency cannot be determined during the measurement period, the asset or liability shall be recognized at the acquisition date using the guidance in SFAS No. 5, “Accounting for Contingencies.” This FSP also amends disclosure requirements. This FSP is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after January 1, 2009. The Company’s adoption of this guidance effective January 1, 2009 did not have a material effect on the Company’s consolidated financial position or results of operations.

 

In September 2008, the FASB Emerging Issues Task Force (“EITF”) reached consensus on EITF Issue No. 08-5, “Issuer’s Accounting for Liabilities Measured at Fair Value with a Third-Party Credit Enhancement.” The consensus concluded that (a) the issuer of a liability (including debt) with a third-party credit enhancement that is inseparable from the liability, shall not include the effect of the credit enhancement in the fair value measurement of the liability; (b) the issuer shall disclose the existence of any third-party credit enhancement on such liabilities, and (c) in the period of adoption the issuer shall disclose the valuation techniques used to measure the fair value of such liabilities and disclose any changes from valuation techniques used in prior periods. The Company’s adoption of this guidance on a prospective basis effective January 1, 2009 did not have a material effect on the Company’s consolidated financial position or results of operations.

 

In June 2008, the FASB EITF reached consensus on the following issues contained in EITF Issue No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock:” (1) how an entity should evaluate whether an instrument (or embedded feature) is indexed to the entity’s own stock; (2) how the currency in which the strike price of an equity-linked financial instrument (or embedded equity-linked feature) is denominated affects the determination of whether the instrument is indexed to the entity’s own stock; (3) how an issuer should account for equity-linked financial instruments issued to investors for purposes of establishing a market-based measure of the grant-date fair value of employee stock options. This guidance clarifies what instruments qualify as indexed to an entity’s own stock and are thereby exempt from requirements of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and eligible for equity classification under EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” The Company’s adoption of this guidance effective January 1, 2009 did not have a material effect on the Company’s consolidated financial position or results of operations.

 

14


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” This FSP states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share (EPS) pursuant to the two-class method described in paragraphs 60 and 61 of FASB Statement No. 128, “Earnings per Share.” This FSP is effective for fiscal years and interim periods beginning after December 15, 2008, and must be applied retrospectively to all EPS data presented. The Company’s adoption of this guidance effective January 1, 2009 reduced earnings per basic share of Common Stock for both the three and six months ended June 30, 2008 by $0.01 and had no reportable impact on earnings per diluted share of Common Stock for both the three and six months ended June 30, 2008. The Company’s adoption of this guidance effective January 1, 2009 reduced earnings per basic share of Common Stock for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 by $0.01, $0.05, $0.06, $0.06 and $0.02, respectively, and earnings per diluted share of Common Stock by $0.01, $0.01, $0.02, $0.03 and $0.01, respectively.

 

In May 2008, the FASB issued FSP APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” This FSP, which is effective for fiscal years and interim periods beginning after December 15, 2008 and must be applied retrospectively, addresses the accounting for certain convertible debt instruments including those that have been issued by the Company. It requires bifurcation of the instrument into a debt component that is initially recorded at fair value and an equity component. The difference between the fair value of the debt component and the initial proceeds from issuance of the instrument is recorded as a component of equity within additional paid-in capital. The liability component of the debt instrument is accreted to par using the effective yield method, with the accretion being reported as a component of interest expense. Bond issuance costs are allocated to the debt and equity components in proportion to the debt proceeds. The Company’s adoption of this guidance effective January 1, 2009 reduced net income for the three months ended June 30, 2008 by $9 million or $0.02 per share of Common Stock, on both a basic and diluted basis and reduced net income for the six months ended June 30, 2008 by $18 million or $0.04 per share of Common Stock, on both a basic and diluted basis. The Company’s adoption of this guidance effective January 1, 2009 reduced net income for the years ended December 31, 2008, 2007, 2006 and 2005 by $44 million, $42 million, $36 million and $5 million, or $0.10, $0.09, $0.07 and $0.01 per share of Common Stock, on both a basic and diluted basis, respectively.

 

In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the list of factors an entity should consider in developing renewal or extension assumptions used to determine the useful life of recognized intangible assets under SFAS No. 142. This FSP is effective for fiscal years and interim periods beginning after December 15, 2008, with the guidance for determining the useful life of a recognized intangible asset being applied prospectively to intangible assets acquired after the effective date and the disclosure requirements being applied prospectively to all intangible assets recognized as of, and after, the effective date. The Company’s adoption of this guidance effective January 1, 2009 did not have a material effect on the Company’s consolidated financial position or results of operations.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” an amendment of SFAS No. 133. This statement amends and expands the disclosure requirements for derivative instruments and hedging activities by requiring companies to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The Company’s adoption of this guidance effective January 1, 2009 did not have a material effect on the Company’s consolidated financial position or results of operations. The required disclosures are provided in Note 14.

 

15


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

In February 2008, the FASB issued FSP FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” The FSP provides recognition and derecognition guidance for a repurchase financing transaction, which is a repurchase agreement that relates to a previously transferred financial asset between the same counterparties, that is entered into contemporaneously with or in contemplation of, the initial transfer. The FSP is effective for fiscal years beginning after November 15, 2008. The Company’s adoption of this guidance on a prospective basis effective January 1, 2009 did not have a material effect on the Company’s consolidated financial position or results of operations.

 

In February 2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement No. 157.” This FSP applies to nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). FSP FAS 157-2 delays the effective date of SFAS No. 157 for these items to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company’s adoption of this guidance effective January 1, 2009 did not have a material effect on the Company’s consolidated financial position or results of operations.

 

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations.” This statement, which addresses the accounting for business acquisitions, is effective for fiscal years beginning on or after December 15, 2008, with early adoption prohibited, and generally applies to business acquisitions completed after December 31, 2008. Among other things, the new standard requires that all acquisition-related costs be expensed as incurred, and that all restructuring costs related to acquired operations be expensed as incurred. This new standard also addresses the current and subsequent accounting for assets and liabilities arising from contingencies acquired or assumed and, for acquisitions both prior and subsequent to December 31, 2008, requires the acquirer to recognize changes in the amount of its deferred tax benefits that are recognizable because of a business combination either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances. The Company’s adoption of this guidance effective January 1, 2009 did not have a material effect on the Company’s consolidated financial position or results of operations, but may have an effect on the accounting for future business combinations.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” SFAS No. 160 changes the accounting for minority interests, which will be recharacterized as noncontrolling interests and classified by the parent company as a component of equity. Upon adoption, SFAS No. 160 requires retroactive adoption of the presentation and disclosure requirements for existing noncontrolling interests and prospective adoption for all other requirements. The Company’s adoption of this guidance effective January 1, 2009 did not have a material effect on the Company’s consolidated financial position or results of operations, but did affect financial statement presentation and disclosure. Noncontrolling interests, previously reported as a liability, are now required to be reported as a separate component of equity on the balance sheet, and totaled $293 million at June 30, 2008 and totaled $351 million, $409 million, $329 million, $110 million, and $97 million at December 31, 2008, 2007, 2006, 2005 and 2004, respectively. In addition, income attributable to the noncontrolling interests, which was previously reported as an expense in “General and administrative expenses” and reflected within Income from Continuing Operations is now reported as a separate amount below Net Income, and totaled $8 million and $32 million for the three and six months ended June 30, 2008, respectively, and totaled $36 million, $67 million, $25 million, $21 million and $13 million for the years ended December 31, 2008, 2007, 2006, 2005 and 2004, respectively.

 

Recent Accounting Pronouncements

 

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162.” The FASB’s Codification was launched on July 1, 2009 as the source of authoritative U.S. GAAP to be applied by

 

16


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

nongovernmental entities. The Codification is not intended to change U.S. GAAP but is a new structure which takes accounting pronouncements and organizes them by accounting topic. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. This statement will become effective for the Company beginning with the interim reporting period ending September 30, 2009 and will impact the way the Company references U.S. GAAP accounting standards in the financial statements.

 

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).” This statement amends the consolidation guidance for variable interest entities. It also makes certain changes to the disclosures required under FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities,” which the Company adopted effective December 31, 2008. This statement is effective for interim and annual reporting periods beginning after November 15, 2009. The Company will adopt this guidance effective January 1, 2010. The Company is currently assessing the impact of this statement on the Company’s consolidated financial position, results of operations and financial statement disclosures.

 

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140.” This statement changes the accounting for transfers of financial assets, and is effective for transfers of financial assets occurring in interim and annual reporting periods beginning after November 15, 2009. It removes the concept of a qualifying special-purpose entity (QSPE) from Statement No. 140 and removes the exception from applying FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” to qualifying special-purpose entities. It also defines “participating interest” to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale. Disclosure provisions will be applied to transfers that occurred both before and after January 1, 2010. The Company will adopt this guidance effective January 1, 2010. The Company is currently assessing the impact of this statement on the Company’s consolidated financial position, results of operations and financial statement disclosures.

 

In December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”, which amends the plan asset disclosures required under FAS 132(R). This FSP requires additional disclosures about the components of plan assets, investment strategies for plan assets, significant concentrations of risk within plan assets, and requires disclosures regarding the measurement of plan assets similar to those required under SFAS No. 157. This FSP is effective for fiscal years ending after December 15, 2009. The Company will provide the required disclosures in the annual reporting period ending December 31, 2009.

 

3. ACQUISITIONS AND DISPOSITIONS

 

Acquisition of Yamato Life

 

On May 1, 2009, the Company’s Gibraltar Life operations acquired Yamato Life, a Japanese life insurance company that declared bankruptcy in October 2008. Gibraltar Life served as the reorganization sponsor for Yamato and under the reorganization agreement acquired Yamato by contributing $72 million of capital to Yamato. As of June 30, 2009, the Statement of Financial Position of Prudential Financial reflects $2.3 billion of assets and $2.3 billion of liabilities related to Yamato. Subsequent to the acquisition, the Company renamed the acquired company Prudential Financial of Japan Life Insurance Company Ltd.

 

Acquisition of Hyundai Investment and Securities Co., Ltd.

 

In 2004, the Company acquired an 80 percent interest in Hyundai Investment and Securities Co., Ltd., a Korean asset management firm, from an agency of the Korean government, for $301 million in cash, including

 

17


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

$210 million used to repay debt assumed. Subsequent to the acquisition, the company was renamed Prudential Investment & Securities Co., Ltd. On January 25, 2008, the Company acquired the remaining 20 percent for $90 million.

 

Additional Investment in UBI Pramerica

 

On January 18, 2008, the Company made an additional investment of $154 million in its UBI Pramerica operating joint venture in Italy, which is accounted for under the equity method. This additional investment was necessary to maintain the Company’s ownership interest at 35 percent and was a result of the merger of the Company’s joint venture partner with another Italian bank, and the subsequent consolidation of their asset management companies into the UBI Pramerica joint venture.

