Prudential Financial, inc Annual Report

Transcription

1 Prudential Financial, inc Annual Report

2 Who We are For more than 135 years, Prudential Financial, Inc. has helped people grow and protect their wealth. We offer individual and institutional clients a wide array of financial products and services. Today, we are one of the world s largest financial services institutions. We have more than $1 trillion in assets under management and approximately $3.6 trillion of gross life insurance in force worldwide as of December 31, We have operations in the United States, Asia, Europe and Latin America. We also have one of the most recognized and trusted brand symbols: The Rock, an icon of strength, stability, expertise and innovation. We measure our long-term success by 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 support the communities where we live and work.

3 Message from the Chairman Dear fellow shareholders: In 2012, companies in many industries continued to face challenges from a variety of external forces, including low interest rates, currency fluctuations, market volatility and regulatory uncertainty. Despite these challenges, I am pleased to report that Prudential continued to perform well. Our market position and the foundation of our businesses remain strong. We have demonstrated, once again, that we have the financial strength and the flexibility to pursue opportunities that further strengthen our competitive standing and provide a platform for future growth. For the year, our businesses delivered solid earnings. We also completed several significant transactions, which grew the scale of our operations and positioned us well for the future. In November, we announced our highest-ever dividend to shareholders. These and other actions throughout the year demonstrated our continued focus on deploying our capital prudently, maintaining a strategic mix of high-quality businesses, managing risk effectively, and pursuing profitable growth for the long term. We have demonstrated, once again, that we have the financial strength and the flexibility to pursue opportunities that further strengthen our competitive standing and provide a platform for future growth. JOHN STRANGFELD Our strong performance validates our focus on four overarching characteristics that continue to drive Prudential s success: 1. Our portfolio of businesses has been developed by choice and design, as we have made deliberate decisions to enter markets in which we have strength and see opportunity. The complementary nature of our operations provides a mix of growth and stability, helping balance risk across the company. 2. Our businesses are high-quality, well-led and well-positioned in the markets in which we operate. 3. Our financial strength remains a hallmark of the company. It enables us to seize opportunities and grow, while continuing to deliver on our promises. 4. Our emphasis on integrity, talent and promoting a diverse and inclusive culture helps us continue to attract, develop and retain high-quality people, who remain our most important competitive advantage. For the year, core earnings improved for most of our businesses and our underlying operating performance was solid. Our business fundamentals remain sound, as shown by our strong sales, net flows and market momentum. On an after-tax adjusted operating income basis,* our Financial Services Businesses earned $2.958 billion, or $6.27 per share of Common Stock, compared to $2.845 billion, or $5.83 per share of Common Stock in Our Financial Services Businesses reported net income of $428 million, or 94 cents per share of Common Stock, in 2012, compared to $3.42 billion, or $6.99 per share of Common Stock in We achieved a significant milestone with our worldwide assets under management topping $1 trillion. This is more than just an impressive number. It is a clear reflection of the confidence our clients continue to place in Prudential. And it is especially gratifying given the unsettled market environment of the past several years. While the year proved challenging, our businesses produced strong results virtually across the board and took significant steps that have positioned our company for future growth and enhanced our earnings potential. Based on our strong performance, combined with our core strengths as a company, we are confident and excited about the future. * Adjusted operating income is not calculated under U.S. generally accepted accounting principles (GAAP) and is a financial measure we use to analyze the operating performance of our Financial Services Businesses. See footnote (1) on page 5 and footnote (A) on page 7 for a further description of adjusted operating income. Prudential Financial, Inc Annual Report 1

