Prudential 2007 Annual Report Download - page 26

Results of Operations—Financial Services Businesses
2007 to 2006 Annual Comparison. Income from continuing operations attributable to the Financial Services Businesses increased
$424 million, from $3.073 billion in 2006 to $3.497 billion in 2007. The increase reflects improved investment results, continued growth in
our international operations, the benefit of higher asset based fees, a greater contribution from the variable annuity business acquired from
The Allstate Corporation, for which the prior year period includes results from only the June 1, 2006 date of acquisition, as well as
increased earnings from our retail brokerage joint venture with Wachovia, including the benefit of lower retained expenses in 2007.
Partially offsetting these items were increased general and administrative expenses, consistent with the growth in the business, and a lower
level of net realized investment gains. On a diluted per share basis, income from continuing operations attributable to the Financial Services
Businesses for the year ended December 31, 2007 of $7.58 per share of Common Stock increased from $6.36 per share of Common Stock
for the year ended December 31, 2006. This increase reflects the increase in earnings discussed above and the benefit of a lower number of
shares of Common Stock outstanding due to our share repurchase program. We analyze the operating performance of the segments
included in the Financial Services Businesses using “adjusted operating income” as described in “—Segment Measures,” below. For a
discussion of our segment results on this basis see “—Results of Operations for Financial Services Businesses by Segment,” below. In
addition, for a discussion of the realized investment gains (losses), net, attributable to the Financial Services Businesses, see “—Realized
Investment Gains and General Account Investments—Realized Investment Gains,” below.
The direct equity adjustment increased income from continuing operations available to holders of the Common Stock for earnings per
share purposes by $53 million for the year ended December 31, 2007, compared to $68 million for the year ended December 31, 2006. As
described more fully in Note 14 to the Consolidated Financial Statements, the direct equity adjustment modifies earnings available to
holders of the Common Stock and the Class B Stock for earnings per share purposes. The holders of the Common Stock will benefit from
the direct equity adjustment as long as reported administrative expenses of the Closed Block Business are less than the cash flows for
administrative expenses determined by the policy servicing fee arrangement that is based upon insurance and policies in force and statutory
cash premiums. As statutory cash premiums and policies in force in the Closed Block Business decline, we expect the benefit to the
Common Stock holders from the direct equity adjustment to decline accordingly. If the reported administrative expenses of the Closed
Block Business exceed the cash flows for administrative expenses determined by the policy servicing fee arrangement, the direct equity
adjustment will reduce income available to holders of the Common Stock for earnings per share purposes.
2006 to 2005 Annual Comparison. Income from continuing operations attributable to the Financial Services Businesses of $3.073
billion declined slightly from 2005. Continued growth of international insurance operations, improved investment results, higher asset
based fees including the results of the business we acquired from Allstate in 2006, and increased earnings from our investment in the retail
brokerage joint venture with Wachovia were offset by a lower level of net realized investment gains and a higher level of general and
administrative expenses consistent with the growth in the businesses. The benefit of these items as compared to the prior year were more
than offset by the benefit recognized in 2005 of $720 million from a reduction of tax liabilities in connection with the Internal Revenue
Service examination of our tax returns for the years 1997 through 2001. On a diluted per share basis, income from continuing operations
attributable to the Financial Services Businesses for the year ended December 31, 2006 of $6.36 per share of Common Stock declined from
$6.48 per share of Common Stock for the year ended December 31, 2005. This decline reflects the decrease in earnings discussed above,
partially offset by the benefit of a lower number of shares of Common Stock outstanding due to our share repurchase program, the cost of
which contributed to the decline in earnings discussed above.
The direct equity adjustment increased income from continuing operations available to holders of the Common Stock for earnings per
share purposes by $68 million for the year ended December 31, 2006, compared to $82 million for the year ended December 31, 2005.
Results of Operations—Closed Block Business
2007 to 2006 Annual Comparison. Income from continuing operations attributable to the Closed Block Business for the year ended
December 31, 2007, was $190 million, or $68.50 per share of Class B stock, compared to $284 million, or $108.00 per share of Class B
Stock, for the year ended December 31, 2006. The direct equity adjustment decreased income from continuing operations available to the
Class B Stock holders for earnings per share purposes by $53 million for the year ended December 31, 2007, compared to $68 million for
the year ended December 31, 2006. For a discussion of the results of operations for the Closed Block Business, see “—Results of
Operations of Closed Block Business,” below.
2006 to 2005 Annual Comparison. Income from continuing operations attributable to the Closed Block Business for the year ended
December 31, 2006, was $284 million, or $108.00 per share of Class B Stock, compared to $321 million, or $119.50 per share of Class B
Stock, for the year ended December 31, 2005. The direct equity adjustment decreased income from continuing operations available to the
Class B Stock holders for earnings per share purposes by $68 million for the year ended December 31, 2006, compared to $82 million for
the year ended December 31, 2005.
Segment Measures
In managing our business, we analyze operating performance separately for our Financial Services Businesses and our Closed Block
Business. For the Financial Services Businesses, we analyze our segments’ operating performance using “adjusted operating income.”
Results of the Closed Block Business for all periods are evaluated and presented only in accordance with U.S. GAAP. Adjusted operating
income does not equate to “income from continuing operations before income taxes and equity in earnings of operating joint ventures” or
“net income” as determined in accordance with U.S. GAAP but is the measure of segment profit or loss we use to evaluate segment
performance and allocate resources, and consistent with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related
Information,” is our measure of segment performance. Adjusted operating income is calculated for the segments of the Financial Services
24 Prudential Financial 2007 Annual Report