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ANNUAL
REPORT
PRUDENTIAL FINANCIAL
2010

Table of contents

  • Page 1
    2010 ANNUAL REPORT PRUDENTIAL FINANCIAL

  • Page 2
    ... measure our long-term success on our ability to deliver value for shareholders, meet customer needs, attract and develop the best talent in our industry, offer an inclusive work environment where employees can develop to their full potential, and give back to the communities where we live and work...

  • Page 3
    ... product activities. In Asset Management, net institutional long-term inï¬,ows exceeded $28 billion for the year, a record high and more than double the 2009 level. In addition, our International Insurance operation achieved a record-high level of sales, based on annualized new business premiums...

  • Page 4
    ... on September 30, 2010, of an agreement to acquire AIG Star Life Insurance Co., Ltd., and AIG Edison Life Insurance Company from the American International Group, Inc., for approximately $4.8 billion was clear evidence of our superior financial strength. This acquisition is the largest by far that...

  • Page 5
    ...International Insurance business turned in another strong performance, reporting pre-tax adjusted operating income of $2.1 billion, compared to $1.8 billion in 2009, thanks to continued growth of our highly successful operations in Japan, home of our largest operations outside the U.S. For the year...

  • Page 6
    ... markets, as evidenced by gains in sales and ï¬,ows. Business momentum is strong. We are well positioned to serve customers' needs for protection, retirement and income accumulation products. We will continue to benefit from our diversification in multiple areas-distribution channels, geographies...

  • Page 7
    ... Insurance and Annuity Company (PRIAC), Hartford, CT. We define customers as primary customers, plan participants and consumers of our products and services. FORTUNE® and "The World's Most Admired Companies®" are registered trademarks of Time Inc. Prudential Financial 2010 Annual Report...

  • Page 8
    ... expenses Income (loss) from 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...

  • 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...

  • Page 10
    ... Private Securities Reform Act of 1995. Please see page 272 for a description of certain risks and uncertainties that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements. 8 Prudential Financial 2010 Annual Report

  • Page 11
    ... "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. Financial Services Businesses and Closed Block...

  • Page 12
    ... of Operations" and the Consolidated Financial Statements included elsewhere herein. Year Ended December 31, 2010 2009 2008 2007 2006 (in millions, except per share and ratio information) Income Statement Data: Revenues: Premiums ...Policy charges and fee income ...Net investment income ...Asset...

  • Page 13
    ... life of the Closed Block to fund payments of all expenses, taxes, and policyholder benefits to be paid to, and the reasonable dividend expectations of, holders of the Closed Block policies. We also segregated for accounting purposes the assets that we need to hold outside the Closed Block to meet...

  • Page 14
    ... profitability of certain products we offer as well as returns on the investment portfolio backing our insurance liabilities and equity. Disruptions in the credit markets in recent years have also limited sales opportunities for certain products we offer. 12 Prudential Financial 2010 Annual Report

  • Page 15
    ...the acquisition from American International Group, Inc., or AIG, of AIG Star Life Insurance Co., Ltd., or Star, AIG Edison Life Insurance Company, or Edison, and certain other AIG subsidiaries pursuant to the stock purchase agreement dated September 30, 2010 between Prudential Financial and AIG. The...

  • Page 16
    ... holding company, had cash and short-term investments of $6.672 billion. On November 9, 2010, Prudential Financial declared an annual dividend for 2010 of $1.15 per share of Common Stock, reflecting an increase of approximately 64% from the 2009 Common Stock dividend. Outlook Management expects...

  • Page 17
    ... an increase in amortization of deferred policy acquisition costs net of related amortization of unearned revenue reserves, reflecting the impact of equity markets on separate account fund performance in the respective periods, partially offset by the favorable impact of variable life policyholder...

  • Page 18
    ... hedge positions associated with certain of our variable annuity contracts partially offset by the impact of foreign currency exchange rates. • Income (loss) from continuing operations before income taxes in the Closed Block Business increased $1,205 million in 2010 compared to 2009, primarily...

  • Page 19
    ...in the customer separate account funds. For a discussion of the change in our hedging strategy and the results of our hedging program, see "-Results of Operations for Financial Services Businesses by Segment-U.S. Retirement Solutions and Investment Management Division-Individual Annuities-Net impact...

  • Page 20
    ... for the years ended December 31, 2010, 2009 and 2008, see "-Results of Operations for Financial Services Businesses by Segment-U.S. Individual Life and Group Insurance Division- Individual Life." For variable annuity contracts, DAC and DSI are more sensitive to changes in our future rate of return...

  • Page 21
    ... million, all within our Financial Services Businesses. VOBA represents the present value of future profits embedded in acquired businesses, and is determined by estimating the net present value of future cash flows from the contracts in force at the date of acquisition. We have established a VOBA...

  • Page 22
    ... and hence 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...

  • Page 23
    ... whole life, term life, and life contingent structured settlement and group annuity products of our Financial Services Businesses. The future policy benefit reserves for the traditional participating life insurance products of our Closed Block Business, which as of December 31, 2010, represented 39...

  • Page 24
    ... ...Increase in future rate of return by 100 basis points ... For a discussion of adjustments to the reserves for guaranteed minimum death and income benefits related to our Individual Annuities segment for the years ended December 31, 2010, 2009 and 2008, see "-Results of Operations for Financial...

  • Page 25
    ..., equity risk premium and capital appreciation as well as expenses, expected asset manager performance and the effect of rebalancing for the equity, debt and real estate asset mix applied on a weighted average basis to our pension asset portfolio. See Note 18 to our Consolidated Financial Statements...

  • Page 26
    ... 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. On February 14, 2011...

  • Page 27
    ... Prudential Financial, Inc. per share-Common Stock ...Diluted net income (loss) attributable to Prudential Financial, Inc. per share-Common Stock ...Closed Block Business: Income (loss) from continuing operations before income taxes for Closed Block Business ...Income tax expense (benefit) ...Income...

  • Page 28
    ... premiums and policy charges and fee income, largely offset by an increase in policyholders' benefits, including changes in reserves, reflecting business growth, as well as the impact of currency fluctuations, in our International Insurance operations and higher life-contingent structured settlement...

  • Page 29
    ... related charges which represent the unfavorable (favorable) impact of Realized investment gains (losses), net, on change in reserves and the amortization of deferred policy acquisition costs, deferred sales inducements and valuation of business acquired. Prudential Financial 2010 Annual Report 27

  • Page 30
    ... for the guaranteed minimum death and income benefit features of our variable annuity products and in our estimate of total gross profits used as a basis for amortizing deferred policy acquisition and other costs. 2010 included $177 million of benefits from these annual reviews, primarily related...

  • Page 31
    ... to adjustments to the reserves for the guaranteed minimum death and income benefit features of our variable annuity products and to our estimate of total gross profits used as a basis for amortizing deferred policy acquisition and other costs, compared to $1,334 million of charges included in 2008...

  • Page 32
    ... for the guaranteed minimum death and income benefit features of our variable annuity products and in our estimate of total gross profits used as a basis for amortizing deferred policy acquisition and other costs. 2009 included $49 million of charges from these annual reviews, primarily related...

  • Page 33
    ... in 2010. Absent the net $31 million increase related to the adjustments to the reserves for the guaranteed minimum death and income benefit features of our variable annuity products and to our estimate of total gross profits used as a basis for amortizing deferred policy acquisition and other costs...

  • Page 34
    ...current reporting practices. (3) As of December 31, 2010, variable annuity account values are invested in equity funds ($56 billion or 55%), bond funds ($29 billion or 28%), market value adjusted or fixed-rate accounts ($9 billion or 9%), and other ($8 billion or 8%). 2010 to 2009 Annual Comparison...

  • Page 35
    ... the prior years, reflects sales of our latest product offerings which include this feature, as well as the impact on account values of overall favorable equity markets since the prior periods. As of December 31, 2010, approximately 76% of variable annuity account values with living benefit features...

  • Page 36
    ... charges." In 2010, the net impact from the mark-to-market of our embedded derivatives and related hedge positions for the Individual Annuities segment was a benefit of $37 million partially offset by a $4 million increase in the amortization of deferred policy acquisition and other costs resulting...