4 Capitalizing on unique opportunities Our financial strength enabled us to take advantage of opportunities during and after the financial crisis to put more distance between us and the competition, through organic growth, targeted acquisitions, new product development and talent management. In 2012, we announced three significant transactions that strengthened our domestic retirement and life insurance operations. In November, we closed a landmark pension risk transfer agreement with General Motors, under which we assumed responsibility for pension obligations for more than 110,000 salaried GM retirees. This transaction is the largest of its kind in the United States. We followed this with another sizable pension risk transfer agreement with Verizon Communications, which closed in December. This transaction transferred approximately $7.5 billion in pension obligations to Prudential. These significant transactions capitalized on steps we first took several years ago both before and during the financial crisis to broaden our capabilities in the pension risk transfer market. As we analyzed this market, we saw the beginning of a trend, and one that offers attractive opportunities that play to our historical strengths. With our financial strength, investment capabilities and actuarial expertise, we are uniquely suited to assume the responsibilities required to secure pension benefits. In fact, we have been helping companies guarantee pension obligations since It s a business we know well and one that we are confident will generate a significant source of revenue and profits for our domestic retirement business. We also strengthened our domestic life insurance operation with the acquisition of The Hartford s individual life insurance business, through an agreement we signed in September and closed in January From this acquisition, we received approximately 700,000 Hartford life insurance policies with a face amount in force of approximately $135 billion. The result is a life insurance operation with greater scale, broadened product offerings and expanded distribution capabilities, which will enable us to meet the life insurance needs of even more Americans. Our expanded operation ranks among the top five largest individual life insurance operations in the United States, based on new premium sales. We also now hold leadership positions in key product areas, including universal, variable and term life insurance. In addition, we have gained distribution strength in the banking and wirehouse channels, as well as a deep bench of talented people, particularly in the areas of product development and sales. Our recent pension risk transfer transactions and the Hartford acquisition have further enhanced our operations by diversifying our sources of earnings. We saw a similar result in Japan, with the addition of the Star and Edison operations, which brought greater scale, more stability and increased our potential for growth. We remain very satisfied with the results of our recent acquisition activity in Japan. The integration of the Star and Edison companies with our Gibraltar Life operation remains on track. We marked the legal merger of the three companies on January 1, 2012, and have already seen results from the expanded distribution capabilities, which include new sales professionals and third-party distributors, and the addition of a large force of independent agents to our existing channel. This acquisition is delivering what we expected. We continued to expand our international insurance operations in other ways. In November we celebrated the launch of our life insurance joint venture in China with the Fosun Group, a large privately owned holding company. Known as Pramerica Fosun Life Insurance Ltd., the new company is the first life insurance joint venture in China between a private enterprise and a foreign company. We see tremendous potential for growth in China, where life insurance penetration remains well below the average levels seen in many other countries. We are proud of all of these transactions, which we are confident will drive opportunities for new business in the future. Our success with them demonstrates how innovative thinking, collaboration and outstanding execution enable us to deliver groundbreaking results and further differentiate ourselves in the marketplace. It is also additional evidence that we have emerged from the financial crisis in a position of strength. Managing high-quality businesses that perform We maintain a strategic portfolio of high-quality businesses, which we have assembled over time through careful selection and by focusing on a specific set of customer needs protection and retirement. We continue to balance our mix of operations to retain a clear focus on core businesses where we have demonstrated strengths and see potential for returns. In building our portfolio, we have taken deliberate actions to ensure an appropriate blend of growth and stability. This mix provides us with balance during unsettled periods. We also consistently exercise strong risk management and quality control, which we view as core competencies and are reflected in the underlying strength of our business fundamentals. We are confident that we have assembled the best portfolio of businesses in our history, in terms of their ability to deliver an attractive balance of growth, stability and sustainable performance over the long term. The performance of our businesses in 2012 demonstrates the soundness of our strategy. For the year, our International Insurance division achieved record-setting sales of more than $4 billion, on a constant dollar basis, representing an increase of 28 percent over Our operations in Japan continue to benefit from expanded distribution across multiple channels and from the successful integration of the Star and Edison operations. Our Retirement business achieved record account values in 2012, reflecting strong sales of a stable value product, as well as the impact of the two significant pension risk transfer transactions, which in aggregate garnered more than $50 billion in account values. Total account values for the Retirement operation were approximately $290 billion as of year-end 2012, up from approximately $230 billion the prior year. 2 Prudential Financial, Inc Annual Report

5 Individual Annuities account values were approximately $135 billion at year-end 2012, up from approximately $114 billion in We continue to manage our annuities business prudently, especially given the persistency of low interest rates, adapting our products to improve our return prospects and risk profile, while maintaining our value proposition. In our Asset Management segment, we recorded $30 billion of institutional and retail net flows for the year. The Asset Management segment s assets under management totaled $827 million at year-end 2012, compared to $718 million in In Group Insurance, sales totaled $439 million for the year, representing a decrease of $196 million from Our priority in 2012 was to refocus our Group Insurance operation on businesses where we see long-term opportunity. We are taking significant actions to enhance the prospect for improved returns for this operation. Sales in our Individual Life Insurance operation reached $412 million for 2012, up 48 percent over This increase reflects our improved competitive position and expanded distribution through third-party distributors, including banks and wirehouses. As we integrate the Hartford operation into our existing individual life insurance business, we look forward to continued progress in the future. Deploying capital to support our long-term objectives In 2012, we continued to benefit from our long history of effective capital management. Our commitment to maintaining robust capital and liquidity positions helps insulate the company against volatility and preserve our ability to pursue new opportunities for expansion. Our execution of significant transactions provided opportunities to effectively deploy our capital, which remains integral to achieving our financial goals. We remain committed to balancing investments in our businesses with our goal of delivering additional value to our shareholders through dividends and repurchases. In November, we declared a cash dividend of $1.60 per share, representing the largest dividend in our history and an increase of 10 percent over We also announced our intention to pay quarterly dividends, starting in In addition, we continued to repurchase stock throughout During the year, the company acquired 11.5 million shares of its Common Stock at a total cost of $650 million. Our responsibility as a corporate citizen As a multinational institution, we understand that we have responsibilities to a wide variety of stakeholders, including our shareholders; customers; employees; state, federal and international regulators; and our neighbors in the communities in which we operate. To truly abide by our values and meet our objectives as a company, we must fulfill our obligations to all of them. We also recognize the importance of appropriate and meaningful regulation of our industry and our company. To that end, we have continued to participate in productive discussions regarding the improvement of insurance regulation with federal, state and international regulatory authorities and other industry partners. We believe that by working together, we can help regulatory authorities develop an effective regulatory structure that is suitable for our industry. Adherence to a strong program of corporate governance and a commitment to social responsibility are other important aspects of how we meet our obligations to stakeholders. We are proud of the recognition we have received for our sustainability efforts in areas including shareholder engagement, corporate social responsibility and diversity. Our commitment in these areas speaks directly to our culture as a company, which is an important point of competitive differentiation and supports our emphasis on ethics and integrity. Prudential employees around the world have embraced the company s dedication to corporate social responsibility, which has endured since our founding in In October, more than 20,000 volunteers, including employees, friends, family members and clients, in the United States and 10 other countries took part in our 18th annual Global Volunteer Day. We also continued to provide support to communities where we operate in a variety of other ways, including grants of more than $27 million through The Prudential Foundation and other philanthropic activities. Our commitment to talent and diversity Our focus on talent and promoting diversity and inclusion is another key aspect of our culture and our strength as a company. Prudential s people their skills, character and integrity are what really set us apart in the marketplace. They determine how we operate, execute and innovate. That s one reason why we are fully committed to embracing diversity and inclusion in every aspect of our operations. We recognize that diversity and inclusion are inextricably linked to our ability to achieve our goals, both our aspirations to be an employer of choice and to lead in the markets in which we operate. As an employer we must create a culture of support and collaboration for individuals of all backgrounds, where employees feel empowered to bring their best ideas. That type of environment will help us attract and retain top talent, and better leverage employees skills. It will also help us connect more deeply with diverse markets around the world and develop products and services that better meet the needs of multicultural customer segments. In 2012 we continued our program of research into diverse market segments with the release of our sixth biennial study on the financial behavior of women. We also launched a new study that examined the financial experience of lesbian, gay, bisexual and transgender Americans. Together with our recent Prudential Financial, Inc Annual Report 3

