Prudential 2008 Annual Report Download

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PRUDENTIAL FINANCIAL 2008 ANNUAL REPORT

Table of contents

  • Page 1
    PRUDENTIAL FINANCIAL 2008 ANNUAL REPORT

  • Page 2
    ... years, Prudential Financial has helped people grow and protect their wealth. We offer individual and institutional clients a wide array of financial products and services, including life insurance, annuities, retirement-related services, mutual funds, investment management and real estate services...

  • Page 3
    ...insurance companies, our stock price has come under significant pressure as a result of the ongoing crisis, as have our earnings. On a generally accepted accounting principles basis, our Financial Services Businesses reported a net loss for 2008 of $1.10 billion, or $2.42 per share of Common Stock...

  • Page 4
    ... part by strong performances in Prudential of Japan and Gibraltar Life. Our group life insurance business also delivered record earnings in 2008. Pre-tax adjusted operating income for this business was $340 million, a $54 million increase over 2007. "We believe we have the best business mix more...

  • Page 5
    ... like to address where we stand in these areas. mortgage-backed securities portfolio is rated AAA. Finally, subprime asset-backed securities are a manageable exposure for us, at $5.4 billion on an amortized cost basis within the Financial Services Businesses. Eighty percent of these investments are...

  • Page 6
    ... capability in the qualified market. Changes in demographics and public policy in our proven skills in this area will certainly help us as we continue to pursue opportunistic acquisitions that add value for our company and our shareholders. Our employees are using their talent to strengthen our...

  • Page 7
    ... was started in 1875 on a promise-to offer affordable life insurance to the working class. We have demonstrated our commitment to helping people achieve financial security and peace of mind ever since. For JOHN STRANGFELD Chairman of the Board, Chief Executive Officer and President PRUDENTIAL...

  • Page 8
    ... continuing operations before income taxes and equity in earnings of operating joint ventures Return on average equity (B) EARNINGS PER SHARE OF COMMON STOCK - diluted Adjusted operating income after income taxes $ Reconciling items: Realized investment gains (losses), net, and related charges and...

  • Page 9
    ... operating income is a non-GAAP measure of performance of our Financial Services Businesses that excludes "Realized investment gains (losses), net," as adjusted, and related charges and adjustments; net investment gains and losses on trading account assets supporting insurance liabilities; change in...

  • Page 10
    ...of our overall results of operations. All facts and figures are as of or for the year ended December 31, 2008, unless otherwise noted. Annuities issued by Pruco Life Insurance Company (in New York, Pruco Life Insurance Company of New Jersey), both located in Newark, NJ, or Prudential Annuities Life...

  • Page 11
    Financial section Some of the statements included in this Annual Report may contain forward-looking statements within the meaning of the U.S. Private Securities Reform Act of 1995. Please see page 240 for a description of certain risks and uncertainties that could cause actual results to differ, ...

  • Page 12
    ... Effective with the date of demutualization, we established the Financial Services Businesses and the Closed Block Business. The Financial Services Businesses refer to the businesses in our three operating divisions and our Corporate and Other operations. The U.S. Retirement Solutions and Investment...

  • Page 13
    ... with the Internal Revenue Service examination of our tax returns for the years 1997 through 2001. On April 1, 2004, we acquired the retirement business of CIGNA Corporation. Results presented below include the results of this business from the date of acquisition. Our Gibraltar Life operations use...

  • Page 14
    ... before income taxes, extraordinary gain on acquisition and cumulative effect of accounting change excluding undistributed income from equity method investments, fixed charges and interest capitalized. Fixed charges are the sum of gross interest expense, interest credited to policyholders' account...

  • Page 15
    ...72 million used to purchase a guaranteed investment contract to fund a portion of the bond insurance cost associated with that debt, were allocated to the Financial Services Businesses. However, we expect that the IHC debt will be serviced by the net cash flows of the Closed Block Business over time...

  • Page 16
    ... as general economic conditions, securities, credit and real estate market conditions, regulation, competition, interest rates, taxes and foreign exchange rates affect our profitability. In some of our product lines, particularly those in the Closed Block Business, we share experience on mortality...

  • Page 17
    ... asset classes and sectors. As a result, the market for fixed income instruments has experienced decreased liquidity, increased price volatility, credit downgrade events, and increased probability of default. These events in the credit markets as well as volatility in equity and real estate markets...

  • Page 18
    ... investing in our Asset Management segment, to limit our exposure to public equity and real estate markets, and utilized the cash proceeds for capital and liquidity needs. • Ceased sales of certain annuity products. • Streamlined and enhanced data collection, analysis and decision making related...

  • Page 19
    ... of our annual reviews of, and market performance adjustments to, the reserves for the guaranteed minimum death and income benefit features of our variable annuity products and the estimate of total gross profits used as a basis for amortizing deferred policy acquisition and other costs. Results for...

  • Page 20
    ... liquidity associated with private placements. In determining the fair value of certain securities, the discounted cash flow model may use unobservable inputs, which reflect our own assumptions about the inputs market participants would use in pricing the asset. See "-Realized Investment Gains...

  • Page 21
    ..., the impaired security is accounted for as if it had been purchased on the measurement date of the impairment. Accordingly, the discount (or reduced premium) based on the new cost basis is accreted into net investment income, and included in adjusted operating income in future periods based upon...

  • Page 22
    ... and group life and disability, and long-term care benefits in our Group Insurance segment. Certain of the optional living benefits are accounted for as embedded derivatives, with fair values calculated as the present value of future expected benefit payments to customers less the present value of...

  • Page 23
    ... gross profits that is dependent upon the total rate of return on assets held in separate account investment options, and the shorter average life of the contracts. This rate of return influences the fees we earn, costs we incur associated with minimum death benefit and other contractual guarantees...

  • Page 24
    ... life insurance products are derived using a reversion to the mean approach, a common industry practice. Under this approach, we consider actual returns over a period of time and initially adjust future projected returns over a four year period so that the assets grow at the long-term expected rate...

  • Page 25
    ... a company's cost of equity capital. CAPM is determined by beginning with the long-term risk free rate of return then applying adjustments that consider the equity risk premium required for large company common stock investments as well as company specific adjustments to address volatility, small...

  • Page 26
    ...most significant effect on our net period costs associated with these plans. We determine our expected rate of return on plan assets based upon asset classes and a building block approach that includes inflation, real return, a term premium, an equity risk premium, as applicable, a credit spread, as...

  • Page 27
    ... amount determined using the federal statutory tax rate of 35%. The U.S. Treasury Department and the Internal Revenue Service, or IRS, intend to address through regulations the methodology to be followed in determining the DRD related to variable life insurance and annuity contracts. A change in the...

  • Page 28
    ...Regional Taxation Bureau concluded a routine tax audit of the tax returns of Gibraltar Life Insurance Company, Ltd. for the three years ended March 31, 2005 through 2007, as well as a tax audit of the Prudential Financial Inc. Japan Representative office for the tax years ending in 2005 through 2007...

  • Page 29
    ... our share of costs associated with a settlement relating to auction rate securities of the retail brokerage joint venture with Wachovia. Partially offsetting these items were improved results from continued growth in our international insurance operations. On a diluted per share basis, income (loss...

  • Page 30
    ... of the Closed Block Business exceed the cash flows for administrative expenses determined by the policy servicing fee arrangement, the direct equity adjustment will reduce income available to holders of the Common Stock for earnings per share purposes. 2007 to 2006 Annual Comparison. Income from...