 

Discontinued Operations

 

Income (loss) from discontinued businesses, including charges upon disposition, are as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2009             2008             2009             2008      
     (in millions)  

Real estate investments sold or held for sale

   $ 26      $ —        $ 28      $ 1   

Equity sales, trading and research operations

     1        (1     1        (2

International securities operations

     1        (3     1       (2

Mexican asset management operations

     (1     —          (1     1   
                                

Income (loss) from discontinued operations before income taxes

     27        (4     29        (2

Income tax expense (benefit)

     6        (1     7        (1
                                

Income (loss) from discontinued operations, net of taxes

   $ 21      $ (3   $ 22      $ (1
                                

 

Real estate investments sold or held for sale reflects the income from discontinued real estate investments.

 

The Company’s Unaudited Interim Consolidated Statements of Financial Position include total assets and total liabilities related to discontinued businesses of $157 million and $93 million, respectively, as of June 30, 2009 and $218 million and $149 million, respectively, as of December 31, 2008. Charges recorded in connection with the disposals of businesses include estimates that are subject to subsequent adjustment. It is possible that such adjustments might be material to future net results of operations of a particular quarterly or annual period.

 

18


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

4. INVESTMENTS

 

Fixed Maturities and Equity Securities

 

The following tables provide information relating to fixed maturities and equity securities (excluding investments classified as trading) as of the dates indicated:

 

     June 30, 2009  
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
   Other-than-
temporary
impairments
in AOCI(3)
 
     (in millions)  

Fixed maturities, available for sale

              

U.S. Treasury securities and obligations of U.S. government authorities and agencies

   $ 6,260    $ 483    $ 180    $ 6,563    $ —     

Obligations of U.S. states and their political subdivisions

     714      36      2      748      —     

Foreign government bonds

     34,772      1,135      160      35,747      —     

Corporate securities

     86,436      2,120      5,707      82,849      (99

Asset-backed securities(1)

     14,516      117      4,125      10,508      (1,748

Commercial mortgage-backed securities

     11,355      44      1,148      10,251      19   

Residential mortgage-backed securities(2)

     12,022      410      185      12,247      (11
                                    

Total fixed maturities, available for sale

   $ 166,075    $ 4,345    $ 11,507    $ 158,913    $ (1,839
                                    

Equity securities, available for sale

   $ 6,019    $ 557    $ 659    $ 5,917   
                              

 

(1) Includes credit tranched securities collateralized by sub-prime mortgages, auto loans, credit cards, education loans, and other asset types.
(2) Includes publicly traded agency pass-through securities and collateralized mortgage obligations.
(3) Represents the amount of other-than-temporary impairment losses in “Accumulated other comprehensive income (loss),” or “AOCI,” which, from January 1, 2009, were not included in earnings under FSP FAS 115-2 and FAS 124-2. Amount excludes $113 million of net unrealized gains on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.

 

     June 30, 2009
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
   Other-than-
temporary
impairments
in AOCI(3)
     (in millions)

Fixed maturities, held to maturity

              

Foreign government bonds

   $ 1,022    $ 35    $ 1    $ 1,056    $ —  

Corporate securities

     835      —        123      712      —  

Asset-backed securities(1)

     902      9      6      905      —  

Commercial mortgage-backed securities

     446      64      —        510      —  

Residential mortgage-backed securities(2)

     1,730      31      6      1,755      —  
                                  

Total fixed maturities, held to maturity

   $ 4,935    $ 139    $ 136    $ 4,938    $ —  
                                  

 

(1) Includes credit tranched securities collateralized by sub-prime mortgages, auto loans, credit cards, education loans, and other asset types.
(2) Includes publicly traded agency pass-through securities and collateralized mortgage obligations.
(3) Represents the amount of other-than-temporary impairment losses in “Accumulated other comprehensive income (loss),” or “AOCI,” which, from January 1, 2009, were not included in earnings under FSP FAS 115-2 and FAS 124-2.

 

19


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

     December 31, 2008
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
     (in millions)

Fixed maturities, available for sale

           

U.S. Treasury securities and obligations of U.S. government authorities and agencies

   $ 6,236    $ 1,355    $ 13    $ 7,578

Obligations of U.S. states and their political subdivisions

     891      32      12      911

Foreign government bonds

     32,585      2,266      112      34,739

Corporate securities

     87,028      1,630      9,604      79,054

Asset-backed securities

     16,057      109      4,174      11,992

Commercial mortgage-backed securities

     12,381      5      2,334      10,052

Residential mortgage-backed securities

     13,513      450      233      13,730
                           

Total fixed maturities, available for sale

   $ 168,691    $ 5,847    $ 16,482    $ 158,056
                           

Equity securities, available for sale

   $ 7,288    $ 259    $ 1,482    $ 6,065
                           
     December 31, 2008
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
     (in millions)

Fixed maturities, held to maturity

           

Foreign government bonds

   $ 1,093    $ 115    $ —      $ 1,208

Corporate securities

     867      9      128      748

Asset-backed securities

     782      25      1      806

Commercial mortgage-backed securities

     11      —        —        11

Residential mortgage-backed securities

     1,055      8      4      1,059
                           

Total fixed maturities, held to maturity

   $ 3,808    $ 157    $ 133    $ 3,832
                           

 

The amortized cost and fair value of fixed maturities by contractual maturities at June 30, 2009, are as follows:

 

     Available for Sale    Held to Maturity
     Amortized
Cost
   Fair
Value
   Amortized
Cost
   Fair
Value
     (in millions)    (in millions)

Due in one year or less

   $ 7,711    $ 7,702    $ 10    $ 10

Due after one year through five years

     32,998      32,492      —        —  

Due after five years through ten years

     32,516      31,169      22      22

Due after ten years

     54,957      54,544      1,825      1,736

Asset-backed securities

     14,516      10,508      902      905

Commercial mortgage-backed securities

     11,355      10,251      446      510

Residential mortgage-backed securities

     12,022      12,247      1,730      1,755
                           

Total

   $ 166,075    $ 158,913    $ 4,935    $ 4,938
                           

 

Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Asset-backed, commercial mortgage-backed, and residential mortgage-backed securities are shown separately in the table above, as they are not due at a single maturity date.

 

20


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

The following table depicts the sources of fixed maturity proceeds and related gross investment gains (losses), as well as losses on impairments of both fixed maturities and equity securities:

 

     Three Months
Ended
June 30,
    Six Months
Ended
June 30,
 
     2009     2008     2009     2008  
     (in millions)  

Fixed maturities, available for sale:

        

Proceeds from sales

   $ 8,000      $ 18,616      $ 16,643      $ 36,437   

Proceeds from maturities/repayments

     4,401        4,314        8,426        10,195   

Gross investment gains from sales, prepayments and maturities

     266        194        629        491   

Gross investment losses from sales and maturities

     (259     (210     (376     (394

Fixed maturities, held to maturity:

        

Proceeds from maturities/repayments

   $ 106      $ 62      $ 168      $ 111   

Gross investment gains from prepayments

     —          —          —          —     

Fixed maturity and equity security impairments:

        

Total writedowns for other-than-temporary impairment losses on fixed maturities

   $ (1,312   $ (661   $ (3,167   $ (1,200

Portion of loss recognized in other comprehensive income (before taxes)

     813        —          2,063        —     
                                

Net writedowns for other-than-temporary impairment losses on fixed maturities recognized in earnings

   $ (499   $ (661   $ (1,104   $ (1,200

Writedowns for other-than-temporary impairment losses on equity securities

   $ (263   $ (230   $ (756   $ (330

 

As discussed in Note 2, a portion of certain other-than-temporary impairment (“OTTI”) losses on fixed maturity securities are recognized in “Other comprehensive income (loss)” (“OCI”). The net amount recognized in earnings (“credit loss impairments”) represents the difference between the amortized cost of the 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. Any remaining difference between the fair value and amortized cost is recognized in OCI. The following tables set forth the amount of pre-tax credit loss impairments on fixed maturity securities held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized in OCI, and the corresponding changes in such amounts for the periods indicated.

 

21


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

 

Credit losses recognized in earnings on fixed maturity securities held by the Company for which a portion of the OTTI loss was recognized in OCI

  
     Six Months
Ended
June 30, 2009
 
     (in millions)  

Balance, December 31, 2008

   $ —     

Credit losses remaining in retained earnings related to adoption of FSP FAS 115-2 and FAS 124-2

     658   

Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period

     (91

Credit loss impairments previously recognized on securities impaired to fair value during the period(1)

     (6

Credit loss impairment recognized in the current period on securities not previously impaired

     558   

Additional credit loss impairments recognized in the current period on securities previously impaired

     394   

Increases due to the passage of time on previously recorded credit losses

     16   

Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected

     (7
        

Balance, June 30, 2009

   $ 1,522   
        

 

(1) Represents circumstances where the Company determined in the current period that it intends to sell the security or it is more likely than not that it will be required to sell the security before recovery of the security’s amortized cost.

 

Credit losses recognized in earnings on fixed maturity securities held by the Company for which a portion of the OTTI loss was recognized in OCI

  
     Three Months
Ended
June 30, 2009
 
     (in millions)  

Balance, March 31, 2009

   $ 1,207   

Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period

     (90

Credit loss impairments previously recognized on securities impaired to fair value during the period(1)

     (6

Credit loss impairment recognized in the current period on securities not previously impaired

     164   

Additional credit loss impairments recognized in the current period on securities previously impaired

     239   

Increases due to the passage of time on previously recorded credit losses

     14   

Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected

     (6
        

Balance, June 30, 2009

   $ 1,522   
        

 

(1) Represents circumstances where the Company determined in the current period that it intends to sell the security or it is more likely than not that it will be required to sell the security before recovery of the security’s amortized cost.

 

22


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

Trading Account Assets Supporting Insurance Liabilities

 

The following table sets forth the composition of “Trading account assets supporting insurance liabilities” as of the dates indicated:

 

     June 30, 2009    December 31, 2008
     Amortized
Cost
   Fair
Value
   Amortized
Cost
   Fair
Value
     (in millions)    (in millions)

Short-term investments and cash equivalents

   $ 553    $ 553    $ 1,232    $ 1,232

Fixed maturities:

           

Corporate securities

     8,870      8,612      8,814      7,971

Commercial mortgage-backed securities

     2,235      2,132      2,335      2,092

Residential mortgage-backed securities

     1,399      1,381      708      684

Asset-backed securities

     930      692      915      635

Foreign government bonds

     474      479      416      420

U.S. government authorities and agencies and obligations of U.S. states

     121      114      147      143
                           

Total fixed maturities

     14,029      13,410      13,335      11,945

Equity securities

     953      803      1,074      698
                           

Total trading account assets supporting insurance liabilities

   $ 15,535    $ 14,766    $ 15,641    $ 13,875
                           

 

The net change in unrealized gains (losses) from trading account assets supporting insurance liabilities still held at period end, recorded within “Asset management fees and other income” was $752 million and $(80) million during the three months ended June 30, 2009 and 2008, respectively, and $997 million and $(336) million during the six months ended June 30, 2009 and 2008, respectively.

