Prudential 2015 Annual Report Download - page 14

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following analysis of our consolidated financial condition and results of operations in conjunction with the
“Forward-Looking Statements,” “Selected Financial Data” and the “Consolidated Financial Statements” included in this Annual Report,
as well as the “Risk Factors” included in Prudential Financial’s 2015 Annual Report on Form 10-K.
Overview
From December 18, 2001, the date of demutualization, through December 31, 2014, we organized our principal operations into the
Financial Services Businesses and the Closed Block Business, and had two classes of common stock outstanding. The Common Stock,
which is publicly-traded (NYSE:PRU), reflected the performance of the Financial Services Businesses, while the Class B Stock, which was
issued through a private placement and did not trade on any exchange, reflected the performance of the Closed Block Business.
On January 2, 2015, Prudential Financial repurchased and canceled all of the shares of the Class B Stock (the “Class B Repurchase”).
As a result, earnings per share of Common Stock for the year ended December 31, 2015 reflect the consolidated earnings of Prudential
Financial. In addition, we no longer organize our principal operations into the Financial Services Businesses and the Closed Block
Business. Our principal operations are comprised of four divisions, which together encompass seven segments, and our Corporate and
Other operations. The U.S. Retirement Solutions and Investment Management division consists of our Individual Annuities, Retirement
and Asset Management segments. The U.S. Individual Life and Group Insurance division consists of our Individual Life and Group
Insurance segments. The International Insurance division consists of our International Insurance segment. The Closed Block division
consists of our Closed Block segment, which includes certain in force participating insurance and annuity products and corresponding
assets that are used for the payment of benefits and policyholders’ dividends on these products (the “Closed Block”), as well as certain
related assets and liabilities. The Closed Block segment is accounted for as a divested business that is reported separately from the divested
businesses that are included in Corporate and Other operations. Our Corporate and Other operations include corporate items and initiatives
that are not allocated to business segments and businesses that have been or will be divested. See Note 12 to the Consolidated Financial
Statements for additional information on the Closed Block.
As a result of the Class B Repurchase and resulting elimination of the separation of the Financial Services Businesses and the Closed
Block Business, in this MD&A we refer to the divisions and segments of the Company that formerly comprised the Financial Services
Businesses as “PFI excluding the Closed Block division” and we refer to the operations that were formerly included in the Closed Block
Business as the “Closed Block division,” except as otherwise noted. Closed Block Business results were associated with the Company’s
Class B Stock for periods prior to January 1, 2015.
Revenues and Expenses
We earn our revenues principally from insurance premiums; mortality, expense, asset management and administrative fees from
insurance and investment products; and investment of general account and other funds. We earn premiums primarily from the sale of
certain individual life insurance, group life and disability insurance, retirement and annuity contracts. We earn mortality, expense, and asset
management fees primarily from the sale and servicing of separate account products including variable life insurance and variable
annuities, and from the sale and servicing of other products including universal life insurance. We also earn asset management and
administrative fees from the distribution, servicing and management of mutual funds, retirement products and other asset management
products and services. Our operating expenses principally consist of insurance benefits provided and reserves established for anticipated
future insurance benefits, general business expenses, dividends to policyholders, commissions and other costs of selling and servicing our
products and interest credited on general account liabilities.
Profitability
Our profitability depends principally on our ability to price our insurance and annuity products at a level that enables us to earn a
margin over the costs associated with providing benefits and administering those products. Profitability also depends on, among other
items, our actuarial and policyholder behavior experience on insurance and annuity products and our ability to attract and retain customer
assets, generate and maintain favorable investment results, effectively deploy capital and utilize our tax capacity, and manage expenses.
Historically, the participating products included in the Closed Block have yielded lower returns on capital invested than many of our
other businesses. As we have ceased offering domestic participating products, we expect that the proportion of the traditional participating
products in our in force business will gradually diminish as these older policies age, and we grow other businesses. However, the relatively
lower returns to us on this existing block of business will continue to affect our consolidated results of operations for many years.
See “Risk Factors” included in Prudential Financial’s 2015 Annual Report on Form 10-K for a discussion of risks that have affected
and may affect in the future our business, results of operations or financial condition, or cause our actual results to differ materially from
those expected or those expressed in any forward-looking statements made by or on behalf of the Company.
Executive Summary
Industry Trends
Our U.S. and international businesses are impacted by financial markets, economic conditions, regulatory oversight, and a variety of
trends that affect the industries where we compete.
12 Prudential Financial, Inc. 2015 Annual Report