Prudential 2006 Annual Report Download - page 50

Benefits and Expenses
2006 to 2005 Annual Comparison. Benefits and expenses, as shown in the table above under “—Operating Results,” decreased $135
million, from $7.544 billion in 2005 to $7.409 billion in 2006, as dividends to policyholders decreased $135 million, reflecting 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. Benefits and expenses increased $228 million, from $7.316 billion in 2004 to $7.544 billion in
2005, primarily due to a $289 million increase in dividends to policyholders, which includes a $326 million increase in the cumulative
earnings policyholder obligation, offset by a $37 million reduction in dividends to policyholders, primarily due to a reduction in the 2005
dividend scale. Additionally, interest expense increased $24 million, from $168 million in 2004 to $192 million in 2005. Partially offsetting
the foregoing items was a decrease of $62 million in policyholder benefits and related changes in reserves, including interest credited to
policyholders’ accounts, from $4.193 billion in 2004 to $4.131 billion in 2005, resulting from the maturity or termination of policies in
force, as discussed above. Additionally, operating expenses, including in force based distribution costs that we charge to expense,
decreased $16 million, from $485 million in 2004 to $469 million in 2005, reflecting lower distribution costs as we have discontinued sales
of traditional products and continued to reduce operating cost levels.
Income Taxes
Shown below is our income tax provision for the years ended December 31, 2006, 2005 and 2004, separately reflecting the impact of
certain significant items. Also presented below is the income tax provision that would have resulted from application of the statutory 35%
federal income tax rate in each of these periods.
Year ended December 31,
2006 2005 2004
(in millions)
Tax provision ......................................................................................... $1,248 $ 808 $ 938
Impact of:
Non-taxable investment income ....................................................................... 252 185 149
Effect of change in repatriation of foreign earnings ....................................................... 58 (61) 24
Change in valuation allowance ....................................................................... 2 (76) 24
Non-deductible expenses ............................................................................ (45) (70) (6)
Completion of Internal Revenue Service examination for the years 1997 to 2001 ................................ — 720 —
Tax provision excluding these items ....................................................................... $1,515 $1,506 $1,129
Tax provision at statutory rate ............................................................................ $1,541 $1,501 $1,150
For the year ended December 31, 2006, the difference between taxes excluding the items shown above and taxes that would have
resulted from the application of the statutory rate is attributable, in part, to an increase in foreign and domestic tax credits.
For the year ended December 31, 2004, the difference between taxes excluding the items shown above and taxes that would have
resulted from the application of the statutory rate is attributable, in part, to an increase in foreign and domestic tax credits and a decrease in
state income taxes.
We employ various tax strategies, including strategies to minimize the amount of taxes resulting from realized capital gains.
Discontinued Operations
Included within net income are the results of businesses which are reflected as discontinued operations under U.S. GAAP. A summary
of the results of discontinued operations by business is as follows for the periods indicated:
Year ended December 31,
2006 2005 2004
(in millions)
Real estate investments sold or held for sale ................................................................. $ 98 $— $—
Canadian intermediate weekly premium and individual health operations .......................................... (10) (31) 11
Philippine insurance operations ........................................................................... (12) — —
Dryden Wealth Management ............................................................................. (4) (56) (81)
International securities operations ......................................................................... (8) (26) (42)
Healthcare operations ................................................................................... 29 22 6
Other ............................................................................................... — (7) (9)
Income (loss) from discontinued operations before income taxes ................................................. 93 (98) (115)
Income tax expense (benefit) ......................................................................... 28 (16) (27)
Income (loss) from discontinued operations, net of taxes ....................................................... $ 65 $(82) $ (88)
For further information concerning discontinued operations see Note 3 to the Consolidated Financial Statements.
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
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