 

Other Trading Account Assets

 

The following table sets forth the composition of the Company’s other trading account assets as of the dates indicated:

 

     June 30, 2009    December 31, 2008
     Amortized
Cost
   Fair
Value
   Amortized
Cost
   Fair
Value
     (in millions)    (in millions)

Short-term investments and cash equivalents

   $ 6    $ 6    $ 7    $ 7

Fixed maturities:

           

Asset-backed securities

     1,695      1,622      423      308

Residential mortgage-backed securities

     260      118      278      150

Corporate securities

     257      244      230      204

Commercial mortgage-backed securities

     213      120      217      136

U.S. government authorities and agencies and obligations of U.S. states

     56      59      102      106

Foreign government bonds

     32      33      32      33
                           

Total fixed maturities

     2,513      2,196      1,282      937

Derivative instruments and other

     1,196      1,410      2,949      3,250

Equity securities

     99      103      144      142
                           

Total other trading account assets

   $ 3,814    $ 3,715    $ 4,382    $ 4,336
                           

 

23


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

The net change in unrealized gains (losses) from other trading account assets still held at period end, recorded within “Asset management fees and other income” was $(24) million and $236 million during the three months ended June 30, 2009 and 2008, respectively, and $(53) million and $(105) million during the six months ended June 30, 2009 and 2008, respectively.

 

Net Investment Income

 

Net investment income for the three and six months ended June 30, 2009 and 2008 was from the following sources:

 

     Three Months
Ended

June 30,
    Six Months
Ended
June 30,
 
     2009     2008     2009     2008  
     (in millions)  

Fixed maturities, available for sale

   $ 2,024      $ 2,104      $ 4,124      $ 4,219   

Fixed maturities, held to maturity

     37        22        68        45   

Equity securities, available for sale

     79        93        156        165   

Trading account assets

     196        198        393        402   

Commercial mortgage and other loans

     485        485        968        956   

Policy loans

     141        136        278        269   

Broker-dealer related receivables

     5        39        11        83   

Short-term investments and cash equivalents

     34        120        97        282   

Other long-term investments

     (52     53        (158     131   
                                

Gross investment income

     2,949        3,250        5,937        6,552   

Less: Investment expenses

     (114     (224     (247     (500
                                

Net investment income

   $ 2,835      $ 3,026      $ 5,690      $ 6,052   
                                

 

24


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

Realized Investment Gains (Losses), Net

 

Realized investment gains (losses), net, for the three and six months ended June 30, 2009 and 2008 were from the following sources:

 

     Three Months
Ended

June 30,
    Six Months
Ended
June 30,
 
     2009     2008     2009     2008  
     (in millions)  

Other-than-temporary impairment losses on fixed maturities

   $ (1,312   $ (661   $ (3,167   $ (1,200

Portion of loss recognized in other comprehensive income (before taxes)

     813        —          2,063        —     
                                

Net other-than-temporary impairment losses on fixed maturities recognized in earnings

     (499     (661     (1,104     (1,200

Fixed maturities – all other

     7        (16     253        97   
                                

Fixed maturities, net

     (492     (677     (851     (1,103

Equity securities

     (318     (210     (819     (359

Commercial mortgage and other loans

     (209     (49     (329     (78

Investment real estate

     (7     —          (21     —     

Joint ventures and limited partnerships

     (39     (15     (53     (15

Derivatives

     (1,219     46        (69     (271

Other

     9        7        12        16   
                                

Realized investment gains (losses), net

   $ (2,275   $ (898   $ (2,130   $ (1,810
                                

 

25


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

Net Unrealized Investment Gains (Losses)

 

Net unrealized investment gains and losses on securities classified as “available for sale” and certain other long-term investments and other assets are included in the Consolidated Statements of Financial Position as a component of “Accumulated other comprehensive income (loss),” or “AOCI.” Changes in these amounts include reclassification adjustments to exclude from “Other comprehensive income (loss)” those items that are included as part of “Net income” for a period that had been part of “Other comprehensive income (loss)” in earlier periods. The amounts for the periods indicated below, split between amounts related to fixed maturity securities on which an OTTI loss has been recognized, and all other net unrealized investment gains and losses, are as follows:

 

Net Unrealized Investment Gains and Losses on Fixed Maturity Securities on which an OTTI loss has been recognized

 

    Net
Unrealized
Gains
(Losses) On
Investments
    Deferred
Policy
Acquisition
Costs and
Valuation
of Business
Acquired
  Future
Policy
Benefits
    Policyholders’
Dividends
  Deferred
Income
Tax
(Liability)
Benefit
    Accumulated
Other
Comprehensive
Income (Loss)
Related To Net
Unrealized
Investment
Gains (Losses)
 
    (in millions)  

Balance, December 31, 2008

  $ —        $ —     $ —        $ —     $ —        $ —     

Cumulative impact of the adoption of FSP FAS 115-2 and FAS 124-2

    (1,139     9     1        —       388        (741

Net investment gains (losses) on investments arising during the period

    175        —       —          —       (63     112   

Reclassification adjustment for (gains) losses included in net income

    725        —       —          —       (261     464   

Reclassification adjustment for OTTI losses excluded from net income(1)

    (1,487     —       —          —       535        (952

Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and valuation of business acquired

    —          234     —          —       (84     150   

Impact of net unrealized investment (gains) losses on future policy benefits

    —          —       (23     —       8        (15

Impact of net unrealized investment (gains) losses on policyholders’ dividends

    —          —       —          —       —          —     
                                           

Balance, June 30, 2009

  $ (1,726   $ 243   $ (22   $ —     $ 523      $ (982
                                           

 

(1) Represents “transfers in” related to the portion of OTTI losses recognized during the period that were not recognized in earnings for securities with no prior OTTI loss.

 

26


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

All Other Net Unrealized Investment Gains and Losses in AOCI

 

    Net
Unrealized
Gains

(Losses) On
Investments(1)
    Deferred
Policy
Acquisition
Costs and
Valuation
of Business
Acquired
    Future
Policy
Benefits
    Policyholders’
Dividends
    Deferred
Income
Tax
(Liability)
Benefit
    Accumulated
Other
Comprehensive
Income (Loss)
Related To Net
Unrealized
Investment
Gains (Losses)
 
    (in millions)  

Balance, December 31, 2008

  $ (11,893 )   $ 1,479      $ (384 )   $ 431      $ 3,632      $ (6,735 )

Cumulative impact of the adoption of FSP FAS 115-2 and FAS 124-2

    (322     15        4        418        (38     77   

Net investment gains (losses) on investments arising during the period

    4,081        —          —          —          (1,320     2,761   

Reclassification adjustment for (gains) losses included in net income

    971        —          —          —          (350     621   

Reclassification adjustment for OTTI losses excluded from net income(2)

    1,487        —          —          —          (535     952   

Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and valuation of business acquired

    —          (880     —          —          308        (572

Impact of net unrealized investment (gains) losses on future policy benefits

    —          —          202        —          (70     132   

Impact of net unrealized investment (gains) losses on policyholders’ dividends

    —          —          —          (849     298        (551
                                               

Balance, June 30, 2009

  $ (5,676   $ 614      $ (178   $ —        $ 1,925      $ (3,315
                                               

 

(1) Includes cash flow hedges. See Note 14 for information on cash flow hedges.
(2) Represents “transfers out” related to the portion of OTTI losses recognized during the period that were not recognized in earnings for securities with no prior OTTI loss.

 

The table below presents net unrealized gains (losses) on investments by asset class as of the dates indicated:

 

     June 30,
2009
    December 31,
2008
 
     (in millions)  

Fixed maturity securities on which an OTTI loss has been recognized

   $ (1,726 )   $ —     

Fixed maturity securities, available for sale—all other

     (5,436     (10,635 )

Equity securities, available for sale

     (102     (1,223

Derivatives designated as cash flow hedges(1)

     (273     (227

Other investments(2)

     135        192   
                

Net unrealized gains (losses) on investments

   $ (7,402 )   $ (11,893 )
                

 

(1) See Note 14 for more information on cash flow hedges.
(2) Includes $237 million of net unrealized losses on held to maturity securities that were transferred from available-for-sale.

 

27


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

Duration of Gross Unrealized Loss Positions for Fixed Maturities

 

The following table shows the fair value and gross unrealized losses aggregated by investment category and length of time that individual fixed maturity securities have been in a continuous unrealized loss position, as of the dates indicated:

 

     June 30, 2009
     Less than twelve
months(2)
   Twelve months or
more(2)
   Total
     Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
     (in millions)

Fixed maturities(1)

                 

U.S. Treasury securities and obligations of U.S. government authorities and agencies

   $ 1,949    $ 175    $ 36    $ 5    $ 1,985    $ 180

Obligations of U.S. states and their political subdivisions

     57      2      2      —        59      2

Foreign government bonds

     7,317      124      338      37      7,655      161

Corporate securities

     16,233      1,374      28,751      4,456      44,984      5,830

Commercial mortgage-backed securities

     2,391      263      6,476      885      8,867      1,148

Asset-backed securities

     2,982      2,103      5,156      2,028      8,138      4,131

Residential mortgage-backed securities

     2,448      52      1,199      139      3,647      191
                                         

Total

   $ 33,377    $ 4,093    $ 41,958    $ 7,550    $ 75,335    $ 11,643
                                         

 

(1) Includes $1,583 million of fair value and $136 million of gross unrealized losses at June 30, 2009 on securities classified as held to maturity, which are not reflected in accumulated other comprehensive income.
(2) The month count for aging of unrealized losses was reset back to historical unrealized loss month counts for securities impacted by the adoption of FSP FAS 115-2 and FAS 124-2.

 

     December 31, 2008
     Less than twelve
months
   Twelve months or
more
   Total
     Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
     (in millions)

Fixed maturities(1)

                 

U.S. Treasury securities and obligations of U.S. government authorities and agencies

   $ 994    $ 13    $ —      $ —      $ 994    $ 13

Obligations of U.S. states and their political subdivisions

     299      11      7      1      306      12

Foreign government bonds

     3,580      72      294      40      3,874      112

Corporate securities

     36,549      4,508      17,707      5,224      54,256      9,732

Commercial mortgage-backed securities

     6,537      1,380      3,407      954      9,944      2,334

Asset-backed securities

     4,925      1,791      5,910      2,384      10,835      4,175

Residential mortgage-backed securities

     824      109      1,557      128      2,381      237
                                         

Total

   $ 53,708    $ 7,884    $ 28,882    $ 8,731    $ 82,590    $ 16,615
                                         

 

(1) Includes $926 million of fair value and $133 million of gross unrealized losses at December 31, 2008 on securities classified as held to maturity, which are not reflected in accumulated other comprehensive income.