6 research into the financial experience of African Americans, these studies are revealing new information about the needs of customers across these segments. Another initiative of which I am particularly proud is our ongoing work to help America s veterans. In 2012, we continued to spearhead a variety of programs designed to ensure better lives for our veterans and their families. It is one way to give back to those who have given so much. But it is much more than the right thing to do. Our focus on veterans is a key element of our strategy to attract and develop talent. We recognize the value that veterans bring to our workforce, with their proven ability to lead, excel under pressure, drive for results and collaborate in a team. We are working to help veterans hone the skills they need to contribute to the best of their abilities, by providing access to quality education, job training and employment. Like our commitment to diversity and inclusion, we expect this work to produce concrete and enduring benefits to our company, as we tap an underutilized and often overlooked source of high-quality talent. Our work is providing a model for similar programs at companies and universities across the U.S. We were gratified that in 2012 more institutions around the country agreed to join us in these efforts. Our efforts to support diversity and inclusion, develop new pipelines of talent and remain an employer of choice continued to receive recognition in 2012 from a wide External recognition of Prudential s commitment to diversity and to providing a supportive workplace Recognition Prudential s Record Working Mother, 100 Best Companies 23 years Latina Style, 50 Best Companies for Latinas in the U.S. 15 years National Association for Female Executives, Top 50 Companies for Executive Women 13 years DiversityInc, Top 50 Companies for Diversity 12 years Human Rights Campaign, Corporate Equality Index 12 years Dave Thomas Foundation, Best Adoption-Friendly Workplaces 6 years GI Jobs, Top 100 Military Friendly Employers 3 years Military Times EDGE, Best for Vets Employers 3 years Computerworld, Best Places to Work in IT 2 years Black Enterprise, 40 Best Companies for Diversity 2 years ABILITY Magazine, Best Practices Award New in 2012 variety of external authorities. The caliber of our employees and leadership team was also recognized in 2013 when FORTUNE magazine once again named Prudential one of the world s most admired companies in the life and health insurance category. Prudential s people remain our most important point of strategic differentiation and our greatest source of pride. Building on our momentum We are proud of our performance in 2012, and we have every reason to feel optimistic about the future. We enjoy a brand and reputation that are unrivaled in our industry. And in 2012, we continued to put distance between Prudential and the competition. Our success in completing a series of significant transactions over the past two years says much about us as a company. It demonstrates our financial strength, our expertise and innovative thinking, and our determination to lead in markets where we see opportunity. It also speaks to the confidence that our clients and our business partners have in us. We are honored that individuals and institutions around the world choose to do business with us and we greatly respect their trust in Prudential and our people. Our strong capital position, liquidity and asset quality continue to serve us well and support our ability to achieve our objective of producing a normalized return on equity of 13 percent in Reaching that objective and sustaining that level of performance will validate the uniqueness of our business mix, the quality of our operations and the talent of our people. We are determined to get there in the right way. Our commitment to working with integrity and doing business the right way remains paramount. We are proud, but not content. In 2013, we intend to build on our momentum and continue to differentiate ourselves in the eyes of customers and investors. We must do so while retaining our relentless focus on the talent of our people, our products and service, as well as the principles and values that are our legacy. Thank you for your continued interest and confidence in Prudential. I look forward to reporting to you on our achievements in the future. JOHN STRANGFELD Chairman of the Board, Chief Executive Officer and President 4 Prudential Financial, Inc Annual Report

