Prudential 2005 Annual Report Download

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SHAREHOLDERS
CUSTOMERS
EMPLOYEES
COMMUNITIES
focus on
2005
ANNUAL
REPORT

Table of contents

  • Page 1
    SHAREHOLDERS focus on CUSTOMERS EMPLOYEES COMMUNITIES 2005 ANNUAL REPORT

  • Page 2
    ... life insurance, mutual funds, annuities, pension and retirement-related services and administration, asset management, banking and trust services, real estate brokerage and relocation services, and, through a joint venture, retail securities brokerage services. Today, we are one of the largest...

  • Page 3
    ... value to shareholders As a result of our success in delivering on the four ROE levers, I believe Prudential is in its strongest financial position since we became a public company. In 2005, on a generally accepted accounting principles (GAAP) basis, our Financial Services Businesses reported...

  • Page 4
    ... an average annual total return to shareholders (including dividend reinvestment) of more than 24 percent from 2002 to 2005, Prudential has proved to be a very strong investment for shareholders since we became a public company. Our acquisition of American Skandia in 2003 immediately propelled us to...

  • Page 5
    ...annualized new business premiums (on a constant currency basis) and number of policies in force all grew annually at a double-digit rate. In addition, strong policy persistency rates in our Life Planner business point to the caliber of our field force and the quality sales they make. Gibraltar Life...

  • Page 6
    ... for Women" list, as well as Working Mother magazine's "Top 10 Companies for Working Mothers." We believe it is our business to invest in a better quality of life in the communities where we live and work. In 2005, The Prudential Foundation, the company's nonprofit grant-making unit, directed grants...

  • Page 7
    ... are excited about what lies ahead. I thank you, our shareholders, for your continued confidence and support, and I look forward to sharing our future progress with you. ARTHUR F. RYAN Chairman and Chief Executive Officer our competitors can approach. Prudential Financial 2005 Annual Report 5

  • Page 8
    ... acquisition and cumulative effect of accounting change Net income: Financial Services Businesses Closed Block Business Consolidated net income FINANCIAL POSITION Invested assets Total assets Attributed equity: Financial Services Businesses Closed Block Business Total equity Assets under management...

  • Page 9
    ... on trading account assets suppor ting insurance liabilities; change in experience-rated contractholder liabilities due to asset value changes; results of divested b u s i nesses and discontinued operations; cumulative effect of accounting change; extraordinary gain on acquisition; and the related...

  • Page 10
    ... by Prudential Investment Management Services, LLC, American Skandia Marketing, Incorporated, and Pruco Securities, LLC. (all members SIPC). Insurance issued by The Prudential Insurance Company of America and American Skandia Life Assurance Corporation. All are Prudential Financial companies, and...

  • Page 11
    Financial Section Prudential Financial 2005 Annual Report 9

  • Page 12
    ... Services Businesses and the Closed Block Business. The Financial Services Businesses refer to the businesses in our three operating divisions and our Corporate and Other operations. The Insurance division consists of our Individual Life and Annuities and Group Insurance segments. The Investment...

  • Page 13
    ...our New Jersey property and casualty insurance companies to Palisades Group. Results for 2003 include a pre-tax loss of $491 million related to the disposition of these businesses. In the fourth quarter of 2000, we terminated the capital markets activities of Prudential Securities. This business had...

  • Page 14
    ... Data: Total investments excluding policy loans ...Separate account assets ...Total assets ...Future policy benefits and policyholders' account balances ...Separate account liabilities ...Short-term debt ...Long-term debt ...Total liabilities ...Guaranteed beneficial interest in Trust holding solely...

  • Page 15
    ... we need to hold outside the Closed Block to meet capital requirements related to the Closed Block policies. No policies sold after demutualization will be added to the Closed Block, and its in force business is expected to ultimately decline as we pay policyholder benefits in full. We also expect...

  • Page 16
    ... products and services, including life insurance, annuities, pension and retirement-related services and administration, asset management including mutual funds, banking and trust services, real estate brokerage and relocation services, and, through a joint venture, securities brokerage. We offer...

  • Page 17
    ... in the group life insurance business, as well a lower costs related to legal and regulatory matters. • International Investments segment pre-tax adjusted operating income of $110 million in 2005, reflecting improved results of Prudential Investment & Securities Co., Ltd., which we acquired in the...

  • Page 18
    ... Closed Block Business and the non-participating whole life, term life, and life contingent structured settlement and group annuity products of our Financial Services Businesses. The future policy benefit reserves for the traditional participating life insurance products of our Closed Block Business...

  • Page 19
    ... products of our Closed Block Business is amortized over the expected lives of those contracts in proportion to gross margins. Gross margins consider premiums, investment returns, benefit claims, costs for policy administration, changes in reserves, and dividends to policyholders. We evaluate our...

  • Page 20
    ... on assets held in separate account investment options, and the shorter average life of the contracts. This rate of return influences the fees we earn, costs we incur associated with minimum death benefit and other contractual guarantees specific to our variable annuity contracts, as well as other...

  • Page 21
    ... on acquisition and cumulative effect of accounting change in 2005 of $45 million. The amount of income taxes paid by the Company is subject to ongoing audits in various jurisdictions. We reserve for our best estimate of potential payments/settlements to be made to the Internal Revenue Service and...

  • Page 22
    ... employee stock options under the fair value based accounting method, net income of the Financial Services Businesses for the year ended December 31, 2005, would have been reduced by $10 million or, $0.02 per share of Common Stock on both a basic and diluted basis. The net income of the Closed Block...