  • Page 31
    ... ...Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures acquisition and cumulative effect of accounting change ... 2006 $ 1,999 3,076 (1,077) (153) 12 $(1,218) $2,101 1,515 586 (72) 25 $ 539 PRUDENTIAL FINANC IAL 2008 ANNUAL REPORT 29

  • Page 32
    ... rates for policies where the current policyholder account value is below the guaranteed minimum death benefit. Adjusted operating income for 2007 included $30 million of benefits from the annual reviews, reflecting market value increases in the underlying assets associated with our variable annuity...

  • Page 33
    ...basis for amortizing deferred policy acquisition and other costs and the reserve for the guaranteed minimum death and income benefit features of our variable annuity products. Adjusted operating income for 2007 included a $30 million benefit from this annual review, reflecting market value increases...

  • Page 34
    ... relating to the reserves for the guaranteed minimum death and income benefit features of our variable annuity products, as discussed above. Also on this basis, interest credited to policyholders' account balances increased $100 million primarily reflecting higher average annuity account values...

  • Page 35
    ...Sales ...Surrenders and withdrawals ...Net sales ...Benefit payments ...Net flows ...Change in market value, interest credited and other activity ...Policy charges ...Acquisition ...Ending total account value(2) ...Fixed Annuities: Beginning total account value ...Sales ...Surrenders and withdrawals...

  • Page 36
    .... In addition, as a result of a change in the reinsurance arrangement governing the purchase of the guaranteed cost business from CIGNA, the results of this business that were previously presented on a net basis in "Asset management fees and other income" are, beginning on April 1, 2006, presented...

  • Page 37
    ... retirement account values primarily resulting from market appreciation. Premiums increased $35 million, driven by higher single premium group annuity and life-contingent structured settlement sales, and resulted in a corresponding increase in policyholders' benefits, including the change in policy...

  • Page 38
    ... reflecting payments made to plan clients related to a legal action filed against an unaffiliated asset manager, as discussed above, and increased expenses incurred to expand our full service product and service capabilities. In addition, policyholders' benefits, including the change in policy...

  • Page 39
    ... purchase of commercial mortgage loans that we in turn would aggregate and sell into commercial mortgage-backed securitization transactions, together with related hedging activities, are excluded from the Asset Management segment and included in Corporate and Other operations as a divested business...

  • Page 40
    ... variable life insurance asset management revenues from our separate accounts. This also includes funds invested in proprietary mutual funds through our defined contribution plan products. Revenues from fixed annuities and the fixed rate options of both variable annuities and variable life insurance...

  • Page 41
    ... real estate and fixed income funds, which were fully offset by lower expenses related to minority interest in these funds. Service, distribution and other revenues includes payments from Wachovia Corporation under an agreement implementing arrangements with respect to money market mutual funds...

  • Page 42
    ...increase in amortization of deferred policy acquisition costs net of related amortization of unearned revenue reserves, primarily reflecting the impact of unfavorable equity markets on both separate account fund performance, including the impact of a corresponding change to the future rate of return...

  • Page 43
    ... separate account fund performance, including the impact of a corresponding change to the future rate of return assumptions discussed above, and variable product policy persistency. Also on this basis, policyholders' benefits, including interest credited to policyholders' account balances, increased...

  • Page 44
    ... required deposits needed to keep the policies in force. The level of surrenders as a percentage of mean future policy benefit reserves, policyholders' account balances and separate account balances increased from 3.3% in 2007 to 3.8% in 2008. 2007 to 2006 Annual Comparison. The total cash value...

  • Page 45
    ... and fee income. Group disability ratios include long-term care products. (2) Ratio of administrative operating expenses (excluding commissions) to gross premiums, policy charges and fee income. Group disability ratios include long-term care products. 2008 to 2007 Annual Comparison. Benefits and...

  • Page 46
    ...and from excess premiums on group universal life insurance that build cash value but do not purchase face amounts, and include premiums from the takeover of claim liabilities. (2) Includes long-term care products. 2008 to 2007 Annual Comparison. Total annualized new business premiums increased $140...

  • Page 47
    ... Japanese insurance operations also hold dual currency investments in the form of fixed maturities and loans. The principal of these dual currency investments are yen-denominated while the related interest income is U.S. dollar denominated. These investments are the economic equivalent of exchanging...

  • Page 48
    ... in value recorded within "Asset management fees and other income." The remeasurement related to the change in value for foreign currency exchange rate movements for these investments is excluded from adjusted operating income, as part of our application of the hedge of available economic capital...

  • Page 49
    ...Investment gains (losses) on trading account assets supporting insurance liabilities, net(3) ...Change in experience-rated contractholder liabilities due to asset value changes(4) ...Equity in earnings of operating joint ventures(5) ...Income from continuing operations before income taxes and equity...

  • Page 50
    ...increased exposure to corporate securities, and asset growth. Due to the long-term nature of many of the products we sell in Japan, we have historically sought to add duration exposure to our Japanese investment portfolio by employing various strategies, including investing in longer-term securities...

  • Page 51
    ... in benefits and expenses was higher interest credited to policyholders' account balances resulting from growth in our U.S. dollar denominated fixed annuity product. Sales Results In managing our international insurance business, we analyze revenues, as well as annualized new business premiums...

  • Page 52
    ... challenges posed by the current economic environment. Annualized new business premiums, on a constant exchange rate basis, from our Gibraltar Life operation increased $89 million, primarily reflecting strong sales of a new U.S. dollar denominated retirement income product launched in the first...

  • Page 53
    ...-tax basis as a separate line on our Consolidated Statements of Operations. In 2004, we acquired an 80 percent interest in Hyundai Investment and Securities Co., Ltd., a Korean asset management firm, from an agency of the Korean government. We subsequently renamed the company Prudential Investment...

  • Page 54
    ... income for 2007 includes the $37 million gain from the sale of our Oppenheim joint ventures and a $17 million benefit from recoveries related to a former investment of our Korean asset management operations. In addition, market value changes on securities relating to exchange memberships benefited...

  • Page 55
    ... favorable residential real estate market conditions. Certain of our clients utilize a fixed fee home sale program under which we assume the benefits and burdens of ownership with respect to a relocating employee's home that is purchased by us, including carrying costs and any loss on sale. As of...

  • Page 56
    ... as of the date of demutualization. The Closed Block Business includes our in force traditional domestic participating life insurance and annuity products and assets that are used for the payment of benefits and policyholder dividends on these policies, as well as other assets and equity and related...

  • Page 57
    ... related to higher income on joint venture and limited partnership investments and higher dividend income from public equity investments, and an increase of $108 million in net realized investment gains, from $481 million in 2006 to $589 million in 2007. For a discussion of Closed Block Business...

  • Page 58
    ... dividend obligation expense of $92 million. Policyholders' benefits, including changes in reserves, increased $54 million primarily reflecting higher claim costs in 2007 that continue to increase with the aging of the Closed Block policyholders, and a reserve release in 2006. Income Taxes...

  • Page 59
    ... $151 Financial Advisory ...Commercial mortgage securitization operations ...Exchange shares previously held by Prudential Equity Group ...Property and casualty insurance ...Prudential Securities capital markets ...Prudential Home Mortgage Company ...Other ...Total divested businesses excluded from...

  • Page 60
    ... losses on the loans, bonds and hedges from instability in the commercial mortgagebacked securities market during 2008. Exchange shares previously held by Prudential Equity Group In 2007, we exited the equity sales, trading and research operations of the Prudential Equity Group, and the results...

  • Page 61
    ... 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...

