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Prudential Financial 2001 Annual Report - page 151 / 172





151 / 172

Prudential Financial, Inc.

Notes to Consolidated Financial Statements


Segment Information (continued)

investment gains, net of losses and related charges; sales practices remedies and costs; demutualization costs and expenses; and the gains, losses and contribution to income/loss of divested businesses which have been sold but do not qualify for “discontinued operations” treatment under GAAP. Businesses that the Company has placed in wind- down status but are not divested remain in “adjusted operating income.” The Company’s discontinued healthcare operations are excluded from “Income (loss) from continuing operations before income taxes.”

The excluded items are important to an understanding of overall results of operations. “Adjusted operating income” is not a substitute for net income determined in accordance with 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 Company’s businesses.

The Company excludes realized investment gains, net of losses and related charges, from “adjusted operating income” because the timing of transactions resulting in recognition of gains or losses is largely at the Company’s discretion and the amount of these gains or losses is heavily influenced by and fluctuates in part according to the availability of market opportunities. Including the fluctuating effects of these transactions could distort trends in the underlying profitability of the businesses. The Company excludes sales practices remedies and costs because they relate to a substantial and identifiable non-recurring event. The Company excludes demutualization costs and expenses as they are directly related to demutualization and could distort the trends associated with our business operations. The Company excludes the gains and losses and contribution to income/ loss of divested businesses and related runoff operations because, as a result of the decision to dispose of these businesses, these results are not relevant to the profitability of the Company’s ongoing operations and could distort the trends associated with ongoing businesses.

The related charges offset against net realized investment gains and losses relates to policyholder dividends, amortization of deferred policy acquisition costs, and reserves for future policy benefits. Net realized investment gains is one of the elements that the Company considers in establishing the dividend scale, and the related policyholder dividend charge represents the estimated portion of the Company’s expense charge for policyholder dividends that is attributed to net realized investment gains that the Company considers in determining the dividend scale. Deferred policy acquisition costs for certain investment-type products are amortized based on estimated gross profits, which include net realized investment gains and losses on the underlying invested assets, and the related charge for amortization of deferred policy acquisition costs represents the portion of this amortization associated with net realized investment gains and losses. 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.

“Adjusted operating income” for each segment includes earnings on attributed equity established at a level which management considers necessary to support the segment’s risks.

Operating expenses specifically identifiable to a particular segment are allocated to that segment as incurred. Operating expenses not identifiable to a specific segment but which are incurred in connection with the generation of segment revenues are generally allocated based upon the segment’s historical percentage of general and administrative expenses.

The Investment Management and Advisory Services segment revenues include intersegment revenues of $418 million, $404 million and $381 million for the years ended 2001, 2000 and 1999, respectively, which primarily consist of asset-based management fees from the businesses of the U.S. Consumer and Employee Benefits divisions and the Closed Block Business. Management has determined the intersegment fees for the various asset classes with reference to market rates. These fees are eliminated in consolidation.

The financial results of the International Insurance segment reflect the impact of intercompany currency hedging arrangements whereby currency fluctuation exposure within annual reporting periods is assumed within Corporate and Other. As discussed in Note 19, the Company executes forward currency transactions with third parties to

Prudential Financial 2001 Annual Report


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