Prudential 2003 Annual Report Download - page 165

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PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
19. SEGMENT INFORMATION (continued)
The Company utilizes interest and currency swaps to manage interest and currency exchange rate exposures
arising from mismatches between assets and liabilities, including duration mismatches. For the swap contracts that do
not qualify for hedge accounting treatment, mark-to-market adjustments of open contracts as well as periodic
settlements are included in “Realized investment gains (losses), net.” However, the periodic settlements are included in
adjusted operating income. Adjusted operating income includes $51 million and $52 million for the years ended
December 31, 2003 and 2002, respectively, of periodic settlements of such contracts. Amounts in 2001 were
insignificant.
The Other Asset Management segment uses hedging instruments to mitigate the risk that operating results will
fluctuate due to changes in the estimated fair value of mortgages held for sale, commitments to lend and loan
applications received. Changes in the estimated fair value of such instruments are included on a current basis in
“Commissions and other income.” Commencing in the fourth quarter of 2002, the Company applied hedge accounting
treatment to new mortgage loan inventory. Consequently, changes in the fair value of such inventory are included on a
current basis in “Commissions and other income” of the Other Asset Management segment, consistent with the related
hedges. Prior to the fourth quarter of 2002, the mortgage loan inventory was recorded at the lower of aggregate cost or
fair value. However, for segment reporting, changes in the estimated fair value of the mortgage loans (losses of $5
million, $2 million and $21 million for the years ended December 31, 2003, 2002 and 2001, respectively) were
included in adjusted operating income of the Other Asset Management segment with an offsetting adjustment to
adjusted operating income of Corporate and Other operations.
The summary below reconciles adjusted operating income, a non-GAAP measure, to income from continuing
operations before income taxes:
Years Ended
December 31,
2003 2002 2001
(in millions)
Adjusted Operating Income before income taxes for Financial Services Businesses by Segment:
Individual Life and Annuities .................................................................... $ 619 $ 390 $ 389
Group Insurance .............................................................................. 169 155 70
Total Insurance Division .................................................................... 788 545 459
Investment Management ........................................................................ 162 139 141
Financial Advisory ............................................................................ (111) (43) (140)
Retirement ................................................................................... 192 141 110
Other Asset Management ....................................................................... 46 45 55
Total Investment Division ................................................................... 289 282 166
International Insurance ......................................................................... 819 757 611
International Investments ....................................................................... (17) (6) (44)
Total International Insurance and Investments Division ........................................... 802 751 567
Corporate and Other ........................................................................... 93 160 (25)
Adjusted Operating Income before income taxes for Financial Services Businesses ......................... 1,972 1,738 1,167
Items excluded from Adjusted Operating Income:
Realized investment losses, net, and related adjustments ............................................... (156) (872) (165)
Charges related to realized gains(losses), net ........................................................ (43) 6 26
Sales practices remedies and costs ................................................................ — (20) —
Divested businesses ........................................................................... (185) (15) 58
Demutualization costs and expenses ............................................................... — — (588)
Income from continuing operations before income taxes for Financial Services Businesses ....................... 1,588 837 498
Income (loss) from continuing operations before income taxes for Closed Block Business ........................ 370 (757) (619)
Income (loss) from continuing operations before income taxes .............................................. $1,958 $ 80 $ (121)
Prudential Financial 2003 Annual Report 163