  • Page 62
    ... 1 Fixed maturities, available for sale ...Trading account assets supporting insurance liabilities ...Other trading account assets ...Equity securities, available for sale ...Commercial mortgage and other loans ...Other long-term investments ...Short term investments ...Cash and cash equivalents...

  • Page 63
    ... 1 Fixed maturities, available for sale ...Trading account assets supporting insurance liabilities ...Other trading account assets ...Equity securities, available for sale ...Commercial mortgage and other loans ...Other long-term investments ...Short term investments ...Cash and cash equivalents...

  • Page 64
    ... of Equity Securities Equity securities consist principally of investments in common and preferred stock of publicly traded companies, privately traded securities, as well as common stock mutual fund shares. The fair values of most publicly traded equity securities are based on quoted market prices...

  • Page 65
    ... of the asset management segment. Specifically, the fair value option was elected for funded commercial mortgage loans held for sale that were originated beginning January 1, 2008. In addition, we elected the fair value option for fixed rate commercial mortgage loans held for investment that were...

  • Page 66
    ... credit default swaps and to-be-announced forward contracts on highly rated mortgage-backed securities issued by U.S. government sponsored entities are determined using discounted cash flow models. The fair values of European style option contracts are determined using Black-Scholes option pricing...

  • Page 67
    ..., the valuations are calculated using internally developed models with option pricing techniques. The models calculate a risk neutral valuation, generally using the same interest rate assumptions to both project and discount future rider fees and benefit payments, and incorporate premiums for risks...

  • Page 68
    ..., the impaired security is accounted for as if it had been purchased on the measurement date of the impairment. Accordingly, the discount (or reduced premium) based on the new cost basis is accreted into net investment income, and included in adjusted operating income in future periods based upon...

  • Page 69
    ...losses) by segment-Fixed Maturity Securities Financial Services Businesses: Gross realized investment gains: Individual Annuities ...Retirement ...Asset Management ...Individual Life ...Group Insurance ...International Insurance ...International Investments ...Corporate and Other Operations ...Total...

  • Page 70
    ...related to asset-backed securities collateralized by sub-prime mortgages. Gross losses on sales and maturities of fixed maturity investments of $219 million in 2007, mainly in the Retirement and International Insurance segments, were primarily related to credit spread increases in the credit markets...

  • Page 71
    ... associated with certain variable annuity contracts. Net mark-to-market gains on interest rate derivatives used to manage duration includes the impact of long-duration floating-to-fixed interest rate swaps we entered into in order to add duration exposure to our Japanese investment portfolio...

  • Page 72
    ... to limit our active trading strategy for this portfolio while we evaluate our going forward trading strategies for the Closed Block Business. Net gains on sales and maturities of fixed maturity securities of $205 million in 2007 were also primarily due to sales related to our total return strategy...

  • Page 73
    ... relating to real estate investments and investments in joint ventures and partnerships. Year Ended December 31, 2008 Asset-Backed Securities Collateralized by All Other Sub-Prime Mortgages Investments (in millions) Other-than-temporary impairments on fixed maturity securities-Closed Block Business...

  • Page 74
    ... International Insurance segments, were primarily interest-rate related. Interest-rate related losses on fixed maturities primarily reflect sales of lower yielding bonds in a higher rate environment, primarily in the first half of 2006, in order to meet various cash flow needs and manage portfolio...

  • Page 75
    ...) - Fixed Maturity Investments-Closed Block Business Gross realized investment gains: Gross gains on sales and maturities ...Private bond prepayment premiums ...Total ...Gross realized investment losses: Gross losses on sales and maturities(1) ...Other-than-temporary impairments ...Credit related...

  • Page 76
    ... a diversified investment portfolio in our insurance companies to support our liabilities to customers in our Financial Services Businesses and the Closed Block Business, as well as our other general liabilities. Our general account does not include: (1) assets of our brokerage, trading and banking...

  • Page 77
    ...as fixed annuities and universal life insurance; • participating individual and experience-rated group products in which customers participate in actual investment and business results through annual dividends, interest or return of premium; and • guaranteed products for which there are price or...

  • Page 78
    ...value ...Private, held to maturity, at amortized cost ...Trading account assets supporting insurance liabilities, at fair value ...Other trading account assets, at fair value ...Equity securities, available for sale, at fair value ...Commercial mortgage and other loans, at book value ...Policy loans...

  • Page 79
    ... Fixed maturities ...Trading account assets supporting insurance liabilities ...Equity securities ...Commercial mortgage and other loans ...Policy loans ...Short-term investments and cash equivalents ...Other investments ...Gross investment income before investment expenses ...Investment expenses...

  • Page 80
    Fixed maturities ...Trading account assets supporting insurance liabilities ...Equity securities ...Commercial mortgage and other loans ...Policy loans ...Short-term investments and cash equivalents ...Other investments ...Gross investment income before investment expenses ...Investment expenses ......

  • Page 81
    ... Fixed maturities ...Trading account assets supporting insurance liabilities ...Equity securities ...Commercial mortgage and other loans ...Policy loans ...Short-term investments and cash equivalents ...Other investments ...Gross investment income before investment expenses ...Investment expenses...

  • Page 82
    ... tables set forth the breakdown of the amortized cost of our fixed maturity securities portfolio in total by contractual maturity as of December 31, 2008. December 31, 2008 Financial Services Businesses Closed Block Business Amortized Amortized Cost % of Total Cost % of Total ($ in millions) $ 4,190...

  • Page 83
    ... the risk-free rate and the impact of changes in foreign currency exchange rates. The following table sets forth the composition of the portion of our fixed maturity securities portfolio by industry category attributable to the Closed Block Business as of the dates indicated and the associated gross...

  • Page 84
    ... December 31, 2007 were concentrated primarily in asset-backed securities and the manufacturing, services, and utility sectors of our corporate securities. The gross unrealized gains related to our fixed maturity portfolio attributable to the Closed Block Business decreased from $1.569 billion as of...

  • Page 85
    ... evaluation of the underlying collateral and securitization structure, including any guarantees from monoline bond insurers. On an amortized cost basis, asset-backed securities collateralized by sub-prime mortgages attributable to the Financial Services Businesses decreased from $7.812 billion as of...

  • Page 86
    ...Services Businesses as of December 31, 2008, reflects our investment in medium term notes that are collateralized by investment portfolios primarily consisting of European fixed income securities, including 45% European corporate and bank bonds, 21% bank capital, 14% European asset-backed securities...

  • Page 87
    Asset-Backed Securities at Amortized Cost-Closed Block Business December 31, 2008 Lowest Rating Agency Rating BB and below Total Amortized Cost Total December 31, 2007 Vintage Collateralized by sub-prime mortgages: Enhanced short-term portfolio(1) ...2008 ...2007 ...2006 ...2005 ...2004 ...2003 & ...

  • Page 88
    ...evaluation of the underlying collateral and securitization structure, including any guarantees from monoline bond insurers. On an amortized cost basis, asset-backed securities collateralized by sub-prime mortgages attributable to the Closed Block Business decreased from $6.330 billion as of December...

  • Page 89
    ..., included in asset-backed securities of the Closed Block Business, reflects our investment in medium term notes that are collateralized by investment portfolios primarily consisting of European fixed income securities, including 45% European corporate and bank bonds, 21% bank capital, 14% European...

  • Page 90
    ...of the capital structure which has been effectively defeased by U.S. Treasury securities, of our U.S. and Non-U.S. commercial mortgage-backed securities attributable to the Financial Services Businesses based on amortized cost as of December 31, 2008, by rating and vintage. U.S. Commercial Mortgage...