  • Page 37
    ...31, 2010 2009 2008 (in millions) Operating results: Revenues ...Benefits and expenses ...Adjusted operating income ...Realized investment gains (losses), net, and related adjustments(1) ...Related charges(2) ...Investment gains (losses) on trading account assets supporting insurance liabilities, net...

  • Page 38
    ...profits used as a basis for amortizing deferred policy acquisition costs and valuation of business acquired, as well as the impact of our quarterly adjustments to total gross profits for current period experience. Adjusted operating income for 2009 included a $3 million charge from the annual review...

  • Page 39
    ...driven by higher life-contingent structured settlement sales, partially offset by lower single premium group annuity sales, which resulted in a corresponding increase in policyholders' benefits, including the change in policy reserves, as discussed below. Prudential Financial 2010 Annual Report 37

  • Page 40
    ...interim service agreement relating to the retirement business acquired from Union Bank of California, N.A. and a $12 million charge for one-time costs associated with certain cost reduction programs, which were included in 2008. Sales Results and Account Values The following table shows the changes...

  • Page 41
    ...In addition, sales of guaranteed investment products in the institutional and retail markets continue to be negatively impacted by capital market conditions. 2009 to 2008 Annual Comparison. Account values in our full service business amounted to $126.3 billion as of December 31, 2009, an increase of...

  • Page 42
    ...in 2010 also reflect an increase in performance-based incentive fees primarily related to institutional real estate funds. These increases were partially offset by an increase in compensation expenses and lower income related to securities lending activities. 2009 to 2008 Annual Comparison. Adjusted...

  • Page 43
    ... fixed rate options of both variable annuities and variable life insurance are included in the general account. (2) Includes mortgage origination and spread lending revenues of our commercial mortgage origination and servicing business. (3) Includes payments from Wells Fargo under an agreement dated...

  • Page 44
    ...257 million in 2009 to $1,888 million in 2010. Asset management fees increased $224 million primarily from institutional and retail customer assets as a result of higher asset values from market appreciation and positive net asset flows. Commercial mortgage revenues increased $188 million primarily...

  • Page 45
    ...decrease in adjusted operating income was higher net investment income from an increase in assets supporting our term and universal life products, growth in universal life policyholder account balances and the impact of gains in 2010 on investments in real property separate account funds compared to...

  • Page 46
    ... policyholder deposits, as well as gains in 2010 on investments in real property separate account funds compared to losses in 2009. Premiums increased $28 million, primarily due to growth of our in force block of term insurance. Policy charges and fees and asset management fees and other income...

  • Page 47
    ... individual life insurance business' policy surrender experience for variable and universal life insurance, measured by cash value of surrenders, for the periods indicated. These amounts do not correspond to expenses under U.S. GAAP. In managing this business, we analyze the cash value of surrenders...

  • Page 48
    ... payments or the contractually 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 3.8% in 2008 to 4.2% in 2009. Group Insurance Operating...

  • Page 49
    ... in policyholder benefits on these contracts, as discussed below. Partially offsetting the increase in group life premiums is the premium adjustment recorded in 2008 as discussed above. Group disability premiums and policy charges and fee income, which include long-term care products, increased by...

  • Page 50
    ...of large case disability products to both new and existing customers, as well as a decrease in long-term care sales. 2009 to 2008 Annual Comparison. Total annualized new business premiums increased $85 million, from $492 million in 2008 to $577 million in 2009. Group life sales increased $51 million...

  • Page 51
    ...5.4 81.5 ¥100.2 Weighted average forward exchange rate per U.S. Dollar (Yen per $) 85.3 83.0 81.6 79.2 80.0 Year 2011 ...2012 ...2013 ...2014-2034 ...Total ... (1) Yen amounts are imputed from the contractual U.S. dollar denominated interest cash flows. Prudential Financial 2010 Annual Report 49

  • Page 52
    ..."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. The U.S. dollar denominated...

  • Page 53
    ... ...Benefits and expenses: Life Planner operations ...Gibraltar Life ...Adjusted operating income: Life Planner operations ...Gibraltar Life ...Realized investment gains (losses), net, and related adjustments(1) ...Related charges(2) ...Investment gains (losses) on trading account assets supporting...

  • Page 54
    ... policies. These surrender charges were 20% in the first year and decline by 2% each year thereafter. Subsequent to the acquisition, we renamed the acquired company The Prudential Gibraltar Financial Life Insurance Company, Ltd, or Prudential Gibraltar Financial. Adjusted Operating Income 2010...

  • Page 55
    ... income margins primarily reflect investment portfolio growth in our U.S. dollar denominated products in Japan. In addition, adjusted operating income benefited by $21 million in 2009 due to the migration to a new policy valuation system that resulted in favorable refinements in the current year...

  • Page 56
    ... of business in force from new sales and continued strong persistency. Net investment income also increased $106 million, from $985 million in 2008 to $1,091 million in 2009, primarily due to investment portfolio growth in our U.S. dollar denominated products in Japan. Revenues from Gibraltar Life...

  • Page 57
    ... our bank channel distribution and to service orphaned policyholders. Factoring in these transfers, the number of Japanese Life Planners would have increased 5%, from December 31, 2008 to December 31, 2009. Annualized new business premiums, on a constant exchange rate basis, from our Gibraltar Life...

  • Page 58
    ... more favorable sales and trading results, partially offset by a write-down of software technology in 2010. Also contributing to the increase in adjusted operating income was higher asset-based fees in 2010 from the segment's asset management businesses. 56 Prudential Financial 2010 Annual Report

  • Page 59
    ... portion of this cash and short-term investments to partially fund the purchase price for the acquisition of the Star and Edison Businesses. See "-Liquidity and Capital Resources" for additional details. Net investment income, net of interest expense, excluding capital debt interest expense was also...

  • Page 60
    ...2010. The increase in adjusted operating income reflects higher relocation transaction volume and higher real estate average home sale prices, as well as lower operating expenses in 2010 compared to the prior year. In addition, results include our share of the earnings from equity method investments...

  • Page 61
    ... 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 62
    ... accounted for under the equity method. These decreases to income were partially offset by a decrease of $348 million in dividends paid and accrued to policyholders, primarily due to a decrease in the dividend scales for 2009 and 2010. In addition, amortization of deferred policy acquisition costs...

  • Page 63
    ... divested businesses excluded from adjusted operating income ...(1) Primarily includes Prudential Securities Capital Markets and exchange shares previously held by Prudential Equity Group. Financial Advisory In 2008, we classified our Financial Advisory business as a divested business, reflecting...

  • Page 64
    ..."Trading account assets supporting insurance liabilities, at fair value." These net investment gains and losses primarily represent interest-rate related mark-to-market adjustments, which include the impact of changes in credit spreads on fixed maturity securities. In addition, results for the years...

  • Page 65
    ...Equity securities, available for sale ...Commercial mortgage and other loans ...Other long-term investments ...Short-term investments ...Cash equivalents ...Other assets ...Subtotal excluding separate account assets ...Separate account assets(3) ...Total assets ...Future policy benefits ...Long-term...

  • Page 66
    ...Equity securities, available for sale ...Commercial mortgage and other loans ...Other long-term investments ...Short-term investments ...Cash equivalents ...Other assets ...Subtotal excluding separate account assets ...Separate account assets(3) ...Total assets ...Future policy benefits ...Long-term...

  • Page 67
    ...Equity securities, available for sale ...Commercial mortgage and other loans ...Other long-term investments ...Short-term investments ...Cash equivalents ...Other assets ...Subtotal excluding separate account assets ...Separate account assets(4) ...Total assets ...Future policy benefits ...Long-term...

  • Page 68
    ...Equity securities, available for sale ...Commercial mortgage and other loans ...Other long-term investments ...Short-term investments ...Cash equivalents ...Other assets ...Subtotal excluding separate account assets ...Separate account assets(4) ...Total assets ...Future policy benefits ...Long-term...

  • Page 69
    ..., 2009 of private fixed maturities, with values primarily based on internally-developed models. Significant unobservable inputs used included: issue specific credit adjustments, material non-public financial information, management judgment, estimation of future earnings and cash flows, default rate...