7 NOTES (1) Adjusted operating income, which is not measured in accordance with accounting principles generally accepted in the United States of America (GAAP), excludes Realized investment gains (losses), net, as adjusted, and related charges and adjustments. A significant element of realized investment gains and losses are impairments and credit-related and interest rate-related gains and losses. Impairments and losses from sales of credit-impaired securities, the timing of which depends largely on market credit cycles, can vary considerably across periods. The timing of other sales that would result in gains or losses, such as interest raterelated gains or losses, is largely subject to our discretion and influenced by market opportunities as well as our tax and capital profile. Realized investment gains (losses) within certain of our businesses for which such gains (losses) are a principal source of earnings, and those associated with terminating hedges of foreign currency earnings and current period yield adjustments are included in adjusted operating income. Adjusted operating income excludes realized investment gains and losses from products that contain embedded derivatives, and from associated derivative portfolios that are part of a hedging program related to the risk of those products. Adjusted operating income also excludes gains and losses from changes in value of certain assets and liabilities relating to foreign currency exchange movements that have been economically hedged or considered part of our capital funding strategies for our international subsidiaries, as well as gains and losses on certain investments that are classified as other trading account assets. Adjusted operating income also excludes investment gains and losses on trading account assets supporting insurance liabilities and changes in experience-rated contractholder liabilities due to asset value changes, because these recorded changes in asset and liability values are expected to ultimately accrue to contractholders. Trends in the underlying profitability of our businesses can be more clearly identified without the fluctuating effects of these transactions. In addition, adjusted operating income excludes the results of divested businesses, which are not relevant to our ongoing operations. Discontinued operations, which is presented as a separate component of net income under GAAP, is also excluded from adjusted operating income. We believe that the presentation of adjusted operating income as we measure it for management purposes enhances understanding of the results of operations of the Financial Services Businesses by highlighting the results from ongoing operations and the underlying profitability of our businesses. However, adjusted operating income is not a substitute for income determined in accordance with GAAP, and the adjustments made to derive adjusted operating income are important to an understanding of our overall results of operations. References to adjusted operating income and net income refer to amounts attributable to Prudential Financial, Inc. All facts and figures are as of or for the year ended December 31, 2012, unless otherwise noted. Life insurance and annuities issued by The Prudential Insurance Company of America, Newark, NJ, and its insurance affiliates. FORTUNE and The World s Most Admired Companies are registered trademarks of Time Inc ranking as of 3/1/2013. Prudential Financial, Inc Annual Report 5

8 Financial highlights Financial Services Businesses In millions, except per share amounts For the years ended December 31, RESULTS BASED ON ADJUSTED OPERATING INCOME (A) Revenues $ 81,133 $ 38,933 $ 30,087 Benefits and expenses 77,184 35,097 26,459 Adjusted operating income before income taxes $ 3,949 $ 3,836 $ 3,628 Operating return on average equity (B) % % % GAAP RESULTS Revenues $ 78,558 $ 42,015 $ 31,131 Benefits and expenses 77,946 37,320 27,737 Income from continuing operations before income taxes and equity in earnings of operating joint ventures $ 612 $ 4,695 $ 3,394 Return on average equity (B) 1.22 % % % EARNINGS PER SHARE OF COMMON STOCK diluted Adjusted operating income after income taxes $ 6.27 $ 5.83 $ 5.67 Reconciling items: Realized investment gains (losses), net, and related charges and adjustments (5.94 ) 1.73 (0.06) Other reconciling items (1.06) 0.41 (0.24) Tax (expense) benefit on above 1.64 (1.05) (0.12) Income from continuing operations of the Financial Services Businesses attributable to Prudential Financial, Inc. (after-tax) $ 0.91 $ 6.92 $ 5.25 Consolidated Information In millions, unless otherwise noted As of or for the years ended December 31, GAAP RESULTS Total revenues $ 84,815 $ 49,030 $ 38,217 Income after income taxes: Continuing operations $ 532 $ 3,603 $ 2,979 Discontinued operations Less: Noncontrolling interests Consolidated net income attributable to Prudential Financial, Inc. $ 469 $ 3,566 $ 3,001 Net income attributable to Prudential Financial, Inc. Financial Services Businesses $ 428 $ 3,420 $ 2,506 Closed Block Business Consolidated net income attributable to Prudential Financial, Inc. $ 469 $ 3,566 $ 3,001 FINANCIAL POSITION Invested assets $405,582 $356,247 $283,912 Total assets $709,298 $620,244 $535,744 Attributed equity: Financial Services Businesses $ 37,078 $ 32,817 $ 28,310 Closed Block Business 1,497 1,436 1,225 Total attributed equity $ 38,575 $ 34,253 $ 29,535 Assets under management (in billions) $ 1,060 $ 901 $ Prudential Financial, Inc Annual Report

