Prudential 2007 Annual Report Download - page 40

investments financed by borrowings. As noted above, net investment income also includes the impact of mortgage prepayments, the benefit
from the disposition of real estate within an investment joint venture, and the collection of investment income on a previously defaulted
bond, as well as the benefit from the sale of lower yielding bonds and reinvestment of proceeds at higher available interest rates. Partially
offsetting the increases in revenue discussed above, was a decrease in premiums of $26 million reflecting lower sales of life-contingent
structured settlements in 2006, partially offset by a single large sale of a group annuity product in the first quarter of 2006.
Benefits and Expenses
2007 to 2006 Annual Comparison. Benefits and expenses, as shown in the table above under “—Operating Results,” increased $357
million, from $3.869 billion in 2006 to $4.226 billion in 2007. Interest credited to policyholders’ account balances increased $220 million,
primarily reflecting higher interest credited on a greater base of guaranteed investment products sold in the institutional and retail markets
and higher crediting rates on general account liabilities. General and administrative expenses, net of capitalization, increased $88 million
primarily reflecting payments made to plan clients related to a legal action filed against an unaffiliated asset manager, as discussed above,
and increased expenses incurred to expand our full service product and service capabilities. In addition, policyholders’ benefits, including
the change in policy reserves, increased $41 million primarily reflecting the increase in premiums on higher single premium group annuity
and life-contingent structured settlement sales discussed above, as well as a lower benefit from reserve refinements relating to updates of
client census data on a group annuity block of business. Also contributing to the increase in policyholders’ benefits is a $21 million
increase due to the change in the reinsurance arrangement with respect to the guaranteed cost business acquired from CIGNA discussed
above. These increases in policyholders’ benefits were partially offset by improved case experience in 2007.
2006 to 2005 Annual Comparison. Benefits and expenses increased $342 million, from $3.527 billion in 2005 to $3.869 billion in
2006. Interest credited to policyholders’ account balances increased $220 million reflecting higher interest credited on the greater base of
guaranteed investment products sold in the institutional and retail markets, as well as higher crediting rates on full service general account
liabilities. Interest expense increased $98 million primarily due to increased financing costs on increased borrowings, the proceeds of which
were used to purchase invested assets. Policyholders’ benefits, including the change in policy reserves, increased $55 million and reflects a
$66 million increase due to the change in the reinsurance arrangement related to the guaranteed cost business acquired from CIGNA as
discussed above and a $15 million increase due to lower reserve releases in 2006 as discussed above. Excluding these items, policyholders’
benefits, including the change in policy reserves, decreased $26 million, primarily from the $26 million decrease in premiums discussed
above. General and administrative expenses were relatively stable as the decrease in transition expenses in 2006, were mostly offset by
expenses incurred to expand our full service distribution and client servicing capabilities, as well as costs incurred related to expense
reduction initiatives.
Sales Results and Account Values
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 sales or additions, as applicable, minus withdrawals and benefits. These
concepts do not correspond to revenues under U.S. GAAP, but are used as a relevant measure of business activity.
Year ended December 31,
2007 2006 2005
(in millions)
Full Service(2):
Beginning total account value ........................................................................ $ 97,430 $ 88,385 $ 83,891
Deposits and sales ................................................................................. 14,692 16,156 13,006
Withdrawals and benefits ............................................................................ (13,749) (15,989) (13,918)
Change in market value, interest credited and interest income(3) ............................................. 6,563 8,878 5,406
Acquisition(1) ..................................................................................... 7,256 — —
Ending total account value ....................................................................... $112,192 $ 97,430 $ 88,385
Net additions (withdrawals) .......................................................................... $ 943 $ 167 $ (912)
Institutional Investment Products(4):
Beginning total account value ........................................................................ $ 50,269 $ 48,080 $ 47,680
Additions ........................................................................................ 4,973 5,993 4,065
Withdrawals and benefits(5) ......................................................................... (5,866) (4,881) (4,347)
Change in market value, interest credited and interest income ............................................... 2,765 2,247 2,319
Other(5)(6) ....................................................................................... (550) (1,170) (1,637)
Ending total account value ....................................................................... $ 51,591 $ 50,269 $ 48,080
Net additions (withdrawals) .......................................................................... $ (893) $ 1,112 $ (282)
(1) On December 31, 2007 we acquired a portion of Union Bank of California, N.A.’s retirement business for $103 million of cash consideration.
(2) Ending total account value for the full service business includes assets of Prudential’s retirement plan of $5.7 billion, $5.6 billion and $5.3 billion as of
December 31, 2007, 2006 and 2005, respectively.
(3) Change in market value, interest credited and interest income includes $511 million for 2007 representing a transfer from Institutional Investment
Products to Full Service as a result of one client’s change in contract form.
38 Prudential Financial 2007 Annual Report