Prudential 2007 Annual Report Download - page 30

2007 to 2006 Annual Comparison. The total cash value of surrenders increased $8 million, from $744 million in 2006 to $752
million in 2007, reflecting a greater volume of surrenders of variable life insurance in 2007 compared to the prior year. The level of
surrenders as a percentage of mean future policy benefit reserves, policyholders’ account balances and separate account balances remained
essentially flat.
2006 to 2005 Annual Comparison. The total cash value of surrenders increased $46 million, from $698 million in 2005 to $744
million in 2006, reflecting an increase in surrenders of variable corporate-owned life insurance in 2006 compared to the prior year. The
level of surrenders as a percentage of mean future policy benefit reserves, policyholders’ account balances and separate account balances
remained flat.
Individual Annuities
Operating Results
The following table sets forth the Individual Annuities segment’s operating results for the periods indicated.
Year ended December 31,
2007 2006 2005
(in millions)
Operating results:
Revenues .......................................................................................... $2,495 $2,101 $1,717
Benefits and expenses ................................................................................ 1,779 1,515 1,212
Adjusted operating income ............................................................................ 716 586 505
Realized investment gains (losses), net, and related adjustments(1) ........................................ (54) (72) 3
Related charges(1)(2) ............................................................................ 10 25 (5)
Income from continuing operations before income taxes and equity
in earnings of operating joint ventures ................................................................. $ 672 $ 539 $ 503
(1) Revenues exclude Realized investment gains (losses), net, and related charges and adjustments. The related charges represent payments related to the
market value adjustment features of certain of our annuity products. See “—Realized Investment Gains and General Account Investments—Realized
Investment Gains.”
(2) Benefits and expenses exclude related charges which represent the unfavorable (favorable) impact of Realized investment gains (losses), net, on change
in reserves and the amortization of deferred policy acquisition costs, deferred sales inducements and value of business acquired.
On June 1, 2006, we acquired the variable annuity business of The Allstate Corporation, or Allstate, through a reinsurance transaction
for $635 million of total consideration, consisting primarily of a $628 million ceding commission. Our initial investment in the business
was approximately $600 million, consisting of the total consideration, offset by the related tax benefits and an additional contribution of
$94 million to meet regulatory capital requirements. See Note 3 to the Consolidated Financial Statements for further discussion of this
acquisition.
Adjusted Operating Income
2007 to 2006 Annual Comparison. Adjusted operating income increased $130 million, from $586 million in 2006 to $716 million in
2007. Results for both periods include the impact of annual reviews of our estimate of total gross profits used as a basis for amortizing
deferred policy acquisition and other costs and the reserve for the guaranteed minimum death and income benefit features of our variable
annuity products. Adjusted operating income for 2007 included a $30 million benefit from this annual review, reflecting market value
increases in the underlying assets associated with our variable annuity products, and decreased cost of actual and expected death claims,
partially offset by the impact of model refinements and higher expected lapse rates for the variable annuity business acquired from Allstate.
Adjusted operating income for 2006 included a $37 million benefit from the annual review, primarily reflecting improved net interest
spread from increased investment yields.
Absent the effect of the annual reviews discussed above, adjusted operating income for 2007 increased $137 million from 2006.
Adjusted operating income from the variable annuity business acquired from Allstate, excluding the impact of the annual review discussed
above, increased $27 million, reflecting a $81 million contribution for 2007, compared to $54 million for 2006, which reflects results only
for the initial seven months of operations from the date of acquisition. The remainder of the increase came primarily from higher fee
income driven by higher average asset balances from market appreciation and positive net asset flows in our variable annuity account
values. Also contributing to the increase was a $17 million favorable variance in the mark-to-market of embedded derivatives and related
hedge positions associated with our living benefit features, net of amortization of deferred policy acquisition and other costs. Partially
offsetting these items was an increase in amortization of deferred policy acquisition and other costs reflecting increased gross profits in
2007, and an increase in general and administrative expenses, net of capitalization, reflecting higher distribution and asset management
costs associated with growth in variable annuity account values, as well as growth of the business. In addition, interest expense increased
driven by higher borrowings related to growth of the business, and net investment income, net of interest credited to policyholders’ account
balances, decreased primarily as a result of declining annuity account values invested in our general account, reflecting our emphasis on
sales of variable annuities together with asset allocation requirements associated with the living benefit features we offer in our variable
annuity products.
28 Prudential Financial 2007 Annual Report