9 Financial Services Businesses Adjusted Operating Income (A) and Income from Continuing Operations (pre-tax, in millions) Adjusted operating income Income from continuing operations before income taxes and equity in earnings of operating joint ventures (GAAP) $5,000 $4,000 $3,000 $2,000 $1,000 $0 Assets Under Management (in billions) $1,200 $1,000 $800 $600 $400 $200 $ Financial Services Businesses Adjusted Operating Revenues (A) and GAAP Revenues (in billions) $100 $80 $60 $40 $20 $0 Adjusted operating revenues Revenues (GAAP) Financial Services Businesses Operating Return on Average Equity (B) and Return on Average Equity (B) 12% 10% 8% 6% 4% 2% 0% Operating return on average equity Return on average equity (A) Adjusted 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 experiencerated contractholder liabilities due to asset value changes; results of divested businesses and discontinued operations; earnings attributable to noncontrolling interests; and the related tax effects thereof. Adjusted operating income includes equity in earnings of operating joint ventures and the related tax effects thereof. Revenues and benefits and expenses shown as components of adjusted operating income, are presented on the same basis as pre-tax adjusted operating income and are adjusted for the items above as well. See Management s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of results based on adjusted operating income and the Consolidated Financial Statements for a reconciliation of results based on adjusted operating income to GAAP results. (B) Operating return on average equity is calculated by dividing adjusted operating income after income taxes by average attributed equity for the Financial Services Businesses excluding accumulated other comprehensive income. An alternative measure to operating return on average equity is return on average equity. Return on average equity is calculated by dividing income from continuing operations after-tax of the Financial Services Businesses attributable to Prudential Financial, Inc. by average total attributed equity for the Financial Services Businesses. Both income amounts above give effect to the direct equity adjustment for earnings per share calculation. Prudential Financial, Inc Annual Report 7

10 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 Please see page 228 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, Inc Annual Report

11 TABLE OF CONTENTS Selected Financial Data... 9 Management s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Consolidated Financial Statements: Management s Annual Report on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm Consolidated Statements of Financial Position as of December 31, 2012 and Consolidated Statements of Operations for the years ended December 31, 2012, 2011 and Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011 and Consolidated Statements of Equity for the years ended December 31, 2012, 2011 and Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and Notes to Consolidated Financial Statements Supplemental Combining Financial Information Market Price of and Dividends on Common Equity and Related Stockholder Matters Performance Graph Forward-Looking Statements Page Number Throughout this Annual Report, Prudential Financial refers to Prudential Financial, Inc., the ultimate holding company for all of our companies. Prudential Insurance refers to The Prudential Insurance Company of America. Prudential, the Company, we and our refer to our consolidated operations. Financial Services Businesses and Closed Block Business Effective with the date of demutualization, December 18, 2001, 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 Management division consists of our Individual Annuities, Retirement and Asset Management segments. The U.S. Individual Life and Group Insurance division consists of our Individual Life and Group Insurance segments. The International Insurance division consists of our International Insurance segment. The Common Stock reflects the performance of the Financial Services Businesses, but there can be no assurance that the market value of the Common Stock will reflect solely the financial performance of these businesses. The Class B Stock, which was issued in a private placement on the date of the demutualization, reflects the financial performance of the Closed Block Business, as defined in Note 22 to the Consolidated Financial Statements. We allocate all of our assets, liabilities and earnings between the Financial Services Businesses and Closed Block Business as if they were separate legal entities, but there is no legal separation between these two businesses. Holders of both the Common Stock and the Class B Stock are common stockholders of Prudential Financial and, as such, are subject to all the risks associated with an investment in Prudential Financial and all of its businesses. The Common Stock and the Class B Stock will be entitled to dividends, if and when declared by Prudential Financial s Board of Directors from funds legally available to pay them, as if the businesses were separate legal entities. See Note 15 to the Consolidated Financial Statements for a discussion of liquidation rights of the Common Stock and the Class B Stock, dividend restrictions on the Common Stock if we do not pay dividends on the Class B Stock when there are funds legally available to pay them and conversion rights of the Class B Stock. SELECTED FINANCIAL DATA We derived the selected consolidated income statement data for the years ended December 31, 2012, 2011 and 2010 and the selected consolidated balance sheet data as of December 31, 2012 and 2011 from our Consolidated Financial Statements included elsewhere herein. We derived the selected consolidated income statement data for the years ended December 31, 2009 and 2008 and the selected consolidated balance sheet data as of December 31, 2010, 2009 and 2008 from consolidated financial statements not included herein. Results for the year ended December 31, 2012 include approximately $32 billion of premiums reflecting two recently completed significant pension risk transfer transactions. On November 1, 2012, we issued a non-participating group annuity contract to the General Motors Salaried Employees Pension Trust, and assumed responsibility for providing specified benefits to certain participants. On December 10, 2012, we issued a non-participating group annuity contract to the Verizon Management Pension Plan and assumed responsibility for providing specified benefits to certain participants. The premiums from these transactions were largely offset by a corresponding increase in policyholders benefits, including the change in policy reserves. On February 1, 2011, we acquired the Star and Edison Businesses from American International Group, Inc. The results of these companies are reported with the Gibraltar Life operations and are included in the results presented below from the date of acquisition. The Star and Edison companies were merged into Gibraltar Life on January 1, On December 31, 2009, we completed the sale of our minority joint venture interest in Wachovia Securities. In 2009, Equity in earnings of operating joint ventures, net of taxes includes a pre-tax gain on the sale of $2.247 billion. In addition, General and administrative expenses includes certain one-time costs related to the sale of the joint venture interest of $104 million for pre-tax compensation costs and costs related to increased contributions to the Company s charitable foundation. The total of these items is an aftertax gain of $1.389 billion, or $2.95 per share of Common Stock. On May 1, 2009, we acquired Yamato Life, a Japanese life insurance company that declared bankruptcy in October 2008, and renamed The Prudential Gibraltar Financial Life Insurance Company, Ltd. Results presented below include the results of this company from the date of acquisition. The 2009 income tax provision includes a benefit of $272 million from a reduction to the liability for unrecognized tax benefits and related interest, primarily related to tax years prior to 2002 as a result of the expiration of the statute of limitations for the 2002 and 2003 tax years. Prudential Financial, Inc Annual Report 9

