Prudential 2006 Annual Report Download - page 49

favorable than we originally expected. The policyholder dividends we charge to expense within the Closed Block Business will include any
change in our policyholder dividend obligation that we recognize for the excess of actual cumulative earnings in any given period over the
cumulative earnings we expected in addition to the actual policyholder dividends declared by the Board of Directors of Prudential
Insurance.
As of December 31, 2006, the Company has recognized a policyholder dividend obligation to Closed Block policyholders for the
excess of actual cumulative earnings over the expected cumulative earnings of $483 million. Actual cumulative earnings, as required by
U.S. GAAP, reflect the recognition of realized investment gains in the current period, as well as changes in assets and related liabilities that
support the policies. Additionally, net unrealized investment gains have arisen subsequent to the establishment of the Closed Block due to
the impact of lower interest rates on the market value of fixed maturities available for sale. These net unrealized investment gains have
been reflected as a policyholder dividend obligation of $1.865 billion as of December 31, 2006, to be paid to Closed Block policyholders,
unless otherwise offset by future experience, with an offsetting amount reported in accumulated other comprehensive income.
Operating Results
Management does not consider adjusted operating income to assess the operating performance of the Closed Block Business.
Consequently, results of the Closed Block Business for all periods are presented only in accordance with U.S. GAAP. The following table
sets forth the Closed Block Business U.S. GAAP results for the periods indicated.
Year ended December 31,
2006 2005 2004
(in millions)
U.S. GAAP results:
Revenues .......................................................................................... $7,812 $8,026 $8,231
Benefits and expenses ................................................................................ 7,409 7,544 7,316
Income from continuing operations before income taxes, equity in earnings of operating joint ventures, extraordinary gain on
acquisition and cumulative effect of accounting change ....................................................... $ 403 $ 482 $ 915
Income from Continuing Operations Before Income Taxes, Equity in Earnings of Operating Joint Ventures,
Extraordinary Gain on Acquisition and Cumulative Effect of Accounting Change
2006 to 2005 Annual Comparison. Income from continuing operations before income taxes, equity in earnings of operating joint
ventures, extraordinary gain on acquisition and cumulative effect of accounting change decreased $79 million, from $482 million in 2005
to $403 million in 2006. Current year results reflect realized investment gains of $481 million as compared to $636 million in the prior
year, a decrease of $155 million. For a discussion of Closed Block Business realized investment gains (losses), net, see “—Realized
Investment Gains and General Account Investments—Realized Investment Gains.” The decrease in net realized investment gains was
partially offset by a decrease in dividends to policyholders of $135 million, which is comprised of a decline in the policyholder dividend
obligation expense of $169 million, partially offset by a $34 million increase in dividends paid and accrued to policyholders.
2005 to 2004 Annual Comparison. Income from continuing operations before income taxes, equity in earnings of operating joint
ventures, extraordinary gain on acquisition and cumulative effect of accounting change decreased $433 million, from $915 million in 2004
to $482 million in 2005. The decrease was primarily due to an increase of $289 million in dividends to policyholders, which includes an
increase to the cumulative earnings policyholder dividend obligation, offset by a decrease in the annual policyholder dividend, primarily as
a result of a reduction in the 2005 dividend scale. Additionally, results in 2005 include a decrease in premiums and net realized investment
gains.
Revenues
2006 to 2005 Annual Comparison. Revenues, as shown in the table above under “—Operating Results,” decreased $214 million,
from $8.026 billion in 2005 to $7.812 billion in 2006. Revenues in the current year reflect a decrease of $155 million in net realized
investment gains and a decrease of $41 million in net investment income. Additionally, results in 2006 reflect a decline in premiums, with a
corresponding decline in changes in reserves, as policies in force in the Closed Block have matured or terminated. We expect this decline in
premiums for this business to continue as these policies continue to mature or terminate.
2005 to 2004 Annual Comparison. Revenues decreased $205 million, from $8.231 billion in 2004 to $8.026 billion in 2005. The
decrease reflects a decline in premiums of $156 million, from $3.776 billion in 2004 to $3.620 billion in 2005 as policies in force in the
Closed Block have matured or terminated, as described above. Additionally, net realized investment gains decreased $79 million, from
$715 million in 2004 to $636 million in 2005. Partially offsetting these items, net investment income increased $40 million, from $3.681
billion in 2004 to $3.721 billion in 2005.
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
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