Prudential 2006 Annual Report Download - page 31

2005 to 2004 Annual Comparison. Adjusted operating income increased $78 million, from $427 million in 2004 to $505 million in
2005. Adjusted operating income for 2005 includes a net $87 million reduction in amortization of deferred policy acquisition costs and
other costs and a decrease in our reserves for the guaranteed minimum death benefit and guaranteed minimum income benefit features of
our variable annuity product. This decline reflects an increased estimate of total gross profits used as a basis for amortizing deferred policy
acquisition and other costs reflecting improved net interest spread resulting from increased investment yields, decreased cost of actual and
expected death claims and modeling refinements implemented. Adjusted operating income for 2004 included reductions in amortization of
deferred policy acquisition costs of $44 million due to our increased estimate of total gross profits on variable annuities reflecting market
value increases in underlying assets as well as continued favorable mortality and lapse experience. Absent these factors, adjusted operating
income increased $35 million. Adjusted operating income in 2005 benefited from higher fees resulting from greater variable annuity
account values and improved net interest spread on our general account annuities reflecting improved investment yields, reduction of
credited interest rates to policyholders effective as of January 1, 2005 as well as higher asset balances. In addition, results for 2005 include
$6 million, net of related amortization of deferred policy acquisition costs, from the collection of investment income on a previously
defaulted bond. Partially offsetting these benefits to adjusted operating income was an increase to amortization of deferred policy
acquisition costs reflecting increased gross profits in the current period.
Revenues
2006 to 2005 Annual Comparison. Revenues, as shown in the table above under “—Operating Results,” increased $384 million,
from $1.717 billion in 2005 to $2.101 billion in 2006, including revenues of $221 million from the Allstate business acquired during
the second quarter of 2006. The remainder of the increase in revenues, $163 million, came primarily from increases of $131 million in
policy charges and fees and $65 million in asset management fees and other income, which includes $9 million from the
mark-to-market of embedded derivatives and related hedge positions associated with our living benefits features. These increases were
partially offset by a $43 million decrease in net investment income. The increase in policy charges and fees reflects an increase in the
average market value of variable annuity account values and positive net flows in our variable annuities, including an increase in
account values with living benefit options. The increase in asset management fees and other income was primarily due to an increase
in asset based fees driven by an increase in the average market value of variable annuity customer accounts and positive net flows of
our variable annuities. The decrease in net investment income came primarily from the impact of a shift in customer funds from fixed
income investments to variable investments. In addition, net investment income for 2005 included the collection of investment income
on a previously defaulted bond as indicated above. These decreases were partially offset by higher yields in 2006 which benefited
from the sale of lower yielding bonds and reinvestment of proceeds at higher available 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.”
2005 to 2004 Annual Comparison. Revenues increased $139 million, from $1.578 billion in 2004 to $1.717 billion in 2005. Policy
charges and fee income increased $76 million, reflecting an increase in the average market value of variable annuity customer accounts and
positive net flows of our variable annuities reflecting the introduction of new product features late in the first quarter of 2005, including an
increase in account values with living benefit options. Net investment income increased $29 million, reflecting a higher level of invested
assets, increased yields and $9 million from the collection of investment income on a previously defaulted bond. Asset management fees
and other income increased $30 million, primarily due to an increase in asset based fees.
Benefits and Expenses
2006 to 2005 Annual Comparison. Benefits and expenses, as shown in the table above under “—Operating Results,” increased $303
million, from $1.212 billion in 2005 to $1.515 billion in 2006, including benefits and expenses of $167 million from the Allstate business
acquired during the second quarter of 2006. The remainder of the increase in benefits and expenses, $136 million, came primarily from
increases of $62 million in general and administrative expenses net of capitalization, $30 million in amortization of deferred policy
acquisition costs, and $25 million in policyholders’ benefits, including interest credited to policyholders’ account balances. The increase in
general and administrative expenses reflects increased distribution costs charged to expense associated with increased variable annuity
account value and sales, increased expenses related to expansion initiatives and growth of the business, and increased asset management
costs associated with the growth in variable annuity account values. General and administrative expenses for 2005 included a $13 million
increase in the amortization of value of business acquired relating to the modeling refinements discussed above. The increase in
amortization of deferred policy acquisition costs reflected a $21 million greater benefit in 2005 than in 2006 due to the changes in estimates
of total gross profits discussed above, as well as greater gross profits in 2006. The increase in policyholders’ benefits, including interest
credited to policyholders’ account balances, reflects a $42 million greater benefit in 2005 than in 2006 from the changes in estimates of
total gross profits and decreased cost of actual and expected death claims discussed above, partly offset by lower costs of our guaranteed
benefits in 2006 resulting from reduction in our net amount at risk.
2005 to 2004 Annual Comparison. Benefits and expenses increased $61 million, from $1.151 billion in 2004 to $1.212 billion in
2005. Amortization of deferred policy acquisition costs increased $48 million, from $125 million in 2004 to $173 million in 2005,
reflecting an increase to amortization due to increased gross profits in the current period and a net $9 million benefit due to the increased
estimates of total gross profits in both 2005 and 2004 discussed above. General and administrative expenses, net of capitalization, increased
$46 million from 2004 to 2005, including a $13 million increase in the amortization of value of business acquired, mainly due to the
modeling refinements discussed above, as well as increased costs associated with expansion of our distribution platforms and distribution
costs charged to expense associated with increased variable annuity sales. In addition, our asset based costs associated with trail
commissions and sub-advisory expenses have increased due to growth in account values. Partially offsetting these items was a decrease of
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
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