  • Page 91
    ...-backed securities market in late 2004 and was modified in early 2005 to increase subordination from 20% to 30%. With the changes to the commercial mortgage-backed securities structure in 2005, there became three distinct AAA classes for commercial mortgage-backed securities with fixed rate terms...

  • Page 92
    ... future contractual principal payments for loans which are currently only required to pay interest. The following tables set forth the amortized cost and fair value of our commercial mortgage-backed securities attributable to the Closed Block Business as of the dates indicated, by credit quality...

  • Page 93
    ... 1.57 times, respectively. The following tables set forth the amortized cost and fair value of our commercial mortgage-backed securities attributable to the Closed Block Business as of December 31, 2008 by loan-to-value and debt service coverage ratios. PRUDENTIAL FINANC IAL 2008 ANNUAL REPORT 91

  • Page 94
    ...of the collateral values used in the calculation of the loan-to-value ratios are based upon the appraised value of the property at the time of loan origination. Commercial Mortgage-Backed Securities by Debt Service Coverage Ratio-Closed Block Business December 31, 2008 Amortized Cost Fair Value (in...

  • Page 95
    ... that are not reflected in other comprehensive income. The following table sets forth our public fixed maturity portfolios by NAIC rating attributable to the Closed Block Business as of the dates indicated. Public Fixed Maturity Securities-Closed Block Business December 31, 2008 December 31, 2007...

  • Page 96
    ... receipt of SVO ratings. Fixed Maturity Securities Guaranteed by Monoline Bond Insurers Certain of our fixed maturity investments are supported by guarantees from monoline bond insurers. The following table sets forth the amortized cost and fair value of our fixed maturity investments supported by...

  • Page 97
    ... by guarantees from monoline bond insurers, that 75% of the $685 million total attributable to the Closed Block Business as of December 31, 2008 (based upon amortized cost) would have investment grade credit ratings, including 65% of the asset-backed securities collateralized by sub-prime mortgages...

  • Page 98
    ... derivative contracts are recorded at fair value with changes in fair value, including the premium received, recorded in "Realized investment gains (losses), net." The premium received for the credit derivatives we sell attributable to the Financial Services Businesses was $12 million for the year...

  • Page 99
    ... the rating level of the lowest credit. In addition to selling credit protection, we have purchased credit protection using credit derivatives in order to hedge specific credit exposures in our investment portfolio, including exposures relating to certain guarantees from monoline bond insurers. For...

  • Page 100
    ... widening in the structured credit marketplace and increased liquidity discounts, and we believe the recoverable value of these investments based on the expected future cash flows is greater than or equal to our amortized cost, and we have the ability and intent to hold the security for a period of...

  • Page 101
    ... of the number of months the estimated fair value remained below amortized cost by 15% or more, but less than 20%, using month-end valuations. The following table sets forth the amortized cost and gross unrealized losses of fixed maturity securities attributable to the Closed Block Business where...

  • Page 102
    ... and private fixed maturities and create watch lists to highlight securities that require special scrutiny and management. Our public fixed maturity asset managers formally review all public fixed maturity holdings on a quarterly basis and more frequently when necessary to identify potential credit...

  • Page 103
    ...-term Investments and Cash Equivalents ...Fixed Maturities: Corporate Securities ...Commercial Mortgage-Backed ...Asset-Backed Securities ...Residential Mortgage-Backed ...Foreign Government ...U.S. Government ...Total Fixed Maturities ...Equity Securities ...Total trading account assets supporting...

  • Page 104
    ... portfolio as of the dates indicated, by credit quality, and for asset-backed securities collateralized by sub-prime mortgages, by year of issuance (vintage). Asset-Backed Securities at Fair Value-Trading Account Assets Supporting Insurance Liabilities December 31, 2008 Lowest Rating Agency Rating...

  • Page 105
    ... trading account assets supporting insurance liabilities portfolio as of the dates indicated, by credit quality and by year of issuance (vintage). Commercial Mortgage-Backed Securities at Fair Value-Trading Account Assets Supporting Insurance Liabilities December 31, 2008 Lowest Rating Agency Rating...

  • Page 106
    ...on NAIC designations. (2) Reflects equivalent ratings for investments of the international insurance operations that are not rated by U.S. insurance regulatory authorities. (3) Amounts are reported in "Asset management fees and other income." Commercial Mortgage and Other Loans Investment Mix As of...

  • Page 107
    ... Block Services Closed Block Businesses Business Businesses Business Gross Gross Gross Gross Carrying % of Carrying % of Carrying % of Carrying % of Value Total Value Total Value Total Value Total ($ in millions) Commercial mortgage loans by property type: Industrial buildings ...Office buildings...

  • Page 108
    ... income are used in the calculation of the loan-to-value and debt service coverage ratios. As of December 31, 2008, our commercial mortgage loan portfolio included approximately $1.8 billion and $0.6 billion of such loans, attributable to the Financial Services Businesses and the Closed Block...

  • Page 109
    ... other loans ... Commercial Mortgage and Other Loan Quality Ongoing review of the portfolio is performed and loans are placed on watch list status based on a predefined set of criteria. We place loans on early warning status in cases where we detect that the physical condition of the property, the...

  • Page 110
    ... in common and preferred stock of publicly traded companies, as well as mutual fund shares, as discussed below, and perpetual preferred securities. The following table sets forth the composition of our equity securities portfolio attributable to the Financial Services Businesses and the associated...

  • Page 111
    ... equity securities attributable to the Closed Block Business consist principally of investments in common and preferred stock of publicly traded companies. The following table sets forth the composition of our equity securities portfolio attributable to the Closed Block Business and the associated...

  • Page 112
    ...count of the number of months the estimated fair value remained below cost by less than 20%, using month-end valuations. The following table sets forth the cost and gross unrealized losses of our equity securities attributable to the Closed Block Business where the estimated fair value had declined...

  • Page 113
    ... fair value. Estimated fair values for publicly traded equity securities are based on quoted market prices or prices obtained from independent pricing services. Estimated fair values for privately traded equity securities are determined using valuation and discounted cash flow models that require...

  • Page 114
    ..., customer deposit liabilities are primarily supported by fixed maturity and short-term investments, in addition to cash and cash equivalents. As part of our asset management operations we make proprietary investments in real estate, as well as fixed income, public equity and real estate securities...

  • Page 115
    ...million are held outside the general account in other entities and operations, with credit ratings of AAA. As of December 31, 2008, fixed maturity investments of the Closed Block Business include $2.278 billion of publicly traded pass-through securities with guarantees from Fannie Mae or Freddie Mac...

  • Page 116
    ... existing products; (6) undertaking asset sales; and (7) seeking temporary or permanent changes to regulatory rules. Certain of these actions may require regulatory approval. Management monitors the liquidity of Prudential Financial and the Company on a daily basis and projects borrowing and capital...

  • Page 117
    ...Shareholder dividends ...Repayment of long-term senior debt, net of issuances(3) ...Repayment of floating rate convertible senior notes(3) ...Purchase of funding agreements from Prudential Insurance, net of maturities(2) ...Other, net ...Total uses ...Net decrease in cash and short-term investments...

  • Page 118
    ... other things, limit our ability to market products, reduce our competitiveness, increase the number or value of policy surrenders and withdrawals, increase our borrowing costs and potentially make it more difficult to borrow funds, adversely affect the availability of financial guarantees, such as...

