Prudential 2003 Annual Report Download - page 59

Discontinued Operations
Included within net income are the results of businesses which are reflected as discontinued operations under
GAAP. A summary of the results of discontinued operations by business is as follows for the periods indicated:
Year ended December 31,
2003 2002 2001
(in millions)
Property and casualty operations ................................................................... $ (28) $(32) $(21)
International securities operations .................................................................. (76) (69) (40)
Web-based workplace distribution of voluntary benefits ................................................ — (58) (20)
Healthcare operations ........................................................................... 11 71 25
Other ........................................................................................ (13) 3 (25)
Loss from discontinued operations before income taxes ................................................. (106) (85) (81)
Income tax benefit ............................................................................ (62) (10) (16)
Loss from discontinued operations, net of taxes ....................................................... $ (44) $(75) $(65)
Realized Investment Gains and General Account Investments
Realized Investment Gains
Realized investment gains, net of losses, primarily include gains and losses resulting from sales and impairments
of fixed income and equity investments, prepayment premiums we receive on private bond issues, and gains and losses
in connection with derivative contracts that do not qualify for hedge accounting treatment. We perform impairment
reviews on an ongoing basis and record an impairment charge when we determine that a decline in value is other than
temporary. The level of impairments generally reflects economic conditions and is expected to increase when
economic conditions worsen and to decrease when economic conditions improve. We may realize additional
credit-related losses through sales of investments pursuant to our credit risk and portfolio management objectives. We
require most issuers of private fixed maturity securities to pay us make-whole yield maintenance payments when they
prepay the securities. Prepayments are driven by factors specific to the activities of our borrowers as much as by the
interest rate environment.
We use derivative contracts to hedge the risk that changes in interest rates or foreign currency exchange rates will
affect the market value of certain investments. We also use derivative contracts to mitigate the risk that unfavorable
changes in currency exchange rates will reduce U.S. dollar equivalent earnings generated by certain of our non-U.S.
businesses. Derivative contracts also include forward purchases and sales of to-be-announced mortgage-backed
securities primarily related to our mortgage dollar roll program. The vast majority of these derivative contracts do not
qualify for hedge accounting, and consequently we recognize the changes in fair value of such contracts from period to
period in current earnings, although we do not necessarily account for the hedged assets or liabilities the same way.
Accordingly, realized investment gains and losses from our hedging activities contribute significantly to fluctuations in
net income.
The comparisons below discuss realized investment gains, net of losses and related charges and adjustments.
Related charges, which are not applicable to the Closed Block Business, pertain to policyholder dividends, deferred
policy acquisition costs and reserves for future policy benefits. A percentage of net realized investment gains on
specified Gibraltar Life assets is required to be paid as dividends to Gibraltar Life policyholders. We amortize deferred
policy acquisition costs for interest sensitive products based on estimated gross profits, which include net realized
investment gains on the underlying invested assets, and the related charge for amortization of deferred policy
acquisition costs represents the amortization related to net realized investment gains. We adjust the reserves for some
of our policies when cash flows related to these policies are affected by net realized investment gains, and the related
charge for reserves for future policy benefits represents that adjustment. The changes in these related charges from one
period to another may be disproportionate to the changes in realized investment gains, net of losses, evaluated over
several periods.
Prudential Financial 2003 Annual Report 57