  • Page 70
    ... expected future benefit payments, primarily resulting from an increase in policyholder account balances driven by favorable market conditions in 2010. These changes were significantly offset by decreased amortization of deferred policy acquisition and other costs, and changes in value of related...

  • Page 71
    ... related to certain of our businesses which primarily originate investments for sale or syndication to unrelated investors) are excluded from adjusted operating income. We require most issuers of private fixed maturity securities to pay us make-whole yield maintenance payments when they prepay the...

  • Page 72
    ... in the following table: Year Ended December 31, 2010 2009 (in millions) Realized investment gains (losses), net-Fixed Maturity Securities-Financial Services Businesses Gross realized investment gains: Gross gains on sales and maturities(1) ...Private bond prepayment premiums ...Total gross realized...

  • Page 73
    .... Net trading gains on sales and maturities of fixed maturity securities of $469 million in 2009 were primarily due to sales of government bonds in our Gibraltar Life and Japanese Life Planner operations and sales within our Individual Annuities segment. Sales of fixed maturity securities in...

  • Page 74
    ... 2010 were primarily in our Japanese insurance operations equity portfolios. Equity security other-than-temporary impairments in 2009 were primarily driven by declines in value of fund shares representing our interest in high yield bond funds of certain of our separate account investments supporting...

  • Page 75
    ... in 2009, as set forth in the following table: Year Ended December 31, 2010 2009 (in millions) Realized investment gains (losses), net-Fixed Maturity Securities-Closed Block Business Gross realized investment gains: Gross gains on sales and maturities(1) ...Private bond prepayment premiums ...Total...

  • Page 76
    ... securities, by reason. Year Ended December 31, 2010 2009 (in millions) Other-than-temporary impairments recorded in earnings-Closed Block Business(1) Public fixed maturity securities ...Private fixed maturity securities ...Total fixed maturity securities ...Equity securities ...Other invested...

  • Page 77
    ... embedded in the living benefit features of some of our variable annuity products. Net trading gains on sales and maturities of fixed maturity investments of $111 million in 2008, were primarily related to sales of government bonds in our Gibraltar Life and Japanese Life Planner operations. None of...

  • Page 78
    ..., by reason. Year Ended December 31, 2009 2008 (in millions) Other-than-temporary impairments recorded in earnings-Financial Services Businesses(1) Public fixed maturity securities ...Private fixed maturity securities ...Total fixed maturity securities ...Equity securities ...Other invested assets...

  • Page 79
    ... Group, or AIG. Equity security other-than-temporary impairments in 2008 were primarily driven by overall declines in the Japanese equity markets and value declines in our mutual fund shares representing our interest in high yield bond funds of certain of our separate account investments supporting...

  • Page 80
    ... securities, by reason. Year Ended December 31, 2009 2008 (in millions) Other-than-temporary impairments recorded in earnings-Closed Block Business(1) Public fixed maturity securities ...Private fixed maturity securities ...Total fixed maturity securities ...Equity securities ...Other invested...

  • Page 81
    ... impairments in 2008 were primarily driven by overall declines in the equity markets. General Account Investments We maintain diversified investment portfolios in our insurance companies to support our liabilities to customers in our Financial Services Businesses and the Closed Block Business, as...

  • Page 82
    ... 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, at outstanding balance ...Other long-term investments(1) ...Short-term...

  • Page 83
    ... to our Japanese insurance operations in 2010 is primarily attributable to the impact of changes in foreign currency exchange rates, portfolio growth as a result of business inflows and a net increase in fair value driven by a decrease in risk free rates. Prudential Financial 2010 Annual Report 81

  • Page 84
    ...... 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 85
    ... trading, banking operations, real estate and relocation services, and asset management operations. See below for a discussion of the change in the Financial Services Businesses' yields. The increase in net investment income yield attributable to the Closed Block Business for 2010 compared to 2009...

  • Page 86
    ... insurance operations see, "-Results of Operations for Financial Services Businesses by Segment-International Insurance and Investments Division." Fixed Maturity Securities Investment Mix Our fixed maturity securities portfolio consists of publicly-traded and privately-placed debt securities...

  • Page 87
    ... $423 million, based on amortized cost, substantially all within the Financial Services Businesses and primarily representing Italian government securities owned by Prudential's Italian insurance operations. As of December 31, 2010, our consolidated direct investment exposure in Turkey, United Arab...

  • Page 88
    ... proceedings could result in increased servicing costs which could negatively impact the value of the impacted securities. Separately, as an investor in sub-prime securities, we are evaluating our legal options with respect to potential remedies arising 86 Prudential Financial 2010 Annual Report

  • Page 89
    ... issuances and cash generated from certain trading and operating activities. The investment policy statement of this portfolio requires that securities purchased for this portfolio have a remaining expected average life of 2 years or less when acquired. Prudential Financial 2010 Annual Report 87

  • Page 90
    ... to the Financial Services Businesses, excluding those supported by guarantees from monoline bond insurers, was 29% as of December 31, 2010. The subordination percentage represents the current weighted average estimated percentage of the capital structure subordinated to our investment holding that...

  • Page 91
    ... activities, and cash generated from certain trading and operating activities. The investment policy statement of this portfolio requires that securities purchased for this portfolio have a remaining expected average life of 2 years or less when acquired. Prudential Financial 2010 Annual Report 89

  • Page 92
    ... to the Closed Block Business, excluding those supported by guarantees from monoline bond insurers, was 31% as of December 31, 2010. The subordination percentage represents the current weighted average estimated percentage of the capital structure subordinated to our investment holding that is...

  • Page 93
    ..., we consider these market factors in making our investment decisions on securities in these vintages. The following tables set forth the amortized cost and fair value of our commercial mortgagebacked securities attributable to the Financial Services Businesses as of the dates indicated by credit...

  • Page 94
    ...-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 95
    ... 31% as of December 31, 2010. See above for a definition of this percentage. As of December 31, 2010, based on amortized cost, approximately 95% of the commercial mortgage-backed securities attributable to the Closed Block Business have estimated credit Prudential Financial 2010 Annual Report 93

  • Page 96
    ...regulated locally by the Financial Services Agency, an agency of the Japanese government. The Financial Services Agency has its own investment quality criteria and risk control standards. Our Japanese insurance companies comply with the Financial Services 94 Prudential Financial 2010 Annual Report

  • Page 97
    ... Total Public Fixed Maturities ...$123,918 (1) Reflects equivalent ratings for investments of the international insurance operations. (2) Includes, as of December 31, 2010 and 2009, 17 securities with amortized cost of $11 million (fair value, $20 million) and 19 securities with amortized cost of...

  • Page 98
    ......Total Private Fixed Maturities ... (1) Reflects equivalent ratings for investments of the international insurance operations. (2) Includes, as of December 31, 2010 and 2009, 160 securities with amortized cost of $1,776 million (fair value, $1,800 million) and 138 securities with amortized cost of...

  • Page 99
    ...sell attributable to the Financial Services Businesses was $7 million and $10 million for the years ended December 31, 2010 and 2009, respectively, and is included in adjusted operating income as an adjustment to "Realized investment gains (losses), net." Prudential Financial 2010 Annual Report 97

  • Page 100
    ... 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. As of December 31, 98 Prudential Financial 2010 Annual Report

  • Page 101
    ... paid for the credit derivatives we purchase attributable to the Financial Services Businesses was $50 million and $52 million for the years ended December 31, 2010 and 2009, respectively, and is included in adjusted operating income as an adjustment to "Realized investment gains (losses), net...

  • Page 102
    .... Our regional offices closely monitor the portfolios in their regions. We set all valuation standards centrally, and we assess the fair value of all investments quarterly. Our private fixed maturity asset managers formally review all private fixed maturity holdings on a quarterly basis and more...

  • Page 103
    ... and agencies and obligations of U.S. states ...Total fixed maturities ...Equity securities ...Total trading account assets supporting insurance liabilities ... As a percentage of amortized cost, 76% and 75% of the portfolio was publicly traded as of December 31, 2010, and December 31, 2009...

  • Page 104
    ...our 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 Amortized Cost-Trading Account Assets Supporting Insurance Liabilities December 31, 2010 Lowest Rating Agency...