  • Page 119
    ... on a daily basis. Depending on the overall availability of cash, the parent holding company invests excess cash on a short-term basis or borrows funds in the capital markets. Additional longer term liquidity is available through inter-affiliate borrowing arrangements. Prudential Financial and...

  • Page 120
    ... is primarily used to purchase securities in the short-term spread portfolios of our domestic insurance entities. Investments held in the short term spread portfolios include cash and cash equivalents, short-term investments and fixed maturities, including mortgage-and asset-backed securities, with...

  • Page 121
    ... and investment markets are continuously monitored in order to appropriately manage the cost of funds, investment spreads, asset/liability duration matching and liquidity. Federal Home Loan Bank of New York In June 2008, Prudential Insurance became a member of the Federal Home Loan Bank of New York...

  • Page 122
    ... and annuity considerations, investment and fee income, and investment maturities and sales associated with our insurance and annuity operations, as well as internal and external borrowings. The principal uses of that liquidity include benefits, claims, dividends paid to policyholders, and payments...

  • Page 123
    ...the Closed Block Business. We manage Prudential Insurance's RBC ratio to a level consistent with a "AA" ratings objective. RBC is determined by statutory formulas that consider risks related to the type and quality of the invested assets, insurance-related risks associated with an insurer's products...

  • Page 124
    ... reorganization plan. As of December 31, 2008, a liability of $501 million related to the special dividend is included in "Policyholders' dividends." The special dividend will take the form of additional policy values, and to a lesser extent, cash. Gibraltar Life's investment portfolio is structured...

  • Page 125
    ... net cash outflows from Prudential Financial in excess of our historical experience. Asset Management Subsidiaries Our asset management businesses, which include real estate, public and private fixed income and public equity asset management, as well as commercial mortgage origination and servicing...

  • Page 126
    ... sources such as asset sales, operating cash flow, deposits from clients and debt refinancings or from the above-mentioned portfolio level credit facilities. In cases where the separate account is not able to fund maturing obligations, Prudential Insurance may be called upon or required to provide...

  • Page 127
    ...interest is payable semi-annually at a fixed rate of 8.875% until June 15, 2018, from which date interest is payable quarterly at a floating rate of 3-month LIBOR plus 5.00%. Prudential Financial may redeem the institutional notes, subject to the terms of the replacement capital covenant, or RCC, as...

  • Page 128
    ... this program. Consolidated Borrowings Current capital markets activities for the Company on a consolidated basis principally consist of unsecured short-term and long-term debt borrowings issued by Prudential Funding and Prudential Financial, unsecured third party bank borrowings, and asset-based...

  • Page 129
    ...an effective 10-year credit default swap spread of 2,000 basis points, based on indications of forward LIBOR rates as of December 31, 2008. As we continue to underwrite term and universal life business, we expect to have borrowing needs in 2009 to finance statutory reserves required under Regulation...

  • Page 130
    ... in "Policyholders' account balances" and not included in the foregoing table) secured by funding agreements issued to the trust by Prudential Insurance and included in our Retirement segment. The funding agreements provide cash flow sufficient for the debt service on the related medium-term notes...

  • Page 131
    ... to which we may be contingently required to make payments now or in the future. A number of guarantees provided by us relate to real estate investments held in our separate accounts, in which the separate account has borrowed funds, and we have guaranteed their obligation to their lender. We...

  • Page 132
    ... enhancements of certain debt instruments that provide financing for commercial real estate assets, including certain tax-exempt bond financings. The credit enhancements provide assurances to the debt holders as to the timely payment of amounts due under the debt instruments. As of December 31, 2008...

  • Page 133
    ... or our access to or requirements for capital resources. In addition, we do not have relationships with any unconsolidated entities that are contractually limited to narrow activities that facilitate our transfer of or access to associated assets. PRUDENTIAL FINANCIAL 2008 ANNUAL REPORT 131

  • Page 134
    ... life insurance products, excluding the fixed rate options in these products, mutual funds and most separate accounts, our main exposure to the market is the risk that asset-based fees decrease as a result of declines in assets under management due to changes in investment prices. We also run...

  • Page 135
    ... interest rate risk through policyholder account balances relating to interest-sensitive life insurance, annuity and other investment-type contracts, collectively referred to as investment contracts, and through outstanding short-term and long-term debt. PRUDENTIAL FINANCIAL 2008 ANNUAL REPORT 133

  • Page 136
    ...) Notional Amount of Derivatives Financial assets with interest rate risk: Fixed maturities(1) ...Commercial mortgage and other loans ...Policy loans ...Derivatives: ...Swaps ...Futures ...Options ...Forwards ...Variable Annuity and Other Living Benefit Feature Embedded Derivatives(2) ...Financial...

  • Page 137
    ...overall risk management strategy. We generally hedge our anticipated exposure to adjusted operating income fluctuations resulting from changes in foreign currency exchange rates relating to our International operations primarily in Japan, Korea, Taiwan and Europe. • Second, we translate our equity...

  • Page 138
    ... and selling exchange-listed contracts for our customers, and as a dealer, by entering into futures and security transactions as a principal. As a broker, we assume counterparty and credit risks that we seek to mitigate by using margin or other credit enhancements and by establishing trading limits...

  • Page 139
    ... of 2007, the Company announced its decision to exit the equity sales, trading and research operations of the Prudential Equity Group. See Note 3 to the Consolidated Financial Statements for additional information. Value-at-Risk VaR is one of the tools we use to monitor and manage our exposure to...

  • Page 140
    ...regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. The...

  • Page 141
    ... an option to report selected financial amounts at fair value on January 1, 2008. Also, the Company changed its method of accounting for uncertainty in income taxes, for deferred acquisition costs in connection with modifications or exchanges of insurance contracts, and for income tax-related cash...

  • Page 142
    ... value ...Other trading account assets, at fair value ...Equity securities, available for sale, at fair value (cost: 2008-$7,288; 2007-$7,895) ...Commercial mortgage and other loans (includes $573 measured at fair value at December 31, 2008) ...Policy loans ...Securities purchased under agreements...

  • Page 143
    ... per share amounts) 2008 REVENUES Premiums ...Policy charges and fee income ...Net investment income ...Realized investment gains (losses), net ...Asset management fees and other income ...Total revenues ...BENEFITS AND EXPENSES Policyholders' benefits ...Interest credited to policyholders' account...

  • Page 144
    ... 2007 ...Common Stock acquired ...Stock-based compensation programs ...Dividends declared on Common Stock ...Dividends declared on Class B Stock ...Impact on Company's investment in Wachovia Securities due to addition of A.G. Edwards business, net of tax ...Cumulative effect of changes in accounting...

  • Page 145
    ... ...Trading account assets supporting insurance liabilities and other trading account assets ...Equity securities, available for sale ...Commercial mortgage and other loans ...Policy loans ...Other long-term investments ...Short-term investments ...Payments for the purchase/origination of: Fixed...

  • Page 146
    .... The Common Stock, which is publicly traded, reflects the performance of the Financial Services Businesses, and the Class B Stock, which was issued through a private placement, reflects the performance of the Closed Block Business. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of...

  • Page 147
    ... tax benefits that would be recognized in additional paid-in capital upon exercise or release of the award. Investments and Investment-Related Liabilities The Company's principal investments are fixed maturities; trading account assets; equity securities; commercial mortgage and other loans; policy...

  • Page 148
    ... 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...

  • Page 149
    ... ACCOUNTING POLICIES (continued) Income and expenses related to these transactions executed within the insurance companies and broker-dealer subsidiaries used to earn spread income are reported as "Net investment income;" however, for transactions used to borrow funds, the associated borrowing cost...

