Prudential 2005 Annual Report Download - page 25

Adjusted operating income of the segment’s individual annuity business increased $78 million, from $427 million in 2004 to $505
million in 2005. Adjusted operating income for 2005 includes a net $87 million reduction in amortization of deferred policy acquisition
costs and other costs and a decrease in our reserves for the guaranteed minimum death benefit and guaranteed minimum income benefit
features of our variable annuity product. This decline reflects an increased estimate of total gross profits used as a basis for amortizing
deferred policy acquisition and other costs reflecting improved net interest spread resulting from increased investment yields, decreased
cost of actual and expected death claims and modeling refinements implemented. Adjusted operating income for 2004 included reductions
in amortization of deferred policy acquisition costs of $44 million due to our increased estimate of total gross profits on variable annuities
reflecting market value increases in underlying assets as well as continued favorable mortality and lapse experience. Absent these factors,
adjusted operating income of the segment’s individual annuity business increased $35 million. Adjusted operating income in 2005
benefited from higher fees resulting from greater variable annuity account values and improved net interest spread on our general account
annuities reflecting improved investment yields, reduction of credited interest rates to policyholders effective as of January 1, 2005 as well
as higher asset balances. In addition, results for 2005 include the collection of investment income on a previously defaulted bond. Partially
offsetting these benefits to adjusted operating income was an increase to amortization of deferred policy acquisition costs reflecting
increased gross profits in the current period.
2004 to 2003 Annual Comparison. The segment’s individual life business adjusted operating income increased $33 million, from
$357 million in 2003 to $390 million in 2004. The increase reflected more favorable claims experience, net of reinsurance, in 2004.
However, results for 2004 reflect a lower contribution from investment income after investment related expenses in comparison to 2003,
due to a decrease in the level of capital required to support the business. The decrease in the level of capital required to support the business
reflected changes in statutory reserving requirements for certain products and certain reinsurance arrangements we initiated. Results for
2004 also include a decline in recovery of costs of our agency distribution system associated with the distribution of property and casualty
insurance products, due to our sale of the property and casualty business in late 2003.
Results of the segment’s individual annuity business for 2004 included adjusted operating income of $242 million from the operations
of American Skandia, compared to $167 million in 2003, which included the results of these operations for only the last eight months of the
year. Adjusted operating income of $242 million for 2004 consisted of revenues of $771 million and total benefits and expenses of $529
million. American Skandia’s revenues in 2004 consisted primarily of policy charges and fee income of $443 million, asset management
and service fees of $212 million and net investment income of $92 million. Benefits and expenses consisted primarily of general and
administrative expenses of $296 million, including $30 million from the amortization of the value of business acquired asset established
when the company was acquired, interest credited to policyholder account balances of $80 million and policyholder benefits, including
related change in reserves, of $123 million.
Adjusted operating income of the segment’s individual annuity business, excluding American Skandia, increased $90 million, from
$95 million in 2003 to $185 million in 2004. The increase in adjusted operating income came primarily from improved net interest spread
on our general account annuities reflecting improved investment yields, reductions of credited interest rates effective as of January 1, 2004,
as well as higher asset balances, and higher fees resulting from greater variable annuity account values. Increased amortization of deferred
policy acquisition costs reflecting the higher level of gross profits partially offset the foregoing factors. Adjusted operating income for 2004
and 2003 included reductions in amortization of deferred policy acquisition costs of $44 million and $39 million, respectively, due to our
increased estimate of total gross profits on variable annuities reflecting market value increases in underlying assets as well as continued
favorable mortality and lapse experience, which amount for 2003 was largely offset by a $36 million charge to strengthen reserves for our
periodic income annuities.
Revenues
2005 to 2004 Annual Comparison. Revenues of the segment’s individual life insurance business, as shown in the table above under
“—Operating Results,” increased $189 million, from $2.073 billion in 2004 to $2.262 billion in 2005. Premiums increased $57 million,
primarily due to increased premiums on term life insurance reflecting growth of our in force block of term insurance products. Policy
charges and fee income increased $68 million, from $1.027 billion in 2004 to $1.095 billion in 2005, including a $43 million increase
reflecting an update and refinement of our assumptions related to the amortization of unearned revenue reserves, which was largely offset
by an increase in amortization of DAC net of a decrease in change in reserves discussed below. The remainder of the increase in policy
charges and fee income reflects growth in our universal life business. Net investment income increased $79 million, from $421 million in
2004 to $500 million in 2005, reflecting an increased asset base largely due to increased borrowings, which resulted in increased interest
expense. Partially offsetting these items was a decrease in commissions and other income, primarily reflecting a decline in revenues from
the distribution of non-proprietary insurance products by our agents, which decline was partially offset by a decline in operating expenses,
including agent commissions on sales of these products.
Revenues of the segment’s individual annuity business increased $138 million, from $1.608 billion in 2004 to $1.746 billion in 2005.
Policy charges and fee income increased $81 million, reflecting an increase in the 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 million, reflecting a higher level
of invested assets, increased yields and the collection of investment income on a previously defaulted bond. Commissions, investment
management fees, and other income increased $25 million, primarily due to an increase in asset based fees.
2004 to 2003 Annual Comparison. The segment’s individual life insurance business reported revenues of $2.073 billion in 2004,
compared to $1.850 billion in 2003. Commissions and other income increased $141 million, primarily reflecting an increase in revenue
from the distribution of property and casualty insurance products by our agents, which was more than offset by a related increase in
operating expenses, including agent commissions. Premiums increased $56 million, primarily due to increased premiums on term life
insurance reflecting growth of our in force block of term insurance products.
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