  • Page 23
    ... Services Businesses by segment: Individual Life and Annuities ...Group Insurance ...Total Insurance Division ...Asset Management ...Financial Advisory ...Retirement ...Total Investment Division ...International Insurance ...International Investments ...Total International Insurance and Investments...

  • Page 24
    ... policy acquisition costs and value of business acquired. For a discussion of these items see "-Realized Investment Gains and General Account Investments-Realized Investment Gains." On May 1, 2003, we acquired Skandia U.S. Inc., which included American Skandia, Inc., for a total purchase price...

  • Page 25
    ... average market value of variable annuity customer accounts and positive net flows of our variable annuities reflecting the introduction of new product features late in the first quarter of 2005, including an increase in account values with living benefit options. Net investment income increased $28...

  • Page 26
    ... costs related to the distribution of property and casualty insurance products discussed above. Amortization of deferred policy acquisition costs increased $79 million from 2003 to 2004, reflecting a lower level of amortization in the prior year due to the strong equity market performance and...

  • Page 27
    ......Life Insurance sales by distribution channel(1): Prudential Agents(2) ...Third party(2) ...Corporate-owned life insurance ...Total ...Variable Annuities(3): Beginning total account value ...Sales ...Surrenders and withdrawals ...Net sales ...Benefit payments ...Net flows ...Change in market value...

  • Page 28
    ... future policy benefit reserves, policyholders' account balances and separate account balances decreased from 2003 to 2004, reflecting a lower level of surrenders in 2004 associated with increases in variable life insurance account values due to market performance. Group Insurance Operating Results...

  • Page 29
    ...274 billion in 2004, primarily reflecting growth in business in force resulting from new sales and continued strong persistency, which improved slightly from 93% in 2003 to 94% in 2004. Group disability premiums, which include long-term care products, increased by $46 million, from $630 million in...

  • Page 30
    ... contract and from excess premiums on group universal life insurance that build cash value but do not purchase face amounts, and include premiums from the takeover of claim liabilities. (2) Includes long-term care products. 2005 to 2004 Annual Comparison. Total new annualized premiums increased...

  • Page 31
    ...million in 2003 to $266 million in 2004, which includes $31 million from the management of assets associated with the retirement business acquired from CIGNA. Results for 2004 benefited from higher asset-based fees in our investment management and advisory services reflecting market appreciation and...

  • Page 32
    ... CIGNA, an increase in transaction and performance based incentive fees related to real estate assets under management and increased revenues related to program services for certain mutual fund wrap and separately managed platforms of Wachovia Securities. Reduced income from our commercial mortgage...

  • Page 33
    ... due to asset value changes in the pool of investments supporting these experiencerated contracts. For a discussion of these items see "-Trading account assets supporting insurance liabilities." On April 1, 2004, we acquired the retirement business of CIGNA Corporation for cash consideration of...

  • Page 34
    ...million in 2003 to $206 million in 2004, primarily reflecting lower crediting rates on full service general account liabilities and higher asset management and service fees from a larger base of full service customer account values. A benefit in the prior year from investment market value changes in...

  • Page 35
    ... to the increase in lapses related to the acquisition of the CIGNA retirement business, as expected, a transfer from the full service business to our Asset Management segment, and a single large case sale in the third quarter of 2003. Account values in our institutional investment products business...

  • Page 36
    ... asset value changes in the pool of investments supporting these experiencerated contracts. For a discussion of these items see "-Trading Account Assets Supporting Insurance Liabilities." On November 1, 2004, we acquired Aoba Life for a total purchase price of $191 million. Results of Aoba Life for...

  • Page 37
    ... income margins was primarily a result of certain portfolio strategies implemented in 2005, including increased investments in unhedged U.S. dollar denominated securities. 2004 to 2003 Annual Comparison. Adjusted operating income from our international insurance operations, other than Gibraltar Life...

  • Page 38
    ... increase in policyholders' benefits. Sales of single pay business in 2003 consisted primarily of endowment contracts, for which premiums collected from customers are not included in reported revenues. Excluding the effect of single pay contracts, revenue declined due to a reduction in the in force...

  • Page 39
    ... half of 2003. Sales other than single pay contracts increased 6%. Investment Margins and Other Profitability Factors Many of our insurance products sold in international markets provide for the buildup of cash values for the policyholder at contractually fixed guaranteed interest rates. Japanese...

  • Page 40
    ... dividend scale. Our obligations under these settlements relate to both variable life and traditional dividend-paying policies that were issued before our demutualization. A reduction in the 2005 dividend scale resulted in an increase in the obligation for net premiums on traditional dividend-paying...

  • Page 41
    ... of demutualization. The Closed Block Business includes our in force traditional domestic participating life insurance and annuity products and assets that are used for the payment of benefits and policyholder dividends on these policies, as well as other assets and equity and related liabilities...

  • Page 42
    ... investment gains. For a discussion of Closed Block Business realized investment gains (losses), net, see "-Realized Investment Gains and General Account Investments-Realized Investment Gains." Partially offsetting these items, policyholder benefits and net investment income increased. 2004 to 2003...

  • Page 43
    ... Account Investments Realized Investment Gains Realized investment gains and losses are generated from numerous sources, including the sale of fixed maturity securities, equity securities, real estate investments, investments in joint ventures and limited partnerships and other types of investments...

  • Page 44
    ... acquisition costs, valuation of business acquired, or VOBA, and unearned revenue reserves; interest credited to policyholders' account balances; reserves for future policy benefits; payments associated with the market value adjustment features related to certain of the annuity products we sell...

