Prudential 2002 Annual Report Download - page 116
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Please find page 116 of the 2002 Prudential annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
10. CLOSED BLOCK
On the date of demutualization, Prudential Insurance established a Closed Block for certain individual life
insurance policies and annuities issued by Prudential Insurance in the United States. The Closed Block forms the
principal component of the Closed Block Business. For a discussion of the Closed Block Business see Note 21.
The Company established a separate closed block for participating individual life insurance policies issued by the
Canadian branch of Prudential Insurance. Because of the substantially smaller number of outstanding Canadian
policies, this separate closed block is insignificant in size and is not included in the information presented below.
Effective with demutualization, the Company adopted the American Institute of Certified Public Accountants
Statement of Position (“SOP”) 00-3, “Accounting by Insurance Enterprises for Demutualizations and Formations
of Mutual Insurance Holding Companies and For Certain Long-Duration Participating Contracts.” SOP 00-3
addresses financial statement presentation and accounting for certain participating policies after demutualization
included in the Closed Block, accounting for demutualization expenses, and accounting for retained earnings and
other comprehensive income at the date of demutualization.
The policies included in the Closed Block are specified individual life insurance policies and individual
annuity contracts that were in force on the effective date of the Plan of Reorganization and for which Prudential
Insurance is currently paying or expects to pay experience-based policy dividends. Assets have been allocated to
the Closed Block in an amount that has been determined to produce cash flows which, together with revenues
from policies included in the Closed Block, are expected to be sufficient to support obligations and liabilities
relating to these policies, including provision for payment of benefits, certain expenses, and taxes and to provide
for continuation of the policyholder dividend scales in effect in 2000, assuming experience underlying such scales
continues. To the extent that, over time, cash flows from the assets allocated to the Closed Block and claims and
other experience related to the Closed Block are, in the aggregate, more or less favorable than what was assumed
when the Closed Block was established, total dividends paid to Closed Block policyholders in the future may be
greater than or less than the total dividends that would have been paid to these policyholders if the policyholder
dividend scales in effect in 2000 had been continued. Any cash flows in excess of amounts assumed will be
available for distribution over time to Closed Block policyholders and will not be available to stockholders. If the
Closed Block has insufficient funds to make guaranteed policy benefit payments, such payments will be made
from assets outside of the Closed Block. The Closed Block will continue in effect as long as any policy in the
Closed Block remains in force unless, with the consent of the New Jersey insurance regulator, it is terminated
earlier.
The recorded assets and liabilities were allocated to the Closed Block at their historical carrying amounts.
During the first quarter of 2002, the Company completed a GAAP and statutory reconciliation of the assets and
liabilities allocated to the Closed Block and the amounts reported as Closed Block assets and liabilities at
December 31, 2001. As a result of this reconciliation, it was determined that net assets of $94 million on a GAAP
basis that had been included in the Financial Services Businesses should have been included in the Closed Block.
During the first quarter of 2002, such assets were reclassified to the Closed Block from the Financial Services
Businesses. The statutory amounts were unaffected.
The excess of Closed Block Liabilities over Closed Block Assets at the date of the demutualization (adjusted
to eliminate the impact of related amounts in “Accumulated other comprehensive income (loss)”) represented the
estimated maximum future earnings at that date from the Closed Block expected to result from operations
attributed to the Closed Block after income taxes. As required by SOP 00-3, the Company developed an actuarial
calculation of the timing of such maximum future earnings. If actual cumulative earnings of the Closed Block
from inception through the end of any given period are greater than the expected cumulative earnings, only the
expected earnings will be recognized in income. Any excess of actual cumulative earnings over expected
cumulative earnings will represent undistributed accumulated earnings attributable to policyholders, which are
recorded as a policyholder dividend obligation. The policyholder dividend obligation represents amounts to be
paid to Closed Block policyholders as an additional policyholder dividend unless otherwise offset by future
Closed Block performance that is less favorable than originally expected. If the actual cumulative earnings
Prudential Financial 2002 Annual Report 115