During the fourth quarter of 2014, the Company reached an agreement with the NY DFS on reserving methodologies for New York financial reporting purposes in respect of certain variable annuity products. For a discussion of the impact of the agreement, see “Business--Regulation--State Insurance Regulation--Insurance Reserves and Regulatory Capital”.
Effective February 25, 2013, the Advanced Series Trust (“AST”) adopted a Rule 12b-1 Plan under the Investment Company Act of 1940 with respect to most of the AST portfolios that are offered through the Company’s variable annuity and variable life investment products. Under the Rule 12b-1 Plan, AST pays an affiliate of the Company for distribution and administrative services. Prior to the adoption of the 12b-1 Plan, the Company received an administrative service fee from AST and incurred expenses associated with administrative services provided.
Reinsurance recoverables increased $437 million from $999 million at December 31, 2013 to $1,436 million at December 31, 2014. The increase was primarily driven by the mark-to-market of the reinsurance recoverables related to the reinsured liability for variable annuity living benefits, primarily driven by lower interest rates, the annual review and update of assumptions and the impact of term and universal life business growth which increased ceded reserves and ceded policyholders’ account balances. See Note 12 to the Financial Statements for additional information regarding affiliated reinsurance transactions.
Separate account liabilities increased $1,142 million, corresponding to the increase in separate account assets described above.
2014 to 2013 Annual Comparison. Income from operations before income taxes decreased $213 million from income of $231 million in 2013 to $18 million in 2014. Excluding the impact on the amortization of DAC and DSI of the mark-to-market of the living benefit embedded derivative liability and related hedge positions as well as the impact of changes in the estimated profitability of the business, as discussed below, income from operations before income taxes decreased $102 million. This decrease was primarily driven by an unfavorable variance in the mark-to-market related to embedded derivatives associated with our non-reinsured living benefit features in our annuity products.
Benefits and expenses increased $144 million. This increase was primarily driven by an unfavorable variance of $82 million in DAC amortization and $29 million in interest credited to policyholders’ account balances which includes DSI amortization. Higher DAC and DSI amortization is mainly related to the impact of the mark-to-market of the living benefit embedded derivative liability and related hedge positions and the impact of changes in the estimated profitability of the business, as discussed above. Also contributing to the increase was an increase of $30 million in general, administrative and other expenses, primarily reflecting higher asset-based distribution expenses in our annuity products due to higher separate account asset values.
Our life insurance business is subject to Regulation XXX and Guideline AXXX. The regulation and supporting guideline require insurers to establish statutory reserves for term and universal life insurance policies with long-term premium guarantees, a portion of which we believe are non-economic. Prudential Financial uses captive reinsurance companies that are affiliates of the Company to finance the non-economic reserves required under Regulation XXX and Guideline AXXX. The affiliated reinsurance agreements are described further in Note 12.