Prudential 2007 Annual Report Download - page 49

(1) Includes consolidating adjustments.
(2) Revenues exclude Realized investment gains (losses), net, and related adjustments. See “—Realized Investment Gains and General Account
Investments—Realized Investment Gains.”
(3) Revenues exclude net investment gains and losses on trading account assets supporting insurance liabilities. See “—Trading Account Assets Supporting
Insurance Liabilities.”
(4) See “—Divested Businesses.”
2007 to 2006 Annual Comparison. Adjusted operating income decreased $97 million, from income of $47 million in 2006 to a loss
of $50 million in 2007. Adjusted operating income from corporate operations decreased $50 million, from a loss of $28 million in 2006 to a
loss of $78 million in 2007. Corporate operations investment income, net of interest expense, decreased $62 million, primarily reflecting
the impact of deployment of our excess capital in our businesses and for share repurchases, increased borrowings and less favorable income
from equity method investments, including tax credit investments, partially offset by investment income, net of related interest expense,
from the investment of proceeds from our $2 billion November 2005 convertible debt issuance and our $2 billion December 2006
convertible debt issuance. In May 2007 the company called for redemption the November 2005 convertible debt securities. The proceeds
from our December 2006 convertible debt issuance were previously used to fund an investment portfolio, but beginning in December of
2007 were reinvested in short-term investments and may be used to fund operations in lieu of other short-term borrowings in future periods.
The proceeds from a $3 billion December 2007 convertible debt issuance have been deployed in a similar manner. 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 pre-tax earnings on a growing book of equity method tax credit investments.
Corporate operations includes income from our qualified pension plan of $366 million in 2007, an increase of $23 million from $343
million in 2006. The increase reflects changes in the market value of our plan assets. During 2007 we transferred $1 billion of assets within
the qualified pension plan under Section 420 of the Internal Revenue Code from assets supporting pension benefits to assets supporting
retiree medical benefits.
For purposes of calculating pension income from our own qualified pension plan for the year ended December 31, 2008, we will
increase the discount rate to 6.25% from 5.75% in 2007. The expected return on plan assets will decline from 8.00% in 2007 to 7.75% in
2008 and the assumed rate of increase in compensation will remain unchanged at 4.5%. 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, the decline in plan assets
supporting pension benefits of $1 billion discussed above, 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
2008, but at a level of about $70 million to $80 million below that of the year 2007. This decline will be offset by a decline in other
postretirement benefit expenses in a range of $80 million to $90 million. The decline in other postretirement benefit expense is driven
primarily by the increase in expected return on assets reflecting the transfer of assets to our retiree medical benefit plans discussed above.
In 2008, pension and other postretirement benefit service costs related to active employees will continue to be allocated to our business
segments.
Adjusted operating income of our real estate and relocation services business decreased $47 million, from $75 million in 2006 to $28
million in 2007. The decline reflected lower transaction volume associated with less favorable residential real estate market conditions as
well as a fixed asset write-off in 2007.
2006 to 2005 Annual Comparison. Adjusted operating income decreased $141 million, from $188 million in 2005 to $47 million in
2006. Adjusted operating income from corporate operations decreased $111 million, from income of $83 million in 2005 to a loss of $28
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. 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.
General and administrative expenses, excluding income from our qualified pension plan, declined by $93 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 2006.
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