  • Page 45
    ... 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...

  • Page 46
    .... Included in private fixed maturity impairments for 2004 were impairments relating to a U.K. facilities management company and an electronic test equipment distributor. 2004 to 2003 Annual Comparison Financial Services Businesses The Financial Services Businesses' net realized investment gains in...

  • Page 47
    ... investment portfolio in our insurance companies to support our liabilities to customers in our Financial Services Businesses and the Closed Block Business, as well as our other general liabilities. Our general account does not include: (1) assets of our securities brokerage, securities trading...

  • Page 48
    ...investment policies. Our asset/liability management process has permitted us to manage interest-sensitive products successfully through several market cycles. Portfolio Composition Our investment portfolio consists of public and private fixed maturity securities, commercial loans, equity securities...

  • Page 49
    ... as a result of the reinvestment of net investment income and increased investments financed by borrowings. As of December 31, 2005, our general account investment portfolio attributable to the Closed Block Business consisted primarily of $49.5 billion of fixed maturity securities (73% of the total...

  • Page 50
    ... Fixed maturities ...Trading account assets supporting insurance liabilities ...Equity securities ...Commercial loans ...Policy loans ...Short-term investments and cash equivalents ...Other investments ...Gross investment income before investment expenses ...Investment expenses ...Investment income...

  • Page 51
    ...and Risk Management Group and, in the case of our international insurance portfolios, to a profile that reflects local market regulations and our investment competencies in these markets. We seek to employ relative value analysis both in credit selection and in purchasing and selling securities. The...

  • Page 52
    ... the mortgagebacked securities in the Financial Services Businesses were publicly traded agency pass-through securities related to residential mortgage loans. Collateralized mortgage obligations represented the remaining 7% of mortgage-backed securities (and less than 1% of total fixed maturities in...

  • Page 53
    ...the mortgage-backed securities in the Closed Block Business were publicly traded agency pass-through securities related to residential mortgage loans. Collateralized mortgage obligations represented the remaining 17% of mortgage-backed securities (and 1% of total fixed maturities in the Closed Block...

  • Page 54
    ... losses as of December 31, 2004 on securities classified as held to maturity that are not reflected in other comprehensive income. The following table sets forth our public fixed maturity portfolios by NAIC rating attributable to the Closed Block Business as of the dates indicated. (1) NAIC...

  • Page 55
    ... and in return receive a quarterly premium. With single name credit default derivatives, this premium or credit spread generally corresponds to the difference between the yield on the referenced name's public fixed maturity cash instruments and swap rates, at the time the agreement is executed. With...

  • Page 56
    ... through credit derivatives in the Closed Block Business portfolios by NAIC rating of the underlying credits as of the dates indicated. (1) NAIC Designation 1 2 . 3 4 5 6 December 31, 2005 Rating Agency Equivalent Aaa, Aa, A ...Baa ...Subtotal Investment Grade ...Ba ...B...C and lower ...In or...

  • Page 57
    ... all other public watch list assets as closely monitored. For private placements our credit and portfolio management processes help ensure prudent controls over valuation and management. We have separate pricing and authorization processes to establish "checks and balances" for new investments. We...

  • Page 58
    ... Cost Short-term Investments and Cash Equivalents ...Fixed Maturities: U.S. Government ...Foreign Government ...Corporate Securities ...Asset-Backed Securities ...Mortgage Backed ...Total Fixed Maturities ...Equity Securities ...Total trading account assets supporting insurance liabilities ...$ 317...

  • Page 59
    ... our experience in real estate and mortgage lending. Our loan portfolio strategy emphasizes diversification by property type and geographic location. Consumer loans are loans extended by Gibraltar Life to individuals for financing purchases of consumer goods and services and are guaranteed by third...

  • Page 60
    ... location. The following tables set forth the breakdown of the gross carrying values of our commercial loan portfolio by geographic region and property type as of the dates indicated. December 31, 2004 December 31, 2005 Financial Services Closed Block Financial Services Closed Block Businesses...

  • Page 61
    ... value for commercial loans by loan classification as of the dates indicated: December 31, 2005 Financial Services Businesses Performing ...Delinquent, not in foreclosure ...Delinquent, in foreclosure ...Restructured ...Total Commercial Loans ...$15,812 52 - 10 $15,874 December 31, 2004 Closed Block...

  • Page 62
    ... Fair Value $1,605 44 $1,649 The equity securities attributable to the Closed Block Business consist principally of investments in common stock of publicly traded companies. The following table sets forth the composition of our equity securities portfolio attributable to the Closed Block Business...

  • Page 63
    ... Closed Block Financial Services Closed Block Businesses Business Businesses Business (in millions) Joint ventures and limited partnerships: Real estate related ...Non real estate related ...Real estate held through direct ownership ...Separate accounts ...Other ...Total other long-term investments...

  • Page 64
    ...agreement to sell our work-place distribution property and casualty insurance operations, which closed in the first quarter of 2004. The results of operations for these businesses are included in "Loss from discontinued operations" for all periods presented. The results for the Prudential Securities...

  • Page 65
    ...(4) ...Share repurchases ...Demutualization consideration(5) ...Net payments under intercompany loan agreements (6) ...Shareholder dividends ...Purchase of funding agreements from Prudential Insurance, net of maturities(2) ...Total uses ...Net increase in cash and short-term investments ...$ 2,393...

  • Page 66
    ...both the Financial Services Businesses and the Closed Block Business. We manage Prudential Insurance's RBC ratio to a level consistent with our ratings targets. RBC is determined by statutory formulas that consider risks related to the type and quality of the invested assets, insurance-related risks...