 

28


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

The gross unrealized losses at June 30, 2009 and December 31, 2008 are composed of $7,769 million and $12,863 million related to investment grade securities and $3,874 million and $3,752 million related to below investment grade securities, respectively. At June 30, 2009, $6,338 million of the gross unrealized losses represented declines in value of greater than 20%, $1,698 million of which had been in that position for less than six months, as compared to $11,505 million at December 31, 2008 that represented declines in value of greater than 20%, $10,509 million of which had been in that position for less than six months. At June 30, 2009, the $7,550 million of gross unrealized losses of twelve months or more were concentrated in asset-backed securities, manufacturing and services sectors of the Company’s corporate securities, and commercial mortgage-backed securities. At December 31, 2008, the $8,731 million of gross unrealized losses of twelve months or more were concentrated in asset-backed securities, and in the manufacturing and utilities sectors of the Company’s corporate securities. In accordance with its policy described in Note 2, the Company concluded that an adjustment to earnings for other-than-temporary impairments for these securities was not warranted at June 30, 2009 or December 31, 2008. These conclusions are based on a detailed analysis of the underlying credit and cashflows on each security. The gross unrealized losses are primarily attributable to credit spread widening and increased liquidity discounts. At June 30, 2009, the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before the anticipated recovery of its remaining amortized cost basis.

 

Duration of Gross Unrealized Loss Positions for Equity Securities

 

The following tables show the fair value and gross unrealized losses aggregated by length of time that individual equity securities have been in a continuous unrealized loss position, as of the dates indicated:

 

     June 30, 2009
     Less than twelve
months
   Twelve months or
more
   Total
     Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
     (in millions)

Equity securities, available for sale

   $ 2,234    $ 502    $ 580    $ 157    $ 2,814    $ 659
                                         

 

     December 31, 2008
     Less than twelve
months
   Twelve months or
more
   Total
     Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
     (in millions)

Equity securities, available for sale

   $ 3,978    $ 1,419    $ 263    $ 63    $ 4,241    $ 1,482
                                         

 

At June 30, 2009, $450 million of the gross unrealized losses represented declines of greater than 20%, $139 million of which had been in that position for less than six months. At December 31, 2008, $1,227 million of the gross unrealized losses represented declines of greater than 20%, $1,086 million of which had been in that position for less than six months. Securities with fair value of $580 million and $263 million and gross unrealized losses of $157 million and $63 million that have been in a continuous unrealized loss position for twelve months or more as of June 30, 2009 and December 31, 2008, respectively, represent perpetual preferred securities, which have characteristics of both debt and equity securities and to which an impairment model similar to the Company’s fixed maturities is applied. In accordance with its policy described in Note 2, the Company concluded that an adjustment for other-than-temporary impairments for these securities was not warranted at June 30, 2009 or December 31, 2008.

 

29


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

5. VARIABLE INTEREST ENTITIES

 

In the normal course of its activities, the Company enters into relationships with various special purpose entities and other entities that are deemed to be variable interest entities (“VIEs”), in accordance with FIN No. 46(R), “Consolidation of Variable Interest Entities.” A VIE is an entity that either (1) has equity investors that lack certain essential characteristics of a controlling financial interest (including the ability to control the entity, the obligation to absorb the entity’s expected losses and the right to receive the entity’s expected residual returns) or (2) lacks sufficient equity to finance its own activities without financial support provided by other entities, which in turn would be expected to absorb at least some of the expected losses of the VIE. If the Company determines that it stands to absorb a majority of the VIE’s expected losses or to receive a majority of the VIE’s expected residual returns, the Company would be deemed to be the VIE’s “primary beneficiary” and would be required to consolidate the VIE.

 

Consolidated Variable Interest Entities for which the Company is the Sponsor

 

The Company is the sponsor of certain asset-backed investment vehicles (commonly referred to as collateralized debt obligations, or “CDOs”) and certain other vehicles for which the Company earns fee income for investment management services, including certain investment structures which the Company’s asset management business invests with other co-investors in investment funds referred to as feeder funds. The Company sells or syndicates investments through these vehicles, principally as part of the proprietary investing activity of the Company’s asset management businesses. Additionally, the Company may invest in debt or equity securities issued by these vehicles. CDOs raise capital by issuing debt securities, and use the proceeds to purchase investments, typically interest-bearing financial instruments. The Company analyzes these relationships to determine whether or not it absorbs the majority of expected losses or receives the majority of the expected residual returns, and thus is the primary beneficiary. This analysis includes a review of the Company’s size and relative position in the capital structure and/or a review of cash flow projections driven by assumptions regarding the underlying collateral including default rate, recovery rate, deal call probability, reinvestment rates and fees and expenses. The Company has not provided material financial or other support that was not contractually required to any VIE for which it is the sponsor.

 

The Company has determined that it is the primary beneficiary of certain VIEs that it sponsors, including one CDO and certain other investment structures, as it absorbs a majority of the expected losses or receives the majority of the expected residual returns. These VIEs are consolidated and reflected in the table below. The table below reflects the carrying amount and balance sheet caption in which the assets and liabilities of consolidated VIEs for which the Company is the sponsor are reported. The creditors of these VIEs do not have recourse to the Company in excess of the assets contained within the VIE.

 

     June 30,
2009
   December 31,
2008
     (in millions)

Fixed maturities, available for sale

   $ 26    $ 29

Commercial mortgages and other loans

     424      450

Other long-term investments

     11      100

Cash and cash equivalents

     33      1

Accrued investment income

     2      2

Other assets

     4      5

Separate account assets

     72      91
             

Total assets of consolidated VIEs

   $ 572    $ 678
             

Other liabilities

   $ 413    $ 424

Separate account liabilities

     72      91
             

Total liabilities of consolidated VIEs

   $ 485    $ 515
             

 

30


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

Unconsolidated Variable Interest Entities for which the Company is the Sponsor

 

The Company has also determined that it is not the primary beneficiary of certain VIEs that it sponsors, including certain CDOs and other investment structures, as it will not absorb a majority of the expected losses or receive the majority of the expected residual returns. The Company’s maximum exposure to loss resulting from its relationship with unconsolidated VIEs it sponsors is limited to its investment in the VIEs, which was $401 million and $674 million at June 30, 2009 and December 31, 2008, respectively. The Company’s maximum exposure to loss decreased from December 31, 2008, reflecting the redemption of a fixed income fund as of June 30, 2009. These investments are reflected in “Fixed maturities, available for sale” and “Other long-term investments.” The fair value of assets held within these unconsolidated VIEs was $6,556 million and $5,916 million as of June 30, 2009 and December 31, 2008, respectively. There are no liabilities associated with these unconsolidated VIEs on the Company’s balance sheet.

 

Consolidated Variable Interest Entities for which the Company is not the Sponsor

 

The Company is the primary beneficiary of certain VIEs in which the Company has invested, as part of its investment activities, but over which the Company does not exercise control and is not the sponsor. Included among these structured investments are structured investments issued by a VIE that manages yen-denominated investments coupled with cross-currency coupon swap agreements thereby creating synthetic dual currency investments. The Company’s position in the capital structure and/or relative size indicates that the Company is the primary beneficiary. The Company has not provided material financial or other support that was not contractually required to these VIEs. The table below reflects the carrying amount and balance sheet caption in which the assets of consolidated VIEs for which the Company is not the sponsor are reported. The liabilities of consolidated VIEs for which the Company is not the sponsor are included in “Other liabilities” and are also reflected in the table below. These liabilities primarily comprise obligations under debt instruments issued by the VIEs that are non-recourse to the Company. The creditors of each consolidated VIE have recourse only to the assets of that VIE. As reflected in the table below, total assets of consolidated VIEs for which the Company is not a sponsor decreased from December 31, 2008 to June 30, 2009, reflecting the deconsolidation of a VIE that manages investments in the European market. The assets held by the VIE were distributed to the Company during March 2009.

 

     June 30,
2009
   December 31,
2008
     (in millions)

Fixed maturities, available for sale

   $ 103    $ 124

Fixed maturities, held to maturity

     951      1,012

Other trading account assets

     —        404

Other long-term investments

     6      43

Cash and cash equivalents

     2      79

Accrued investment income

     4      8

Other assets

     —        55
             

Total assets of consolidated VIEs

   $ 1,066    $ 1,725
             

Total liabilities of consolidated VIEs

   $ 19    $ 61
             

 

In addition, not reflected in the table above, the Company has created a trust that is a VIE, to facilitate Prudential Insurance’s Funding Agreement Notes Issuance Program (“FANIP”). The trust issues medium-term notes secured by funding agreements issued to the trust by Prudential Insurance with the proceeds of such notes. The trust is the beneficiary of an indemnity agreement with the Company that provides that the Company is responsible for costs related to the notes issued with limited exception. As a result, the Company has determined that it is the primary beneficiary of the trust, which is therefore consolidated.

 

31


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

The funding agreements represent an intercompany transaction that is eliminated upon consolidation. However, in recognition of the security interest in such funding agreements, the trust’s medium-term note liability of $6,678 million and $7,130 million at June 30, 2009 and December 31, 2008, respectively, is classified within “Policyholders’ account balances.” Creditors of the trust have recourse to Prudential Insurance if the trust fails to make contractual payments on the medium-term notes. The Company has not provided material financial or other support that was not contractually required to the trust.

 

Significant Variable Interests in Unconsolidated Variable Interest Entities for which the Company is not the Sponsor

 

In addition, in the normal course of its activities, the Company will invest in structured investments including VIEs for which it is not the sponsor. These structured investments typically invest in fixed income investments and are managed by third parties and include asset-backed securities, commercial mortgage-backed securities and residential mortgage-backed securities. The Company’s maximum exposure to loss on these structured investments, both VIEs and non-VIEs, is limited to the amount of its investment. The Company has not provided material financial or other support that was not contractually required to these structures. The Company has determined that it is not the primary beneficiary of these structures due to its relative size and position in the capital structure of these entities.

 

Included among these structured investments are asset-backed securities issued by VIEs that manage investments in the European market. In addition to a stated coupon, each investment provides a return based on the VIE’s portfolio of assets and related investment activity. The market value of these VIEs was approximately $8 billion as of both June 30, 2009 and December 31, 2008, and these VIEs were financed primarily through the issuance of notes similar to those purchased by the Company. The Company generally accounts for these investments as available for sale fixed maturities containing embedded derivatives that are bifurcated and marked-to-market through “Realized investment gains (losses), net,” based upon the change in value of the underlying portfolio. The Company’s variable interest in each of these VIEs represents less than 50% of the only class of variable interests issued by the VIE. The Company’s maximum exposure to loss from these interests was $1,079 million and $1,095 million at June 30, 2009 and December 31, 2008, respectively, which includes the fair value of the embedded derivatives.

 

6. CLOSED BLOCK

 

On the date of demutualization, Prudential Insurance established a Closed Block for certain individual life insurance policies and annuities issued by Prudential Insurance in the U.S. The recorded assets and liabilities were allocated to the Closed Block at their historical carrying amounts. The Closed Block forms the principal component of the Closed Block Business.

