Prudential 2012 Annual Report Download - page 30

(1) Includes variable and fixed annuities sold as retail investment products. Investments sold through defined contribution plan products are included with
such products within the Retirement segment. Variable annuity account values were $131.6 billion, $109.7 billion and $102.3 billion as of
December 31, 2012, 2011 and 2010, respectively. Fixed annuity account values were $3.7 billion, $3.8 billion and $3.8 billion as of December 31, 2012,
2011 and 2010, respectively.
(2) As of December 31, 2012, includes variable annuity account values of $75 billion, or 57%, invested in equity portfolios, $41 billion, or 31%, invested in
bond portfolios, $8 billion, or 6%, invested in market value adjusted or fixed-rate accounts and $8 billion, or 6%, invested in money market funds.
As shown above, our account values are significantly impacted by net sales and the impact of market performance on customers’
accounts. Our sales levels were relatively flat between 2012 and 2011, reflecting the dynamic competitive landscape we have experienced
over this period. During 2012, we suspended additional customer deposits for variable annuities with certain optional living benefit riders
that were no longer being offered and implemented variable annuity product modifications for new sales to scale back benefits, increase
pricing and close a share class in the third quarter. Certain of our competitors have taken actions to implement product modifications that
scale back benefits and to exit, or limit their presence in, the variable annuity marketplace. Our results in future periods may continue to be
impacted by the dynamic competitive landscape. The decrease in surrenders and withdrawals for 2012 compared to 2011 primarily reflects
the continued retention of contracts with guarantees that are in-the-money and the attractiveness of our inforce contracts relative to
substitute products currently available in the marketplace.
The decrease in gross sales for 2011 compared to 2010 reflects the impacts of modifications we implemented in the first quarter of
2011 to scale back benefits and increase pricing, and increased competition as certain of our competitors became more aggressive in
product design and pricing. Surrenders and withdrawals were relatively flat despite the increase in account values, reflecting a decline in
withdrawal rates.
Operating Results
The following table sets forth the Individual Annuities segment’s operating results for the periods indicated.
Year ended December 31,
2012 2011 2010
(in millions)
Operating results:
Revenues ........................................................................................ $3,983 $ 3,638 $3,195
Benefits and expenses .............................................................................. 2,944 2,976 2,245
Adjusted operating income ........................................................................... 1,039 662 950
Realized investment gains (losses), net, and related adjustments ......................................... (1,882) 3,136 120
Related charges ............................................................................... 942 (1,686) (146)
Income from continuing operations before income taxes and equity in earnings of operating joint ventures ............ $ 99 $2,112 $ 924
Adjusted Operating Income
2012 to 2011 Annual Comparison. Adjusted operating income increased $377 million. Excluding the impacts of changes in the
estimated profitability of the business, discussed below, adjusted operating income increased $74 million. This increase was driven by
higher asset-based fees due to growth in average variable annuity account values, as discussed in “—Account Values” above, net of an
increased level of distribution and amortization costs. The increase was partially offset by higher general and administrative expenses, net
of capitalization, reflecting increased costs to support business initiatives, including a $9 million charge related to an impairment of
capitalized software costs in the fourth quarter of 2012, based on a review of recoverability.
The impacts of changes in the estimated profitability of the business include adjustments to the reserves for the GMDB and GMIB
features of our variable annuity products and to the amortization of DAC and other costs. These adjustments reflect the impacts of market
performance, current period experience and the annual review and update of assumptions performed in the third quarter. These changes
resulted in an $81 million net benefit in 2012, and a $222 million net charge in 2011. The $81 million net benefit in 2012 was primarily
driven by the impact of positive market performance on customer accounts relative to our assumptions, partially offset by the impact of
annual assumption updates. These annual assumption updates were driven by updates to our economic assumptions, primarily reflecting
reductions to our long-term interest and equity rate of return assumptions, as well as updates to actuarial assumptions and other
refinements. The $222 million net charge in 2011 was primarily driven by the impact of negative market performance on customer
accounts relative to our assumptions.
In addition to these current period impacts, the changes to the estimated profitability of our business also drive changes in our future
accrual rates for GMDB and GMIB reserves and amortization rates for DAC and other costs, which will impact results in future periods.
Additionally, we include certain results of our living benefits hedging program in our best estimate of gross profits used to determine
amortization rates, which also drives changes in the amortization of DAC and other costs in future periods. The results above exclude the
fourth quarter impacts of resetting the amortization rates for this item, as both the results of our living benefits hedging program and related
amortization of DAC and other costs are excluded from adjusted operating income in the quarter realized, as described below in “—
Variable Annuity Living Benefits Hedging Program Results.” However, adjusted operating income in future periods includes the impact on
amortization of applying the new rates to actual gross profits. The inclusion of net unfavorable results from our living benefits hedging
program in our best estimate of gross profits drove increases in amortization rates and, therefore, an increase in amortization expense
included in adjusted operating income in 2012. While a decrease in our best estimate of total gross profits accelerates amortization and
decreases income in a given period, it does not affect our cash flow or liquidity position.
For weighted average rate of return assumptions and additional information on our policy for amortizing DAC and other costs, and for
estimating future expected claims costs associated with the GMDB and GMIB features of our variable annuity products as of December 31,
2012, see “—Accounting Policies & Pronouncements—Application of Critical Accounting Estimates.”
28 Prudential Financial, Inc. 2012 Annual Report