Prudential 2006 Annual Report Download - page 15

(3) The SEC and other regulators are investigating the Company’s reinsurance arrangements and the SEC’s investigation is focused on certain reinsurance
contracts entered into with a single counterparty in the years 1997 through 2002 relating to the Company’s property and casualty insurance operations
that were sold in 2003. The Company accounted for these property and casualty contracts as reinsurance. However, if as a result of these investigations
deposit accounting rather than reinsurance accounting were required to be applied to these property and casualty contracts, there would be no impact on
the consolidated financial statements of the Company for any annual period for which selected consolidated income statement data is presented above
(or for any interim period subsequent to December 31, 2002) except that consolidated income (loss) from continuing operations before extraordinary
gain on acquisition and cumulative effect of accounting change would be decreased by approximately $25 million in 2002. See “Legal Proceedings”
included in Prudential Financial’s 2006 Annual Report on Form 10-K.
(4) The Company adopted Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans” effective December 31, 2006, which resulted in a reduction of stockholders’ equity of $556 million upon adoption.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following analysis of our consolidated financial condition and results of operations in conjunction with the
“Forward-Looking Statements,” “Selected Financial Data” and the “Consolidated Financial Statements” included in this Annual Report,
as well as the “Risk Factors” included in Prudential Financial’s 2006 Annual Report on Form 10-K.
Overview
Prudential Financial has two classes of common stock outstanding. The Common Stock, which is publicly traded (NYSE:PRU),
reflects the performance of the Financial Services Businesses, while the Class B Stock, which was issued through a private placement and
does not trade on any exchange, reflects the performance of the Closed Block Business. The Financial Services Businesses and the Closed
Block Business are discussed below.
Financial Services Businesses
Our Financial Services Businesses consist of three operating divisions, which together encompass eight segments, and our Corporate
and Other operations. The Insurance division consists of our Individual Life, Individual Annuities and Group Insurance segments. The
Investment division consists of our Asset Management, Financial Advisory and Retirement segments. The International Insurance and
Investments division consists of our International Insurance and International Investments segments. Our Corporate and Other operations
include our real estate and relocation services business, as well as corporate items and initiatives that are not allocated to business
segments. Corporate and Other operations also include businesses that have been or will be divested and businesses that we have placed in
wind-down status. In 2006, the results of the Individual Life and Annuities businesses, formerly reported as components of the Individual
Life and Annuities segment, are reported as discrete segments for all periods presented.
We attribute financing costs to each segment based on the amount of financing used by each segment, excluding financing costs
associated with corporate debt. The net investment income of each segment includes earnings on the amount of equity that management
believes is necessary to support the risks of that segment.
We seek growth internally and through acquisitions, joint ventures or other forms of business combinations or investments. Our
principal acquisition focus is in our current business lines, both domestic and international.
Closed Block Business
In connection with the demutualization, we ceased offering domestic participating products. The liabilities for our traditional domestic
in force participating products were segregated, together with assets, in a regulatory mechanism referred to as the “Closed Block.” The
Closed Block is designed generally to provide for the reasonable expectations for future policy dividends after demutualization of holders
of participating individual life insurance policies and annuities included in the Closed Block by allocating assets that will be used
exclusively for payment of benefits, including policyholder dividends, expenses and taxes with respect to these products. See Note 10 to
the Consolidated Financial Statements for more information on the Closed Block. At the time of demutualization, we determined the
amount of Closed Block assets so that the Closed Block assets initially had a lower book value than the Closed Block liabilities. We expect
that the Closed Block assets will generate sufficient cash flow, together with anticipated revenues from the Closed Block policies, over the
life of the Closed Block to fund payments of all expenses, taxes, and policyholder benefits to be paid to, and the reasonable dividend
expectations of, holders of the Closed Block policies. We also segregated for accounting purposes the assets that we need to hold outside
the Closed Block to meet capital requirements related to the Closed Block policies. No policies sold after demutualization will be added to
the Closed Block, and its in force business is expected to ultimately decline as we pay policyholder benefits in full. We also expect the
proportion of our business represented by the Closed Block to decline as we grow other businesses.
Concurrently with our demutualization, Prudential Holdings, LLC, a wholly owned subsidiary of Prudential Financial that owns the
capital stock of Prudential Insurance, issued $1.75 billion in senior secured notes, which we refer to as the IHC debt. The net proceeds from
the issuances of the Class B Stock and IHC debt, except for $72 million used to purchase a guaranteed investment contract to fund a
portion of the bond insurance cost associated with that debt, were allocated to the Financial Services Businesses. However, we expect that
the IHC debt will be serviced by the net cash flows of the Closed Block Business over time, and we include interest expenses associated
with the IHC debt when we report results of the Closed Block Business.
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
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