  • Page 105
    ... insurance operations that are not rated by U.S. insurance regulatory authorities. (3) Amounts are reported in "Asset management fees and other income." The following table sets forth our private fixed maturities included in our trading account assets supporting insurance liabilities portfolio...

  • Page 106
    ..."Net investment income," and is included in adjusted operating income. The following table sets forth the composition of our other trading account assets as of the dates indicated. December 31, 2009 December 31, 2010 Financial Services Closed Block Financial Services Closed Block Businesses Business...

  • Page 107
    ... values of our general account investments in commercial and agricultural mortgage loans by geographic region and property type as of the dates indicated. December 31, 2009 December 31, 2010 Financial Services Closed Block Financial Services Closed Block Businesses Business Businesses Business...

  • Page 108
    ...Financial Services Businesses were fixed rate loans. As of December 31, 2010, our general account investments in commercial and agricultural mortgage loans attributable to the Closed Block Business had a weighted average debt service coverage ratio of 1.79 times, and a weighted average loan-to-value...

  • Page 109
    ... watch list to determine if it is probable that amounts due according to the contractual terms of the loan agreement will not be collected. In our international portfolios, we monitor delinquency in consumer loans on a pool basis and evaluate any servicing relationship and guarantees the same way we...

  • Page 110
    ... loans can increase or decrease from period to period based on these factors. The following tables set forth the aging schedule of our general account investments in commercial mortgage and other loans attributable to the Financial Services Businesses and Closed Block Businesses. Commercial Mortgage...

  • Page 111
    ... assets of certain of our separate account investments supporting corporate-owned life insurance. These mutual funds invest primarily in high yield bonds. (3) Hedge funds and other alternative investments are included in "Other long-term investments." Prudential Financial 2010 Annual Report 109

  • Page 112
    ... upon a 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 Financial Services Businesses where the estimated fair...

  • Page 113
    ...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 114
    ... Other Long-Term Investments "Other long-term investments" are comprised as follows: December 31, 2009 December 31, 2010 Financial Closed Financial Closed Services Block Services Block Businesses Business Businesses Business (in millions) Joint ventures and limited partnerships: Real estate related...

  • Page 115
    ... operations as of the dates indicated. December 31, 2010 2009 (in millions) Fixed Maturities: Public, available for sale, at fair value ...Private, available for sale, at fair value ...Other trading account assets, at fair value ...Equity securities, available for sale, at fair value ...Commercial...

  • Page 116
    ... 31, 2009 December 31, 2010 Financial Closed Financial Closed Services Block Services Block Businesses Business Businesses Business (in millions) General Account Commercial Mortgage-Backed Securities, at fair value: Fixed Maturity Securities ...Trading Account Assets Supporting Insurance Liabilities...

  • Page 117
    ... of cash by facilitating the lending and borrowing of funds between Prudential Financial and its subsidiaries on a daily basis. Also included are short-term investments of $1.085 billion, consisting primarily of government agency securities and money market funds. Prudential Financial 2010 Annual...

  • Page 118
    ... Life Insurance Company of Arizona to fund deferred acquisition costs on variable annuity products, and net borrowings of $150 million by our asset management subsidiaries. The remainder represents net repayments from other subsidiaries as well as net activity in our intercompany liquidity account...

  • Page 119
    ... limitations, the terms of the IHC debt contain restrictions potentially limiting dividends by Prudential Insurance applicable to the Financial Services Businesses in the event the Closed Block Business is in financial distress and under certain other circumstances. The laws regulating dividends...

  • Page 120
    ... spread portfolios of our domestic insurance entities. Investments held in the short-term spread portfolios include cash and cash equivalents, shortterm investments and fixed maturities, including mortgage- and asset-backed securities, with a weighted average life at time of purchase of two years or...

  • Page 121
    ... cash outflows, including claims. The impact of Prudential Funding's financing capacity on liquidity, as discussed more fully under "-Alternative Sources of Liquidity," is considered in the internal liquidity measures of the domestic insurance operations. Prudential Financial 2010 Annual Report...

  • Page 122
    .... Annuity benefits and guaranteed investment withdrawals under group annuity contracts are generally not subject to early withdrawal. Gross account withdrawals for our domestic insurance operations' products were consistent with our assumptions in asset/liability management, and the associated cash...

  • Page 123
    ... by statutory accounting rules, which are subject to change by insurance regulators. During 2010, we changed the focus of our capital hedge program from the equity price risk associated with our annuities business to a broader view of equity market exposure of the statutory capital of the Company as...

  • Page 124
    ... penalties on existing policies. These charges were 20% in the first year and decline by 2% each year thereafter. Subsequent to the acquisition, we renamed the acquired company The Prudential Gibraltar Financial Life Insurance Company, Ltd. As of December 31, 2010 and 2009, Prudential of Japan had...

  • Page 125
    ... use of internal measures. 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, and retail investment products, such as mutual funds and...

  • Page 126
    ... share for gross proceeds of $1.0 billion. The proceeds from the offering, along with proceeds from the sale of $1.0 billion of medium-term notes, were used to fund a portion of the purchase price for the acquisition of the Star and Edison Businesses from AIG. 124 Prudential Financial 2010 Annual...

  • Page 127
    ...fund a portion of the acquisition purchase price for the Star and Edison Businesses. The weighted average interest rates on Prudential Financial's medium-term and senior notes, including the effect of interest rate hedging activity, were 5.21% and 5.51% for the years ended December 31, 2010 and 2009...

  • Page 128
    ... information concerning these junior subordinated notes. Consolidated Borrowings Current capital markets activities for the Company on a consolidated basis principally consist of unsecured short-term and long-term borrowings by Prudential Funding and Prudential Financial, unsecured third party bank...

  • Page 129
    ... connection with the intercompany reinsurance of certain universal life insurance policies. Surplus notes issued under this facility are subordinated to policyholder obligations and are subject to regulatory approvals for principal and interest payments. Prudential Financial 2010 Annual Report 127

  • Page 130
    ... financial strength ratings of Prudential Financial or its rated subsidiaries could potentially, among 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...

  • Page 131
    ... of Japan) ...Gibraltar Life Insurance Company, Ltd...Credit Ratings: Prudential Financial, Inc.: Short-term borrowings ...Long-term senior debt(5) ...Junior subordinated long-term debt ...The Prudential Insurance Company of America: Capital and surplus notes ...Prudential Funding, LLC: Short-term...

  • Page 132
    ...acquire AIG Star Life Insurance Co., Ltd. and AIG Edison Life Insurance Company, all four rating agencies reviewed and affirmed all of our ratings. Contractual Obligation The table below summarizes the future estimated cash payments related to certain contractual obligations as of December 31, 2010...

  • Page 133
    ...extend the date of the expiration in exchange for a fee. (5) The estimated payments due by period for insurance liabilities reflect future estimated cash payments to be made to policyholders and others for future policy benefits, policyholders' account balances, policyholder's dividends, reinsurance...

  • Page 134
    ... gross profits would accelerate amortization and decrease net income in a given period, it would not affect our cash flow or liquidity position. For variable annuity and variable life insurance products with minimum guaranteed death benefits and variable annuity products with living benefits such...

  • Page 135
    ... fixed-income securities and lapses and surrenders of insurance products and the potential impact of any guaranteed minimum interest rates. We evaluate any shortfalls that this cash flow testing reveals to determine if we need to increase statutory reserves or adjust portfolio management strategies...

  • Page 136
    ... ...Options ...Forwards ...Variable annuity and other living benefit feature embedded derivatives(2) ...Financial liabilities with interest rate risk: Short-term and long-term debt ...Debt of consolidated variable interest entities(3) ...Investment contracts ...Bank customer liabilities ...Net...

  • Page 137
    ... capital hedges primarily consisted of equity-based total return swaps that were designed to partially offset changes in our capital position resulting from market driven changes in certain living and death benefit features of our variable annuity products. Our estimated equity price risk associated...

  • Page 138
    ...an increase in investment-only, fee-based stable value products sold in our retirement segment, which are accounted for as derivatives, as well as an increase in equity-based derivatives related to our capital hedge program. We use credit derivatives to enhance the return on our investment portfolio...