 

The policies included in the Closed Block are specified individual life insurance policies and individual annuity contracts that were in force on the effective date of the Plan of Reorganization and for which Prudential Insurance is currently paying or expects to pay experience-based policy dividends. Assets have been allocated to the Closed Block in an amount that has been determined to produce cash flows which, together with revenues from policies included in the Closed Block, are expected to be sufficient to support obligations and liabilities relating to these policies, including provision for payment of benefits, certain expenses, and taxes and to provide for continuation of the policyholder dividend scales in effect in 2000, assuming experience underlying such scales continues. To the extent that, over time, cash flows from the assets allocated to the Closed Block and claims and other experience related to the Closed Block are, in the aggregate, more or less favorable than what was assumed when the Closed Block was established, total dividends paid to Closed Block policyholders in the

 

32


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

future may be greater than or less than the total dividends that would have been paid to these policyholders if the policyholder dividend scales in effect in 2000 had been continued. Any cash flows in excess of amounts assumed will be available for distribution over time to Closed Block policyholders and will not be available to stockholders. If the Closed Block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside of the Closed Block. The Closed Block will continue in effect as long as any policy in the Closed Block remains in force unless, with the consent of the New Jersey insurance regulator, it is terminated earlier.

 

The excess of Closed Block Liabilities over Closed Block Assets at the date of the demutualization (adjusted to eliminate the impact of related amounts in “Accumulated other comprehensive income (loss)”) represented the estimated maximum future earnings at that date from the Closed Block expected to result from operations attributed to the Closed Block after income taxes. In establishing the Closed Block, the Company developed an actuarial calculation of the timing of such maximum future earnings. If actual cumulative earnings of the Closed Block from inception through the end of any given period are greater than the expected cumulative earnings, only the expected earnings will be recognized in income. Any excess of actual cumulative earnings over expected cumulative earnings will represent undistributed accumulated earnings attributable to policyholders, which are recorded as a policyholder dividend obligation. The policyholder dividend obligation represents amounts to be paid to Closed Block policyholders as an additional policyholder dividend unless otherwise offset by future Closed Block performance that is less favorable than originally expected. If the actual cumulative earnings of the Closed Block from its inception through the end of any given period are less than the expected cumulative earnings of the Closed Block, the Company will recognize only the actual earnings in income. However, the Company may reduce policyholder dividend scales in the future, which would be intended to increase future actual earnings until the actual cumulative earnings equaled the expected cumulative earnings. As of January 1, 2009, the Company recognized an adjusted policyholder dividend obligation of $851 million to Closed Block policyholders for the excess of actual cumulative earnings over the expected cumulative earnings, which reflects a cumulative adjustment of $418 million related to the Company’s adoption of FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” effective January 1, 2009. See Note 2 for more information on the adoption of FSP FAS 115-2 and FAS 124-2. As of June 30, 2009, actual cumulative earnings fell below the expected cumulative earnings by $622 million, thereby eliminating the cumulative earnings policyholder dividend obligation. Furthermore, due to the accumulation of net unrealized investment losses that have arisen subsequent to the establishment of the Closed Block, the policyholder dividend obligation balance as of December 31, 2008 was reduced to zero through “Accumulated other comprehensive income (loss)” and remains at zero as of June 30, 2009. See the table below for changes in the components of the policyholder dividend obligation for the six months ended June 30, 2009.

 

33


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

Closed Block Liabilities and Assets designated to the Closed Block, as well as maximum future earnings to be recognized from Closed Block Liabilities and Closed Block Assets, are as follows:

 

     June 30,
2009
    December 31,
2008
 
     (in millions)  

Closed Block Liabilities

    

Future policy benefits

   $ 51,720      $ 51,763   

Policyholders’ dividends payable

     1,039        1,036   

Policyholder dividend obligation

     —          —     

Policyholders’ account balances

     5,597        5,622   

Other Closed Block liabilities

     5,795        5,724   
                

Total Closed Block Liabilities

     64,151        64,145   
                

Closed Block Assets

    

Fixed maturities, available for sale, at fair value

     35,984        35,345   

Other trading account assets, at fair value

     163        120   

Equity securities, available for sale, at fair value

     2,468        2,354   

Commercial mortgage and other loans

     8,087        8,129   

Policy loans

     5,443        5,423   

Other long-term investments

     1,584        1,676   

Short-term investments

     1,234        1,340   
                

Total investments

     54,963        54,387   

Cash and cash equivalents

     1,596        1,779   

Accrued investment income

     612        615   

Other Closed Block assets

     428        409   
                

Total Closed Block Assets

     57,599        57,190   
                

Excess of reported Closed Block Liabilities over Closed Block Assets

     6,552        6,955   

Portion of above representing accumulated other comprehensive income:

    

Net unrealized investment gains (losses)

     (2,911     (4,371

Allocated to policyholder dividend obligation

     —          433   
                

Future earnings to be recognized from Closed Block Assets and Closed Block Liabilities

   $ 3,641      $ 3,017   
                

 

Information regarding the policyholder dividend obligation is as follows:

 

     Six Months Ended
June 30, 2009
 
     (in millions)  

Balance, January 1, 2009

   $ —     

Impact from earnings allocable to policyholder dividend obligation

     (851

Change in net unrealized investment gains (losses) allocated to policyholder dividend obligation

     851   
        

Balance, June 30, 2009

   $ —     
        

 

34


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

Closed Block revenues and benefits and expenses for the three and six months ended June 30, 2009 and 2008 were as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2009             2008             2009             2008      
     (in millions)  

Revenues

        

Premiums

   $ 867      $ 965      $ 1,640      $ 1,821   

Net investment income

     710        800        1,428        1,641   

Realized investment gains (losses), net

     (820     (349     (1,228     (444

Other income

     37        8        52        27   
                                

Total Closed Block revenues

     794        1,424        1,892        3,045   
                                

Benefits and Expenses

        

Policyholders’ benefits

     992        1,093        1,904        2,065   

Interest credited to policyholders’ account balances

     35        35        70        70   

Dividends to policyholders

     253        155        256        657   

General and administrative expenses

     143        160        288        332   
                                

Total Closed Block benefits and expenses

     1,423        1,443        2,518        3,124   
                                

Closed Block revenues, net of Closed Block benefits and expenses, before income taxes and discontinued operations

     (629     (19     (626     (79
                                

Income tax expense (benefit)

     (7     (9     (2     (61
                                

Closed Block revenues, net of Closed Block benefits and expenses and income taxes, before discontinued operations

     (622     (10     (624     (18

Income from discontinued operations, net of taxes

     —          —          —          —     
                                

Closed Block revenues, net of Closed Block benefits and expenses, income taxes and discontinued operations

   $ (622   $ (10   $ (624   $ (18
                                

 

7. EQUITY

 

The Company has outstanding two classes of common stock: the Common Stock and the Class B Stock. The changes in the number of shares issued, held in treasury and outstanding are as follows for the periods indicated:

 

     Common Stock    Class B Stock
   Issued    Held In
Treasury
    Outstanding    Issued and
Outstanding
     (in millions)

Balance, December 31, 2008

   604.9    183.6      421.3    2.0

Common Stock issued(1)

   36.9    —        36.9    —  

Common Stock acquired

   —      —        —      —  

Stock-based compensation programs(2)

   —      (2.3   2.3    —  
                    

Balance, June 30, 2009

   641.8    181.3      460.5    2.0
                    

 

(1) In June 2009, the Company issued 36,858,975 shares of Common Stock in a public offering at a price of $39.00 per share for net proceeds of $1.391 billion.
(2) Represents net shares issued from treasury pursuant to the Company’s stock-based compensation programs.

 

35


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

Comprehensive Income

 

The components of comprehensive income are as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2009             2008             2009             2008      
     (in millions)  

Net income

   $ 180      $ 589      $ 183      $ 673   

Other comprehensive income (loss), net of taxes:

        

Change in foreign currency translation adjustments

     188        9        (140     260   

Change in net unrealized investment gains (losses)(1)

     3,369        (926     3,102        (2,164

Change in pension and postretirement unrecognized net periodic benefit

     9        12        18        11   
                                

Other comprehensive income (loss)(2)

     3,566        (905     2,980        (1,893
                                

Comprehensive income (loss)

     3,746        (316     3,163        (1,220

Comprehensive (income) loss attributable to noncontrolling interests

     (32     (9     19        (31
                                

Comprehensive income (loss) attributable to Prudential Financial, Inc.

   $ 3,714      $ (325   $ 3,182      $ (1,251
                                

 

(1) Includes cash flow hedges of $(55) million and $23 million for the three months ended June 30, 2009 and 2008, respectively and $(30) million and $(53) million for the six months ended June 30, 2009 and 2008, respectively.
(2) Amounts are net of tax expense (benefit) of $1,719 million and $(625) million for the three months ended June 30, 2009 and 2008, respectively and $1,492 million and $(1,156) million for the six months ended June 30, 2009 and 2008, respectively.

 

The balance of and changes in each component of “Accumulated other comprehensive income (loss) attributable to Prudential Financial, Inc.” for the six months ended June 30, 2009 are as follows (net of taxes):

 

     Accumulated Other Comprehensive Income (Loss) Attributable to
Prudential Financial, Inc.
 
   Foreign
Currency
Translation
Adjustments
    Net
Unrealized
Investment
Gains
(Losses)(1)
    Pension and
Postretirement
Unrecognized
Net Periodic
Benefit (Cost)
    Total
Accumulated
Other
Comprehensive
Income(Loss)
 
     (in millions)  

Balance, December 31, 2008

   $ 375      $ (6,735   $ (983   $ (7,343

Change in component during period

     (115     3,102        18        3,005   

Impact of adoption of FSP FAS 115-2 and
FAS 124-2(2)

     —          (664     —          (664
                                

Balance, June 30, 2009

   $ 260      $ (4,297   $ (965   $ (5,002
                                

 

(1) Includes cash flow hedges of $(177) million and $(147) million as of June 30, 2009 and December 31, 2008, respectively.
(2) See Note 2 for additional information on the adoption of FSP FAS 115-2 and FAS 124-2.

 

8. EARNINGS PER SHARE

 

The Company has outstanding two separate 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. Accordingly, earnings per share is calculated separately for each of these two classes of common stock.

 

36


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

Net income for the Financial Services Businesses and the Closed Block Business is determined in accordance with U.S. GAAP and includes general and administrative expenses charged to each of the respective businesses based on the Company’s methodology for the allocation of such expenses. Cash flows between the Financial Services Businesses and the Closed Block Business related to administrative expenses are determined by a policy servicing fee arrangement that is based upon insurance and policies in force and statutory cash premiums. To the extent reported administrative expenses vary from these cash flow amounts, the differences are recorded, on an after tax basis, as direct equity adjustments to the equity balances of the businesses.

 

The direct equity adjustments modify the earnings available to each of the classes of common stock for earnings per share purposes.

