Prudential 2015 Annual Report Download - page 211

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
“Net income (loss)” as determined in accordance with U.S. GAAP but is the measure of segment profit or loss used by the Company’s
chief operating decision maker to evaluate segment performance and allocate resources, and consistent with authoritative guidance, is the
measure of segment performance presented below. Adjusted operating income is calculated by adjusting each segment’s “Income (loss)
from continuing operations before income taxes and equity in earnings of operating joint ventures” for the following items, which are
described in greater detail below:
• realized investment gains (losses), net, and related charges and adjustments;
• net investment gains (losses) on trading account assets supporting insurance liabilities and changes in experience-rated
contractholder liabilities due to asset value changes;
• the contribution to income (loss) of divested businesses that have been or will be sold or exited, including businesses that have been
placed in wind down status, but that did not qualify for “discontinued operations” accounting treatment under U.S. GAAP; and
• equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests.
These items are important to an understanding of overall results of operations. Adjusted operating income is not a substitute for
income determined in accordance with U.S. GAAP, and the Company’s definition of adjusted operating income may differ from that used
by other companies. However, the Company believes that the presentation of adjusted operating income as measured for management
purposes enhances the understanding of results of operations by highlighting the results from ongoing operations and the underlying
profitability factors of its businesses.
In addition, as previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2014, during 2014, the
Company recorded out of period adjustments resulting in an aggregate net decrease of $193 million to “Income (loss) from continuing
operations before income taxes and equity in earnings of operating joint ventures.” Subsequent to 2014, the Company identified and
recorded additional out of period adjustments of $84 million related to 2014, primarily reflecting a benefit from the release of reserves
related to certain variable annuities products with optional living benefit guarantees. The impact of these items resulted in a decrease in pre-
tax adjusted operating income of $193 million for the year ended December 31, 2014, principally consisting of a net decrease of $84
million for the Group Insurance segment and $73 million for the International Insurance segment.
Realized investment gains (losses), net, and related charges and adjustments
Realized investment gains (losses), net
Adjusted operating income excludes “Realized investment gains (losses), net,” except for certain items described below. Significant
activity excluded from adjusted operating income includes impairments and credit-related gains (losses) from sales of securities, the timing
of which depends largely on market credit cycles and can vary considerably across periods, and interest rate-related gains (losses) from
sales of securities, which are largely subject to the Company’s discretion and influenced by market opportunities, as well as the Company’s
tax and capital profile. Additionally, certain gains (losses) pertaining to derivative contracts that do not qualify for hedge accounting
treatment are also excluded from adjusted operating income. Trends in the underlying profitability of the Company’s businesses can be
more clearly identified without the fluctuating effects of these transactions.
The following table sets forth the significant components of “Realized investment gains (losses), net” that are included in adjusted
operating income and, as a result, are reflected as adjustments to “Realized investment gains (losses), net” for purposes of calculating
adjusted operating income:
Year Ended December 31,
2015 2014 2013
(in millions)
Net gains (losses) from(1):
Terminated hedges of foreign currency earnings .......................................................... $284 $293 $240
Current period yield adjustments ...................................................................... $475 $476 $445
Principal source of earnings .......................................................................... $123 $100 $122
(1) In addition to the items in the table above, “Realized investment gains (losses), net, and related charges and adjustments” also includes an adjustment to
reflect “Realized investment gains (losses), net” related to divested businesses as results of “Divested businesses,” discussed below.
Terminated Hedges of Foreign Currency Earnings. The amounts shown in the table above primarily reflect the impact of an
intercompany arrangement between Corporate and Other operations and the International Insurance segment, pursuant to which the non-
U.S. dollar-denominated earnings in all countries for a particular year, including its interim reporting periods, are translated at fixed
currency exchange rates. The fixed rates are determined in connection with a currency hedging program designed to mitigate the risk that
unfavorable rate changes will reduce the segment’s U.S. dollar-equivalent earnings. Pursuant to this program, the Company’s Corporate
and Other operations may execute forward currency contracts with third parties to sell the net exposure of projected earnings from the
hedged currency in exchange for U.S. dollars at a specified exchange rate. The maturities of these contracts correspond with the future
periods in which the identified non-U.S. dollar-denominated earnings are expected to be generated. These contracts do not qualify for
hedge accounting under U.S. GAAP, so the resulting profits or losses are recorded in “Realized investment gains (losses), net.” When the
contracts are terminated in the same period that the expected earnings emerge, the resulting positive or negative cash flow effect is included
in adjusted operating income.
Prudential Financial, Inc. 2015 Annual Report 209