Prudential 2006 Annual Report Download - page 27

Financial Services Businesses. Adjusted operating income excludes “Realized investment gains (losses), net,” except as indicated below,
and related charges and adjustments. A significant element of realized investment gains and losses are impairments and credit-related and
interest rate-related gains and losses. Impairments and losses from sales of credit-impaired securities, the timing of which depends largely
on market credit cycles, can vary considerably across periods. The timing of other sales that would result in gains or losses, such as interest
rate-related gains or losses, is largely subject to our discretion and influenced by market opportunities, as well as our tax profile. Trends in
the underlying profitability of our businesses can be more clearly identified without the fluctuating effects of these transactions. Similarly,
adjusted operating income excludes investment gains and losses on trading account assets supporting insurance liabilities and changes in
experience-rated contractholder liabilities due to asset value changes, because these recorded changes in asset and liability values will
ultimately accrue to the contractholders. Adjusted operating income excludes the results of divested businesses because they are not
relevant to understanding our ongoing operating results. The contributions to income/loss of wind-down businesses that we have not
divested remain in adjusted operating income. See Note 20 to the Consolidated Financial Statements for further information on the
presentation of segment results.
As noted above, certain “Realized investment gains (losses), net,” are included in adjusted operating income. We include in adjusted
operating income the portion of our realized investment gains and losses on derivatives that arise from the termination of contracts used to hedge
our foreign currency earnings in the same period that the expected earnings emerge. Similarly, we include in adjusted operating income the
portion of our realized investment gains and losses on derivatives that represent current period yield adjustments. The realized investment gains
or losses from products that are free standing derivatives, or contain embedded derivatives, along with the realized investment gains or losses
from associated derivative portfolios that are part of an economic hedging program related to the risk of these products, are included in adjusted
operating income. Adjusted operating income also includes for certain embedded derivatives, as current period yield adjustments, a portion of the
cumulative realized investment gains, on an amortized basis over the remaining life of the related security, or cumulative realized investment
losses in the period incurred. Adjusted operating income also includes those realized investment gains and losses that represent profit or loss of
certain of our businesses which primarily originate investments for sale or syndication to unrelated investors.
Results of Operations for Financial Services Businesses by Segment
Insurance Division
Individual Life
Operating Results
The following table sets forth the Individual Life segment’s operating results for the periods indicated.
Year ended
December 31,
2006 2005 2004
(in millions)
Operating results:
Revenues .......................................................................................... $2,216 $2,262 $2,073
Benefits and expenses ................................................................................ 1,672 1,764 1,683
Adjusted operating income ............................................................................ 544 498 390
Realized investment gains (losses), net, and related adjustments(1) ........................................ (62) 29 23
Income from continuing operations before income taxes, equity in earnings of operating joint ventures, extraordinary gain
on acquisition and cumulative effect of accounting change acquisition and cumulative effect of accounting change .... $ 482 $ 527 $ 413
(1) Revenues exclude Realized investment gains (losses), net, and related adjustments. See “—Realized Investment Gains and General Account
Investments—Realized Investment Gains.”
Adjusted Operating Income
2006 to 2005 Annual Comparison. Adjusted operating income increased $46 million, from $498 million in 2005 to $544 million in
2006. Adjusted operating income for 2006 includes a $46 million benefit from a net reduction in amortization of deferred policy acquisition
costs and other costs. The net reduction in amortization and other costs is due to an increased estimate of total gross profits used as a basis
for amortizing deferred policy acquisition costs and unearned revenue reserves, based on an annual review, primarily reflecting improved
mortality and lower maintenance expenses, partially offset by refinements in other reserves. Results for 2006 also improved $20 million
from the prior year, as the current year includes a $25 million benefit and the prior year included a $5 million benefit from compensation
received based on multi-year profitability of third-party products we distribute. The benefits of these items to 2006 results, together with
higher fees resulting from higher asset balances reflecting market value changes and increased net investment income, net of interest
credited and interest expense, primarily reflecting higher yields in 2006, were partially offset by less favorable mortality experience, net of
reinsurance, compared to the prior year.
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
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