12 Our Gibraltar Life operations use a November 30 fiscal year end. Consolidated balance sheet data as of December 31, 2012, 2011, 2010, 2009 and 2008 includes Gibraltar Life assets and liabilities as of November 30. Consolidated income statement data for 2012, 2011, 2010, 2009 and 2008 includes Gibraltar Life results for the twelve months ended November 30, 2012, 2011, 2010, 2009 and 2008, respectively. This selected consolidated financial information should be read in conjunction with Management s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements included elsewhere herein. Year Ended December 31, (in millions, except per share and ratio information) Income Statement Data: Revenues: Premiums... $65,354 $24,301 $18,238 $ 16,497 $15,459 Policy charges and fee income... 4,489 3,924 3,323 2,832 3,138 Net investment income... 13,661 13,124 11,865 11,390 11,824 Asset management fees and other income... 2,752 4,850 3,741 4, Realized investment gains (losses), net... (1,441) 2,831 1,050 (2,897) (2,457) Total revenues... 84,815 49,030 38,217 32,335 28,721 Benefits and expenses: Policyholders benefits... 65,131 23,614 18,285 16,346 16,531 Interest credited to policyholders account balances... 4,234 4,484 4,209 4,484 2,335 Dividends to policyholders... 2,176 2,723 2,189 1,298 2,218 Amortization of deferred policy acquisition costs... 1,504 2,695 1,085 1,131 1,102 General and administrative expenses... 11,094 10,605 8,309 7,788 8,035 Total benefits and expenses... 84,139 44,121 34,077 31,047 30,221 Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures ,909 4,140 1,288 (1,500) Income tax expense (benefit) ,488 1,243 (118) (589) Income (loss) from continuing operations before equity in earnings of operating joint ventures ,421 2,897 1,406 (911) Equity in earnings of operating joint ventures, net of taxes ,523 (447) Income (loss) from continuing operations ,603 2,979 2,929 (1,358) Income (loss) from discontinued operations, net of taxes (19) 146 Net income (loss) ,638 3,012 2,910 (1,212) Less: Income (loss) attributable to noncontrolling interests (34) 36 Net Income (loss) attributable to Prudential Financial, Inc.... $ 469 $ 3,566 $ 3,001 $ 2,944 $ (1,248) Basic earnings per share Common Stock: Income (loss) from continuing operations attributable to Prudential Financial, Inc.... $ 0.91 $ 7.01 $ 5.31 $ 7.32 $ (3.20) Income (loss) from discontinued operations, net of taxes (0.04) 0.34 Net income (loss) attributable to Prudential Financial, Inc.... $ 0.95 $ 7.08 $ 5.38 $ 7.28 $ (2.86) Diluted earnings per share Common Stock: Income (loss) from continuing operations attributable to Prudential Financial, Inc.... $ 0.91 $ 6.92 $ 5.25 $ 7.27 $ (3.20) Income (loss) from discontinued operations, net of taxes (0.04) 0.34 Net income (loss) attributable to Prudential Financial, Inc.... $ 0.94 $ 6.99 $ 5.32 $ 7.23 $ (2.86) Dividends declared per share Common Stock... $ 1.60 $ 1.45 $ 1.15 $ 0.70 $ 0.58 Basic and diluted earnings per share Class B Stock: Income (loss) from continuing operations attributable to Prudential Financial, Inc.... $ $ $ $(164.50) $ (9.50) Income (loss) from discontinued operations, net of taxes... (1.00) Net income (loss) attributable to Prudential Financial, Inc.... $ $ $ $(164.50) $ (9.50) Dividends declared per share Class B Stock... $ $ $ $ $ Ratio of earnings to fixed charges(1) As of December 31, Balance Sheet Data: Total investments excluding policy loans... $394,007 $344,688 $273,245 $250,406 $232,322 Separate account assets , , , , ,095 Total assets , , , , ,399 Future policy benefits and policyholders account balances , , , , ,653 Separate account liabilities , , , , ,095 Short-term debt... 2,484 2,336 1,982 3,122 10,535 Long-term debt... 24,729 24,622 23,653 21,037 20,290 Total liabilities , , , , ,307 Prudential Financial, Inc. equity... 38,575 34,253 29,535 22,603 10,741 Noncontrolling interests Total equity... $ 39,291 $ 34,841 $ 30,048 $ 23,137 $ 11, Prudential Financial, Inc Annual Report