 

Common Stock

 

A reconciliation of the numerators and denominators of the basic and diluted per share computations is as follows:

 

    Three Months Ended June 30,
  2009   2008
  Income   Weighted
Average
Shares
  Per
Share
Amount
  Income   Weighted
Average
Shares
  Per
Share
Amount
  (in millions, except per share amounts)

Basic earnings per share

           

Income from continuing operations attributable to the Financial Services Businesses

  $ 534       $ 577    

Direct equity adjustment

    11         14    

Less: Income attributable to noncontrolling interests

    17         8    

Less: Earnings allocated to participating unvested share-based payment awards

    6         4    
                   

Income from continuing operations attributable to the Financial Services Businesses available to holders of Common Stock after direct equity adjustment

  $ 522   432.9   $ 1.21   $ 579   431.9   $ 1.34
                               

Add: Earnings allocated to participating unvested share-based payment awards—Basic

  $ 6       $ 4    

Less: Earnings allocated to participating unvested share-based payment awards—Diluted

    6         4    
                   

Effect of dilutive securities and compensation programs

           

Stock options

    1.1       3.6  

Deferred and long-term compensation programs

    0.3       1.0  
               

Diluted earnings per share

           

Income from continuing operations attributable to the Financial Services Businesses available to holders of Common Stock after direct equity adjustment

  $ 522   434.3   $ 1.20   $ 579   436.5   $ 1.33
                               

 

37


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

    Six Months Ended June 30,
  2009   2008
  Income   Weighted
Average
Shares
  Per
Share
Amount
  Income   Weighted
Average
Shares
  Per
Share
Amount
  (in millions, except per share amounts)

Basic earnings per share

           

Income from continuing operations attributable to the Financial Services Businesses

  $ 517       $ 667    

Direct equity adjustment

    22         26    

Less: Income attributable to noncontrolling interests

    6         32    

Less: Earnings allocated to participating unvested share-based payment awards

    6         4    
                   

Income from continuing operations attributable to the Financial Services Businesses available to holders of Common Stock after direct equity adjustment

  $ 527   427.5   $ 1.23   $ 657   437.0   $ 1.50
                               

Add: Earnings allocated to participating unvested share-based payment awards—Basic

  $ 6       $ 4    

Less: Earnings allocated to participating unvested share-based payment awards—Diluted

    6         4    
                   

Effect of dilutive securities and compensation programs

           

Stock options

    0.6       3.7  

Deferred and long-term compensation programs

    0.6       0.9  
               

Diluted earnings per share

           

Income from continuing operations attributable to the Financial Services Businesses available to holders of Common Stock after direct equity adjustment

  $ 527   428.7   $ 1.23   $ 657   441.6   $ 1.49
                               

 

Unvested share-based payment awards that contain nonforfeitable rights to dividends are participating securities and included in the computation of earnings per share pursuant to the two-class method. Under this method, earnings of the Financial Services Businesses attributable to Prudential Financial, Inc. are allocated between Common Stock and the participating awards, as if the awards were a second class of stock. Earnings allocated to participating unvested share-based payment awards for the three months ended June 30, 2009 and 2008 was based on 5.3 million and 2.6 million of such awards, respectively, weighted for the period they were outstanding. Earnings allocated to participating unvested share-based payment awards for the six months ended June 30, 2009 and 2008 was based on 4.7 million and 2.7 million of such awards, respectively, weighted for the period they were outstanding. The computation of earnings per share of Common Stock excludes the dilutive impact of participating unvested share-based awards based on the application of the two-class method.

 

For the three months ended June 30, 2009 and 2008, 12.8 million and 7.0 million options, respectively, weighted for the portion of the period they were outstanding, with a weighted average exercise price of $67.15 and $79.62 per share, respectively were excluded from the computation of diluted earnings per share because the options, based on application of the treasury stock method, were antidilutive. For the six months ended June 30, 2009 and 2008, 16.0 million and 5.6 million options, respectively, weighted for the portion of the period they were outstanding, with a weighted average exercise price of $59.67 and $81.03 per share, respectively were excluded from the computation of diluted earnings per share because the options, based on application of the treasury stock method, were antidilutive.

 

38


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

The Company’s convertible senior notes provide for the Company to issue shares of its Common Stock as a component of the conversion of the notes. As of June 30, 2009, $4 million of senior notes related to the $2.0 billion December 2006 issuance remain outstanding. These will be dilutive to earnings per share if the average market price of the Common Stock for a particular period is above the initial conversion price of $104.21. As of June 30, 2009, $83 million of senior notes related to the $3.0 billion December 2007 issuance remain outstanding. These senior notes will be dilutive to earnings per share if the average market price of the Common Stock for a particular period is above the initial conversion price of $132.39. See Note 9 for additional information regarding the convertible senior notes.

 

Class B Stock

 

Income (loss) from continuing operations per share of Class B Stock was $(193.00) and $0.50 for the three months ended June 30, 2009 and 2008, respectively, and $(189.00) and $(9.50) for the six months ended June 30, 2009 and 2008, respectively.

 

The income (loss) from continuing operations attributable to the Closed Block Business available to holders of Class B Stock after direct equity adjustment for the three months ended June 30, 2009 and 2008 amounted to $(386) million and $1 million, respectively. The direct equity adjustment resulted in a decrease in the income (loss) from continuing operations attributable to the Closed Block Business applicable to holders of Class B Stock for earnings per share purposes of $11 million and $14 million for the three months ended June 30, 2009 and 2008, respectively. The income (loss) from continuing operations attributable to the Closed Block Business available to holders of Class B Stock after direct equity adjustment for the six months ended June 30, 2009 and 2008 amounted to $(378) million and $(19) million, respectively. The direct equity adjustment resulted in a decrease in the income (loss) from continuing operations attributable to the Closed Block Business applicable to holders of Class B Stock for earnings per share purposes of $22 million and $26 million for the six months ended June 30, 2009 and 2008, respectively. For the three and six months ended June 30, 2009 and 2008, the weighted average number of shares of Class B Stock used in the calculation of earnings per share amounted to 2.0 million. There are no potentially dilutive shares associated with the Class B Stock.

 

9. SHORT-TERM AND LONG-TERM DEBT

 

Commercial Paper

 

Prudential Financial has a commercial paper program rated A-1 by Standard & Poor’s Rating Services (“S&P”), P-2 by Moody’s Investor Service, Inc. (“Moody’s”) and F2 by Fitch Ratings Ltd. (“Fitch”) as of June 30, 2009. Prudential Financial’s outstanding commercial paper borrowings were $505 million and $1,243 million as of June 30, 2009 and December 31, 2008, respectively.

 

Prudential Funding, LLC, a wholly owned subsidiary of Prudential Insurance, has a commercial paper program, rated A-1+ by S&P, P-1 by Moody’s and F1 by Fitch as of June 30, 2009. Prudential Funding’s outstanding commercial paper and master note borrowings were $1,718 million and $4,354 million as of June 30, 2009 and December 31, 2008, respectively. Prudential Financial has issued a subordinated guarantee covering Prudential Funding’s domestic commercial paper program.

 

As of June 30, 2009 and December 31, 2008, the weighted average maturity of the total commercial paper outstanding was 32 and 29 days, respectively.

 

Both Prudential Financial’s and Prudential Funding’s commercial paper programs were granted approval during the fourth quarter of 2008 to participate in the Commercial Paper Funding Facility (“CPFF”) sponsored by

 

39


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

the Federal Reserve Bank of New York. Commercial paper programs must maintain ratings of at least A-1/P-1/F1 by at least two rating agencies in order to be eligible for the CPFF. As of June 30, 2009, neither Prudential Financial nor Prudential Funding had any commercial paper outstanding under the CPFF. On February 19, 2009, the commercial paper credit rating of Prudential Financial was downgraded by Fitch from F1 to F2. Consequently, as of that date, Prudential Financial became ineligible to issue commercial paper under the CPFF. Prudential Funding continues to be eligible based on its current credit ratings to sell to the CPFF three-month unsecured U.S. dollar denominated commercial paper up to a maximum of $9.815 billion, less the outstanding amount of any non-CPFF commercial paper at any applicable time. Access to the CPFF for the issuance of new commercial paper is scheduled to terminate on February 1, 2010, unless such date is extended by the Federal Reserve Bank of New York.

 

Convertible Senior Notes

 

On December 12, 2007, Prudential Financial issued in a private placement $3.0 billion of floating rate convertible senior notes that are convertible by the holders at any time after issuance into cash and shares of Prudential Financial’s Common Stock. The conversion price, $132.39 per share, is subject to adjustment upon certain corporate events. The conversion feature requires net settlement in shares; therefore, upon conversion, a holder would receive cash up to the par amount of the convertible notes surrendered for conversion and shares of Prudential Financial Common Stock only for the portion of the settlement amount in excess of the par amount, if any. These notes are redeemable by Prudential Financial, at par plus accrued interest, on or after June 16, 2009. Holders of the notes may also require Prudential Financial to repurchase the notes, at par plus accrued interest, on contractually specified dates, of which the first such date was June 15, 2009. On June 15, 2009, $1,819 million of these notes were repurchased by Prudential Financial as required by the holders. The next date on which holders of these notes may require Prudential Financial to repurchase these notes is December 15, 2009. Separately, during the fourth quarter of 2008 and the first quarter of 2009, the Company repurchased, in individually negotiated transactions, $853 million and $245 million, respectively, of these notes which were offered to the Company by certain holders. These notes were repurchased at a discount resulting in a pre-tax gain of $7 million that is recorded within “Asset management fees and other income.” As of June 30, 2009, $83 million of these floating rate convertible senior notes remain outstanding. In addition, as of June 30, 2009, $4 million of floating rate convertible senior notes that were issued by Prudential Financial in a private placement in December 2006 remain outstanding. The next date on which holders of these notes may require Prudential Financial to repurchase these notes is December 12, 2009.

 

Medium-term Notes

 

In June 2009, Prudential Financial issued $250 million of 6.20% medium-term notes due January 2015 and $750 million of 7.375% medium-term notes due June 2019 under its shelf registration statement.

 

Federal Home Loan Bank of New York

 

Prudential Insurance has been a member of the Federal Home Loan Bank of New York (“FHLBNY”) since June 2008. Membership allows Prudential Insurance access to collateralized advances, collateralized funding agreements, and other FHLBNY products. Collateralized advances from the FHLBNY are classified in “Short-term debt” or “Long-term debt,” depending on the maturity date of the obligation. Collateralized funding agreements issued to the FHLBNY are classified in “Policyholders’ account balances.” These funding agreements have priority claim status above debt holders of Prudential Insurance.

 

Prudential Insurance’s membership in FHLBNY requires the ownership of member stock, and borrowings from FHLBNY require the purchase of FHLBNY activity based stock in an amount equal to 4.5% of the

 

40


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

outstanding borrowings. All FHLBNY stock purchased by Prudential Insurance is classified as restricted general account investments within “Other long-term investments,” and the carrying value of these investments was $221 million as of June 30, 2009.

 

The FHLBNY requires Prudential Insurance to pledge qualifying mortgage-related assets or U.S. Treasury securities as collateral for all borrowings. On May 8, 2009, the New Jersey Department of Banking and Insurance (“NJDOBI”) revised its prior guidance to increase the maximum amount of qualifying assets that Prudential Insurance may pledge as collateral to the FHLBNY from 5% to 7% of its prior year-end statutory net admitted assets exclusive of separate account assets; however, this limitation resets to 5% on December 31, 2010 unless extended by NJDOBI. Based on its statutory net admitted assets as of December 31, 2008, the 7% limitation equates to a maximum amount of pledged assets of $10.5 billion and an estimated maximum borrowing capacity, after taking into account applicable required collateralization levels and required purchases of activity based FHLBNY stock, of approximately $9.0 billion. However, the ability to borrow from the FHLBNY is subject to the availability and maintenance of qualifying assets at Prudential Insurance, and there is no assurance that Prudential Insurance will have sufficient qualifying assets available to it in order to access the increased capacity in full at any particular time. Also, the revised guidance from NJDOBI limits the aggregate amount of assets Prudential Insurance may pledge for all loans, including borrowings from the FHLBNY, to 10% of its prior year-end statutory net admitted assets exclusive of separate account assets; however, this limitation excludes certain activities, such as asset-based financing transactions.

