Prudential 2005 Annual Report Download - page 45

regarding adjusted operating income, which is our measure of performance of the segments of our Financial Services Businesses, see Note
20 to the Consolidated Financial Statements.
Year ended December 31,
2005 2004 2003
(in millions)
Realized investment gains (losses), net:
Financial Services Businesses ............................................................................ $ 739 $ 83 $ (46)
Closed Block Business .................................................................................. 636 715 426
Consolidated realized investment gains (losses), net ........................................................... $1,375 $ 798 $ 380
Financial Services Businesses:
Realized investment gains (losses), net
Fixed maturity investments .......................................................................... $ (18) $ 114 $ (93)
Equity securities ................................................................................... 194 122 39
Derivative instruments .............................................................................. 388 (313) (143)
Other ........................................................................................... 175 160 151
Total ................................................................................................ 739 83 (46)
Related adjustments ................................................................................ (67) (1) (110)
Realized investment gains (losses), net, and related adjustments ................................................. $ 672 $ 82 $(156)
Related charges ....................................................................................... $ (108) $ (58) $ (43)
Closed Block Business:
Realized investment gains (losses), net
Fixed maturity investments .......................................................................... $ 335 $304 $331
Equity securities ................................................................................... 250 317 (33)
Derivative instruments .............................................................................. 40 45 64
Other ........................................................................................... 11 49 64
Total ................................................................................................ $ 636 $715 $426
2005 to 2004 Annual Comparison
Financial Services Businesses
The Financial Services Businesses’ net realized investment gains in 2005 were $739 million, compared to net realized investment
gains of $83 million in 2004. Net realized losses on fixed maturity securities of $18 million in 2005 included fixed maturity impairments of
$69 million and credit-related losses of $31 million. Net realized losses on sales and maturities of fixed maturity securities of $47 million in
2005 included gross losses of $349 million, which were primarily interest rate-related. Partially offsetting these items were private bond
prepayment premiums of $96 million and a $33 million recovery of impaired principal on a previously defaulted bond. Net realized gains
on fixed maturity securities in 2004 were $114 million and relate primarily to net gains on sales and maturities of fixed maturity securities
of $171 million, which included gross realized losses of $102 million, and private bond prepayment premiums of $72 million. Partially
offsetting these items were fixed maturity impairments of $122 million and credit-related losses of $7 million. For further information on
these impairments, see the discussion below. We realized net gains on equity securities of $194 million in 2005, compared to net realized
gains of $122 million in 2004. The net realized gains on equity securities in 2005 and 2004 were primarily the result of sales in our
Gibraltar Life operations, in our proprietary investing business and in our domestic private equity portfolio. Realized gains in 2005
included net derivative gains of $388 million, compared to net derivative losses of $313 million in 2004. The gains in 2005 were primarily
the result of positive mark-to-market adjustments of $290 million on currency forward contracts used to hedge the future income of
non-U.S. businesses, mainly driven by the strengthening of the U.S. dollar against the Japanese Yen. Derivative losses in 2004 were
primarily the result of negative mark-to-market adjustments of $160 million on currency forward contracts used to hedge the future of
income of non-US business driven by the weakening of the U.S. dollar. Derivative losses in 2004 also included losses of $75 million on
hedges of investments in foreign businesses and losses of $50 million on hedges of foreign denominated investments, both driven by the
weakening of the U.S. dollar. Realized investment gains in 2005 also included a $110 million net gain for a Gibraltar Life settlement with
Dai Ichi Fire and Marine Insurance Company related to certain capital investments made by Gibraltar Life’s predecessor, Kyoei Life
Insurance Company Ltd., in Dai Ichi. This amount was partially offset in our Statement of Operations by a $68 million increase in
“Dividends to policyholders” in accordance with the reorganization plan entered into at the time of the Company’s acquisition of Gibraltar
Life, which is reflected as a related charge. Both of these items are excluded from adjusted operating income. The net realized investment
gains in 2005 and 2004 also included gains of $39 million and $63 million, respectively, related to our commercial mortgage operations. In
addition, realized investment gains in 2004 included a gain of $47 million related to the sale of a real estate investment.
During 2005, we recorded total other than temporary impairments of $82 million attributable to the Financial Services Businesses,
compared to total other than temporary impairments of $146 million attributable to the Financial Services Businesses in 2004. The
impairments in 2005 consisted of $69 million relating to fixed maturities, $8 million relating to equity securities and $5 million relating to
other invested assets which include commercial loans, real estate investments and investments in joint ventures and partnerships. The
impairments in 2004 consisted of $122 million relating to fixed maturities, $19 million relating to equity securities and $5 million relating
to other invested assets as defined above.
Prudential Financial 2005 Annual Report 43