Prudential 2007 Annual Report Download - page 39

Adjusted Operating Income
2007 to 2006 Annual Comparison. Adjusted operating income for the Retirement segment decreased $53 million, from $509 million
in 2006 to $456 million in 2007. Included within adjusted operating income in 2007 is an $82 million charge related to payments made to
plan clients associated with a legal action filed against an unaffiliated asset manager, State Street Global Advisors, Inc., or SSgA. This
action seeks, among other relief, restitution of certain losses experienced by plan clients attributable to certain investment funds managed
by SSgA as to which we believe SSgA employed investment strategies and practices that were misrepresented by SSgA and failed to
exercise the standard of care of a prudent investment manager. In order to protect the interests of the affected plans and their participants
while we pursue these remedies, we have made payments to affected plan clients that authorized us to proceed on their behalf.
Excluding the charge discussed above, adjusted operating income for 2007 increased $29 million compared to 2006, reflecting
improved results from our full service business and essentially unchanged results for our institutional investment products business. The
full service business benefited primarily from higher fees, driven by increases in full service retirement account values related primarily to
market appreciation. Contributing to the increase to a lesser extent was the lack of transition expenses in 2007, as 2006 included $6 million
of transition expenses related to the completion of the integration of the retirement business acquired from CIGNA. Partially offsetting
these items within the full service business was an increase in general and administrative expenses driven by expenses incurred to expand
our product and service capabilities. In addition, adjusted operating income for 2006 included a benefit from the disposition of real estate
within an investment joint venture. In our institutional investment products business, a greater contribution from investment results,
primarily due to a larger base of invested assets and higher portfolio yields, and improved case experience essentially offset decreases in
the market value of certain externally managed investments in the European market during 2007, a decrease in the level of mortgage
prepayment income, and a lower benefit from reserve refinements reflecting updates of client census data on a group annuity block of
business. For information regarding our externally managed investments in the European market, see “—Realized Investment Gains and
Losses and General Account Investments—General Account Investments—Fixed Maturity Securities—Fixed Maturity Securities and
Unrealized Gains and Losses by Industry Category.” Contributing to the higher portfolio yields in 2007 is the benefit from the sale of lower
yielding bonds and reinvestment of proceeds at higher available interest rates, which primarily occurred in the first half of 2006. 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.”
2006 to 2005 Annual Comparison. Adjusted operating income for the Retirement segment increased $11 million, from $498 million
in 2005 to $509 million in 2006. Results for 2006 include $25 million from mortgage prepayment income, a $13 million benefit from the
disposition of real estate within an investment joint venture, $12 million from reserve releases mainly reflecting updates of client census
data on a group annuity block of business and $6 million of transition expenses related to the integration of the retirement business acquired
from CIGNA, which was completed in the first quarter of 2006. Results for 2005 include $49 million from mortgage prepayment income,
$27 million from reserve releases mainly reflecting updates of client census data on a group annuity block of business, $36 million of
transition expenses and $7 million from the collection of investment income on a previously defaulted bond.
Excluding the items discussed above, adjusted operating income for the Retirement segment increased $14 million. This increase
primarily reflects an increase in adjusted operating income from our institutional investment products business reflecting a greater
contribution from investment results due principally to a larger base of invested assets. Partially offsetting this increase was a decrease in
adjusted operating income from our full service business. The decrease in our full service business reflects higher general and
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.”
Revenues
2007 to 2006 Annual Comparison. Revenues, as shown in the table above under “—Operating Results,” increased $304 million, from
$4.378 billion in 2006 to $4.682 billion in 2007. Net investment income increased $251 million, primarily due to a larger base of invested
assets due to sales of guaranteed investment products in the institutional and retail markets and higher portfolio yields, partially offset by a
benefit in 2006 from the disposition of real estate within an investment joint venture and decreases in the level of mortgage prepayment
income. Also contributing to the increase in net investment income is $24 million relating to the change in the reinsurance arrangement
with respect to the guaranteed cost business acquired from CIGNA. Due to this change, the results of this business, which were previously
presented on a net basis in “Asset management fees and other income” are, beginning on April 1, 2006, presented on a gross basis in our
results of operations. In addition, asset management fees and other income increased $25 million reflecting growth in fees due to higher full
service retirement account values primarily resulting from market appreciation, partially offset by decreases in the market value of certain
externally managed investments in the European market. Premiums increased $35 million, driven by higher single premium group annuity
and life-contingent structured settlement sales, and resulted in a corresponding increase in policyholders’ benefits, including the change in
policy reserves, as discussed below.
2006 to 2005 Annual Comparison. Revenues 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
Prudential Financial 2007 Annual Report 37