  • Page 67
    ... other companies are subject to regulatory limitations on the payment of dividends and other transfers of funds to affiliates. With respect to Prudential Insurance, New Jersey insurance law provides that, except in the case of extraordinary dividends or distributions, all dividends or distributions...

  • Page 68
    ... to a new underwriting process in order to obtain a new insurance policy. Annuity benefits under group annuity contracts are generally not subject to early withdrawal. Liquid Assets Liquid assets include cash, cash equivalents, short-term investments, fixed maturity and public equity securities. As...

  • Page 69
    ... either additional policy values or cash. Gibraltar Life's investment portfolio is structured to provide adequate liquidity for the special dividend. Prudential of Japan, with $15.5 billion and $16.3 billion of general account insurance related liabilities, other than dividends to policyholders, as...

  • Page 70
    ..., Prudential Financial issued $850 million of medium-term notes, Series C. The net proceeds from the sale of the notes were used for general corporate purposes, including a loan to one of our domestic insurance subsidiaries. The individual life business used the loan to replace reliance on 364-day...

  • Page 71
    ... proceeds to purchase an investment grade fixed income investment portfolio as well as to repurchase under Prudential Financial's existing share repurchase authorization shares of its Common Stock. Current capital markets activities for the Company on a consolidated basis principally consist of...

  • Page 72
    ... in "Policyholders' account balances" and not included in the foregoing table) secured by funding agreements issued to the trust by Prudential Insurance and included in our Retirement segment. The funding agreements provide cash flow sufficient for the debt service on the medium-term notes. The...

  • Page 73
    ...but are not limited to, future policy benefits relating to life insurance products, individual disability income claim reserves that are 100% coinsured, and endowments and policyholder account balances relating to deferred/accumulation annuities and universal life products. Significant uncertainties...

  • Page 74
    ...narrow activities that facilitate our transfer of or access to associated assets. Deferred Policy Acquisition Costs We capitalize costs that vary with and are related primarily to the acquisition of new and renewal insurance and annuities contracts. The costs include commissions, costs to issue and...

  • Page 75
    ...management fees calculated by reference to performance could be lower. For variable annuity and variable life insurance products with minimum guaranteed death and other benefits, we also face the risk that declines in the value of underlying investments as a result of changes in prices of securities...

  • Page 76
    ... to increase statutory reserves or adjust portfolio management strategies. Market Risk Related to Interest Rates Our "other than trading" assets that subject us to interest rate risk include primarily fixed maturity securities, commercial loans and policy loans. In the aggregate, the carrying value...

  • Page 77
    ... ...Commercial loans ...Mortgage broker-loan inventory ...Policy loans ...Derivatives: Swaps ...Futures ...Options ...Forwards ...Financial liabilities with interest rate risk: Short-term and long-term debt ...Investment contracts ...Net estimated potential loss ... Hypothetical Change in Fair Value...

  • Page 78
    ...equity portfolio, they represent near term reasonably possible hypothetical changes that illustrate the potential impact of such events. Market Risk Related to Foreign Currency Exchange Rates We are exposed to foreign currency exchange rate risk in our domestic general account investment portfolios...

  • Page 79
    ... and selling exchange-listed contracts for our customers, and as a dealer, by entering into futures and security transactions as a principal. As a broker, we assume counterparty and credit risks that we seek to mitigate by using margin or other credit enhancements and by establishing trading limits...

  • Page 80
    ... or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management's assessment...

  • Page 81
    ...and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts" as of January 1, 2004, and Financial Accounting Standards Board Interpretation No. 46(R), "Consolidation of Variable Interest Entities" as of December 31, 2003. Internal Control Over...

  • Page 82
    ... of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. New York, New York February 28, 2006 80 Prudential Financial 2005 Annual Report

  • Page 83
    ... trading account assets, at fair value ...Equity securities, available for sale, at fair value (cost: 2005-$4,179; 2004-$3,610) ...Commercial loans ...Policy loans ...Securities purchased under agreements to resell ...Other long-term investments ...Short-term investments ...Total investments ...Cash...

  • Page 84
    ...gain on acquisition, net of taxes ...Cumulative effect of accounting change, net of taxes ...Net income per share of Common Stock ...Dividends declared per share of Common Stock ...Closed Block Business Net income (loss) per share of Class B Stock-basic and diluted ...Dividends declared per share of...

  • Page 85
    ...' Stock Stock Capital (Deficit) Treasury Compensation Income (Loss) Equity Balance, December 31, 2002 ...Common Stock acquired ...Stock-based compensation programs ...Adjustments to policy credits issued and cash payments to eligible policyholders ...Dividends declared on Common Stock ...Dividends...

  • Page 86
    ... for sale ...Fixed maturities, held to maturity ...Equity securities, available for sale ...Commercial loans ...Policy loans ...Other long-term investments ...Short-term investments ...Acquisition of subsidiaries, net of cash acquired...Cash of operations contributed to Wachovia Securities Financial...

  • Page 87
    ... is managed separately from the Financial Services Businesses. The Closed Block Business was established on the date of demutualization and includes the Company's in force participating insurance and annuity products and assets that are used for the payment of benefits and policyholder dividends on...

  • Page 88
    ...2003 under the fair value based accounting method of SFAS No. 123 for the years ended December 31, 2005, 2004 and 2003, net income and earnings per share would have been as follows: Year ended December 31, 2005 Financial Services Businesses Net income, as reported ...Add: Total employee stock option...