  • Page 150
    ...impaired security is accounted for as if it had been purchased on the measurement date of the impairment. Accordingly, the discount (or reduced premium) based on the new cost basis is accreted into net investment income in future periods based upon the amount and timing of expected future cash flows...

  • Page 151
    ... at the balance sheet date, and relocation real estate assets and receivables. Other liabilities consist primarily of trade payables, broker-dealer related payables, pension and other employee benefit liabilities, reinsurance payables, payables resulting from purchases of securities that had not yet...

  • Page 152
    ... of payment depends on policyholder mortality or morbidity, less the present value of future net premiums. For individual traditional participating life insurance products, the mortality and interest rate assumptions applied are those used to calculate the policies' guaranteed cash surrender values...

  • Page 153
    ... certain group insurance policies. The special dividends payable to the policyholders of Gibraltar Life are based on 70% of the net increase in the fair value, through March 2009, of certain real estate and loans, net of transaction costs and taxes, included in the Gibraltar Life reorganization plan...

  • Page 154
    ... 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...

  • Page 155
    ... 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...

  • Page 156
    ...long-term basis in the near term. See Note 12 for additional information regarding short-term and longterm debt. Income Taxes The Company and its eligible domestic subsidiaries file a consolidated federal income tax return that includes both life insurance companies and non-life insurance companies...

  • Page 157
    ... earnings per diluted share of Common Stock by $0.01, $0.01 and $0.02, 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...

  • Page 158
    ... 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 did not have a material effect on the Company...

  • Page 159
    ...commercial mortgage loans held for sale outside of the commercial mortgage operations. The fair value option has not been elected for the Company's other fixed rate commercial mortgage loans held for investment (primarily held by the general account), as the underlying business drivers and economics...

  • Page 160
    ... Asset Management S.a.r.l., which the Company accounted for under the equity method, to its partner Oppenheim S.C.A. for $121 million. These businesses establish, package and distribute mutual fund products to German and other European retail investors. The Company recorded a pre-tax gain on sale...

  • Page 161
    ... indemnity coinsurance arrangement, effectively retaining the economics of the defined benefit guaranteed-cost contracts for the life of the block of business. Upon conversion, the Company extinguished its reinsurance recoverable and reinsurance payable with CIGNA related to the modified-coinsurance...

  • Page 162
    ... transaction-oriented stockbrokerage and related activities of Prudential Securities Group, Inc. The year ended December 31, 2007 includes a $21 million tax benefit associated with the discontinued international securities operations. (6) The sale of the Company's healthcare business to Aetna was...

  • Page 163
    ... subdivisions ...Foreign government bonds ...Corporate securities ...Asset-backed securities(1) ...Commercial mortgage-backed securities ...Residential mortgage-backed securities(2) ...Total fixed maturities, available for sale ...Equity securities, available for sale ... Fair Value $ 6,236 891...

  • Page 164
    ... 4. INVESTMENTS (continued) 2007 Gross Gross Unrealized Unrealized Gains Losses (in millions) $ 10 11 11 - 4 $ 36 $ 6 16 2 - 17 Amortized Cost Fixed maturities, held to maturity Foreign government bonds ...Corporate securities ...Asset-backed securities ...Commercial mortgage-backed securities...

  • Page 165
    ... states ...Foreign government bonds ...Corporate securities ...Asset-backed securities ...Commercial mortgage-backed securities ...Residential mortgage-backed securities ...Total fixed maturities ...Equity securities ...Total trading account assets supporting insurance liabilities ... Net change in...

  • Page 166
    ... it will sell the loan to an investor. As of December 31, 2008 and 2007, $71 million and $306 million, respectively, of loans held for sale are subject to such arrangements. The Company exited the commercial mortgage securitization business during 2008. Commercial mortgage loans in securitization...

  • Page 167
    PRUDENTIAL FINANCIAL, INC. Notes to Consolidated Financial Statements 4. INVESTMENTS (continued) In certain investment structures, the Company's asset management business invests with other co-investors in an investment fund referred to as a feeder fund. In these structures, the invested capital of...

  • Page 168
    ...Fixed maturities, held to maturity ...Equity securities, available for sale ...Trading account assets ...Commercial mortgage and other loans ...Policy loans ...Broker-dealer related receivables ...Short-term investments and cash equivalents ...Other long-term investments ...Gross investment income...

  • Page 169
    ... net income ...Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and valuation of business acquired ...Impact of net unrealized investment (gains) losses on future policy benefits ...Impact of net unrealized investment (gains) losses on policyholders' dividends...

  • Page 170
    ...Value Losses Fixed maturities(1) U.S. Treasury securities and obligations of U.S. government authorities and agencies ...Obligations of U.S. states and their political subdivisions ...Foreign government bonds ...Corporate securities ...Commercial mortgage-backed securities ...Asset-backed securities...

  • Page 171
    ... Losses $235 $29 Less than twelve months Unrealized Fair Value Losses Cost Method Investments ...$47 $2 Total Unrealized Fair Value Losses $82 $6 The aggregate cost of the Company's cost method investments included in "Other long-term investments" totaled $507 million and $370 million at December...

  • Page 172
    ...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, as discussed in further detail in Note 2. The Company sells or...

  • Page 173
    ... 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...

  • Page 174
    ... to fund certain employee benefits. Securities restricted as to sale amounted to $208 million and $154 million at December 31, 2008 and 2007, respectively. These amounts include member and activity based stock associated with membership in the Federal Home Loan Bank of New York. Restricted cash and...

  • Page 175
    ...' businesses. Such customer claims, litigation and regulatory matters include matters typical for retail securities brokerage and clearing operations and matters unique to the joint venture operations. In recent months, following the failure in early 2008 of the auctions which set the rates for...

  • Page 176
    ... changes in market value, which are included in accumulated other comprehensive income and relate to the market price of China Pacific Group's publicly traded shares, which began trading on the Shanghai Exchange in 2007. The Company recognized combined after-tax losses from these joint ventures...

  • Page 177
    ... account assets and corresponding decreases in anticipated fee income and overall expected future earnings for this business. During the fourth quarter of 2008, the Company impaired the entire $123 million of goodwill associated with the International Investments segment's asset management reporting...

  • Page 178
    ... certain other reserves for group, annuities and individual life and health products. Future policy benefits for individual participating traditional life insurance are based on the net level premium method, calculated using the guaranteed mortality and nonforfeiture interest rates which range from...

  • Page 179
    ... of future disability claim payments and expenses as well as estimates of claims incurred but not yet reported as of the balance sheet dates related to group disability products. Unpaid claim liabilities are discounted using interest rates ranging from 0% to 6%. Policyholders' Account Balances...

  • Page 180
    ... death, annuitization or at specified dates during the accumulation period and withdrawal and income benefits payable during specified periods. The Company also issues annuity contracts with market value adjusted investment options ("MVAs"), which provide for a return of principal plus a fixed rate...

  • Page 181
    ... annuity contracts with guarantees were invested in separate account investment options as follows: December 31, December 31, 2008 2007 (in millions) $16,809 $36,100 7,866 6,732 13,202 22,510 3,934 2,966 1,343 3,198 $43,154 $71,506 Equity funds ...Bond funds ...Balanced funds ...Money market funds...

  • Page 182
    ... for GMAB, GMWB and GMIWB are included in "Future policy benefits." As discussed above, the Company maintains a portfolio of derivative investments that serve as a partial economic hedge of the risks associated with these products, for which the changes in fair value are also recorded in "Realized...