 

The fair value of the qualifying assets pledged as collateral by Prudential Insurance must be maintained at certain specified levels of the borrowed amount, which can vary, depending on the nature of the assets pledged. As of June 30, 2009, Prudential Insurance had pledged qualifying assets with a fair value of $7,439 million, which is above the minimum level required by the FHLBNY, and had total outstanding borrowings of $3.5 billion. The total borrowings from the FHLBNY as of June 30, 2009, is comprised of collateralized advances, of which $1.0 billion is reflected in “Short-term debt” and $1.0 billion is reflected in “Long-term debt,” as well as $1.5 billion of collateralized funding agreements that are reflected in “Policyholders’ account balances.”

 

TALF Borrowings

 

During the first six months of 2009, the Company purchased securities under the Federal Reserve’s Term Asset-Backed Securities Loan Facility (“TALF”). TALF provides secured financing for asset-backed securities backed by certain types of consumer and small business loans and as of July 2009 for certain high-quality commercial mortgage-backed securities issued before January 1, 2009. TALF financing is non-recourse to the borrower, is collateralized by the purchased securities and provides financing for the purchase price of the securities, less a ‘haircut’ that varies based on the type of collateral. Borrowers under the program can deliver the collateralized securities to a special purpose vehicle created by the Federal Reserve in full defeasance of the loan.

 

As of June 30, 2009, the Company has $1,250 million of securities purchased under TALF that are reflected within “Other trading account assets,” and has $1,167 million of secured financing from the Federal Reserve related to the purchase of these securities that is reflected within “Long-term debt.” The Company is carrying the securities at fair value as SFAS No. 115 trading assets and the loan at fair value under the fair value option afforded by SFAS No. 159.

 

10. EMPLOYEE BENEFIT PLANS

 

The Company has funded and non-funded contributory and non-contributory defined benefit pension plans, which cover substantially all of its employees. For some employees, benefits are based on final average earnings and length of service, while benefits for other employees are based on an account balance that takes into consideration age, service and earnings during their career.

 

41


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

The Company provides certain health care and life insurance benefits for its retired employees, their beneficiaries and covered dependents (“other postretirement benefits”). The health care plan is contributory; the life insurance plan is non-contributory. Substantially all of the Company’s U.S. employees may become eligible to receive other postretirement benefits if they retire after age 55 with at least 10 years of service or under certain circumstances after age 50 with at least 20 years of continuous service. The Company has elected to amortize its transition obligation for other postretirement benefits over 20 years.

 

Net periodic (benefit) cost included in “General and administrative expenses” includes the following components:

 

     Three Months Ended June 30,  
     Pension Benefits     Other Postretirement
Benefits
 
       2009         2008         2009         2008    
     (in millions)  

Components of net periodic (benefit) cost

        

Service cost

   $ 41      $ 38      $ 3      $ 3   

Interest cost

     115        117        29        31   

Expected return on plan assets

     (182     (180     (27     (40

Amortization of prior service cost

     7        11        (3     (3

Amortization of actuarial (gain) loss, net

     8        4        11        —     

Special termination benefits

     —          —          —          —     
                                

Net periodic (benefit) cost

   $ (11   $ (10   $ 13      $ (9
                                
     Six Months Ended June 30,  
     Pension Benefits     Other Postretirement
Benefits
 
       2009         2008         2009       2008    
     (in millions)  

Components of net periodic (benefit) cost

        

Service cost

   $ 82      $ 77      $ 6      $ 6   

Interest cost

     230        234        58        62   

Expected return on plan assets

     (364     (360     (54     (80

Amortization of prior service cost

     14        22        (6     (6

Amortization of actuarial (gain) loss, net

     16        8        22        —     

Special termination benefits

     —          2        —          —     
                                

Net periodic (benefit) cost

   $ (22   $ (17   $ 26      $ (18
                                

 

11. SEGMENT INFORMATION

 

Segments

 

The Company has organized its principal operations into the Financial Services Businesses and the Closed Block Business. Within the Financial Services Businesses, the Company operates through three divisions, which together encompass seven reportable segments. The Company’s real estate and relocation services business as well as businesses that are not sufficiently material to warrant separate disclosure and businesses to be divested, including the Company’s investment in Wachovia Securities, are included in Corporate and Other operations within the Financial Services Businesses. Collectively, the businesses that comprise the three operating divisions and Corporate and Other are referred to as the Financial Services Businesses.

 

42


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

Adjusted Operating Income

 

In managing the Financial Services Businesses, the Company analyzes the operating performance of each segment using “adjusted operating income.” Adjusted operating income does not equate to “income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures” or “net income” as determined in accordance with U.S. GAAP but is the measure of segment profit or loss used by the Company to evaluate segment performance and allocate resources, and consistent with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” is the measure of segment performance presented below.

 

Adjusted operating income is calculated by adjusting each segment’s “income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures” for the following items, which are described in greater detail below:

 

   

realized investment gains (losses), net, and related charges and adjustments;

 

   

net investment gains and losses on trading account assets supporting insurance liabilities and changes in experience-rated contractholder liabilities due to asset value changes;

 

   

the contribution to income/loss of divested businesses that have been or will be sold or exited but that did not qualify for “discontinued operations” accounting treatment under U.S. GAAP; and

 

   

equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests.

 

These items are important to an understanding of overall results of operations. Adjusted operating income is not a substitute for income determined in accordance with U.S. GAAP, and the Company’s definition of adjusted operating income may differ from that used by other companies. However, the Company believes that the presentation of adjusted operating income as measured for management purposes enhances the understanding of results of operations by highlighting the results from ongoing operations and the underlying profitability factors of the Financial Services Businesses.

 

Realized investment gains (losses), net, and related charges and adjustments. Adjusted operating income excludes realized investment gains (losses), net, except as indicated below. A significant element of realized investment gains and losses are impairments and credit-related and interest rate-related gains and losses from sales of securities. Impairments and losses from sales of credit-impaired securities, the timing of which depends largely on market credit cycles, can vary considerably across periods. The timing of other sales that would result in gains or losses, such as interest rate-related gains or losses, is largely subject to the Company’s discretion and influenced by market opportunities, as well as the Company’s tax and capital profile. Trends in the underlying profitability of the Company’s businesses can be more clearly identified without the fluctuating effects of these transactions.

 

Charges that relate to realized investment gains (losses), net, are also excluded from adjusted operating income. The related charges are associated with: policyholder dividends; amortization of deferred policy acquisition costs, valuation of business acquired (“VOBA”), unearned revenue reserves and deferred sales inducements; interest credited to policyholders’ account balances; reserves for future policy benefits; and payments associated with the market value adjustment features related to certain of the annuity products the Company sells. The related charges associated with policyholder dividends include a percentage of the net increase in the fair value of specified assets included in Gibraltar Life’s reorganization plan that is required to be paid as a special dividend to Gibraltar Life policyholders. Deferred policy acquisition costs, VOBA, unearned revenue reserves and deferred sales inducements for certain products are amortized based on estimated gross profits, which include net realized investment gains and losses on the underlying invested assets. The related charge for these items represents the portion of this amortization associated with net realized investment gains and losses. The related charges for interest credited to policyholders’ account balances relate to certain group life policies that pass back certain realized investment gains and losses to the policyholder. The reserves for certain

 

43


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

policies are adjusted when cash flows related to these policies are affected by net realized investment gains and losses, and the related charge for reserves for future policy benefits represents that adjustment. Certain of the Company’s annuity products contain a market value adjustment feature that requires us to pay to the contractholder or entitles us to receive from the contractholder, upon surrender, a market value adjustment based on the crediting rates on the contract surrendered compared to crediting rates on newly issued contracts or based on an index rate at the time of purchase compared to an index rate at time of surrender, as applicable. These payments mitigate the net realized investment gains or losses incurred upon the disposition of the underlying invested assets. The related charge represents the payments or receipts associated with these market value adjustment features.

 

Adjustments to “Realized investment gains (losses), net,” for purposes of calculating adjusted operating income, include the following:

 

Gains and losses pertaining to derivative contracts that do not qualify for hedge accounting treatment, other than derivatives used in the Company’s capacity as a broker or dealer, are included in “Realized investment gains (losses), net.” This includes mark-to-market adjustments of open contracts as well as periodic settlements. As discussed further below, adjusted operating income includes a portion of realized gains and losses pertaining to certain derivative contracts.

 

Adjusted operating income of the International Insurance segment and International Investments segment, excluding the global commodities group, reflect the impact of an intercompany arrangement with Corporate and Other operations pursuant to which the segments’ non-U.S. dollar denominated earnings in all countries for a particular year, including its interim reporting periods, are translated at fixed currency exchange rates. The fixed rates are determined in connection with a currency hedging program designed to mitigate the risk that unfavorable rate changes will reduce the segments’ U.S. dollar equivalent earnings. Pursuant to this program, the Company’s Corporate and Other operations execute forward currency contracts with third parties to sell the net exposure of projected earnings from the hedged currency in exchange for U.S. dollars at a specified exchange rate. The maturities of these contracts correspond with the future periods in which the identified non-U.S. dollar denominated earnings are expected to be generated. These contracts do not qualify for hedge accounting under U.S. GAAP and, as noted above, all resulting profits or losses from such contracts are included in “Realized investment gains (losses), net.” When the contracts are terminated in the same period that the expected earnings emerge, the resulting positive or negative cash flow effect is included in adjusted operating income (net gains of $8 million and $3 million for the three months ended June 30, 2009 and 2008, respectively, and net gains of $13 million and $4 million for the six months ended June 30, 2009 and 2008, respectively). As of June 30, 2009 and December 31, 2008, the fair value of open contracts used for this purpose was a net asset of $38 million and a net asset of $85 million, respectively.

 

The Company uses 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. For the derivative contracts that do not qualify for hedge accounting treatment, mark-to-market adjustments of open contracts as well as periodic settlements are included in “Realized investment gains (losses), net.” However, the periodic swap settlements, as well as other derivative related yield adjustments, are included in adjusted operating income to reflect the after-hedge yield of the underlying instruments. In certain instances, when these derivative contracts are terminated or offset before their final maturity, the resulting realized gains or losses recorded within “Realized investment gains (losses), net” are recognized in adjusted operating income over periods that generally approximate the expected terms of the derivatives or underlying instruments in order for adjusted operating income to reflect the after-hedge yield of the underlying instruments. Adjusted operating income includes net gains of $31 million and $17 million for the three months ended June 30, 2009 and 2008, respectively, due to periodic settlements and yield adjustments of such contracts, and includes net gains of $5 million and net losses of $6 million, respectively, related to derivative contracts that were terminated or offset in

 

44


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

prior periods. Adjusted operating income includes net gains of $57 million and $29 million for the six months ended June 30, 2009 and 2008, respectively, due to periodic settlements and yield adjustments of such contracts, and includes net gains of $11 million and net losses of $8 million, respectively, related to derivative contracts that were terminated or offset in prior periods. The table below reflects the total deferred gain (loss) related to derivative contracts that were terminated or offset in prior periods that will be recognized in adjusted operating income in future periods for each segment, as well as the weighted average period over which these deferred amounts will be recognized.