  • Page 89
    ... for sale" are comprised of common and non-redeemable preferred stock and are carried at fair value. The associated unrealized gains and losses, net of tax and the effect on deferred policy acquisition costs, valuation of business acquired, future policy benefits and policyholders' dividends that...

  • Page 90
    ...sale of loans, which are recognized when the Company relinquishes control over the loans, as well as changes in the allowance for loan losses, are reported in "Realized investment gains (losses), net." Policy loans are carried at unpaid principal balances. Securities repurchase and resale agreements...

  • Page 91
    ... and near-term prospects of the issuer. Realized investment gains (losses) are generated from numerous sources, including the sale of fixed maturity securities, equity securities, real estate investments, investments in joint ventures and limited partnerships and other types of investments, as well...

  • Page 92
    ... fair value and represent segregated funds that are invested for certain policyholders, pension funds and other customers. The assets consist of equity securities, fixed maturities, real estate related investments, real estate mortgage loans and short-term investments. The assets of each account are...

  • Page 93
    ... payable for policies other than the participating policies included in the Closed Block include extraordinary dividends to certain policyholders of Gibraltar Life, a Japanese insurance company acquired in April 2001, and dividends payable in accordance Prudential Financial 2005 Annual Report 91

  • Page 94
    ... ACCOUNTING POLICIES (continued) with certain group insurance policies. The extraordinary dividends payable to the policyholders of Gibraltar Life are based on 70% of net realized investment gains, if any, over the value of real estate and loans included in Gibraltar Life's reorganization plan...

  • Page 95
    ... to manage their exposure to interest rates, foreign exchange rates, indices or prices of securities and commodities and similarly in a dealer or broker capacity through the operation of hedge portfolios in a limited-purpose subsidiary. Realized and unrealized changes in fair value of derivatives...

  • Page 96
    ...Company does not have a corresponding investor purchase commitment for the resulting loan; and 2) the fair value of the future mortgage servicing right ("MSR") related to the resulting loan. However, subsequent changes in fair value on loan commitments for loans that will be held for sale, exclusive...

  • Page 97
    ... guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in SFAS No. 97. The SOP defines an internal replacement as a modification in product benefits, features, rights, or...

  • Page 98
    ... on the Company's consolidated financial position or results of operations. In July 2003, the AcSEC of the AICPA issued SOP 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts." The AcSEC issued this SOP to address the...

  • Page 99
    ... liabilities at accreted value, and the effect of establishing reserves for guaranteed minimum death benefit provisions of the Company's variable annuity and variable life contracts. The Company also recognized a cumulative effect of accounting change related to unrealized investment gains within...

  • Page 100
    ... defined benefit plan contracts. Prior to the acquisition, CIGNA Life assumed from CIGNA all of the insurance liabilities associated with these contracts, totaling $15.9 billion, and received from CIGNA the related investments. PRIAC has established a trust account for the benefit of CIGNA to secure...

  • Page 101
    ...at fair value(1) ...Cash and cash equivalents ...Accrued investment income ...Valuation of business acquired ("VOBA") ...Goodwill ...Reinsurance recoverable(2) ...Deferred tax asset ...Other assets ...Separate account assets ...Total assets acquired ...Future policy benefits-assumed ...Policyholders...

  • Page 102
    ... of the purchase price to assets acquired and liabilities assumed: Total investments at market value ...Cash and cash equivalents ...Valuation of business acquired ("VOBA") ...Other assets at fair value ...Separate account assets ...Total assets acquired ...Policyholders' account balances ...Other...

  • Page 103
    ...subject to certain limitations, require Wachovia to purchase its interests in Wachovia Securities for a price generally equal to the Company's share of the then appraised value of the common equity of the organization, determined as if it were a public company and including a control premium such as...

  • Page 104
    ... result of favorable resolution of certain legal, regulatory and contractual matters. (4) This includes the results of the Company's work-place distribution and specialty automobile property and casualty insurance operations, which the Company sold in 2004 and 2003, respectively. (5) Other includes...

  • Page 105
    ... U.S. government corporations and agencies ...Obligations of U.S. states and their political subdivisions ...Foreign government bonds ...Corporate securities ...Mortgage-backed securities ...Total fixed maturities, available for sale ...Equity securities, available for sale ... Fair Value $ 6,302...

  • Page 106
    ... may have the right to call or prepay obligations. The following table depicts the sources of fixed maturity proceeds and related gross investment gains (losses), as well as losses on impairments of both fixed maturities and equity securities: 2005 Fixed maturities, available for sale: Proceeds from...

  • Page 107
    ... Short-term investments and cash equivalents ...Fixed maturities: U.S. government corporations and agencies and obligations of U.S. states ...Foreign government bonds ...Corporate securities ...Mortgage-backed securities ...Total fixed maturities ...Equity securities ...Total trading account assets...

  • Page 108
    ... related ...Non real estate related ...Total joint ventures and limited partnerships ...Real estate held through direct ownership ...Separate accounts ...Other ...Total other long-term investments ...$ 861 1,068 1,929 1,147 1,426 966 $5,468 $ 829 1,058 1,887 1,435 1,361 1,113 $5,796 106 Prudential...

  • Page 109
    ... ventures and limited partnership interests accounted for under the equity method, including the Company's investment in operating joint ventures, is as follows: At December 31, 2005 2004 (in millions) STATEMENTS OF FINANCIAL POSITION Investments in real estate ...Investments in securities ...Cash...

