Prudential 2006 Annual Report Download - page 37

asset inflows during 2004 and 2005, including assets associated with the retirement business acquired from CIGNA, as well as net market
appreciation. Additionally, revenues for 2005 include an increase of $79 million in performance based incentive and transaction fees
primarily related to our real estate investment management business. Revenues for 2004 include asset management fees of $28 million
associated with certain money market mutual fund balances of brokerage clients of Wachovia Securities. These balances were essentially
eliminated as of September 30, 2004 due to the replacement of those funds with other investment alternatives for those brokerage clients.
The resulting reduction in revenues has been offset by payments from Wachovia under an agreement dated as of July 30, 2004
implementing arrangements with respect to money market mutual funds in connection with the combination of our retail securities
brokerage and clearing operations with those of Wachovia. This agreement extends for ten years after termination of the joint venture with
Wachovia. The revenue from Wachovia under this agreement, included in revenues from retail customers in the table above, was $54
million and $35 million for 2005 and 2004, respectively.
Expenses
2006 to 2005 Annual Comparison. Expenses, as shown in the table above under “—Operating Results,” increased $225 million,
from $1.232 billion in 2005 to $1.457 billion in 2006. The increase in expenses is primarily due to higher performance-based compensation
costs resulting from favorable performance in 2006, higher expenses related to proprietary investing activities and incentive compensation
related to performance based incentive fees, as discussed above.
2005 to 2004 Annual Comparison. Expenses increased $34 million, from $1.198 billion in 2004 to $1.232 billion in 2005, primarily
reflecting higher incentive based compensation costs resulting from favorable performance in 2005. Partially offsetting this increase is a
reduction in commission expenses associated with the money market funds of brokerage clients of Wachovia Securities subject to the
arrangements with Wachovia described above. Additionally, 2004 results include charges related to declines in value of intangible assets,
expenses incurred in exiting an operating facility and termination of activities related to certain of our international investment management
operations.
Financial Advisory
Operating Results
The following table sets forth the Financial Advisory segment’s operating results for the periods indicated.
Year ended December 31,
2006 2005 2004
(in millions)
Operating results:
Revenues ........................................................................................ $574 $453 $318
Expenses ........................................................................................ 513 708 563
Adjusted operating income .......................................................................... 61 (255) (245)
Equity in earnings of operating joint ventures(1) ..................................................... (294) (192) (58)
Income from continuing operations before income taxes, equity in earnings of operating joint ventures, extraordinary
gain on acquisition and cumulative effect of accounting change ........................................... $(233) $(447) $(303)
(1) Equity in earnings of operating joint ventures are included in adjusted operating income but excluded from income from continuing operations before
income taxes, equity in earnings of operating joint ventures, extraordinary gain on acquisition and cumulative effect of accounting change as they are
reflected on a U.S. GAAP basis on an after-tax basis as a separate line on our Consolidated Statements of Operations.
On July 1, 2003, we combined our retail securities brokerage and clearing operations with those of Wachovia Corporation, or
Wachovia, and formed Wachovia Securities Financial Holdings, LLC, or Wachovia Securities, a joint venture headquartered in Richmond,
Virginia. We have a 38% ownership interest in the joint venture, while Wachovia owns the remaining 62%. The transaction included our
securities brokerage operations but did not include our equity sales, trading and research operations. As part of the transaction we retained
certain assets and liabilities related to the contributed businesses, including liabilities for certain litigation and regulatory matters. We
account for our 38% ownership of the joint venture under the equity method of accounting.
2006 to 2005 Annual Comparison. Adjusted operating income increased $316 million, from a loss of $255 million in 2005 to
income of $61 million in 2006. The segment’s results for 2006 include our share of earnings from Wachovia Securities, on a pre-tax
basis, of $294 million, compared to $217 million in 2005 before transition costs, reflecting increased fee income of the joint venture. The
segment’s results also include expenses of $267 million in 2006 related to obligations and costs we retained in connection with the
contributed businesses primarily for litigation and regulatory matters, compared to $452 million during 2005. The current and prior year
expenses reflected increases in our reserve for settlement costs related to market timing issues involving the former Prudential Securities
operations, with respect to which the Company announced that a settlement was reached in August 2006. There are no transition costs in
2006 as the business integration was completed during the first half of 2005. Transition costs were $20 million in 2005. In addition,
results of the segment include income of $34 million and zero from our equity sales and trading operations for 2006 and 2005,
respectively. The increase came primarily from income of $42 million from securities relating to trading exchange memberships,
primarily representing shares received in connection with the commencement of public trading of exchange shares. The majority of those
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
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