Prudential 2007 Annual Report Download - page 27

Businesses by adjusting each segment’s “income from continuing operations before income taxes and equity in earnings of operating joint
ventures” for the following items:
• realized investment gains (losses), net, except as indicated below, and related charges and adjustments;
• net investment gains and losses on trading account assets supporting insurance liabilities and changes in experience-rated
contractholder liabilities due to asset value changes;
• the contribution to income/loss of divested businesses that have been or will be sold or exited that do not qualify for “discontinued
operations” accounting treatment under U.S. GAAP; and
• equity in earnings of operating joint ventures.
The items above are important to an understanding of our overall results of operations. Adjusted operating income is not a substitute
for income determined in accordance with U.S. GAAP, and our definition of adjusted operating income may differ from that used by other
companies. However, we believe that the presentation of adjusted operating income as we measure it for management purposes enhances
understanding of our results of operations by highlighting the results from ongoing operations and the underlying profitability of the
Financial Services Businesses. Adjusted operating income excludes “Realized investment gains (losses), net,” except as indicated below,
and related charges and adjustments. A significant element of realized investment gains and losses are impairments and credit-related and
interest rate-related gains and losses. Impairments and losses from sales of credit-impaired securities, the timing of which depends largely
on market credit cycles, can vary considerably across periods. The timing of other sales that would result in gains or losses, such as interest
rate-related gains or losses, is largely subject to our discretion and influenced by market opportunities, as well as our tax profile. Trends in
the underlying profitability of our businesses can be more clearly identified without the fluctuating effects of these transactions. Similarly,
adjusted operating income excludes investment gains and losses on trading account assets supporting insurance liabilities and changes in
experience-rated contractholder liabilities due to asset value changes, because these recorded changes in asset and liability values will
ultimately accrue to the contractholders. Adjusted operating income excludes the results of divested businesses because they are not
relevant to understanding our ongoing operating results. The contributions to income/loss of wind-down businesses that we have not
divested remain in adjusted operating income. See Note 20 to the Consolidated Financial Statements for further information on the
presentation of segment results.
As noted above, certain “Realized investment gains (losses), net,” are included in adjusted operating income. We include in adjusted
operating income the portion of our realized investment gains and losses on derivatives that arise from the termination of contracts used to
hedge our foreign currency earnings in the same period that the expected earnings emerge. Similarly, we include in adjusted operating
income the portion of our realized investment gains and losses on derivatives that represent current period yield adjustments. The realized
investment gains or losses from products that are free standing derivatives, or contain embedded derivatives, along with the realized
investment gains or losses from associated derivative portfolios that are part of an economic hedging program related to the risk of these
products, are included in adjusted operating income. Adjusted operating income also includes for certain embedded derivatives, as current
period yield adjustments, a portion of the cumulative realized investment gains above the original fair value, on an amortized basis over the
remaining life of the related security, or cumulative realized investment losses, and recoveries of such losses, in the period incurred.
Adjusted operating income also includes those realized investment gains and losses that represent profit or loss of certain of our businesses
which primarily originate investments for sale or syndication to unrelated investors.
Results of Operations for Financial Services Businesses by Segment
Insurance Division
Individual Life
Operating Results
The following table sets forth the Individual Life segment’s operating results for the periods indicated.
Year ended
December 31,
2007 2006 2005
(in millions)
Operating results:
Revenues .......................................................................................... $2,594 $2,216 $2,262
Benefits and expenses ................................................................................ 1,980 1,672 1,764
Adjusted operating income ............................................................................ 614 544 498
Realized investment gains (losses), net, and related adjustments(1) ............................................ (66) (62) 29
Income from continuing operations before income taxes and equity in earnings
of operating joint ventures .......................................................................... $ 548 $ 482 $ 527
(1) Revenues exclude Realized investment gains (losses), net, and related adjustments. See “—Realized Investment Gains and General Account
Investments—Realized Investment Gains.”
Prudential Financial 2007 Annual Report 25