Prudential 2006 Annual Report Download - page 39

administrative expenses relating to the expansion of our distribution and client servicing capabilities, as well as costs associated with
expense reduction initiatives. Also contributing to the decrease in our full service business were higher crediting rates on general account
liabilities. Partially offsetting these decreases were increased fees due to higher full service retirement account values primarily resulting
from market appreciation. In addition, the adjusted operating income of both businesses reflect the benefit 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. Adjusted operating income increased $164 million, from $334 million in 2004 to $498 million in
2005. Results for the segment during 2005 included adjusted operating income of $195 million from the retirement business we acquired
from CIGNA, compared to $128 million in 2004, which included only the initial nine months of results for these operations. Adjusted
operating income for the acquired retirement business for 2005 consisted of revenues of $1.295 billion and total benefits and expenses of
$1.100 billion. Revenues from the acquired business consisted primarily of $873 million in net investment income, mainly related to
trading assets supporting insurance liabilities, and $289 million in asset management fees and other income. Benefits and expenses from
the acquired business consisted primarily of $677 million of interest credited to policyholders’ account balances and $434 million of
general and administrative expense. Transition costs related to the acquisition were $36 million in 2005 and $43 million in 2004.
Adjusted operating income from the segment’s original businesses, excluding the retirement business we acquired from CIGNA,
increased $97 million, from $206 million in 2004 to $303 million in 2005. Results for 2005 benefited by $49 million from mortgage
prepayment income, which represents a $34 million benefit to 2005 compared to 2004. Results for 2005 also benefited by $27 million from
reserve releases, which include updates of client census data on a group annuity block of business. In addition, the 2005 period benefited
from improved investment results, primarily reflecting lower crediting rates on full service general account liabilities, and from the
collection of investment income on a previously defaulted bond in the first quarter of 2005 amounting to $7 million.
Revenues
2006 to 2005 Annual Comparison. Revenues, as shown in the table above under “—Operating Results,” increased $353 million,
from $4.025 billion in 2005 to $4.378 billion in 2006. Net investment income increased $385 million, of which $75 million is due to the
change in the reinsurance arrangement related to the guaranteed cost business acquired from CIGNA as discussed above. The remainder of
the increase in net investment income primarily reflects a larger base of invested assets due to sales of guaranteed investment products in
the institutional and retail markets and investments financed by borrowings. As noted above, net investment income also includes the
impact of mortgage prepayments, the benefit from the disposition of real estate within an investment joint venture, and the collection of
investment income on a previously defaulted bond, as well as the benefit from the sale of lower yielding bonds and reinvestment of
proceeds at higher available interest rates. Partially offsetting the increases in revenue discussed above, was a decrease in premiums of $26
million reflecting lower sales of life-contingent structured settlements in 2006, partially offset by a single large sale of a group annuity
product in the first quarter of 2006.
2005 to 2004 Annual Comparison. Revenues increased $800 million, from $3.225 billion in 2004 to $4.025 billion in 2005. Revenue
of the business acquired from CIGNA contributed $420 million of this increase, as revenue was $1.295 billion in 2005, compared to $875
million in 2004, which included only the initial nine months of results for these operations. Revenue for the segment’s original businesses,
excluding the business acquired from CIGNA, increased by $380 million. Premiums increased $225 million, primarily due to an increase in
sales of life-contingent structured settlements following the upgrade of Prudential Insurance’s financial strength rating by A.M. Best during
2004. Net investment income increased $145 million reflecting a larger base of invested assets due to sales of guaranteed investment
products in the institutional and retail markets and investments financed by borrowings. In addition, net investment income included greater
mortgage prepayment income, which increased $34 million in 2005, and $7 million from the collection of investment income on a
previously defaulted bond. These factors were partially offset by lower portfolio yields.
Benefits and Expenses
2006 to 2005 Annual Comparison. Benefits and expenses, as shown in the table above under “—Operating Results,” increased $342
million, from $3.527 billion in 2005 to $3.869 billion in 2006. Interest credited to policyholders’ account balances increased $220 million
reflecting higher interest credited on the greater base of guaranteed investment products sold in the institutional and retail markets, as well
as higher crediting rates on full service general account liabilities. Interest expense increased $98 million primarily due to increased
financing costs on increased borrowings, the proceeds of which were used to purchase invested assets. Policyholders’ benefits, including
the change in policy reserves, increased $55 million and reflects a $66 million increase due to the change in the reinsurance arrangement
related to the guaranteed cost business acquired from CIGNA as discussed above and a $15 million increase due to lower reserve releases
in 2006 as discussed above. Excluding these items, policyholders’ benefits, including the change in policy reserves, decreased $26 million,
primarily from the $26 million decrease in premiums discussed above. General and administrative expenses were relatively stable as the
decrease in transition expenses in 2006, were mostly offset by expenses incurred to expand our full service distribution and client servicing
capabilities, as well as costs incurred related to expense reduction initiatives.
2005 to 2004 Annual Comparison. Benefits and expenses increased $636 million, from $2.891 billion in 2004 to $3.527 billion in
2005. Benefits and expenses of the business acquired from CIGNA contributed $353 million of this increase as benefits and expenses were
$1.100 billion in 2005, compared to $747 million in 2004, which included only the initial nine months of results for these operations.
Benefits and expenses for the segment’s original businesses, excluding the business acquired from CIGNA, increased by $283 million.
Policyholders’ benefits, including the change in policy reserves, increased by $185 million reflecting an increase in reserves commensurate
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
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