01—Abstract
Summary
Summary of the 10-K filed February 28, 2006. Cited figures are marked; the original filing is the authoritative source.
Prudential Financial, Inc. reported 2005 net income of $3.54 billiona, up from $2.26 billion in 2004, on total revenues of $31.71 billion.
Income from continuing operations before income taxes was $4.47 billionb, which includes a $720 million benefit from the completion of the IRS examination of tax years 1997 through 2001. Adjusted operating income for the Financial Services Businesses rose to $3.55 billion from $2.52 billion, led by International Insurance ($1.31 billion) and Individual Life and Annuities ($1.00 billion). The company is split into Financial Services Businesses (Common Stock, NYSE: PRU) and the Closed Block Business (non-traded Class B Stock), with no legal separation between them.
Capital deployment was a major theme. Prudential repurchased 32.4 million shares for $2.1 billionc in 2005, raised its annual Common Stock dividend 25% to $0.78 per share, and authorized up to $2.5 billion of repurchases for 2006. Total borrowings rose to $19.4 billion from $11.7 billion, driven largely by the $2.0 billion floating rate convertible senior notes issued in November 2005.
Stockholders' equity grew to $22.76 billiond from $22.34 billion. The filing also discloses significant legal and regulatory exposure, including market timing investigations involving Prudential Securities and American Skandia, a $269 million judgment on appeal in the Burns case, and ongoing reinsurance accounting inquiries by the SEC and Connecticut Attorney General.
The company restated its 2004 and interim 2005 cash flow statements for classification errors. Management believes the ultimate outcome of pending litigation should not have a material adverse effect on financial position, but acknowledges that results in a given quarter could be materially affected.
02—Key points
Key Highlights
- Net income of $3.54 billion in 2005, up from $2.26 billion in 2004; diluted net income per Common Stock share of $6.34 versus $3.31.
- Total revenues of $31.71 billion in 2005, up from $28.12 billion, with net investment income of $10.56 billion and asset management fees and other income of $3.53 billion.
- Income tax provision includes a $720 million benefit from reduction of tax liabilities after the IRS closed its audit of 1997 to 2001 returns; the company expects a cash refund of about $570 million in 2006.
- Repurchased 32.4 million Common Stock shares for $2.1 billion in 2005; board authorized up to $2.5 billion of repurchases in 2006; quarterly-equivalent annual dividend raised 25% to $0.78 per share.
- International Insurance adjusted operating income rose to $1.31 billion from $917 million, including $502 million from Gibraltar Life; Individual Life and Annuities adjusted operating income rose to $1.00 billion from $817 million.
- Total borrowings increased to $19.4 billion from $11.7 billion, including $2.0 billion of floating rate convertible senior notes issued in November 2005 with a conversion price of $90 per share.
- Ongoing market timing investigations and litigation, including a $269 million judgment on appeal in the Burns case, and a reserve established for anticipated settlement costs; the company recorded $452 million of expenses in 2005 for retained Wachovia-related obligations.
03—Questions
Frequently Asked Questions
How are the two classes of common stock tied to the business?
The publicly traded Common Stock (NYSE: PRU) reflects the performance of the Financial Services Businesses, while the non-traded Class B Stock reflects the Closed Block Business. There is no legal separation between the two businesses, so holders of each class are subject to all risks of an investment in the company. Dividends on Class B Stock have a Target Dividend Amount of $19.25 million, and Common Stock dividends can only be paid if that Class B dividend obligation is met.
What drove the increase in 2005 net income?
Net income rose to $3.54 billion from $2.26 billion. Key drivers included higher adjusted operating income in International Insurance and Individual Life and Annuities, $1.38 billion of realized investment gains (up from $798 million), and the $720 million tax benefit from the IRS audit resolution. Financial Advisory remained a loss, at $255 million on an adjusted operating income basis, largely due to $452 million of retained obligations from the Wachovia Securities joint venture.
How much exposure does Prudential have to Japan?
The filing states that 30% of Financial Services Businesses general account investments at December 31, 2005 related to Japanese insurance operations, down from 32% in 2004. Japanese general account investments totaled $44.2 billion. A substantial portion of revenues and income from continuing operations comes from foreign operations, primarily Japan and Korea, and the company notes risks around fund transfer restrictions and negative spreads on guaranteed-rate products in Japan.
What are the main legal and regulatory risks disclosed?
The filing discloses several matters, including market timing investigations involving the former Prudential Securities retail brokerage and certain American Skandia entities, with an offer to settle the American Skandia matters for $95 million in restitution and penalties. It also discloses a $269 million judgment in the Burns case under appeal, reinsurance accounting inquiries by the SEC and Connecticut Attorney General, and a remediation program for about 11,000 American Skandia annuity contracts. Management believes the ultimate outcome should not have a material adverse effect on financial position, but results in a particular period could be materially affected.
Did the company restate any financial statements?
Yes. Management identified misclassifications in the Consolidated Statements of Cash Flows for 2004, 2003 and 2002 and for the interim periods of 2005 and 2004. The company filed a Form 10-K/A and Forms 10-Q/A on February 15, 2006. The filing states the restatements relate to classification of data rather than the collection or numerical accuracy of data, and that controls have been enhanced to prevent similar errors.
04—Continue