Prudential 2007 Annual Report Download - page 53

The level of other-than-temporary 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 and interest rate related losses
through sales of investments pursuant to our credit risk and portfolio management objectives. Other-than-temporary impairments, interest
rate related losses and credit losses (other than those related to certain of our businesses which primarily originate investments for sale or
syndication to unrelated investors) are excluded from adjusted operating income. In periods subsequent to the recognition of an other-than-
temporary impairment, the impaired security is accounted for as if it had been purchased on the measurement date of the impairment.
Accordingly, the discount (or reduced premium) based on the new cost basis is accreted into net investment income, and included in
adjusted operating income in future periods based upon the amount and timing of expected future cash flows of the security, if the
recoverable value of the investment based upon those cash flows is greater than the carrying value of the investment after the impairment.
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 well as the interest rate environment.
We use interest and currency swaps and other derivatives to manage interest and currency exchange rate exposures arising from
mismatches between assets and liabilities, including duration mismatches. We 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. We also
use equity-based derivatives to hedge the equity risks embedded in some of our annuity products. Derivative contracts also include forward
purchases and sales of to-be-announced mortgage-backed securities primarily related to our mortgage dollar roll program. Many 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 related assets or liabilities the same way. Accordingly,
realized investment gains and losses from our derivative activities can contribute significantly to fluctuations in net income.
Adjusted operating income excludes “Realized investment gains (losses), net,” (other than those representing profit or loss of certain
of our businesses which primarily originate investments for sale or syndication to unrelated investors, and those associated with terminating
hedges of foreign currency earnings, current period yield adjustments, or product derivatives and the effect of any related economic
hedging program) and related charges and adjustments.
Prudential Financial 2007 Annual Report 51