 

     As of June 30, 2009

Segment

   Deferred
amount
    Weighted average
period
     (in millions)      

International Insurance

   $ 767      32 years

Corporate and Other

     (62   8 years
          

Total deferred gain (loss)

   $ 705     
          

 

Certain products the Company sells are accounted for as freestanding derivatives or contain embedded derivatives. Changes in the fair value of these derivatives, along with any fees received or payments made relating to the derivative, are recorded in “Realized investment gains (losses), net.” These “Realized investment gains (losses), net” are included in adjusted operating income in the period in which the gain or loss is recorded. In addition, the changes in fair value of any associated derivative portfolio that is part of an economic hedging program related to the risk of these products (but which do not qualify for hedge accounting treatment under U.S. GAAP) are also included in adjusted operating income in the period in which the gains or losses on the derivative portfolio are recorded. Adjusted operating income includes net losses of $487 million and $2 million for the three months ended June 30, 2009 and 2008, respectively, and net gains of $858 million and net losses of $45 million for the six months ended June 30, 2009 and 2008, respectively, related to these products and any associated derivative portfolio.

 

Adjustments are also made for the purposes of calculating adjusted operating income for the following items:

 

The Company conducts certain activities for which “Realized investment gains (losses), net” are a principal source of earnings for its businesses and therefore included in adjusted operating income, particularly within the Company’s Asset Management segment. For example, Asset Management’s proprietary investing business makes investments for sale or syndication to other investors or for placement or co-investment in the Company’s managed funds and structured products. The “Realized investment gains (losses), net” associated with the sale of these proprietary investments, as well as related derivative results, are a principal activity for this business and included in adjusted operating income. In addition, the “Realized investment gains (losses), net” associated with loans originated by the Company’s commercial mortgage operations, as well as related derivative results and retained mortgage servicing rights, are a principal activity for this business and included in adjusted operating income. Net realized investment losses of $94 million and $44 million for the three months ended June 30, 2009 and 2008, respectively, and $142 million and of $83 million for the six months ended June 30, 2009 and 2008, respectively, related to these and other businesses were included in adjusted operating income as an adjustment to “Realized investment gains (losses), net.”

 

The Company has certain investments in its general account portfolios that are classified as trading. These trading investments are carried at fair value and included in “Other trading account assets, at fair value” on the Company’s statements of financial position. Realized and unrealized gains and losses for these investments are recorded in “Asset management fees and other income,” and interest and dividend income for these investments is recorded in “Net investment income.” Consistent with the exclusion of realized investment gains and losses with respect to other investments managed on a consistent basis, the net gains or losses on these investments, which is recorded within “Asset management fees and other income,” is excluded from adjusted operating income and is reflected as an

 

45


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

adjustment to “Realized investment gains (losses), net.” In addition, the secured financing received from the Federal Reserve under TALF that is reflected within “Long-term debt,” is carried at fair value under the fair value option afforded by SFAS No. 159. The changes in the fair value of this debt, which is recorded within “Asset management fees and other income,” is also excluded from adjusted operating income and are reflected as an adjustment to “Realized investment gains (losses), net.” This is consistent with the securities purchased with the proceeds from this financing, which are carried at fair value and included in “Other trading account assets, at fair value” as discussed above. The net impact of these adjustments was net gains of $23 million and $15 million for the three months ended June 30, 2009 and 2008, respectively, and net losses of $17 million and net gains of $18 million for the six months ended June 30, 2009 and 2008, respectively.

 

The Company has certain assets and liabilities for which, under GAAP, the change in value due to changes in foreign currency exchange rates during the period is recorded in “Asset management fees and other income.” To the extent the foreign currency exposure on these assets and liabilities is economically hedged, the change in value included in “Asset management fees and other income” is excluded from adjusted operating income and is reflected as an adjustment to “Realized investment gains (losses), net.” These adjustments were net losses of $19 million and $18 million for the three months ended June 30, 2009 and 2008, respectively, and net gains of $59 million and $47 million for the six months ended June 30, 2009 and 2008, respectively.

 

Investment gains and losses on trading account assets supporting insurance liabilities and changes in experience-rated contractholder liabilities due to asset value changes. Certain products included in the Retirement and International Insurance segments, are experience-rated in that investment results associated with these products are expected to ultimately accrue to contractholders. The investments supporting these experience-rated products, excluding commercial mortgage and other loans, are classified as trading and are carried at fair value. These trading investments are reflected on the statements of financial position as “Trading account assets supporting insurance liabilities, at fair value.” Realized and unrealized gains and losses for these investments are reported in “Asset management fees and other income.” Interest and dividend income for these investments is reported in “Net investment income.” Commercial mortgage and other loans that support these experience-rated products are carried at unpaid principal, net of unamortized discounts and an allowance for losses, and are reflected on the statements of financial position as “Commercial mortgage and other loans.”

 

Adjusted operating income excludes net investment gains and losses on trading account assets supporting insurance liabilities. This is consistent with the exclusion of realized investment gains and losses with respect to other investments supporting insurance liabilities managed on a consistent basis. In addition, to be consistent with the historical treatment of charges related to realized investment gains and losses on investments, adjusted operating income also excludes the change in contractholder liabilities due to asset value changes in the pool of investments (including commercial mortgage and other loans) supporting these experience-rated contracts, which are reflected in “Interest credited to policyholders’ account balances.” The result of this approach is that adjusted operating income for these products includes net fee revenue and interest spread the Company earns on these experience-rated contracts, and excludes changes in fair value of the pool of investments, both realized and unrealized, that are expected to accrue to the contractholders.

 

Divested businesses. The contribution to income/loss of divested businesses that have been or will be sold or exited, but that did not qualify for “discontinued operations” accounting treatment under U.S. GAAP, are excluded from adjusted operating income as the results of divested businesses are not relevant to understanding the Company’s ongoing operating results.

 

Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests. Equity in earnings of operating joint ventures, on a pre-tax basis, are included in adjusted operating income as these results are a principal source of earnings. These earnings are reflected on a U.S. GAAP basis on an after-tax basis as a separate line on the Company’s Unaudited Interim Consolidated Statements of Operations.

 

46


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

Earnings attributable to noncontrolling interests are excluded from adjusted operating income. Earnings attributable to noncontrolling interests represents the portion of earnings from consolidated entities that relates to the equity interests of minority investors, and are reflected on a U.S. GAAP basis as a separate line on the Company’s Unaudited Interim Consolidated Statements of Operations.

 

The summary below reconciles adjusted operating income before income taxes for the Financial Services Businesses to income from continuing operations before income taxes and equity in earnings of operating joint ventures:

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
        2009             2008             2009             2008      
    (in millions)  

Individual Annuities

  $ 432      $ 154      $ 449      $ 269   

Retirement

    99        141        258        265   

Asset Management

    33        190        32        309   
                               

Total U.S. Retirement Solutions and Investment Management Division

    564        485        739        843   

Individual Life

    138        103        178        199   

Group Insurance

    105        80        198        170   
                               

Total U.S. Individual Life and Group Insurance Division

    243        183        376        369   
                               

International Insurance

    465        453        890        866   

International Investments

    16        26        26        51   
                               

Total International Insurance and Investments Division

    481        479        916        917   
                               

Corporate Operations

    (165     (17     (268     (45

Real Estate and Relocation Services

    3        (3     (60     (26
                               

Total Corporate and Other

    (162     (20     (328     (71
                               

Adjusted Operating Income before income taxes for Financial Services Businesses

    1,126        1,127        1,703        2,058   
                               

Reconciling items:

       

Realized investment gains (losses), net, and related adjustments

    (872     (527     (1,582     (1,192

Charges related to realized investment gains (losses), net

    (5     41        39        28   

Investment gains (losses) on trading account assets supporting insurance liabilities, net

    686        (123     831        (385

Change in experience-rated contractholder liabilities due to asset value changes

    (347     94        (392     294   

Divested businesses

    (24     10        (56     (57

Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests

    14        (32     17        (68
                               

Income from continuing operations before income taxes and equity in earnings of operating joint ventures for Financial Services Businesses

    578        590        560        678   
                               

Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures for Closed Block Business

    (586     38        (556     12   
                               

Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures

  $ (8   $ 628      $ 4      $ 690   
                               

 

47


PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

The U.S. Retirement Solutions and Investment Management Division and U.S. Individual Life and Group Insurance Division results reflect deferred policy acquisition costs as if the individual annuity business and group insurance business were stand-alone operations. The elimination of intersegment costs capitalized in accordance with this policy is included in consolidating adjustments within Corporate and Other operations.

 

The summary below presents revenues for the Company’s reportable segments:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2009             2008             2009             2008      
     (in millions)  

Financial Services Businesses:

        

Individual Annuities

   $ 115      $ 622      $ 2,007      $ 1,195   

Retirement

     1,230        1,207        2,438        2,474   

Asset Management

     342        564        605        1,112   
                                

Total U.S. Retirement Solutions and Investment Management Division

     1,687        2,393        5,050        4,781   
                                

Individual Life

     703        676        1,383        1,356   

Group Insurance

     1,303        1,218        2,636        2,475   
                                

Total U.S. Individual Life and Group Insurance Division

     2,006        1,894        4,019        3,831   
                                

International Insurance

     2,533        2,329        5,070        4,654   

International Investments

     108        148        209        318   
                                

Total International Insurance and Investments Division

     2,641        2,477        5,279        4,972   
                                

Corporate Operations

     (48     27        (57     79   

Real Estate and Relocation Services

     52        63        51        109   
                                

Total Corporate and Other

     4        90        (6     188   
                                

Total

     6,338        6,854        14,342        13,772   
                                

Reconciling items:

        

Realized investment gains (losses), net, and related adjustments

     (872     (527     (1,582     (1,192

Charges related to realized investment gains (losses), net

     (53     15        (61     16   

Investment gains (losses) on trading account assets supporting insurance liabilities, net

     686        (123     831        (385

Divested businesses

     (16     28        (42     (17

Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests

     (2     (40     12        (100
                                

Total Financial Services Businesses

     6,081        6,207        13,500        12,094   
                                

Closed Block Business

     825        1,496        1,965        3,167   
                                

Total per Unaudited Interim Consolidated Financial Statements

   $ 6,906      $ 7,703      $ 15,465      $ 15,261   
                                

 

The Asset Management segment revenues include intersegment revenues of $84 million and $87 million for the three months ended June 30, 2009 and 2008, respectively, and $169 million and $180 million for the six months ended June 30, 2009 and 2008, respectively, primarily