Prudential 2012 Annual Report Download - page 35

2011 to 2010 Annual Comparison. Adjusted operating income increased $29 million. The increase includes a $17 million unfavorable
comparative impact from certain changes in our estimated profitability of the business on the amortization of DAC and VOBA, which
resulted in net charges of $24 million and $7 million in 2011 and 2010, respectively. These changes were driven by quarterly adjustments for
current period experience, as well our annual review and update of assumptions performed in the third quarter, driven by changes to expense
and net cash flow assumptions in 2011, and driven by changes in lapse rate and fee-based profit margin assumptions in 2010.
Excluding these items, AOI increased $46 million, primarily reflecting higher asset-based fee income, partially offset by lower net
investment spread results and higher general and administrative expenses, net of capitalization. Higher asset-based fee income was driven
by an increase in investment-only stable value account values driven by net additions, and higher average full service fee-based account
values driven by market appreciation. Lower net investment spread results were driven by lower reinvestment rates, and the unfavorable
impact of changes in the market values of alternative investments and equity investments in certain separate accounts. Partially offsetting
these declines were the impacts of crediting rate reductions and higher full service general account stable value account values. Higher
general and administrative expenses, net of capitalization, were driven by costs related to legal matters and strategic initiatives, partially
offset by a decline in charges related to certain cost reduction initiatives.
Revenues, Benefits and Expenses
2012 to 2011 Annual Comparison. Revenues, as shown in the table above under “—Operating Results,” increased $31,724 million.
Premiums increased $31,622 million, primarily driven by the significant pension risk transfer transactions discussed above. The increase in
premiums resulted in a corresponding increase in policyholders’ benefits, including the change in policy reserves, discussed below. Policy
charges and fee income, and asset management fees and other income increased $77 million, primarily from higher asset-based fees on
investment-only stable value account values and higher income from alternative investments accounted for under the fair value option,
partially offset by lower asset-based fees on full service fee-based account values. Net investment income increased $25 million primarily
reflecting the impacts of higher institutional investment products account values, driven by the significant pension risk transfer
transactions, higher full service general account stable value account values, and a favorable impact from changes in the market values of
equity-method alternative investments, partially offset by the impacts of lower portfolio yields and the divestiture of bank deposits in 2012.
Benefits and expenses, as shown in the table above under “—Operating Results,” increased $31,680 million. Policyholders’ benefits,
including the change in policy reserves, increased $31,723 million, driven by the significant pension risk transfer transactions associated
with the increase in premiums discussed above. Absent this increase and the $46 million net decrease associated with the legal settlement,
changes in our estimated profitability of the business on the amortization of DAC and VOBA, intangible asset write off and costs related to
the divestiture of bank deposits, discussed above, benefits and expenses increased $3 million. General and administrative expenses, net of
capitalization, increased $12 million, primarily reflecting increased costs to support strategic initiatives and business expansion, partially
offset by lower costs related to legal matters. The amortization of DAC increased $6 million, reflecting an increase from the amortization
of acquisition costs related to the significant pension risk transfer transactions, partially offset by a decrease related to a refinement
associated with certain structured settlements recorded in 2011. Interest credited to policyholders’ account balances decreased $20 million
primarily driven by the impacts of crediting rate reductions and the divestiture of bank deposits in 2012, partially offset by the impact of
higher full service general account stable value account values and an increase related to a refinement associated with certain structured
settlements recorded in 2011.
2011 to 2010 Annual Comparison. Revenues decreased $312 million. Premiums decreased $286 million, driven by lower life-
contingent structured settlement and single-premium annuity sales, partially offset by higher pension risk transfer transactions within our
non-participating group annuity product offering. The decrease in premiums resulted in a corresponding decrease in policyholders’
benefits, including the change in policy reserves, discussed below. Net investment income decreased $60 million primarily reflecting lower
portfolio yields and the unfavorable impact of changes in the market values of equity-method alternative investments and equity
investments in certain separate accounts, partially offset by higher full service general account stable value account values. Policy charges
and fee income and asset management fees and other income increased $34 million, primarily driven by an increase in asset-based fees due
to an increase in investment-only stable value account values and average full service fee-based account values. These increases were
partially offset by the unfavorable impact of changes in the market values of certain alternative investments accounted for under the fair
value option.
Benefits and expenses decreased $341 million. Absent the $17 million increase from the impact of changes in our estimated
profitability of the business on the amortization of DAC and VOBA discussed above, benefits and expenses decreased $358 million.
Policyholders’ benefits, including the change in policy reserves, decreased $254 million, primarily reflecting a decrease in change in policy
reserves associated with the decrease in premiums discussed above. Interest credited to policyholders’ account balances decreased $119
million including a refinement associated with certain structured settlements recorded in 2011. Also contributing to the decrease were the
impacts of crediting rate reductions, partially offset by the impact of higher full service general account stable value account values. The
amortization of DAC increased $22 million primarily driven by a refinement associated with certain structured settlement contracts
recorded in 2011.
Account Values
Our account values are a significant driver of our operating results, and are primarily driven by net additions (withdrawals) and the
impact of market changes. For our fee-based products, the income we earn varies with the level of fee-based account values, since many
policy fees are determined by these values. For our spread-based products, both the investment income and interest we credit to
policyholders vary with the level of general account values. To a lesser extent, changes in account values impact our pattern of
amortization of DAC and VOBA, and general and administrative expenses. The following table shows the changes in the account values
and net additions (withdrawals) of Retirement segment products for the periods indicated. Net additions (withdrawals) are deposits and
Prudential Financial, Inc. 2012 Annual Report 33