13 (1) For purposes of this computation, earnings are defined as income from continuing operations before income taxes excluding undistributed income (loss) from equity method investments, fixed charges and interest capitalized. Also excludes earnings attributable to noncontrolling interests. Fixed charges are the sum of gross interest expense, interest credited to policyholders account balances and an estimated interest component of rent expense. Due to the Company s loss for the year ended December 31, 2008, the ratio coverage was less than 1:1 and is therefore not presented. Additional earnings of $1,133 million would have been required for the year ended December 31, 2008 to achieve a ratio of 1:1. The historical information presented in the table above has been revised to reflect the impact of retrospective adoption of the amended guidance related to the deferral of acquisition costs as well as the impact of retrospective application of a change in method of an accounting principle for the Company s pension plans. For further information, see Accounting Policies and Pronouncements Adoption of New Accounting Pronouncements and Note 2 to the Consolidated Financial Statements. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following analysis of our consolidated financial condition and results of operations in conjunction with the Forward-Looking Statements, Selected Financial Data and the Consolidated Financial Statements included in this Annual Report, as well as the Risk Factors included in Prudential Financial s 2012 Annual Report on Form 10-K. Overview Prudential Financial has two classes of common stock outstanding. The Common Stock, which is publicly traded (NYSE:PRU), reflects the performance of the Financial Services Businesses, while the Class B Stock, which was issued through a private placement and does not trade on any exchange, reflects the performance of the Closed Block Business. The Financial Services Businesses and the Closed Block Business are discussed below. Financial Services Businesses Our Financial Services Businesses consist of three operating divisions, which together encompass six segments, and our Corporate and Other operations. The U.S. Retirement Solutions and Investment Management division consists of our Individual Annuities, Retirement and Asset Management segments. The U.S. Individual Life and Group Insurance division consists of our Individual Life and Group Insurance segments. The International Insurance division consists of our International Insurance segment. Our Corporate and Other operations include corporate items and initiatives that are not allocated to business segments, as well as businesses that have been or will be divested. We attribute financing costs to each segment based on the amount of financing used by each segment, excluding financing costs associated with corporate debt which are reflected in Corporate and Other operations. The net investment income of each segment includes earnings on the amount of capital that management believes is necessary to support the risks of that segment. We seek growth internally and through acquisitions, joint ventures or other forms of business combinations or investments. Our principal acquisition focus is in our current business lines, both domestic and international. Closed Block Business In connection with the demutualization, we ceased offering domestic participating products. The liabilities for our traditional domestic in force participating products were segregated, together with assets, in a regulatory mechanism referred to as the Closed Block. The Closed Block is designed generally to provide for the reasonable expectations for future policy dividends after demutualization of holders of participating individual life insurance policies and annuities included in the Closed Block by allocating assets that will be used exclusively for payment of benefits, including policyholder dividends, expenses and taxes with respect to these products. See Note 12 to the Consolidated Financial Statements and Business Demutualization and Separation of Business included in Prudential Financial s 2012 Annual Report on Form 10-K for more information on the Closed Block. Revenues and Expenses We earn our revenues principally from insurance premiums; mortality, expense, asset management and administrative fees from insurance and investment products; and investment of general account and other funds. We earn premiums primarily from the sale of individual life insurance, group life and disability insurance, and certain annuity contracts. We earn mortality, expense, and asset management fees primarily from the sale and servicing of separate account products including variable life insurance and variable annuities, and from the sale and servicing of other products including universal life insurance. We also earn asset management and administrative fees from the distribution, servicing and management of mutual funds, retirement products and other asset management products and services. Our operating expenses principally consist of insurance benefits provided and reserves established for anticipated future insurance benefits, general business expenses, dividends to policyholders, commissions and other costs of selling and servicing the various products we sell and interest credited on general account liabilities. Profitability Our profitability depends principally on our ability to price our insurance and annuity products at a level that enables us to earn a margin over the costs associated with providing benefits and administering those products. Profitability also depends on, among other items, our actuarial and policyholder behavior experience on insurance and annuity products, our ability to attract and retain customer assets, generate and maintain favorable investment results, effectively deploy capital and utilize our tax capacity, and manage expenses. Historically, the participating products included in the Closed Block have yielded lower returns on capital invested than many of our other businesses. As we have ceased offering domestic participating products, we expect that the proportion of the traditional participating products in our in force business will gradually diminish as these older policies age, and we grow other businesses. However, the relatively Prudential Financial, Inc Annual Report 11

