Prudential 2006 Annual Report Download - page 48

2006 to 2005 Annual Comparison. Adjusted operating income decreased $116 million, from $202 million in 2005 to $86 million in
2006. Adjusted operating income from corporate operations decreased $86 million, from $97 million in 2005 to $11 million in 2006.
Corporate operations investment income, net of interest expense, decreased $79 million primarily reflecting the impact of deployment of
our excess capital in our businesses and for share repurchases, increased borrowings, higher short term borrowing rates and less favorable
income from equity method investments. These items were partially offset by income from the investment of proceeds from our convertible
debt issuances of $2 billion principal amount in November 2005 and $2 billion principal amount in December 2006. We anticipate our
investment income, net of interest expense within our corporate operations will continue to decline in future periods as we continue to
repurchase shares and experience less favorable earnings on equity method investments reflecting prior sales of the underlying real estate
assets within these investments. Adjusted operating income from corporate operations for 2006 also included income of $26 million
reflecting market appreciation on shares received by our Financial Advisory segment in connection with the commencement of public
trading of stock exchange shares, which shares were transferred to corporate operations during the first quarter of 2006. In 2005, adjusted
operating income from corporate operations included $20 million of non-recurring gains from home office property sales.
Corporate operations includes income from our qualified pension plan of $343 million in 2006, a decrease of $68 million from $411
million in 2005. The decline includes the impact of a reduction in the expected return on plan assets from 8.5% for 2005 to 8.0% for 2006.
For purposes of calculating pension income from our own qualified pension plan for the year ended December 31, 2007, we will
increase the discount rate to 5.75% from 5.50% in 2006. The expected return on plan assets and the assumed rate of increase in
compensation will remain unchanged at 8.00% and 4.5%, respectively. We determined our expected return on plan assets based upon the
arithmetic average of prospective returns, which is based upon a risk free interest rate as of the measurement date adjusted by a risk
premium that considers historical information and expected asset manager performance, for equity, debt and real estate markets applied on
a weighted average basis to our pension asset portfolio. Giving effect to the foregoing assumptions, as well as other items including the
increase in market value of pension assets, we expect on a consolidated basis income from our own qualified pension plan will continue to
contribute to adjusted operating income in 2007, but at a level of about $20 million to $30 million above that of the year 2006. In 2007,
pension service costs related to active employees will continue to be allocated to our business segments.
General and administrative expenses, excluding income from our qualified pension plan, declined by $92 million, reflecting lower
employee benefit costs in 2006. Results for 2005 included the reversal of $30 million of amortization of deferred policy acquisition costs
recorded in earlier periods.
Adjusted operating income of our real estate and relocation services business decreased $30 million, from $105 million in 2005 to $75
million in 2006. The decline was driven by less favorable residential real estate market conditions in the current year.
2005 to 2004 Annual Comparison. Adjusted operating income increased $26 million, from $176 million in 2004 to $202 million in
2005. Adjusted operating income from corporate operations increased $22 million, from $75 million in 2004 to $97 million in 2005. Costs
incurred for expense reduction initiatives declined from $61 million in 2004 to $11 million in 2005. Results for 2005 also include the
reversal of $30 million of amortization of deferred policy acquisition costs recorded in prior periods. Corporate operations included $40
million of costs in 2005 from retained obligations relating to policyholders with whom we had previously agreed to provide insurance for
reduced or no premium in accordance with contractual settlements related to prior individual life sales practices remediation, as compared
to $68 million in 2004. The costs in 2004 include the impact of a reduction in our policy dividend scale. Our obligations under these
settlements relate to both variable life and traditional dividend-paying policies that were issued before our demutualization. A reduction in
the 2005 dividend scale resulted in an increase in the obligation for net premiums on traditional dividend-paying policies to be absorbed by
us under these settlements, which was recognized within 2004 Corporate and Other results. Corporate operations includes income from our
qualified pension plan of $411 million in 2005, a decrease of $55 million from $466 million in 2004. The decline includes the impact of a
reduction in the expected return on plan assets from 8.75% for 2004 to 8.50% for 2005. Corporate operations investment income, net of
interest expense, decreased $24 million, reflecting increased borrowings.
Adjusted operating income of our real estate and relocation services business increased $4 million, from $101 million in 2004 to $105
million in 2005. The improvement was the result of higher revenues in our real estate franchise operations and higher operating income in
our real estate financing business due to increased real estate transaction volumes and home prices.
Results of Operations of Closed Block Business
We established the Closed Block Business effective as of the date of demutualization. The Closed Block Business includes our in
force traditional domestic participating life insurance and annuity products and assets that are used for the payment of benefits and
policyholder dividends on these policies, as well as other assets and equity and related liabilities that support these policies. We no longer
offer these traditional domestic participating policies. See “—Overview—Closed Block Business” for additional details.
At the end of each year, the Board of Directors of Prudential Insurance determines the dividends payable on participating policies for
the following year based on the experience of the Closed Block, including investment income, net realized and unrealized investment gains,
mortality experience and other factors. Although Closed Block experience for dividend action decisions is based upon statutory results, at
the time the Closed Block was established, we developed, as required by U.S. GAAP, an actuarial calculation of the timing of the
maximum future earnings from the policies included in the Closed Block. If actual cumulative earnings in any given period are greater than
the cumulative earnings we expected, we will record this excess as a policyholder dividend obligation. We will subsequently pay this
excess to Closed Block policyholders as an additional dividend unless it is otherwise offset by future Closed Block performance that is less
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
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