Prudential 2005 Annual Report Download - page 42

Income from Continuing Operations Before Income Taxes, Extraordinary Gain on Acquisition and Cumulative Effect of
Accounting Change
2005 to 2004 Annual Comparison. Income from continuing operations before income taxes, extraordinary gain on acquisition and
cumulative effect of accounting change decreased $433 million, from $915 million in 2004 to $482 million in 2005. The decrease was
primarily due to an increase of $289 million in dividends to policyholders, which includes an increase to the cumulative earnings
policyholder dividend obligation, offset by a decrease in the annual policyholder dividend, primarily as a result of a reduction in the 2005
dividend scale. Additionally, results in 2005 include a decrease in premiums and net realized 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 Annual Comparison. Income from continuing operations before income taxes, extraordinary gain on acquisition and
cumulative effect of accounting change increased $545 million, from $370 million in 2003 to $915 million in 2004. Net realized investment
gains increased $289 million, from $426 million in 2003 to $715 million in 2004. In addition, dividends to policyholders decreased $88
million, reflecting reductions in the 2005 dividend scale, and operating expenses declined $76 million. For a discussion of Closed Block
Business realized investment gains (losses), net, see “—Realized Investment Gains and General Account Investments—Realized
Investment Gains.”
Revenues
2005 to 2004 Annual Comparison. Revenues, as shown in the table above under “—Operating Results,” decreased $205 million,
from $8.231 billion in 2004 to $8.026 billion in 2005. The decrease reflects a decline in premiums of $156 million, from $3.776 billion in
2004 to $3.620 billion in 2005 as policies in force in the Closed Block have matured or terminated. We expect the decline in premiums for
this business to continue as these policies continue to mature or terminate. Additionally, net realized investment gains decreased $79
million, from $715 million in 2004 to $636 million in 2005. Partially offsetting these items, net investment income increased $40 million,
from $3.681 billion in 2004 to $3.721 billion in 2005.
2004 to 2003 Annual Comparison. Revenues increased $249 million, from $7.982 billion in 2003 to $8.231 billion in 2004. Net
realized investment gains increased $289 million, from $426 million in 2003 to $715 million in 2004. Premiums decreased $84 million,
from $3.860 billion in 2003 to $3.776 billion in 2004 as policies in force matured or terminated.
Benefits and Expenses
2005 to 2004 Annual Comparison. Benefits and expenses, as shown in the table above under “—Operating Results,” increased $228
million, from $7.316 billion in 2004 to $7.544 billion in 2005, primarily due to a $289 million increase in dividends to policyholders,
which includes a $326 million increase in the cumulative earnings policyholder obligation, offset by a $37 million reduction in dividends to
policyholders, primarily due to a reduction in the 2005 dividend scale. Additionally, interest expense increased $24 million, from $168
million in 2004 to $192 million in 2005. Partially offsetting the foregoing items was a decrease of $62 million in policyholder benefits and
related changes in reserves, including interest credited to policyholders’ accounts, from $4.193 billion in 2004 to $4.131 billion in 2005,
resulting from the maturity or termination of policies in force, as discussed above. Additionally, operating expenses, including in force
based distribution costs that we charge to expense, decreased $16 million, from $485 million in 2004 to $469 million in 2005, reflecting
lower distribution costs as we have discontinued sales of traditional products and continued to reduce operating cost levels.
2004 to 2003 Annual Comparison. Benefits and expenses decreased $296 million, from $7.612 billion in 2003 to $7.316 billion in
2004. Policyholder benefits and related changes in reserves, including interest credited to policyholders’ accounts, decreased $120 million,
from $4.313 billion in 2003 to $4.193 billion in 2004, consistent with the decline in policies in force, as discussed above, as well as reserve
adjustments recorded in 2004. Dividends to policyholders decreased $88 million, from $2.452 billion in 2003 to $2.364 billion in 2004,
reflecting reductions in the 2005 dividend scale based on evaluations of the experience underlying the dividend scale. Operating expenses,
including in force based distribution costs that we charge to expense, decreased $76 million, from $561 million in 2003 to $485 million in
2004, reflecting reduced operating cost levels.
Income Taxes
Shown below is our income tax provision for the years ended December 31, 2005, 2004 and 2003, separately reflecting the impact of
certain significant items. Also presented below is the income tax provision that would have resulted from application of the statutory 35%
federal income tax rate in each of these periods.
Year ended December 31,
2005 2004 2003
(in millions)
Tax provision ......................................................................................... $ 869 $ 955 $662
Impact of:
Completion of IRS examination for the years 1997 to 2001 ................................................. 720 — —
Non-taxable investment income ....................................................................... 185 149 72
Change in valuation allowance ....................................................................... (76) 24 2
Non-deductible expenses ............................................................................ (70) (6) 12
Effect of change in repatriation of foreign earnings ....................................................... (64) 29 (114)
Disposition of subsidiaries ........................................................................... — — 78
Tax provision excluding these items ....................................................................... $1,564 $1,151 $ 712
Tax provision at statutory rate ............................................................................ $1,565 $1,179 $ 694
Prudential Financial 2005 Annual Report40