  • Page 110
    ..., available for sale ...Fixed maturities, held to maturity ...Equity securities, available for sale ...Trading account assets ...Commercial loans ...Policy loans ...Broker-dealer related receivables ...Short-term investments and cash equivalents ...Other investment income ...Gross investment income...

  • Page 111
    ... on deferred policy acquisition costs and valuation of business acquired ...Impact of net unrealized investment (gains) losses on future policy benefits ...Impact of net unrealized investment (gains) losses on policyholders' dividends ...Cumulative effect of accounting change ...Balance, December...

  • Page 112
    ... Unrealized Fair Value Losses Fixed maturities(1) U.S. Treasury securities and obligations of U.S. government corporations and agencies ...Obligations of U.S. states and their political subdivisions ...Foreign government bonds ...Corporate securities ...Mortgage-backed securities ...Total ... Total...

  • Page 113
    ...$90 million at December 31, 2005 and 2004, respectively. In accordance with its policy described in Note 2, the Company concluded that an adjustment for other than temporary impairments for these securities was not warranted at December 31, 2005 or 2004. Prudential Financial 2005 Annual Report 111

  • Page 114
    ... VIEs ... In addition, the Company created a trust that is a VIE, to facilitate Prudential Insurance's Funding Agreement Notes Issuance Program ("FANIP"). The trust issues medium-term notes secured by funding agreements issued to the trust by Prudential Insurance with the proceeds of such notes...

  • Page 115
    ... investment activity. The Company accounts for these investments as available for sale fixed maturities containing embedded derivatives that are marked to market through "Realized investment gains (losses), net," based upon the change in value of the underlying portfolio. The Company's variable...

  • Page 116
    ...from CIGNA and the acquired American Skandia, Aoba Life and Gibraltar Life businesses, respectively. Certain contracts issued by American Skandia include a market value adjustment ("MVA") feature that requires the Company to pay to the contractholder upon surrender the accreted value of the fund as...

  • Page 117
    ... ...Retirement ...International Insurance ...International Investments ...Corporate Operations ...Real Estate and Relocation Services ...Total ...$142 - 14 113 50 116 $435 Year Ended December 31, 2004 Disposal of Impairment Reporting Acquisitions Charge Unit Other(1) (in millions) $ 86 $- $- $ 18...

  • Page 118
    ...claim adjustment expenses ...Unpaid claims and claim adjustment expenses ...Total future policy benefits ... Life insurance liabilities include reserves for death and endowment policy benefits, terminal dividends and certain health benefits. Individual and group annuities and supplementary contracts...

  • Page 119
    ... ...Group annuities ...Guaranteed investment contracts and guaranteed interest accounts ...Funding agreements ...Interest-sensitive life contracts ...Dividend accumulations and other ...Policyholders' account balances ... Policyholders' account balances represent an accumulation of account deposits...

  • Page 120
    .... The Company also issues annuity contracts with contractually guaranteed death benefits and market value adjusted investment options ("MVAs"), which provide for a return of principal plus a fixed rate of return if held to maturity, or, alternatively, a "market adjusted value" if surrendered prior...

  • Page 121
    ... Equity funds ...Bond funds ...Balanced funds ...Money market funds ...Other ...Total ... In addition to the amounts invested in separate account investment options above, $3,755 million at December 31, 2005 and $4,146 million at December 31, 2004 of account balances of variable annuity contracts...

  • Page 122
    ... All guaranteed amounts include any additional purchase payments and credits less withdrawals. Significant or prolonged declines in the value of any variable investment options a customer may choose as part of their GRO benefit may result in all or a substantial portion of their account values being...

  • Page 123
    ... policies included in the Closed Block are specified individual life insurance policies and individual annuity contracts that were in force on the effective date of the Plan of Reorganization and for which Prudential Insurance is currently paying or expects to pay experience-based policy dividends...

  • Page 124
    ... Future policy benefits ...Policyholders' dividends payable ...Policyholder dividend obligation ...Policyholders' account balances ...Other Closed Block liabilities ...Total Closed Block Liabilities ...Closed Block Assets Fixed maturities, available for sale, at fair value ...Equity securities...

  • Page 125
    ...the reinsurers were unable to meet their obligations to the Company under the terms of the reinsurance agreements. Reinsurance premiums, commissions, expense reimbursements, benefits and reserves related to reinsured long-duration contracts are accounted for over the life of the underlying reinsured...

  • Page 126
    ... holders at any time after issuance into cash and shares of Prudential Financial's Common Stock. The conversion price, initially $90 per share, is subject to adjustment upon certain corporate events, such as certain changes in control or increases to the Company's dividends above the current $0.78...

  • Page 127
    .... Securities business related interest expense of $122 million, $72 million and $82 million for the years ended December 31, 2005, 2004 and 2003, respectively, is included in "Net investment income." Included in "Policyholders' account balances" are additional debt obligations of the Company...

  • Page 128
    ... the Closed Block Business and the ability of Prudential Insurance, the sole direct subsidiary of PHLLC, to dividend such funds to PHLLC. The payment of scheduled principal and interest on the Series A notes and the Series B notes is insured by a financial guarantee insurance policy. The payment of...

  • Page 129
    ... Stock at a price of $87.50 per share. The Class B Stock is a separate class of common stock which is not publicly traded. The Common Stock reflects the performance of the Financial Services Businesses and the Class B Stock reflects the performance of the Closed Block Business. Prudential Financial...

  • Page 130
    ... will no longer be treated as equity of Prudential Financial for federal income tax purposes or (b) the New Jersey Department of Banking and Insurance amends, alters, changes or modifies the regulation of the Closed Block, the Closed Block Business, the Class B Stock or the IHC debt in a manner that...