  • Page 139
    ... of the Company's internal control over financial reporting as of December 31, 2010 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report appearing herein. February 25, 2011 Prudential Financial 2010 Annual Report 137

  • Page 140
    ... operations, of equity and of cash flows present fairly, in all material respects, the financial position of Prudential Financial, Inc. and its subsidiaries at December 31, 2010 and December 31, 2009, and the results of their operations and their cash flows for each of the three years in the period...

  • Page 141
    ...; 2009- $5,198) ...Trading account assets supporting insurance liabilities, at fair value(1) ...Other trading account assets, at fair value ...Equity securities, available for sale, at fair value (cost: 2010-$6,469; 2009-$6,106) ...Commercial mortgage and other loans (includes $364 and $479 measured...

  • Page 142
    PRUDENTIAL FINANCIAL, INC. Consolidated Statements of Operations Years Ended December 31, 2010, 2009 and 2008 (in millions, except per share amounts) 2010 REVENUES Premiums ...Policy charges and fee income ...Net investment income ...Asset management fees and other income ...Realized investment ...

  • Page 143
    ...) Dividends declared on Class B Stock ...(19) (19) (19) Impact on Company's investment in Wachovia Securities due to addition of A.G Edwards business, net of tax(2) ...1,041 1,041 1,041 Cumulative effect of changes in accounting principles, net of taxes ...20 20 20 Comprehensive income: Net income...

  • Page 144
    ... Change in: Deferred policy acquisition costs ...(1,654) Future policy benefits and other insurance liabilities ...4,475 Other trading account assets ...(644) Income taxes ...(1,133) Other, net ...714 Cash flows from operating activities ...CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from the sale...

  • Page 145
    ... 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...

  • Page 146
    ... 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, deferred sales inducements...

  • Page 147
    ...amortization, loan term, estimated market value growth rate and volatility for the property type and region. See Note 4 for additional information related to the loan-to-value ratios and debt service coverage ratios related to the Company's commercial mortgage and agricultural loan portfolios. Loans...

  • Page 148
    ...by the cash surrender value of the associated insurance policies. Securities repurchase and resale agreements and securities loaned transactions are used to earn spread income, to borrow funds, or to facilitate trading activity. Securities repurchase and resale agreements are generally short-term in...

  • Page 149
    ...for the production of income is computed using the straight-line method over the estimated lives of the properties, and is included in "Net investment income." In the period a real estate investment is deemed held for sale and meets all of the discontinued operation criteria, the Company reports all...

  • Page 150
    ...due from banks, certain money market investments and other debt instruments with maturities of three months or less when purchased, other than cash equivalents that are included in "Trading account assets supporting insurance liabilities, at fair value." Deferred Policy Acquisition Costs Costs that...

  • Page 151
    ... account assets are reported at fair value and represent segregated funds that are invested for certain policyholders, pension funds and other customers. The assets consist primarily of equity securities, fixed maturities, real estate related investments, real estate mortgage loans, short-term...

  • Page 152
    ...future net cash flows are discounted. See Note 9 for additional information regarding goodwill, including a discussion of impairments the Company recorded during 2008. The Company offers various types of sales inducements to policyholders related to fixed and variable deferred annuity contracts. The...

  • Page 153
    ... were 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. The liability related to the special dividend was fully paid as of June 30, 2010. As of December 31...

  • Page 154
    ... life contracts, deferred fixed annuities, structured settlements and other contracts without life contingencies, and participating group annuities are reported as deposits to "Policyholders' account balances." Revenues from these contracts are reflected in "Policy charges and fee income" consisting...

  • Page 155
    ... dealer or broker capacity in the Company's global commodities group 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. Realized and unrealized changes...

  • Page 156
    ... on a long-term basis in the near term. See Note 14 for additional information regarding short-term and long-term 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...

  • Page 157
    ...a partnership whose only asset is operating real estate. This guidance also affects accounting and reporting by an entity that exchanges a group of assets that constitutes a business for an equity interest in another entity. The updated guidance also expands disclosures about fair value measurements...

  • Page 158
    ... 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 eligible for equity classification. The Company...

  • Page 159
    ... 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...

  • Page 160
    ...15, 2008. The Company adopted this guidance on December 31, 2008 and the impact of changing from a September 30 measurement date to a December 31 measurement date was a net after-tax increase to retained earnings of $17 million. Future Adoption of New Accounting Pronouncements In December 2010, the...

  • Page 161
    ...the acquisition from American International Group, Inc. ("AIG") of AIG Star Life Insurance Co., Ltd., AIG Edison Life Insurance Company, AIG Financial Assurance Japan K.K., and AIG Edison Service Co, Ltd., pursuant to the stock purchase agreement dated September 30, 2010 between Prudential Financial...

  • Page 162
    ...the sale of real estate properties. In the second quarter of 2009, the Company entered into an agreement to sell its mutual fund and banking operations in Mexico. This transaction closed in the fourth quarter of 2009. Included within the table above for the years ended December 31, 2010 and 2009 are...

  • Page 163
    ... Financial Statements 4. INVESTMENTS (continued) (1) Includes credit tranched securities collateralized by auto loans, credit cards, education loans, and other asset types. (2) Includes publicly traded agency pass-through securities and collateralized mortgage obligations. (3) Represents...

  • Page 164
    ... period ... (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. 162 Prudential Financial 2010 Annual Report

  • Page 165
    ...Trading Account Assets Supporting Insurance Liabilities The following table sets forth the composition of "Trading account assets supporting insurance liabilities" at December 31: 2010 Amortized Cost Short-term investments and cash equivalents ...Fixed maturities: Corporate securities ...Commercial...

  • Page 166
    ... Value Cost Value (in millions) Investments in Japanese government and government agency securities: Fixed maturities, available for sale ...Fixed maturities, held to maturity ...Trading account assets supporting insurance liabilities ...Other trading account assets ...Short-term investments ...Cash...

  • Page 167
    ...275 0 $ 497 $ 8 $ 575 $ 2,279 25,652 0 $27,931 $ 39 1,854 0 $ 0 891 0 $147 76 0 $223 $ 36 1,432 0 $ 2,501 29,905 0 $32,406 $1,893 $891 $1,468 (1) Recorded investment reflects the balance sheet carrying value gross of related allowance. Prudential Financial 2010 Annual Report 165

  • Page 168
    ...terms of the loan agreement will not all be collected. Impaired commercial mortgage and other loans identified in management's specific review of probable loan losses and the related allowance for losses at December 31, 2010 are as follows: Impaired Commercial...Prudential Financial 2010 Annual Report

  • Page 169
    ...2009. Net investment income recognized on these loans totaled $47 million for 2009. See Note 2 for information regarding the Company's accounting policies for commercial mortgage and other loans. The net carrying value of commercial loans held for sale by the Company as of December 31, 2010 and 2009...

  • Page 170
    PRUDENTIAL FINANCIAL, INC. Notes to Consolidated Financial Statements 4. INVESTMENTS (continued) Commercial mortgage loans-Retail Debt Service Coverage Ratio Greater than Less than 2.0X 1.8X to 2.0X 1.5X to

  • Page 171
    PRUDENTIAL FINANCIAL, INC. Notes to Consolidated Financial Statements 4. INVESTMENTS (continued) Commercial mortgage loans-Hospitality Debt Service Coverage Ratio Greater than Less 2.0X 1.8X to 2.0X 1.5X to

  • Page 172
    PRUDENTIAL FINANCIAL, INC. Notes to Consolidated Financial Statements 4. INVESTMENTS (continued) Commercial mortgage and agricultural loans Debt Service Coverage Ratio Greater than Less than 2.0X 1.8X to 2.0X 1.5X to

  • Page 173
    ... and limited partnerships ...Real estate held through direct ownership ...Other ...Total other long-term investments ...$1,058 2,477 3,535 1,659 977 $6,171 $1,161 2,090 3,251 1,516 1,137 $5,904 In certain investment structures, the Company's asset management business invests with other co-investors...

  • Page 174
    ... ventures and limited partnerships, as well as changes in the Company's level of investment in such entities. At December 31, 2010 2009 (in millions) STATEMENT OF FINANCIAL POSITION Investments in real estate ...Investments in securities ...Cash and cash equivalents ...Receivables ...Property and...

