Prudential 2006 Annual Report Download - page 130

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PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
7. VALUATION OF BUSINESS ACQUIRED, GOODWILL AND OTHER INTANGIBLES
Valuation of Business Acquired
The balance of and changes in VOBA as of and for the years ended December 31, are as follows:
2006 2005 2004
(in millions)
Balance, beginning of year .................................................................... $ 776 $930 $489
Acquisitions ............................................................................... 647 — 632
Amortization(1) ............................................................................ (182) (176) (92)
Change in unrealized investment gains and losses .................................................. 2 (3) (1)
Interest(2) ................................................................................. 60 63 41
Foreign currency translation ................................................................... 1 (38) 5
Impact of adoption of SOP 03-1 ................................................................ — — (130)
Opening balance sheet adjustment .............................................................. — — (14)
Balance, end of year ......................................................................... $1,304 $ 776 $ 930
(1) The weighted average remaining expected life of VOBA varies by product. The weighted average remaining expected lives were approximately 5, 19,
5, 7 and 6 years for the VOBA related to the insurance transactions associated with Allstate, CIGNA, American Skandia, Inc. (“American Skandia”),
Aoba Life and Gibraltar Life, respectively. The VOBA balances at December 31, 2006 were $602 million, $296 million, $153 million, $201 million and
$52 million related to Allstate, CIGNA, American Skandia, Aoba Life and Gibraltar, respectively.
(2) The interest accrual rates vary by product. The interest rates were 5.80%, 8.0%, 5.96%, 2.20% to 2.35%, and 0.5% to 1.88% for the VOBA related to
Allstate, CIGNA, American Skandia, Aoba Life and Gibraltar Life, respectively.
Certain contracts acquired by the Company include a market value adjustment (“MVA”) feature that requires the Company to
pay to the contractholder upon surrender the accreted value of the fund as well as a market value adjustment based on the crediting
rates on the contract surrendered compared to crediting rates on newly issued contracts or an indexed rate at time of surrender, as
applicable. As of December 31, 2003, this liability was reflected at market value, which considers the effects of unrealized gains
and losses in contract value resulting from changes in crediting rates. Upon the adoption of SOP 03-1 on January 1, 2004, the
Company changed its accounting for these contracts as described previously under “New Accounting Pronouncements.” The
Company’s net VOBA balance decreased $130 million upon the adoption of SOP 03-1. This was primarily due to the change in the
liability for the MVA feature associated with the acquired contracts, since the expected cash flows on this business in force at the
time of acquisition that corresponded to obligations covered by SOP 03-1 were considered in establishing the initial VOBA.
The following table provides estimated future amortization, net of interest, for the periods indicated.
VOBA
Amortization
(in millions)
2007 ................................................................................................ $ 166
2008 ................................................................................................ 141
2009 ................................................................................................ 119
2010 ................................................................................................ 101
2011 ................................................................................................ 86
2012 and thereafter ..................................................................................... 691
Total ................................................................................................ $1,304
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
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