  • Page 131
    ... for payment under New Jersey corporate law if the Financial Services Businesses were treated as a separate corporation thereunder and the amount that is legally available for payment under New Jersey corporate law on a consolidated basis after taking into account dividends on the Class B Stock. The...

  • Page 132
    ... Stock reflects the performance of the Financial Services Businesses and the Class B Stock reflects the performance of the Closed Block Business. Accordingly, earnings per share is calculated separately for each of these two classes of common stock. 130 Prudential Financial 2005 Annual Report

  • Page 133
    ... on acquisition and cumulative effect of accounting change attributable to the Financial Services Businesses available to holders of Common Stock after direct equity adjustment ...Effect of dilutive securities and compensation programs Stock options ...Deferred and long-term compensation programs...

  • Page 134
    ... the Omnibus Plan, are awarded to certain officers on a recurring basis primarily as replacement for a portion of long-term cash compensation. Each stock option granted under either type of grant has or will have an exercise price no less than the fair market value of the Company's Common Stock on...

  • Page 135
    ...Expected life of stock option ...1.20% 23.77% 3.74% 5.19 years 2004 1.20% 25.84% 3.42% 5.5 years 2003 1.20% 26.27% 3.01% 5.5 years The dividend yield reflects the assumption that the current dividend payout will continue with no anticipated increases. Prudential Financial 2005 Annual Report 133

  • Page 136
    ....81 55.68 $38.82 Options Exercisable Weighted Average Number Exercise Exercisable Price 2,664,044 7,108,026 1,377,397 40,730 11,190,197 $27.57 32.20 44.70 46.56 $32.69 Non-employee Stock Option Grants A summary of the status of the Company's non-employee stock option grants is as follows: Weighted...

  • Page 137
    ... assumptions used in the determination of the fair value of each option are as follows: 2005 Dividend yield ...Expected volatility ...Risk-free interest rate ...Expected life of stock option ...1.20% 23.77% 4.13% 3.98 years 2004 1.20% 25.84% 3.10% 3.33 years 2003 1.20% 26.27% 2.47% 3.20 years The...

  • Page 138
    ... number of shares to be awarded at the end of each performance period will range between 50% and 150% of this target based upon a measure of the reported performance for the Company's Financial Services Businesses relative to stated goals. A summary of the Company's non-employee restricted stock...

  • Page 139
    ... on an account balance that takes into consideration age, service and earnings during their career. The Company provides certain health care and life insurance benefits for its retired employees, their beneficiaries and covered dependents ("other postretirement benefits"). The health care plan is...

  • Page 140
    ... return on plan assets ...Annuity purchase ...Employer contributions ...Plan participants' contributions ...Contributions for settlements ...Disbursement for settlements ...Benefits paid ...Foreign currency changes ...Divestiture ...Fair value of plan assets at end of period ...Funded status Funded...

  • Page 141
    ... of employment related to the Wachovia Securities and Prudential Property and Casualty transactions in 2003, which include the cost of vesting plan participants, accruing benefits until year-end, crediting service for vesting purposes and certain early retirement subsidies. The increase in the...

  • Page 142
    ... to the determination of the expected long term rate of return in 2006. The expected long term rate of return for 2006 is 8.00% and 9.25%, respectively, for the pension and postretirement plans. The Company, with respect to pension benefits, uses market related value to determine the components of...

  • Page 143
    ...% 13% 1% 0% Management reviews its investment strategy on an annual basis. The investment goal of the domestic pension plan assets is to generate an above benchmark return on a diversified portfolio of stocks, bonds and real estate, while meeting the cash requirements for a pension obligation that...

  • Page 144
    ... anticipates that it will make cash contributions in 2006 of approximately $75 million to the pension plans and approximately $140 million to the postretirement plans. Postemployment Benefits The Company accrues postemployment benefits primarily for health and life benefits provided to former or...

  • Page 145
    ... recorded in connection with Prudential Securities Group Inc. state deferred tax assets and $336 million and $443 million recorded in connection with the acquisition of Hyundai. Adjustments to the valuation allowance will be made if there is a change in management's assessment of the amount of...

  • Page 146
    ...private placements. Historically, changes in estimated future cash flows or the assessment of an issuer's credit quality have been the more significant factors in determining fair values. Commercial Loans The fair value of commercial loans, other than those held by the Company's commercial mortgage...

  • Page 147
    ... cash flow model based upon current U.S. Treasury rates and historical loan repayment patterns, while Japanese insurance policy loans use the risk-free proxy based on the Yen LIBOR. For group corporate- and trust-owned life insurance contracts and group universal life contracts, the fair value...

  • Page 148
    ... a portfolio and the duration of liabilities supported by those assets, and to hedge against changes in the value of securities it owns or anticipates acquiring or selling. In exchange-traded futures transactions, the Company agrees to purchase or sell a specified number of contracts, the values of...

  • Page 149
    ... mortgage-backed pools. Typically, the price is agreed upon at the time of the contract and payment for such a contract is made at a specified future date. When the Company has cash flows that it has allocated for investment in equity securities or plans to sell investments in equity securities...

  • Page 150
    ...life insurance, and variable and fixed annuity products, primarily to the U.S. mass market and mass affluent market. The Group Insurance segment manufactures and distributes a full range of group life, long-term and short-term group disability, long-term care and corporate-owned and trust-owned life...

