Prudential 2005 Annual Report Download - page 24

Within our Asset Management segment, the commercial mortgage operations originate loans for sale, including through securitization
transactions. The realized investment gains and losses associated with these loans, including related derivative results and retained
mortgage servicing rights, are a principal source of earnings for this business and are included in adjusted operating income. Also within
our Asset Management segment, the proprietary investing business makes investments for sale or syndication to other investors or for
placement or co-investment in our managed funds and structured products. Realized investment gains and losses associated with the sale of
these proprietary investments, along with derivatives used to hedge certain foreign currency-denominated proprietary investments, are a
principal source of earnings for this business and are included in adjusted operating income.
We also 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 used to manage interest rate and
currency exposure on asset and liability mismatches that represents current period yield adjustments for these assets and liabilities.
Adjusted operating income also includes for certain embedded derivatives, as current period yield adjustments, a portion of the cumulative
realized investment gains, on an amortized basis over the remaining life of the related security, or cumulative realized investment losses in
the period incurred.
Results of Operations for Financial Services Businesses by Segment
Insurance Division
Individual Life and Annuities
Operating Results
The following table sets forth the Individual Life and Annuities segment’s operating results for the periods indicated.
Year ended
December 31,
2005 2004 2003
(in millions)
Operating results:
Revenues:
Individual Life ................................................................................. $2,262 $2,073 $1,850
Individual Annuities ............................................................................. 1,746 1,608 1,169
4,008 3,681 3,019
Benefits and expenses:
Individual Life ................................................................................. 1,764 1,683 1,493
Individual Annuities ............................................................................. 1,241 1,181 907
3,005 2,864 2,400
Adjusted operating income:
Individual Life ................................................................................. 498 390 357
Individual Annuities ............................................................................. 505 427 262
1,003 817 619
Realized investment gains (losses), net, and related adjustments(1) ........................................ 32 21 (41)
Related charges(1)(2) ............................................................................ (5) (34) (13)
Income from continuing operations before income taxes, extraordinary gain on acquisition and cumulative effect of
accounting change ................................................................................. $1,030 $ 804 $ 565
(1) Revenues exclude Realized investment gains (losses), net, and related charges and adjustments. The related charges represent payments related to the
market value adjustment features of certain of our annuity products. For a discussion of these items see “—Realized Investment Gains and General
Account Investments—Realized Investment Gains.”
(2) Benefits and expenses exclude related charges which represent the unfavorable (favorable) impact of Realized investment gains (losses), net, on change
in reserves and the amortization of deferred 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 of $1.184 billion.
Beginning May 1, 2003, the results of American Skandia have been included in our consolidated results and are included as a component of
our annuity business discussed below.
Adjusted Operating Income
2005 to 2004 Annual Comparison. The segment’s individual life business adjusted operating income increased $108 million, from
$390 million in 2004 to $498 million in 2005, primarily reflecting lower general and administrative expenses and more favorable claims
experience, net of reinsurance. In addition, results for 2005 include a higher contribution from investment income, net of interest credited
and interest expense, reflecting higher asset balances compared to the prior year.
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