  • Page 175
    ... 2010 Fixed maturities, available for sale ...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...

  • Page 176
    ... recognized Deferred Policy Acquisition Costs, Accumulated Deferred Other Sales Comprehensive Inducements, Deferred Income (Loss) and Income Related To Net Tax Unrealized Net Unrealized Valuation of Future Business Investment Policy Policyholders' (Liability) Gains (Losses) Acquired Benefit Gains...

  • Page 177
    ... policy acquisition costs, deferred sales inducements 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 ...Balance, December 31, 2009 ...Net investment...

  • Page 178
    ... by investment category and length of time that individual fixed maturity securities have been in a continuous unrealized loss position, at December 31: Less than twelve months Gross Unrealized Fair Value Losses Fixed maturities(1) U.S. Treasury securities and obligations of U.S. government...

  • Page 179
    ... for sale(1) ...Trading account assets supporting insurance liabilities ...Other trading account assets ...Separate account assets ...Equity securities ...Total securities pledged ... (1) Includes $132 million and $838 million of fixed maturity securities classified as short-term investments at...

  • Page 180
    ... 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...

  • Page 181
    ... 31, 2010 2009 (in millions) $ 63 $ 68 9 7 341 412 8 10 84 44 1 2 3 4 4 38 $ 513 $ 379 4 $ 383 $ 585 $ 413 38 $ 451 Fixed maturities, available for sale ...Trading account assets supporting insurance liabilities ...Commercial mortgage and other loans ...Other long-term investments ...Cash and cash...

  • Page 182
    ... the fair value of the embedded derivatives. 6. DEFERRED POLICY ACQUISITION COSTS The balances of and changes in deferred policy acquisition costs as of and for the years ended December 31, are as follows: 2010 Balance, beginning of year ...Capitalization of commissions, sales and issue expenses...

  • Page 183
    ...and relate to the market price of China Pacific Group's publicly traded shares, which began trading on the Shanghai Exchange in 2007 and since the fourth quarter of 2009 are trading on the Hong Kong exchange. In December 2010, a consortium of investors including the Company sold approximately 16% of...

  • Page 184
    ... a corresponding increase to "Additional paid-in capital" of $1.041 billion, net of tax, which represented the excess of the estimated value of the Company's share of the A.G. Edwards business received (of approximately $1.444 billion) and the estimated value of the "lookback" option acquired (of...

  • Page 185
    ... ...2015 ...2016 and thereafter ...Total ... 9. GOODWILL AND OTHER INTANGIBLES The changes in the book value of goodwill by reporting unit are as follows: Real Estate and Individual Asset International International Relocation Annuities Management Retirement Insurance Investments Services Total (in...

  • Page 186
    ... 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 amount of goodwill associated with the International Investments segment's asset management reporting...

  • Page 187
    ... policy benefits and expenses and to recover any unamortized policy acquisition costs. Premium deficiency reserves have been recorded for the group single premium annuity business, which consists of limited-payment, long-duration, traditional, and non-participating annuities; structured settlements...

  • Page 188
    ... indexed rate at surrender, as applicable. In addition, the Company issues variable life, variable universal life and universal life contracts where the Company contractually guarantees to the contractholder a death benefit even when there is insufficient value to cover monthly mortality and expense...

  • Page 189
    ...years Account balances of variable annuity contracts with guarantees were invested in separate account investment options as follows: December 31, 2010 2009 (in millions) $54,775 $41,271 28,064 15,426 314 216 7,932 10,355 $91,085 $67,268 Equity funds ...Bond funds ...Balanced funds ...Money market...

  • Page 190
    ... account liabilities for guarantees on variable contracts. The liabilities for guaranteed minimum death benefits ("GMDB") and guaranteed minimum income benefits ("GMIB") are included in "Future policy benefits" and the related changes in the liabilities are included in "Policyholders' benefits...

  • Page 191
    ... of the customer's initial deposit, (2) additional credits after a certain number of years a contract is held and (3) enhanced interest crediting rates that are higher than the normal general account interest rate credited in certain product lines. Changes in deferred sales inducements, reported as...

  • Page 192
    ...for changes in the components of the policyholder dividend obligation for the years ended December 31, 2010 and 2009. On December 14, 2010, Prudential Insurance's Board of Directors approved a continuation of the Closed Block dividend scales in 2011. On December 8, 2009, Prudential Insurance's Board...

  • Page 193
    ... account assets, at fair value ...Equity securities, available for sale, at fair value ...Commercial mortgage and other loans ...Policy loans ...Other long-term investments ...Short-term investments ...Total investments ...Cash and cash equivalents ...Accrued investment income ...Other Closed Block...

  • Page 194
    PRUDENTIAL FINANCIAL, INC. Notes to Consolidated Financial Statements 12. CLOSED BLOCK (continued) Closed Block revenues and benefits and expenses for the years ended December 31, 2010, 2009 and 2008 were as follows: 2010 Revenues Premiums ...Net investment income ...Realized investment gains (...

  • Page 195
    ...below exclude amounts pertaining to the Company's discontinued operations. Reinsurance amounts included in the Consolidated Statements of Operations for premiums, policy charges and fees and policyholders' benefits for the years ended December 31, were as follows: 2009 2008 (in millions) $19,360 $17...

  • Page 196
    ... to meet the working capital needs of Prudential Insurance and its subsidiaries. Prudential Funding also lends to other subsidiaries of Prudential Financial up to limits agreed with the New Jersey Department of Banking and Insurance. Prudential Funding's outstanding commercial paper borrowings...

  • Page 197
    ... 2006, Prudential Financial issued in a private placement $3.0 billion and $2.0 billion, respectively, 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, at a stated conversion price of...

  • Page 198
    ...Financial Statements 14. SHORT-TERM AND LONG-TERM DEBT (continued) Long-term Debt Long-term debt at December 31, is as follows: Maturity Dates Prudential Holdings, LLC notes (the "IHC debt") Series A ...Series B ...Series C ...Fixed rate notes: Surplus notes ...Other fixed rate notes(3) ...Floating...

  • Page 199
    ... alternative payment securities, which include but are not limited to Common Stock, to satisfy its obligation with respect to the deferred interest. In connection with the issuance of both series of notes, Prudential Financial entered into a RCC for the benefit of holders of the Company's 6.625...

  • Page 200
    ...the years ended December 31, 2010, 2009 and 2008, respectively, reported in "Net investment income." Included in "Policyholders' account balances" are additional debt obligations of the Company. See Notes 10 and 5 for further discussion. Prudential Holdings, LLC Notes On December 18, 2001, the date...

  • Page 201
    ... expenses ...Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures ...Net income (loss) ...Less: Income attributable to noncontrolling interests ...Net income (loss) attributable to Prudential Holdings, LLC...Consolidated Statements of Cash...

  • Page 202
    ... November 2010, the Company issued 18,348,624 shares of Common Stock in a public offering at a price of $54.50 per share for net proceeds of $970 million. Common Stock and Class B Stock On the date of demutualization, Prudential Financial completed an initial public offering of its Common Stock at...

  • Page 203
    ... time in the event that (a) the Class B Stock will no longer be treated as equity of Prudential Financial for federal income tax purposes or (b) the New Jersey Department of Banking and Insurance amends, alters, changes or modifies the regulation of the Closed Block, the Closed Block Business, the...

  • Page 204
    ...charging 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 (loss) of Prudential Insurance...

  • Page 205
    ...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...

  • Page 206
    ... operations attributable to the Closed Block Business available to holders of Class B Stock after direct equity adjustment ... $480 36 $(287) 43 $ 23 55 $444 2.0 $222.00 $(330) 2.0 $(165.00) $(32) 2.0 $(16.00) 17. SHARE-BASED PAYMENTS Omnibus Incentive Plan In March 2003, the Company...

  • Page 207
    ... shares and restricted stock units ...1 0 0 0 (3) (1) 2010 Total ...$135 $49 $153 $55 $ 91 $32 Compensation costs for all stock based compensation plans capitalized in deferred acquisition costs for the years ended December 31, 2010, 2009 and 2008 were de minimis. Prudential Financial 2010 Annual...

