Prudential 2006 Annual Report Download - page 28

2005 to 2004 Annual Comparison. Adjusted operating income increased $108 million, from $390 million in 2004 to $498 million in
2005, primarily reflecting lower general and administrative expenses and more favorable claims experience, net of reinsurance. In addition,
results for 2005 include a higher contribution from investment income, net of interest credited and interest expense, reflecting higher asset
balances compared to the prior year.
Revenues
2006 to 2005 Annual Comparison. Revenues, as shown in the table above under “—Operating Results,” decreased $46 million, from
$2.262 billion in 2005 to $2.216 billion in 2006. Policy charges and fee income decreased $175 million, including $190 million due to the
update of our assumptions related to amortization of unearned revenue reserves, discussed above, amounting to a $147 million reduction in
2006, and a similar update in 2005 resulting in a $43 million increase which was more than offset by an increase in amortization of DAC
net of a decrease in change in reserves. Partially offsetting this decrease in revenues was an increase in premiums of $38 million, primarily
due to increased premiums on term life insurance reflecting continued growth of our in force block of term insurance products. Net
investment income increased $52 million, reflecting higher assets and higher yields in 2006, which included the benefit from the sale of
lower yielding bonds and reinvestment of proceeds at higher interest rates. The realized investment losses generated from these sales are
excluded from adjusted operating income. For a discussion of realized investment gains and losses, including those related to changes in
interest rates, see “—Realized Investment Gains and Losses and General Account Investments—Realized Investment Gains.” This increase
was partially offset by the collection of investment income on a previously defaulted bond in 2005. Asset management fees and other
income increased $39 million, including the benefit to adjusted operating income from compensation received based on multi-year
profitability of third-party products we distribute as discussed above. The remainder of the increase reflects higher asset based fees due to
higher asset balances from market appreciation.
2005 to 2004 Annual Comparison. Revenues increased $189 million, from $2.073 billion in 2004 to $2.262 billion in 2005.
Premiums increased $57 million, primarily due to increased premiums on term life insurance reflecting growth of our in force block of
term insurance products. Policy charges and fee income increased $68 million, from $1.027 billion in 2004 to $1.095 billion in 2005,
including a $43 million increase reflecting an update and refinement of our assumptions related to the amortization of unearned revenue
reserves, which was largely offset by an increase in amortization of deferred policy acquisition costs net of a decrease in change in
reserves discussed below. The remainder of the increase in policy charges and fee income reflects growth in our universal life business.
Net investment income increased $76 million, from $420 million in 2004 to $496 million in 2005, reflecting an increased asset base
largely due to increased borrowings, which resulted in increased interest expense. Partially offsetting these items was a decrease in asset
management fees and other income, primarily reflecting a decline in revenues from the distribution of non-proprietary insurance products
by our agents, which decline was partially offset by a decline in operating expenses, including agent commissions on sales of these
products.
Benefits and Expenses
2006 to 2005 Annual Comparison. Benefits and expenses, as shown in the table above under “—Operating Results,” decreased $92
million, from $1.764 billion in 2005 to $1.672 billion in 2006. Amortization of deferred policy acquisition costs decreased $367 million,
including $378 million due to updates of our assumptions, as discussed above. Policyholders’ benefits, including interest credited to
policyholders’ account balances, increased $257 million, including $142 million due to updates of assumptions and methodology
refinements to certain reserves, growth in our in force block of term insurance products, as well as less favorable mortality experience
compared to the prior year.
2005 to 2004 Annual Comparison. Benefits and expenses increased $81 million, from $1.683 billion in 2004 to $1.764 billion in
2005. Amortization of deferred policy acquisition costs increased $95 million, from $274 million in 2004 to $369 million in 2005.
Amortization of deferred policy acquisition costs in 2005 includes an $89 million increase, reflecting an update and refinement of our
assumptions, which was largely offset by a decrease in change in reserves as well as an increase in policy charges and fee income, as
discussed above. Policyholders’ benefits, including interest credited to policyholder account balances increased $33 million, from $756
million in 2004 to $789 million in 2005, reflecting growth in our term and universal life business partially offset by the impact of the
update and refinement of assumptions discussed above. In addition, interest expense increased $51 million due to increased borrowings.
Partially offsetting these items was a decline in operating expenses of $99 million from 2004 to 2005, reflecting actions previously taken to
reduce staffing and occupancy costs, for which associated costs were incurred in 2004, as well as a decline in commissions paid to our
agents for the distribution of non-proprietary insurance products, as discussed above.
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
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