Prudential 2005 Annual Report Download - page 152

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
20. SEGMENT INFORMATION (continued)
• the contribution to income/loss of divested businesses that have been or will be sold or exited but that did not qualify for
“discontinued operations” accounting treatment under U.S. GAAP.
The excluded 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 the Financial Services Businesses.
Realized investment gains (losses), net, and related charges and adjustments. Adjusted operating income excludes realized
investment gains (losses), net, except as indicated below. A significant element of realized losses is impairments and losses from
sales of credit-impaired securities, the timing of which depends largely on market credit cycles and can vary considerably across
periods. The timing of other sales that would result in gains or losses is largely subject to the Company’s discretion and influenced
by market opportunities. Trends in the underlying profitability of the Company’s businesses can be more clearly identified without
the fluctuating effects of these transactions.
Charges that relate to realized investment gains (losses), net, are also excluded from adjusted operating income. The related
charges, which are offset against net realized investment gains and losses in the schedules below, relate to policyholder dividends;
amortization of deferred policy acquisition costs, VOBA and unearned revenue reserves; interest credited to policyholders’ account
balances; reserves for future policy benefits; payments associated with the market value adjustment features related to certain of the
annuity products we sell; and minority interest in consolidated operating subsidiaries. The related charges associated with
policyholder dividends include a percentage of net realized investment gains on specified Gibraltar Life assets that is required to be
paid as dividends to Gibraltar Life policyholders. Deferred policy acquisition costs, VOBA and unearned revenue reserves for
certain products are amortized based on estimated gross profits, which include net realized investment gains and losses on the
underlying invested assets. The related charge for these items represent the portion of this amortization associated with net realized
investment gains and losses. The related charges for interest credited to policyholders’ account balances relate to certain group life
policies that pass back certain realized investment gains and losses to the policyholder. The reserves for certain policies are adjusted
when cash flows related to these policies are affected by net realized investment gains and losses, and the related charge for reserves
for future policy benefits represents that adjustment. Certain of our annuity products contain a market value adjustment feature that
requires us to pay to the contractholder or entitles us to receive from the contractholder, upon surrender, a market value adjustment
based on the crediting rates on the contract surrendered compared to crediting rates on newly issued contracts or based on an index
rate at the time of purchase compared to an index rate at time of surrender, as applicable. These payments mitigate the net realized
investment gains or losses incurred upon the disposition of the underlying invested assets. The related charge represents the
payments or receipts associated with these market value adjustment features. Minority interest expense is recorded for the earnings
of consolidated subsidiaries owed to minority investors. The related charge for minority interest in consolidated operating
subsidiaries represents the portion of these earnings associated with net realized investment gains and losses.
Adjustments to “Realized investment gains (losses), net,” for purposes of calculating adjusted operating income, include the
following:
Gains and losses pertaining to derivative contracts that do not qualify for hedge accounting treatment, other than derivatives
used in the Company’s capacity as a broker or dealer, are included in “Realized investment gains (losses), net.” This includes
mark-to-market adjustments of open contracts as well as periodic settlements. As discussed further below, adjusted operating
income includes a portion of realized gains and losses pertaining to certain derivative contracts.
Adjusted operating income of the International Insurance and International Investments segments reflect the impact of an
intercompany arrangement with Corporate and Other operations pursuant to which the segments’ results of operations 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 segments’ U.S. dollar equivalent earnings. Pursuant to this program, the Company’s Corporate and Other operations
execute forward sale contracts with third parties in 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 non-U.S. earnings are expected to be generated.
These contracts do not qualify for hedge accounting under U.S. GAAP and, as noted above, all resulting profits or losses from such
contracts are included in “Realized investment gains (losses), net.” When the contracts are terminated in the same period that the
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