  • Page 208
    PRUDENTIAL FINANCIAL, INC. Notes to Consolidated Financial Statements 17. SHARE-BASED PAYMENTS (continued) Stock Options Each stock option granted has an exercise price no less than the fair market value of the Company's Common Stock on the date of grant and has a maximum term of 10 years. Generally...

  • Page 209
    ... no performance shares granted in 2009. (2) Represents the change in shares issued based upon the attainment of performance goals for the Company's Financial Services Businesses. The fair market value of employee restricted stock, restricted units and performance share awards released for the years...

  • Page 210
    ... shares, as well as for purchases under the stock purchase plan. Performance units will be settled in cash in the future. As of December 31, 2010, the Company has not settled any equity instruments granted under share-based payment arrangements in cash. 208 Prudential Financial 2010 Annual Report

  • Page 211
    ... 2009 2010 2009 (in millions) Change in benefit obligation Benefit obligation at the beginning of period ...Acquisition/Divestiture ...Service cost ...Interest cost ...Plan participants' contributions ...Medicare Part D subsidy receipts ...Amendments ...Actuarial gains/(losses), net ...Settlements...

  • Page 212
    ... cost ...Expected return on plan assets ...Amortization of transition obligation ...Amortization of prior service cost ...Amortization of actuarial (gain) loss, net ...Settlements ...Curtailments ...Special termination benefits ...Net periodic (benefit) cost ... 210 Prudential Financial 2010 Annual...

  • Page 213
    ... changes and other ...Balance, December 31, 2010 ... The amounts included in "Accumulated other comprehensive income" expected to be recognized as components of net periodic (benefit) cost in 2011 are as follows: Pension Benefits Amortization of transition obligation ...Amortization of prior service...

  • Page 214
    ..., and tax efficiency. The postretirement plan does not invest in leveraged derivatives. Derivatives such as futures contracts are used to reduce transaction costs and change asset concentration, while interest rate swaps are used to adjust duration. 212 Prudential Financial 2010 Annual Report

  • Page 215
    ...the market. Each approach requires the exercise of subjective judgment. Short-term Investments-Securities are valued initially at cost and thereafter adjusted for amortization of any discount or premium (i.e., amortized cost). Amortized Cost approximates fair value. Prudential Financial 2010 Annual...

  • Page 216
    ...Guaranteed investment contract ...Other(10) ...Unrealized gain (loss) on investment of securities lending collateral(11) ...Subtotal ...Short-term Investments: Pooled separate accounts ...United Kingdom insurance pooled funds ...Subtotal ...Real Estate: Pooled separate accounts(12) ...Partnerships...

  • Page 217
    ... objective is to outperform an index. (13) The contractual net value of the investment of securities lending collateral invested in primarily short-term bond funds is $1,231 million and the liability for securities lending collateral is $1,413 million. Prudential Financial 2010 Annual Report 215

  • Page 218
    ... held at the reporting date ...Relating to assets sold during the period ...Purchases, sales and settlements ...Transfers in and /or out of Level 3 ...Fair Value, end of period ... Year Ended December 31, 2009 Other- Real Estate- Structured Other- Partnerships Debt Partnerships (in millions) $ 64...

  • Page 219
    ...Consolidated Financial Statements 18. EMPLOYEE BENEFIT PLANS (continued) Postretirement plan asset allocations in accordance with the investment guidelines are as follows: As of December 31, 2010 Level 2 Level 3 (in millions) $ 449 88 0 $0 0 0 Level 1 U.S. Equities: Variable Life Insurance Policies...

  • Page 220
    ...lending collateral invested in primarily short-term bond funds is $30 million and the liability for securities lending collateral is $30 million. (10) This category invests in U.S. equity funds, primarily large cap equities whose objective is to track an index. 218 Prudential Financial 2010 Annual...

  • Page 221
    ... Assets Year Ended December 31, 2010 Fixed Maturities- Corporate Debt- Corporate Bonds Fair Value, beginning of period ...Actual Return on Assets: Relating to assets still held at the reporting date ...Relating to assets sold during the period ...Purchases, sales and settlements ...Transfers in...

  • Page 222
    ... operations ...Income tax expense (benefit) reported in 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 ...Cumulative effect of changes in accounting...

  • Page 223
    ... 19. INCOME TAXES (continued) Deferred tax assets and liabilities at December 31, resulted from the items listed in the following table: 2010 2009 (in millions) Deferred tax assets Policyholders' dividends ...Net operating and capital loss carryforwards ...Employee benefits ...Insurance reserves...

  • Page 224
    ... investment management subsidiaries were no longer considered permanently reinvested and the Company recognized an income tax expense of $66 million associated with the assumed repatriation of those earnings in "Income from discontinued operations, net of taxes" in 2009. During 2010, the Company...

  • Page 225
    ... 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, 2009 or 2010 results. Prudential Financial 2010 Annual Report 223

  • Page 226
    ... public and private bonds, most government securities, certain asset-backed and mortgage-backed securities, etc.), certain equity securities (mutual funds, which do not actively trade and are priced based on a net asset value) and commercial mortgage loans, short-term investments and certain cash...

  • Page 227
    ...Equity securities, available for sale ...Commercial mortgage and other loans ...Other long-term investments ...Short-term investments ...Cash equivalents ...Other assets ...Subtotal excluding separate account assets ...Separate account assets(1) ...Total assets ...Future policy benefits ...Long-term...

  • Page 228
    ... 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 certain accounts. Separate account assets classified as Level 3 consist primarily of real estate and real estate investment funds. Separate account...

  • Page 229
    ...." 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 230
    ... and ask prices that are actively quoted or can be readily obtained from external market data providers. The Company's policy is to use mid-market pricing in determining its best estimate of fair value and classify these derivative contracts as Level 2. 228 Prudential Financial 2010 Annual Report

  • Page 231
    ... Company's fair values to broker-dealer values. Cash Equivalents and Short-Term Investments-Cash equivalents and short-term investments include money market instruments, commercial paper and other highly liquid debt instruments. Money market instruments are generally valued using unadjusted quoted...

  • Page 232
    ... common stocks held in the Company's Separate Account. In certain periods, an adjustment may be made to the fair value of these assets beyond the quoted market price to reflect events that occurred between the close of foreign trading markets and the close of U.S. trading markets for that day. If...

  • Page 233
    ... the period(3): Included in earnings: Realized investment gains (losses), net ...Asset management fees and other income ...Included in other comprehensive income (loss) ...$0 $ 82 $ 226 $ 5 $18 $0 $0 $0 $ 0 $ (3) $ 0 $ $ $ 0 1 0 $ 0 $ 5 $ 0 $ 0 $ 1 $ 0 Prudential Financial 2010 Annual Report...

  • Page 234
    ... (losses), net ...Asset management fees and other income ...Included in other comprehensive income (loss) ...$24 Year Ended December 31, 2010 Other Trading Account Equity Commercial AssetsSecurities Mortgage All Available and Other Other for Sale Loans (in millions) $297 $393 $ 338 Other Long-term...

  • Page 235
    ... or accretion of premiums and discounts. 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 236
    ... 31, 2009. Year Ended December 31, 2009 Fixed Maturities Available For Sale- Foreign Government Bonds Fair Value, beginning of period ...Total gains or (losses) (realized/unrealized): Included in earnings: Realized investment gains (losses), net ...Asset management fees and other income ...Included...

  • Page 237
    ...(losses), net ...Asset management fees and other income ...Included in other comprehensive income (loss) ...$19 Year Ended December 31, 2009 Other Trading Account Equity Commercial AssetsSecurities Mortgage All Available and Other Other for Sale Loans (in millions) $1,304 $325 $ 56 Other Long-term...

  • Page 238
    ... or accretion of premiums and discounts. 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 239
    ... (losses), net ...Asset management fees and other income ...Interest credited to policyholders' account balances ...Included in other comprehensive income (loss) ...Net investment income ...Purchases, sales, issuances and settlements ...Foreign currency translation ...Other(1) ...Transfers into (out...

  • Page 240
    ... or accretion of premiums and discounts. 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 241
    ... in earnings: Realized investment gains (losses), net ...Asset management fees and other income ...Purchases, sales, issuances and settlements ...Transfers into Level 3(1) ...Transfers out of Level 3(1) ...Fair Value, end of period ...Unrealized gains (losses) for the period relating to those level...

