Prudential 2006 Annual Report Download - page 26

segments included in the Financial Services Businesses using “adjusted operating income” as described in “—Segment Measures,” below.
For a discussion of our segment results on this basis see “—Results of Operations for Financial Services Businesses by Segment,” below.
The direct equity adjustment increased income from continuing operations before extraordinary gain on acquisition and cumulative
effect of accounting change available to holders of the Common Stock for earnings per share purposes by $68 million for the year ended
December 31, 2006, compared to $82 million for the year ended December 31, 2005. As described more fully in Note 14 to the
Consolidated Financial Statements, the direct equity adjustment modifies earnings available to holders of the Common Stock and the Class
B Stock for earnings per share purposes. The holders of the Common Stock will benefit from the direct equity adjustment as long as
reported administrative expenses of the Closed Block Business are less than the cash flows for administrative expenses determined by the
policy servicing fee arrangement that is based upon insurance and policies in force and statutory cash premiums. As statutory cash
premiums and policies in force in the Closed Block Business decline, we expect the benefit to the Common Stock holders from the direct
equity adjustment to decline accordingly. If the reported administrative expenses of the Closed Block Business exceed the cash flows for
administrative expenses determined by the policy servicing fee arrangement, the direct equity adjustment will reduce income available to
holders of the Common Stock for earnings per share purposes.
2005 to 2004 Annual Comparison. Income from continuing operations before extraordinary gain on acquisition and cumulative
effect of accounting change attributable to the Financial Services Businesses for the year ended December 31, 2005, was $3.3 billion, or
$6.49 per share of Common Stock on a diluted basis, compared to $1.8 billion for the year ended December 31, 2004, or $3.58 per share of
Common Stock on a diluted basis. The increase of $1.5 billion reflects growth in premiums, policy charges and fee income due primarily to
growth in our international insurance operations, a full year of operating results for the retirement business acquired from CIGNA in April
2004, improved investment results, higher asset based fees, and a benefit in 2005 of $720 million from a reduction of tax liabilities in
connection with the Internal Revenue Service examination of our tax returns for the years 1997 through 2001 partially offset by higher
obligations and costs retained in connection with the business contributed to the retail brokerage joint venture with Wachovia.
The direct equity adjustment increased income from continuing operations before extraordinary gain on acquisition and cumulative
effect of accounting change available to holders of the Common Stock for earnings per share purposes by $82 million for the year ended
December 31, 2005, which was essentially unchanged from 2004.
Results of Operations—Closed Block Business
2006 to 2005 Annual Comparison. Net income attributable to the Closed Block Business for the year ended December 31, 2006, was
$284 million, or $108.00 per share of Class B Stock, compared to $321 million, or $119.50 per share of Class B Stock, for the year ended
December 31, 2005. The direct equity adjustment decreased net income available to the Class B Stock holders for earnings per share
purposes by $68 million for the year ended December 31, 2005, compared to $82 million for the year ended December 31, 2005. For a
discussion of the results of operations for the Closed Block Business, see “—Results of Operations of Closed Block Business,” below.
2005 to 2004 Annual Comparison. Net income attributable to the Closed Block Business for the year ended December 31, 2005, was
$321 million, or $119.50 per share of Class B Stock, compared to $582 million, or $249.00 per share of Class B Stock, for the year ended
December 31, 2004. The direct equity adjustment decreased net income available to the Class B Stock holders for earnings per share
purposes by $82 million for the year ended December 31, 2005, essentially unchanged from 2004.
Segment Measures
In managing our business, we analyze operating performance separately for our Financial Services Businesses and our Closed Block
Business. For the Financial Services Businesses, we analyze our segments’ operating performance using “adjusted operating income.”
Results of the Closed Block Business for all periods are evaluated and presented only in accordance with U.S. GAAP. Adjusted operating
income does not equate to “income from continuing operations before income taxes, equity in earnings of operating joint ventures,
extraordinary gain on acquisition and cumulative effect of accounting change” or “net income” as determined in accordance with U.S.
GAAP but is the measure of segment profit or loss we use to evaluate segment performance and allocate resources, and consistent with
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” is our measure of segment performance. Adjusted
operating income is calculated for the segments of the Financial Services Businesses by adjusting each segment’s “income from continuing
operations before income taxes, equity in earnings of operating joint ventures, extraordinary gain on acquisition and cumulative effect of
accounting change” for the following items:
• realized investment gains (losses), net, except as indicated below, and related charges and adjustments;
• net investment gains and losses on trading account assets supporting insurance liabilities and changes in experience-rated
contractholder liabilities due to asset value changes;
• the contribution to income/loss of divested businesses that have been or will be sold or exited that do not qualify for “discontinued
operations” accounting treatment under U.S. GAAP; and
• equity in earnings of operating joint ventures.
The items above are important to an understanding of our overall results of operations. Adjusted operating income is not a substitute
for income determined in accordance with U.S. GAAP, and our definition of adjusted operating income may differ from that used by other
companies. However, we believe that the presentation of adjusted operating income as we measure it for management purposes enhances
understanding of our results of operations by highlighting the results from ongoing operations and the underlying profitability of the
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
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