Prudential 2005 Annual Report Download - page 40

connection with the acquisition of PISC, related to the provision of asset management and brokerage services, which agreement extends
until February 27, 2009. During 2004, PISC contributed $53 million of adjusted operating income from its initial ten months of operation,
including $20 million of fee revenue from the Korean government under the agreement discussed above.
2004 to 2003 Annual Comparison. Adjusted operating income increased $96 million, from a loss of $10 million in 2003 to income
of $86 million in 2004, primarily reflecting earnings of $53 million attributable to our acquisition of PISC in the first quarter of 2004, as
discussed above. Also contributing to the increase in adjusted operating income were improved results from our global derivatives
businesses, as well as the negative effect in 2003 of a $34 million charge to write off a receivable related to an investment in Korea.
Revenues
2005 to 2004 Annual Comparison. Revenues, as shown in the table above under “—Operating Results,” increased $39 million, from
$447 million in 2004 to $486 million in 2005 primarily due to the results of PISC, as discussed above.
2004 to 2003 Annual Comparison. Revenues increased $207 million, from $240 million in 2003 to $447 million in 2004, primarily
due to our acquisition of PISC in the first quarter of 2004. Also contributing to the increase were higher revenues from our global
derivatives businesses, as well as the negative effect in 2003 of a $34 million charge to write off a receivable related to an investment in
Korea.
Expenses
2005 to 2004 Annual Comparison. Expenses, as shown in the table above under “—Operating Results,” increased $15 million, from
$361 million in 2004 to $376 million in 2005 primarily due to the results of PISC, as discussed above.
2004 to 2003 Annual Comparison. Expenses increased $111 million, from $250 million in 2003 to $361 million in 2004, primarily
due to our acquisition of PISC in the first quarter of 2004.
Corporate and Other
Corporate and Other includes corporate operations, after allocations to our business segments and real estate and relocation services.
Corporate operations consist primarily of: (1) corporate-level income and expenses, after allocations to any of our business segments,
including income from our qualified pension plans and investment returns on capital that is not deployed in any of our segments; (2) returns
from investments that we do not allocate to any of our business segments, including a debt-financed investment portfolio, as well as the
impact of transactions with other segments; and (3) businesses that we have placed in wind-down status but have not divested.
Year ended December 31,
2005 2004 2003
(in millions)
Operating Results:
Corporate Operations(1) ................................................................................ $ 93 $ 66 $ 21
Real Estate and Relocation Services ....................................................................... 105 101 63
Adjusted operating income .............................................................................. 198 167 84
Realized investment gains (losses), net, and related adjustments(2) ........................................... 362 (34) (36)
Divested businesses(3) .............................................................................. (50) (33) (158)
Income (loss) from continuing operations before income taxes, extraordinary gain on acquisition and cumulative effect of
accounting change ................................................................................... $510 $100 $(110)
(1) Includes consolidating adjustments.
(2) See “—Realized Investment Gains and General Account Investments—Realized Investment Gains” for a discussion of these items.
(3) See “—Divested Businesses” for a discussion of the results of our divested businesses.
2005 to 2004 Annual Comparison. Adjusted operating income increased $31 million, from $167 million in 2004 to $198 million in
2005. Adjusted operating income from corporate operations increased $27 million, from $66 million in 2004 to $93 million in 2005. Costs
incurred for expense reduction initiatives declined from $61 million in 2004 to $11 million in 2005. Results for 2005 also include the
reversal of $30 million of amortization of deferred policy acquisition costs recorded in prior periods. Corporate operations included $40
million of costs in 2005 from retained obligations relating to policyholders with whom we had previously agreed to provide insurance for
reduced or no premium in accordance with contractual settlements related to prior individual life sales practices remediation, as compared
to $68 million in 2004. The costs in 2004 include the impact of a reduction in our policy 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 policies to be absorbed by
us under these settlements, which was recognized within 2004 Corporate and Other results. Corporate operations includes income from our
qualified pension plan of $411 million in 2005, a decrease of $55 million from $466 million in 2004. The decline includes the impact of a
reduction in the expected return on plan assets from 8.75% for 2004 to 8.50% for 2005. Corporate operations investment income, net of
interest expense, decreased $24 million, reflecting increased borrowings.
For purposes of calculating pension income from our own qualified pension plan for the year ended December 31, 2006, we will apply
a discount rate of 5.50% and we will reduce the expected return on plan assets to 8.00% from 8.50% in 2005. In addition, the assumed rate
of increase in compensation levels will remain unchanged at 4.50%. We determined our expected return on plan assets based upon the
Prudential Financial 2005 Annual Report38