  • Page 242
    ...consisted of discounted cash flows and market multiples. Fair Value Option-The following table presents information regarding changes in fair values recorded in earnings for commercial mortgage loans, other long-term investments and long-term debt, where the fair value option has been elected. Years...

  • Page 243
    ... insurance policy loans use the risk-free proxy based on the Yen LIBOR. For group corporate-, bank- and trust-owned life insurance contracts and group universal life contracts, the fair value of the policy loans is the amount due as of the reporting date. Prudential Financial 2010 Annual Report...

  • Page 244
    ...and money market accounts) approximates or equals their fair values. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates being offered on certificates at the reporting dates to a schedule of aggregated expected monthly...

  • Page 245
    ... guarantee of a minimum rate of return on participant balances supported by the underlying assets, and a guarantee of liquidity to meet certain participant-initiated plan cash flow requirements. These contracts are accounted for as derivatives and recorded at fair value. The Company invests in fixed...

  • Page 246
    ... 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. 244 Prudential Financial 2010 Annual Report

  • Page 247
    ... relationship: Year Ended December 31, 2010 2009 2008 (in millions) Qualifying Hedges Fair value hedges Interest Rate Realized investment gains (losses), net ...Net investment income ...Interest expense-(increase)/decrease ...Interest credited to policyholder account balances-(increase)/decrease...

  • Page 248
    ...of Equity. For effective net investment hedges, the amounts, before applicable taxes, recorded in the cumulative translation adjustment account within "Accumulated other comprehensive income (loss)" were $(73) million in 2010, $127 million in 2009 and $268 million in 2008. 246 Prudential Financial...

  • Page 249
    ... related to surplus notes issued by a subsidiary of Prudential Insurance and embedded derivatives contained in externally-managed investments in the European market, by NAIC rating of the underlying credits as of December 31, 2010 and 2009. Single Name Fair Notional Value $295 25 320 0 0 0 0 0 $320...

  • Page 250
    ... trade date basis and reported in "Asset management fees and other income." The following table sets forth the income statement impact of derivatives used in a dealer or broker capacity. Year Ended December 31, 2010 2009 (in millions) Asset management fees and other income Interest Rate ...Commodity...

  • Page 251
    ... range of group life, long-term and short-term group disability, long-term care and group corporate-, bank- 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...

  • Page 252
    ... quarter of 2010, the Company amended its definition of adjusted operating income as it relates to certain variable annuity contracts and defined contribution accounts that contain optional guaranteed living benefit features. Changes in the fair value of these optional living benefit features, which...

  • Page 253
    ... 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...

  • Page 254
    ... 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...

  • Page 255
    ...investment gains (losses), net." Any subsequent recoveries of these losses will also be excluded from adjusted operating income. There were no adjustments for the years ended December 31, 2010 or 2009. Investment gains and losses on trading account assets supporting insurance liabilities and changes...

  • Page 256
    ... to the equity interests of minority investors, and are reflected on a U.S. GAAP basis as a separate line on the Company's Consolidated Statements of Operations. The summary below reconciles adjusted operating income before income taxes for the Financial Services Businesses to income from continuing...

  • Page 257
    ... the Company's reportable segments: Year Ended December 31, 2010 Interest Credited to Amortization of Net Policyholders' Deferred Policy Investment Policyholders' Account Dividends to Interest Acquisition Revenues Income Benefits Balances Policyholders' Expense Costs (in millions) Financial Services...

  • Page 258
    ... INFORMATION (continued) Year Ended December 31, 2009 Interest Amortization of Credited to Deferred Net Policyholders' Policy Investment Policyholders' Account Dividends to Interest Acquisition Revenues Income Benefits Balances Policyholders' Expense Costs (in millions) Financial Services Businesses...

  • Page 259
    ... INFORMATION (continued) Year Ended December 31, 2008 Interest Amortization of Credited to Deferred Net Policyholders' Policy Investment Policyholders' Account Dividends to Interest Acquisition Revenues Income Benefits Balances Policyholders' Expense Costs (in millions) Financial Services Businesses...

  • Page 260
    ... 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 261
    ... Company's policy is to accrue, at the time it ceases to use the property being leased, the future rental expense net of any expected sub-lease income, and to release this reserve over the remaining commitment period. Of the total non-cancelable operating leases and sub-lease income amounts listed...

  • Page 262
    ... require the Company and its co-owner to jointly and severally pay down the loan balance to the 60% level. The loan-to-value ratio, based on a December 2010 appraisal is 43.5%. Other obligations under the guarantee include guaranteeing the interest-servicing on the loan on a proportionate basis and...

  • Page 263
    ...on the Company's balance sheet. Guarantees of Credit Enhancements As of December 31, 2010 (in millions) $222 $261 $ 0 Guarantees of credit enhancements of debt instruments associated with commercial real estate assets ...Fair value of properties and associated tax credits that secure the guarantee...

  • Page 264
    ... in the discovery of product administration, servicing or other errors, including errors relating to the timing or amount of payments or contract values due to customers. In certain cases, if appropriate, the Company may offer customers remediation and may incur charges, including the cost of such...

  • Page 265
    ...Panel for Multi-District Litigation. In September 2010, Huffman v. The Prudential Insurance Company, a purported nationwide class action brought on behalf of beneficiaries of group life insurance contracts owned by ERISA-governed employee welfare benefit plans was filed in the United States District...

  • Page 266
    ... compensation into a Fair Fund that was distributed to injured investors and consequently, State Street paid PRIAC, for deposit into its separate accounts, approximately $52.5 million. By the terms of the settlement, State Street's payment to PRIAC does not resolve any claims PRIAC has against State...

  • Page 267
    ... conflicts to manipulate and inflate the prices of shares sold in initial public offerings in violation of the federal securities laws. In September 2009, the court entered a final order approving settlement of the litigation. In October 2009, an appeal of the settlement was filed with the United...

  • Page 268
    ... to Prudential Financial, Inc. per share-Class B Stock ...Basic and diluted net income (loss) attributable to Prudential Financial, Inc. per share-Class B Stock ...2009 Total revenues ...Total benefits and expenses ...Income (loss) from continuing operations before income taxes and equity in...

  • Page 269
    ...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 ...Policy loans ...Other long-term investments ...Short-term investments ...Total investments ...Cash and cash...

  • Page 270
    ... Operations Years Ended December 31, 2010 and 2009 (in millions) 2010 2009 Financial Financial Services Closed Block Services Closed Block Businesses Business Consolidated Businesses Business Consolidated REVENUES Premiums ...Policy charges and fee income ...Net investment income ...Asset management...

  • Page 271
    ... most instances, the Company may not change the allocation methodology or accounting policies for the allocation of earnings between the Financial Services Businesses and Closed Block Business without the prior consent of the Class B Stock holders or IHC debt bond insurer. General corporate overhead...

  • Page 272
    ... private placement pursuant to Section 4(2) of the Securities Act of 1933 on the date of demutualization. There is no established public trading market for the Class B Stock. During the fourth quarter of 2010 and 2009, Prudential Financial paid an annual dividend of $9.625 per share of Class B Stock...

  • Page 273
    ... into shares of common stock and an initial investment of $100 at the closing prices on December 31, 2005. ANNUAL RETURN PERCENTAGE Years Ending Dec07 Dec08 Dec09 9.69 5.49 -3.81 -66.61 -37.00 -53.47 66.75 26.46 22.98 Company / Index Prudential Financial, Inc ...S&P 500 Index ...Financial Services...

  • Page 274
    ... deferred policy acquisition costs, valuation of business acquired or goodwill; (9) changes in assumptions for retirement expense; (10) changes in our financial strength or credit ratings; (11) statutory reserve requirements associated with term and universal life insurance policies under Regulation...

  • Page 275
    ...and President, RLJ Development, LLC Gordon M. Bethune Managing Director, g-b1 Partners Gaston Caperton President, The College Board Shareholder information Corporate Office Prudential Financial, Inc. 751 Broad Street, Newark, NJ 07102 973-802-6000 Annual Meeting Shareholders are invited to attend...

  • Page 276
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