14 lower returns to us on this existing block of business will continue to affect our consolidated results of operations for many years. Our Common Stock reflects the performance of our Financial Services Businesses, but there can be no assurance that the market value of the Common Stock will reflect solely the performance of these businesses. See Risk Factors included in Prudential Financial s 2012 Annual Report on Form 10-K for a discussion of risks that have affected and may affect in the future our business, results of operations or financial condition, cause the trading price of our Common Stock to decline materially or cause our actual results to differ materially from those expected or those expressed in any forward looking statements made by or on behalf of the Company. Executive Summary Prudential Financial, a financial services leader with approximately $1.060 trillion of assets under management as of December 31, 2012, has operations in the United States, Asia, Europe and Latin America. Through our subsidiaries and affiliates, we offer a wide array of financial products and services, including life insurance, annuities, retirement-related services, mutual funds, and investment management. We offer these products and services to individual and institutional customers through one of the largest distribution networks in the financial services industry. Industry Trends Our U.S. and international businesses are impacted by financial markets, economic conditions, regulatory oversight, and a variety of trends that affect the industries where we compete. U.S. Businesses Financial and Economic Environment. Although economic and financial conditions continue to show signs of improvement, global market conditions and uncertainty continue to be factors in the markets in which we operate. This uncertainty, particularly in the equity markets, has led to, among other things, increased demand for guaranteed retirement income, fixed income and stable value products, and defined benefit risk transfer solutions. The continued low interest rate environment continues to negatively impact our portfolio income yields, as discussed further below, and continued high unemployment rates and limited growth in salaries also continue to be factors impacting certain business drivers, including contributions to defined contribution plans and the costs of group disability claims. Regulatory Environment. Financial market dislocations have produced, and are expected to continue to produce, extensive changes in existing laws and regulations, and regulatory frameworks applicable to our businesses. In addition, state insurance laws regulate all aspects of our U.S. insurance businesses and our insurance products are substantially affected by federal and state tax laws. Insurance regulators have begun to implement significant changes in the way in which industry participants must determine statutory reserves and statutory capital, particularly for products with embedded options and guarantees such as variable annuities and universal life products with secondary guarantees. Demographics. Income protection, wealth accumulation and the needs of retiring baby boomers continue to shape the insurance industry. Retirement security is one of the most critical issues in the U.S. for individuals and the investment professionals and institutions that support them. The risk and responsibility of retirement savings continues to shift to employees, away from the government and employers. Life insurance ownership among U.S. households has reached its lowest point in fifty years, with consumers citing other financial priorities and cost of insurance as reasons for the lack of coverage. Competitive Environment. For the annuities business, traditional competitors continue to take actions to either exit the marketplace or de-risk products in response to recent market volatility. New non-traditional competitors are beginning to enter this marketplace. In 2012, we implemented modifications to scale back benefits and increase pricing for certain product features. We believe our current product offerings are competitively positioned and that our differentiated risk management strategies will provide us with an attractive risk and profitability profile. All of our new variable annuity sales, as well as a significant portion of our in force business, where an optional living benefit has been elected, include an automatic rebalancing feature, which is a feature that is valued in the variable annuity market. Our retirement and asset management businesses compete on price, service and investment performance. The full service retirement markets are mature, with few dominant players. We have seen a trend toward unbundling of the purchase decision related to the recordkeeping and investment offerings, where the variety of available funds and their performance are the key selection criteria of plan sponsors and intermediaries. Additionally, changes in the regulatory environment have driven more transparent fee disclosures, which have heightened pricing pressures and may accelerate the trend toward unbundling of services. Market disruption and rating agency downgrades have caused some of our institutional investment product competitors to withdraw from the market, creating significant growth opportunities for us in certain markets, including the investment-only stable value market. The recovery of the equity, fixed income, and commercial real estate markets has positively impacted asset managers by increasing assets under management and corresponding fee levels. In addition, institutional fixed income managers have generally experienced positive flows as investors have re-allocated assets into fixed income to reduce risk, including the reduction of risk in pension plans. In 2012, we closed two significant pension risk transfer transactions, which potentially changes the landscape for how plan sponsors consider their pension risk alternatives. The longevity risk associated with these transactions complements our mortality risk businesses. The individual life and group life and disability markets are mature and, due to the large number of competitors, competition is driven mainly by price and service. The economy has exacerbated pressure on pricing, creating a challenge of maintaining pricing discipline. In the individual life market, many of our competitors took pricing actions in 2012 in response to the low interest rate environment, following our own price increases implemented in 2009 and Our individual life sales in 2012 benefited from a strong competitive position as a result of these competitor actions. Maintaining this competitive positioning is dependent on sources of financing for the reserves associated with this business and timely utilization of the associated tax benefits. For group products, rate guarantees have become the industry norm, 12 Prudential Financial, Inc Annual Report