  • Page 183
    ... the date of first withdrawal; (2) cumulative deposits when withdrawals commence, less cumulative withdrawals plus a minimum return; or (3) the highest contract value on a specified date minus any withdrawals. The income option guarantees that a contract holder can, upon the election of this benefit...

  • Page 184
    ... 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...

  • Page 185
    ... ...Total Closed Block Liabilities ...Closed Block Assets Fixed maturities, available for sale, at fair value ...Other trading account assets, at fair value ...Equity securities, available for sale, at fair value ...Commercial mortgage and other loans ...Policy loans ...Other long-term investments...

  • Page 186
    ... reinsurance arrangements with CIGNA to effect the transfer of the retirement business included in the transaction. These reinsurance arrangements are more fully described in Note 3. Life and disability reinsurance is accomplished through various plans of reinsurance, primarily yearly renewable term...

  • Page 187
    ...Individual and group annuities(1) ...Life insurance ...Other reinsurance ...Total reinsurance recoverable ... (1) Primarily represents reinsurance recoverables established under the reinsurance arrangements associated with the acquisition of the retirement business of CIGNA. The Company has recorded...

  • Page 188
    ... be 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...

  • Page 189
    ... fixed rate surplus notes issued by Prudential Insurance are subordinated to other Prudential Insurance borrowings and policyholder obligations, and the payment of interest and principal may only be made with the prior approval of the Commissioner of Banking and Insurance of the State of New Jersey...

  • Page 190
    ..., was distributed to Prudential Financial through a dividend on the date of demutualization for use in the Financial Services Businesses. In addition, $72 million was used to purchase a guaranteed investment contract to fund a portion of the financial guarantee insurance premium related to the 188...

  • Page 191
    ... ventures ...Net income (loss) ...Consolidated Statements of Cash Flows data for the years ended December 31: Cash flows from operating activities ...Cash flows from (used) in investing activities ...Cash flows from (used in) financing activities ...Effect of foreign exchange rate changes on cash...

  • Page 192
    ... of Class B Stock at a price of $87.50 per share. The Class B Stock is a separate class of common stock which is not publicly traded. The Common Stock reflects the performance of the Financial Services Businesses and the Class B Stock reflects the performance of the Closed Block Business. Holders of...

  • Page 193
    ...for payment under New Jersey corporate law on a consolidated basis after taking into account dividends on the Class B Stock. The declaration and payment of dividends on the Class B Stock depends upon the financial performance of the Closed Block Business and, as the Closed Block matures, the holders...

  • Page 194
    ... policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions as well as valuing investments and certain assets and accounting for deferred taxes on a different basis. Statutory net income of Prudential Insurance amounted...

  • Page 195
    ... Financial Services Businesses available to holders of Common Stock after direct equity adjustment ...$(1,072) Effect of dilutive securities and compensation programs(1) Stock options ...Deferred and long-term compensation programs ...Convertible senior notes ...Diluted earnings per share(1) Income...

  • Page 196
    ...32) million, $137 million and $216 million, respectively. The direct equity adjustment resulted in a decrease in the income from continuing operations attributable to the Closed Block Business applicable to holders of Class B Stock for earnings per share purposes of $55 million, $53 million and $68...

  • Page 197
    ... risk-free rate for periods within the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The following chart summarizes the compensation cost recognized and the related income tax benefit for stock options, restricted stock shares, restricted stock...

  • Page 198
    ... based on the satisfaction of certain performance goals. Performance share awards are payable in Common Stock. A summary of the Company's employee restricted stock shares, restricted stock units and performance shares is as follows: Weighted Average Grant Date Fair Value $39.03 - 44.90 - 34.89...

  • Page 199
    ... tax benefit realized upon vesting of restricted stock shares, restricted stock units, and performance shares for the years ended December 31, 2008, 2007 and 2006 was $38 million, $61 million and $52 million, respectively. Stock Purchase Plan At the Annual Meeting of the Shareholders of the Company...

  • Page 200
    ... value is estimated using the 15% discount off of the grant date share price, plus the value of three month call and put options on shares at the grant date share price, less the value of forgone interest. Compensation costs recognized for employees under the Company's Employee Stock Purchase Plan...

  • Page 201
    ... year period ...Effect of measurement date change ...Fair value of plan assets at beginning of period ...Actual return on plan assets ...Annuity purchase ...Employer contributions ...Plan participants' contributions ...Contributions for settlements ...Disbursement for settlements ...Benefits paid...

  • Page 202
    ... annual benefit payment payable by Prudential Insurance for all annuity contracts was $16 million and $26 million as of December 31, 2008 and 2007, respectively. There were no pension plan amendments in 2008. The benefit obligation for pension benefits increased by $4 million in 2007 related to plan...

  • Page 203
    ... and postretirement obligations, respectively. This results in the present value for each respective benefit obligation. A single discount rate is calculated that results in the same present value. The rate is then rounded to the nearest 25 basis points. PRUDENTIAL FINANCIAL 2008 ANNUAL REPORT 201

  • Page 204
    ... blocks for bond returns include inflation, real return, a term premium, credit spread, capital appreciation and the effect of active management, expenses and the effect of rebalancing. The Company applied the same approach to the determination of the expected long-term rate of return on plan assets...

  • Page 205
    .... EMPLOYEE BENEFIT PLANS (continued) Management reviews its investment strategy on an annual basis. The investment goal of the domestic pension plan assets is to generate an above benchmark return on a diversified portfolio of stocks, bonds and other investments, while meeting the cash requirements...

  • Page 206
    ... tax expense (benefit) reported in stockholders' equity related to: Other comprehensive income (loss) ...Impact on Company's investment in Wachovia Securities due to addition of A.G. Edwards business ...Stock-based compensation programs ...Conversion of senior notes ...Cumulative effect of changes...

  • Page 207
    ... income tax benefit of $18 million associated with the assumed repatriation of those earnings was recognized in 2006. During 2007, the Company sold its investment in its German operating joint ventures Oppenheim Pramerica Fonds Trust GmbH and Oppenheim Pramerica Asset Management S.a.r.l. Accordingly...

  • Page 208
    ... taxpayers that the U.S. Treasury Department and the IRS 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. A change in the DRD, including...

  • Page 209
    ...spreads and (v) most information publicly available. The Company's Level 1 assets and liabilities primarily include certain cash equivalents and short term investments, equity securities and derivative contracts that are traded in an active exchange market. Prices are obtained from readily available...

  • Page 210
    ... credit default swaps and to-be-announced forward contracts on highly rated mortgage-backed securities issued by U.S. government sponsored entities are determined using discounted cash flow models. The fair values of European style option contracts are determined using Black-Scholes option pricing...

  • Page 211
    ... discounted using LIBOR interest rates, which are commonly viewed as being consistent with the Company's claims-paying ratings of AA quality. Since there is no observable active market for the transfer of these obligations, the valuations are calculated using internally developed models with option...

  • Page 212
    ... 1 Fixed maturities, available for sale ...Trading account assets supporting insurance liabilities ...Other trading account assets ...Equity securities, available for sale ...Commercial mortgage and other loans ...Other long-term investments ...Short term investments ...Cash and cash equivalents...

  • Page 213
    ... or accretion of premiums and discounts. (3) Separate account assets represent segregated funds that are invested for certain customers. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to...

