Prudential 2005 Annual Report Download - page 29

(2) Benefits and expenses exclude related charges which represent the unfavorable (favorable) impact of Realized investment gains (losses), net, on interest
credited to policyholders’ account balances. For a discussion of these items see “—Realized Investment Gains and General Account Investments—
Realized Investment Gains.”
Adjusted Operating Income
2005 to 2004 Annual Comparison. Adjusted operating income increased $50 million, from $174 million in 2004 to $224 in 2005,
primarily due to an increase in net investment income and growth in the segment’s group life insurance business, as well as lower costs in
2005 related to legal and regulatory matters.
2004 to 2003 Annual Comparison. Adjusted operating income increased $5 million, from $169 million in 2003 to $174 million in
2004. Adjusted operating income for 2003 included a net favorable effect of $8 million from refinements in group life reserves for waiver
of premium features and estimates of amounts due policyholders on experience rated cases. Excluding these items, adjusted operating
income increased $13 million primarily due to more favorable mortality experience in our group life insurance business which was partially
offset by less favorable claims experience in our group disability business and costs related to legal and regulatory matters that were
incurred during 2004.
Revenues
2005 to 2004 Annual Comparison. Revenues, as shown in the table above under “—Operating Results,” increased by $308 million,
from $3.892 billion in 2004 to $4.200 billion in 2005. Group life insurance premiums increased by $272 million, from $2.274 billion in
2004 to $2.546 billion in 2005, primarily reflecting growth in business in force resulting from new sales and continued strong persistency,
which improved from 94% in 2004 to 95% in 2005. Group disability premiums, which include long-term care products, increased by $48
million, from $676 million in 2004 to $724 million in 2005, primarily reflecting growth in business in force resulting from new sales and
continued strong persistency, which declined slightly from 86% in 2004 to 85% in 2005. Net investment income increased by $32 million,
primarily reflecting a larger base of invested assets due to business growth.
2004 to 2003 Annual Comparison. Revenues increased by $175 million, from $3.717 billion in 2003 to $3.892 billion in 2004.
Group life insurance premiums increased by $71 million, from $2.203 billion in 2003 to $2.274 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 2003 to $676 million in
2004, primarily reflecting growth in business in force resulting from new sales and continued strong persistency, which improved slightly
from 85% in 2003 to 86% in 2004. The increase in premiums also reflects the negative effect in 2003 of a $9 million increase in our
estimate of amounts due policyholders on experience rated cases, as discussed above. Policy charges and fee income increased by $80
million, which includes the negative effect in 2003 of a $17 million increase in our estimate of amounts due policyholders on experience
rated cases, as discussed above. Excluding the effect of this refinement, policy charges and fee income increased by $63 million, primarily
reflecting higher charges and fees on experienced rated contracts sold to employers for funding of employee benefit programs. Partially
offsetting these increases was a decrease in net investment income of $24 million, due primarily to a decrease in income from policyholder
loans. The decrease in income from policyholder loans reflects reductions in the balances of these loans, which also results in a
corresponding decline in interest credited to policyholders’ account balances.
Benefits and Expenses
The following table sets forth the Group Insurance segment’s benefits and administrative operating expense ratios for the periods
indicated.
Year ended December 31,
2005 2004 2003
Benefits ratio(1):
Group life ........................................................................................ 88.9% 87.5% 89.9%
Group disability ................................................................................... 95.4 94.6 92.4
Administrative operating expense ratio(2):
Group life ........................................................................................ 8.9 10.9 9.7
Group disability ................................................................................... 20.9 22.1 22.5
(1) Ratio of policyholder benefits to earned premiums, policy charges and fee income. Group disability ratios include long-term care products.
(2) Ratio of administrative operating expenses (excluding commissions) to gross premiums, policy charges and fee income. Group disability ratios include
long-term care products.
2005 to 2004 Annual Comparison. Benefits and expenses, as shown in the table above under “—Operating Results,” increased by
$258 million, from $3.718 billion in 2004 to $3.976 billion in 2005. The increase was primarily driven by an increase of $284 million in
policyholders’ benefits, including the change in policy reserves, reflecting the growth of business in force.
The group life benefits ratio deteriorated 1.4 percentage points from 2004 to 2005, primarily as a result of lower charges and fees in
2005 on experience rated contracts sold to employers for funding of employee benefit programs. These lower charges and fees resulted in a
corresponding decrease in administrative expenses. The group disability benefits ratio deteriorated by 0.8 percentage points from 2004 to
2005, reflecting less favorable claims experience. The group life administrative operating expense ratio improved from 2004 to 2005,
primarily reflecting the increases in premiums discussed above, lower legal and regulatory costs in 2005 and the decrease in administrative
expenses discussed above. The group disability administrative operating expense ratio improved from 2004 to 2005 primarily reflecting the
increases in premiums discussed above.
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