Prudential 2003 Annual Report Download - page 60

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A portion of realized gains, pertaining to certain derivative results, is included in adjusted operating income.
Pursuant to a currency hedging program, we execute forward sale contracts in the hedged currencies in exchange for
U.S. dollars at a specified exchange rate. The maturities of these contracts correspond with future periods in which
non-U.S. earnings are expected to be generated. These contracts do not qualify for hedge accounting under GAAP. All
resulting profits or losses from such contracts, including mark-to-market adjustments of open contracts, are included 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 is included in adjusted operating income. In addition, we
utilize 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.” Periodic settlements pertaining to such contracts are included in adjusted
operating income.
The following tables set forth realized investment gains (losses), net, by investment type for the Financial Services
Businesses and Closed Block Business, as well as related charges and adjustments associated with the Financial
Services Businesses, for the years ended December 31, 2003, 2002, and 2001, respectively. For a discussion of our
investment portfolio and related results, including overall income yield and investment income, as well our policies
regarding other than temporary declines in investment value, see “—General Account Investments” below.
Year ended December 31,
2003 2002 2001
Realized investment gains (losses), net:
Financial Services Businesses ...................................................................... $(156) $ (778) $(131)
Closed Block Business ........................................................................... 426 (587) (543)
Consolidated realized investment gains (losses), net ..................................................... $270 $(1,365) $(674)
Year ended December 31,
2003 2002 2001
Financial Services Businesses:
Realized investment gains (losses), net ...............................................................
Fixed maturity investments .................................................................... $ (93) $(508) $(345)
Equity securities ............................................................................. 23 (149) (59)
Derivative instruments ........................................................................ (231) (226) 236
Other ..................................................................................... 145 105 37
Total .......................................................................................... (156) (778) (131)
Related adjustment for derivative (gains) losses included in adjusted operating income ..................... — (94) (34)
Realized investment gains (losses), net, excluded from adjusted operating income ............................. $(156) $(872) $(165)
Related charges ................................................................................. $ (43) $ 6 $ 26
Year ended December 31,
2003 2002 2001
Closed Block Business:
Realized investment gains (losses), net
Fixed maturity investments .................................................................... $331 $(212) $(372)
Equity securities ............................................................................. (33) (186) (177)
Derivative instruments ........................................................................ 64 (174) (10)
Other ..................................................................................... 64 (15) 16
Total .......................................................................................... $426 $(587) $(543)
2003 to 2002 Annual Comparison. The Financial Services Businesses’ net realized investment losses in 2003
were $156 million compared to $778 million in 2002. Realized losses in 2003 included fixed maturity impairments of
$266 million and credit-related losses of $22 million compared with $385 million and $470 million for 2002,
Growing and Protecting Your Wealth58