  • Page 151
    ... operations, property and casualty insurance businesses, Prudential Securities capital markets and Gibraltar Casualty Company. Closed Block Business. The Closed Block Business, which is managed separately from the Financial Services Businesses, was established on the date of demutualization. It...

  • Page 152
    ...to policyholder dividends; amortization of deferred policy acquisition costs, VOBA and unearned revenue reserves; interest credited to policyholders' account balances; reserves for future policy benefits; payments associated with the market value adjustment features related to certain of the annuity...

  • Page 153
    ... December 31, 2004 and 2003. As part of the acquisition of CIGNA's retirement business, the Company entered into reinsurance agreements with CIGNA, including a modified-coinsurance-with-assumption arrangement that applies to the defined benefit guaranteed-cost contracts acquired. The net results of...

  • Page 154
    ... for sale securities, adjusted operating income also excludes the change in contractholder liabilities due to asset value changes in the pool of investments (including mortgage loans) supporting these experience-rated contracts, which are reflected in "Interest credited to policyholders' account...

  • Page 155
    ... Services Businesses by Segment: Individual Life and Annuities ...Group Insurance ...Total Insurance Division ...Asset Management ...Financial Advisory ...Retirement ...Total Investment Division ...International Insurance ...International Investments ...Total International Insurance and Investments...

  • Page 156
    ... Net Policyholders' Policy Investment Policyholders' Account Dividends to Interest Acquisition Revenues Income Benefits Balances Policyholders Expense Costs (in millions) Financial Services Businesses: Individual Life and Annuities ...Group Insurance ...Total Insurance Division ...Asset Management...

  • Page 157
    ... Net Policyholders' Policy Investment Policyholders' Account Dividends to Interest Acquisition Revenues Income Benefits Balances Policyholders Expense Costs (in millions) Financial Services Businesses: Individual Life and Annuities ...Group Insurance ...Total Insurance Division ...Asset Management...

  • Page 158
    ... Net Policyholders' Policy Investment Policyholders' Account Dividends to Interest Acquisition Revenues Income Benefits Balances Policyholders Expense Costs (in millions) Financial Services Businesses: Individual Life and Annuities ...Group Insurance ...Total Insurance Division ...Asset Management...

  • Page 159
    ...Retirement ...Total Investment Division ...International Insurance ...International Investments ...Total International Insurance and Investments Division ...Corporate Operations ...Real Estate and Relocation Services ...Total Corporate and Other ...Total Financial Services Businesses ...Closed Block...

  • Page 160
    ... relate to real estate investments, in which the investor has borrowed funds, and the Company has guaranteed their obligation to their lender. In some cases, the investor is an affiliate, and in other cases the unaffiliated investor purchases the real estate investment from the Company. The Company...

  • Page 161
    ...agreement that one of the subsidiaries sold to Liberty Mutual had entered into with the purchaser of the Company's commercial property and casualty insurer in 2000. On an ongoing basis, the Company's internal supervisory and control functions review the quality of sales, marketing and other customer...

  • Page 162
    ... Court for the District of New Jersey, In re Employee Benefit Insurance Brokerage Antitrust Litigation, and two shareholder derivative actions, Gillespie v. Ryan and Kahn v. Agnew and the California Department of Banking and Insurance. Both derivative actions were dismissed without prejudice. In...

  • Page 163
    ...brokerage operations of the former Prudential Securities (PSI) and the business of certain American Skandia entities. The Company is cooperating with all investigations. In 2003, in connection with these investigations, the SEC filed a civil action against individual PSI brokers and a branch manager...

  • Page 164
    ...five purported class action lawsuits were filed against the Company, PSI and Prudential Equity Group LLC claiming that stock brokers were improperly classified as exempt employees under state and federal wage and hour laws and, therefore, were improperly denied overtime pay. The complaints seek back...

  • Page 165
    ... businesses contributed to the retail securities brokerage joint venture with Wachovia, including accruals for estimated settlement costs related to market timing issues under active negotiation with state and federal authorities. Results for the third quarter of 2005 include an income tax benefit...

  • Page 166
    ..., at fair value ...Other trading account assets, at fair value ...Equity securities, available for sale, at fair value ...Commercial loans ...Policy loans ...Securities purchased under agreements to resell ...Other long-term investments ...Short-term investments ...Total investments ...Cash and cash...

  • Page 167
    ... Businesses REVENUES Premiums ...Policy charges and fee income ...Net investment income ...Realized investment gains, net ...Asset management fees and other income ...Total revenues ...BENEFITS AND EXPENSES Policyholders' benefits ...Interest credited to policyholders' account balances ...Dividends...

  • Page 168
    ..., the Company may not change the allocation methodology or accounting policies for the allocation of earnings between the Financial Services Businesses and Closed Block Business without the prior consent of the Class B Stock holders or IHC debt bond insurer. General corporate overhead not directly...

  • Page 169
    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Prudential Financial's Common Stock was issued to eligible policyholders in Prudential Insurance's demutualization and sold to investors in Prudential Financial's initial public offering. The Common Stock began trading on the New York Stock ...

  • Page 170
    ... debt payment obligations and continue share repurchases, and the applicable regulatory restrictions on the ability of the subsidiaries to pay such dividends or distributions; and (20) risks due to the lack of legal separation between our Financial Services Businesses and our Closed Block Business...

  • Page 171
    ... Services at Computershare Computershare Trust Company, N.A., the transfer agent for Prudential Financial, Inc., can assist registered shareholders with a variety of services, including: • Change of address • Transfer of stock • Direct deposit of dividends • Online delivery of annual reports...

  • Page 172