  • Page 214
    ...fixed maturities classified as available for sale, trading account assets supporting insurance liabilities, other trading account assets, equity securities, securities purchased under agreements to resell, short-term investments, cash and cash equivalents, accrued investment income, separate account...

  • Page 215
    ... fair value of U.S. insurance policy loans is calculated using a discounted cash flow model based upon current U.S. Treasury rates and historical loan repayment patterns, while Japanese insurance policy loans use the risk-free proxy based on the Yen LIBOR. For group corporate- and trust-owned life...

  • Page 216
    ...,158 97,158 Fixed maturities, held to maturity ...Commercial mortgage and other loans ...Policy loans ...Wachovia Securities "lookback" option ...Policyholder account balances-Investment contracts ...Short-term and long-term debt ...Debt of consolidated VIEs ...Bank customer liabilities ...Separate...

  • Page 217
    ... designated for hedge accounting in instances where the appropriate criteria are met. The Company does not use futures, options, credit, equity or embedded derivatives in any of its fair value, cash flow or net investment hedge accounting relationships. PRUDENTIAL FINANCIAL 2008 ANNUAL REPORT 215

  • Page 218
    ...Rate Realized investment gains (losses) ...Net investment income ...Interest expense-(increase)/decrease ...Interest credited to policyholder account balances-(increase)/decrease ...Currency Realized investment gains (losses) ...Net investment income ...Other Income ...Total fair value hedge ...Cash...

  • Page 219
    ... the Company's own credit and embedded derivatives contained in European managed investments, by NAIC rating of the underlying credits as of the dates indicated. December 31, 2008 First to Default Single Name Basket(1) Index Hedges Fair Fair Fair NAIC Rating Agency Equivalent Notional Value Notional...

  • Page 220
    ... market which contain embedded derivatives whose fair value are primarily driven by changes in credit spreads. These investments are medium term notes that are collateralized by investment portfolios primarily consisting of investment grade European fixed income securities, including corporate bonds...

  • Page 221
    ... of group life, long-term and short-term group disability, long-term care and group corporateowned and trust-owned life insurance in the U.S. primarily to institutional clients for use in connection with employee and membership benefit plans. International Insurance and Investments Division. The...

  • Page 222
    ...on the date of demutualization. It includes the Closed Block (as discussed in Note 10); assets held outside the Closed Block necessary to meet insurance regulatory capital requirements related to products included within the Closed Block; deferred policy acquisition costs related to the Closed Block...

  • Page 223
    ... acquisition costs, VOBA, unearned revenue reserves and deferred sales inducements; interest credited to policyholders' account balances; reserves for future policy benefits; payments associated with the market value adjustment features related to certain of the annuity products the Company sells...

  • Page 224
    ...'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...

  • Page 225
    ... International Insurance and Investments Division ...Corporate Operations ...Real Estate and Relocation Services ...Total Corporate and Other ...Adjusted Operating Income before income taxes for Financial Services Businesses ...Reconciling items: Realized investment gains (losses), net, and related...

  • Page 226
    ... Amortization Credited to of Deferred Net Policyholders' Policy Investment Policyholders' Account Dividends to Interest Acquisition Revenues Income Benefits Balances Policyholders Expense Costs (in millions) Financial Services Businesses: ...Individual Annuities ...Retirement ...Asset Management...

  • Page 227
    ... Amortization Credited to of Deferred Net Policyholders' Policy Investment Policyholders' Account Dividends to Interest Acquisition Revenues Income Benefits Balances Policyholders Expense Costs (in millions) Financial Services Businesses: Individual Annuities ...Retirement ...Asset Management...

  • Page 228
    ... Amortization Credited to of Deferred Net Policyholders' Policy Investment Policyholders' Account Dividends to Interest Acquisition Revenues Income Benefits Balances Policyholders Expense Costs (in millions) Financial Services Businesses: Individual Annuities ...Retirement ...Asset Management...

  • Page 229
    ... Life and Group Insurance Division ...International Insurance ...International Investments ...Total International Insurance and Investments Division ...Corporate Operations ...Real Estate and Relocation Services ...Total Corporate and Other ...Total Financial Services Businesses ...Closed Block...

  • Page 230
    ... it may be contingently required to make payments now or in the future. A number of guarantees provided by the Company relate to real estate investments held in its separate accounts, in which the separate account has borrowed funds, and the Company has guaranteed their obligation to their lender...

  • Page 231
    ... nationwide class action, Garcia v. Prudential Insurance Company of America, was filed in the United States District Court for the District of New Jersey. The complaint, which is brought on behalf of beneficiaries of Prudential policies whose death benefits were placed in retained asset accounts...

  • Page 232
    ... agreement pursuant to which the Company purchased the American Skandia entities in May 2003 from Skandia. Securities Prudential Securities has been named as a defendant in a number of industry-wide purported class actions in the United States District Court for the Southern District of New...

  • Page 233
    ...Stock Exchange, the New Jersey Bureau of Securities and the New York Attorney Generals Office. These settlements resolve the investigations by the above named authorities into these matters as to all Prudential entities without further regulatory proceedings or filing of charges so long as the terms...

  • Page 234
    .... In October 2006, a class action lawsuit, Bouder v. Prudential Financial, Inc. and Prudential Insurance Company of America, was filed in the United States District Court for the District of New Jersey, claiming that the Company failed to pay overtime to insurance agents who were registered...

  • Page 235
    ... a pre-tax charge of $235 million and $120 million, respectively, for the Company's share of costs related to the agreement in principle for a global settlement concerning the underwriting, sale and subsequent auction of certain auction rate securities of the retail brokerage joint venture with...

  • Page 236
    ... sale, at fair value ...Commercial mortgage and other loans ...Policy loans ...Securities purchased under agreements to resell ...Other long-term investments ...Short-term investments ...Total investments ...Cash and cash equivalents ...Accrued investment income ...Deferred policy acquisition costs...

  • Page 237
    ... Services Businesses REVENUES Premiums ...Policy charges and fee income ...Net investment income ...Realized investment gains (losses), net ...Asset management fees and other income ...Total revenues ...BENEFITS AND EXPENSES Policyholders' benefits ...Interest credited to policyholders' account...

  • Page 238
    ... the Class B Stock holders or IHC debt bond insurer. The Financial Services Businesses and Closed Block Business participate in separate internal short-term cash management facilities, pursuant to which they invest cash from securities lending and repurchase activities as well as certain trading and...

  • Page 239
    ...the Closed Block policies as well as the consequences of certain potential adverse tax determinations. In connection with the sale of the Class B Stock and IHC debt, the cost of indemnifying the investors with respect to certain matters will be borne by the Financial Services Businesses. PRUDENTIAL...

  • Page 240
    ... net increase to shareholders' equity of $44 million, reflecting the tax benefit associated with the conversion of the senior notes. The payment of principal and accrued interest was funded primarily through the liquidation of the investment grade fixed income investment portfolio purchased with the...

  • Page 241
    ... of the S&P 500 Life & Health Insurance and S&P 500 Diversified Financials indices. The figures presented below assume the reinvestment of all dividends into shares of common stock and an initial investment of $100 at the closing prices on December 31, 2003. ANNUAL RETURN PERCENTAGE Years Ending...

  • Page 242
    ...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...

  • Page 243
    ... of services, including: • Change of address • Transfer of stock • Direct deposit of dividends • Electronic delivery of annual reports and proxy statements For more information, contact Computershare directly: Online: www.computershare.com/investor By phone: Customer Service Representatives...

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    PRUDENTIAL FINANCIAL, INC. 2008 ANNUAL REPORT