Prudential 2012 Annual Report Download - page 40

Absent the effect of these items, adjusted operating income decreased $44 million driven by $20 million of transaction and other costs
associated with our acquisition of The Hartford’s individual life insurance business and a $13 million decrease in earnings reflecting the
impact of mortality experience, net of reinsurance, which was more unfavorable in the current period, in comparison to 2011. Also
contributing to the decrease in adjusted operating income was a decline in earnings from our variable products primarily due to the continued
expected run-off of variable policies in force and lower net investment results from declines in portfolio reinvestment rates. These
unfavorable items were partially offset by greater contributions from our universal life insurance products reflecting business growth.
For weighted average rate of return assumptions and additional information on our policy for amortizing DAC and URR, and for
estimating future expected claims costs associated with the GMDB feature of our variable and universal life insurance products as of
December 31, 2012, see “—Accounting Policies & Pronouncements—Application of Critical Accounting Estimates.”
2011 to 2010 Annual Comparison. Adjusted operating income was unchanged from 2010 due to a number of offsetting items. Results
in 2011 included a $27 million benefit reflecting the impact of certain changes in the estimated profitability of the business related to the
annual review and update of economic and actuarial assumptions, as discussed above, compared to a $28 million benefit from the annual
review in 2010. Results for 2011 also benefitted from business growth associated with our universal life insurance products and mortality
experience, net of reinsurance, which was $12 million less unfavorable compared to 2010. Partially offsetting these favorable items was an
$11 million expense resulting from changes in our estimates of total gross profits arising from separate account fund performance, largely
reflecting the comparative impact of equity markets on separate account fund performance. Lower than expected market returns in 2011
resulted in a net expense of $4 million whereas higher than expected market returns in 2010 resulted in a $7 million net benefit.
Revenues, Benefits and Expenses
2012 to 2011 Annual Comparison. Revenues, as shown in the table above under “—Operating Results,” increased $467 million.
This increase was primarily driven by a $403 million increase in policy charges and fees and asset management fees and other income
including $227 million from higher amortization of URR. The increase in amortization of URR reflects the impact of the annual reviews
and update of economic and actuarial assumptions partially offset by the impact of changes in our estimates of total gross profits primarily
reflecting more favorable market conditions on separate account fund performance. The increase in policy charges and fees and asset
management fees and other income also reflects a $73 million increase in income on an affiliated note received as part of a financing
transaction for certain regulatory capital requirements which was offset by higher interest expense, as described below, as well as growth in
our universal life insurance business and higher income from alternative investments. These favorable items were partially offset by the
ongoing impact of run-off of variable life insurance inforce. Net investment income increased $55 million reflecting business growth,
partially offset by the impact of lower portfolio reinvestment rates.
Benefits and expenses, as shown in the table above under “—Operating Results,” increased $565 million, including the impact of $300
million associated with annual reviews conducted in both periods. Absent these annual reviews, the increase in benefits and expenses was
$265 million which includes higher interest expense of $102 million reflecting higher costs associated with the financing of regulatory
capital requirements, of which $73 million related to a financing transaction associated with certain universal life insurance policies is
offset in revenues. Policyholders’ benefits increased $80 million driven by growth in our term and universal life blocks of business. The
increase in benefits and expenses also included $52 million of higher general and administrative expenses, net of capitalization, including
the impact of increased sales and $20 million of transaction and other costs associated with our acquisition of The Hartford’s individual life
insurance business. In addition, interest credited to policyholders’ account balances increased $30 million primarily reflecting higher
universal life account balances from policyholder deposits. These unfavorable items were partially offset by a $28 million benefit on DAC
amortization resulting from more favorable market conditions on separate account fund performance in comparison to 2011.
2011 to 2010 Annual Comparison. Revenues increased $83 million driven by higher net investment income of $75 million reflecting
higher asset balances resulting from increased policyholder deposits and higher regulatory capital requirements associated with our
universal life insurance product. Policy charges and fees and asset management fees and other income increased $6 million, including a $24
million reduction in amortization of URR reflecting the impact of the annual reviews and update of economic and actuarial assumptions, as
discussed above. These favorable items were partially offset by a decline in revenue from our variable insurance products primarily due to
the run-off of variable policies inforce.
Benefits and expenses increased $83 million driven by higher interest expense of $52 million primarily reflecting higher borrowings
related to the financing of regulatory capital requirements associated with certain term and universal life insurance policies which was
offset in revenues. Insurance and annuity benefits, including interest credited to policyholders’ account balances, increased $16 million
primarily reflecting an increase in interest credited to policyholders from higher universal life account balances from increased
policyholder deposits and increases in policyholder reserves driven by growth in our term and universal life blocks of business. This was
partially offset by less unfavorable mortality experience of $12 million in 2011 compared to 2010. Additionally, amortization of DAC
increased $15 million driven by the comparative impact of less favorable market conditions on separate account fund performance.
Sales Results
The following table sets forth individual life insurance annualized new business premiums for the periods indicated.
Year ended December 31,
2012 2011 2010
(in millions)
Annualized New Business Premiums(1):
Variable Life ...................................................................................... $ 21 $ 25 $ 23
Universal Life ..................................................................................... 218 95 77
Term Life ......................................................................................... 173 158 160
Total ......................................................................................... $412 $278 $260
Annualized new business premiums by distribution channel(1):
Prudential Agents ................................................................................... $ 90 $ 84 $ 84
Third party ........................................................................................ 322 194 176
Total ......................................................................................... $412 $278 $260
(1) Excludes corporate-owned life insurance.
38 Prudential Financial, Inc. 2012 Annual Report