Prudential 2011 Annual Report Download - page 198

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
11. CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS (continued)
The GMIWB features predominantly present a benefit that provides a contractholder two optional methods to receive guaranteed
minimum payments over time, a “withdrawal” option or an “income” option. The withdrawal option guarantees that, upon the election of
such benefit, a contract holder can withdraw an amount each year until the cumulative withdrawals reach a total guaranteed balance. The
guaranteed remaining balance is generally equal to the protected value under the contract, which is initially established as the greater of:
(1) the account value on the date of first withdrawal; (2) cumulative deposits when withdrawals commence, less cumulative withdrawals
plus a minimum return; or (3) the highest contract value on a specified date minus any withdrawals. The income option guarantees that a
contract holder can, upon the election of this benefit, withdraw a lesser amount each year for the annuitant’s life based on the total
guaranteed balance. The withdrawal or income benefit can be elected by the contract holder upon issuance of an appropriate deferred
variable annuity contract or at any time following contract issue prior to annuitization. Certain GMIWB features include an automatic
rebalancing element that reduces the Company’s exposure to these guarantees. The GMIWB liability is calculated as the present value of
future expected payments to customers less the present value of assessed rider fees attributable to the embedded derivative feature.
As part of its risk management strategy, the Company hedges or limits its exposure to these risks, excluding those risks that have been
deemed suitable to retain and risks that are not able to be hedged, through a combination of product design elements, such as an automatic
rebalancing element, and externally purchased hedging instruments, such as equity options and interest rate derivatives. The automatic
rebalancing element included in the design of certain optional living benefits transfers assets between certain variable investments selected
by the annuity contractholder and, depending on the benefit feature, a fixed-rate account in the general account or a bond portfolio within
the separate accounts. The transfers are based on the static mathematical formula used with the particular optional benefit which considers
a number of factors, including the impact of investment performance of the contractholder’s total account value. In general, negative
investment performance may result in transfers to a fixed-rate account in the general account or a bond portfolio within the separate
accounts, and positive investment performance may result in transfers back to contractholder-selected variable investments. Other product
design elements utilized for certain products to manage these risks include asset allocation restrictions and minimum issuance age
requirements. For risk management purposes the Company segregates the variable annuity living benefit features into those that include the
automatic rebalancing element, including certain GMIWB riders and certain GMAB riders that feature the GRO policyholder benefits; and
those that do not include the automatic rebalancing element, including certain legacy GMIWB, GMWB, GMAB and GMIB riders. Living
benefit riders that include the automatic rebalancing element also include GMDB riders, and as such the GMDB risk in these riders also
benefits from the automatic rebalancing element.
Sales Inducements
The Company defers sales inducements and amortizes them over the anticipated life of the policy using the same methodology and
assumptions used to amortize deferred policy acquisition costs. These deferred sales inducements are included in “Other assets.” The
Company offers various types of sales inducements. These inducements include: (1) a bonus whereby the policyholder’s initial account
balance is increased by an amount equal to a specified percentage of the customer’s initial deposit, (2) additional credits after a certain
number of years a contract is held and (3) enhanced interest crediting rates that are higher than the normal general account interest rate
credited in certain product lines. Changes in deferred sales inducements, reported as “Interest credited to policyholders’ account balances,”
are as follows:
Sales
Inducements
(in millions)
Balance at December 31, 2008 ............................................................................ $1,023
Capitalization ...................................................................................... 390
Amortization—Impact of assumption and experience unlocking and true-ups ................................... 16
Amortization—All other ............................................................................. (213)
Change in unrealized investment gains and losses ......................................................... (99)
Balance at December 31, 2009 ............................................................................ 1,117
Capitalization ...................................................................................... 431
Amortization—Impact of assumption and experience unlocking and true-ups ................................... 52
Amortization—All other ............................................................................. (267)
Change in unrealized investment gains and losses ......................................................... 15
Balance at December 31, 2010 ............................................................................ 1,348
Capitalization ...................................................................................... 359
Amortization—Impact of assumption and experience unlocking and true-ups ................................... (81)
Amortization—All other ............................................................................. (645)
Change in unrealized investment gains and losses and other ................................................. 20
Balance at December 31, 2011 ............................................................................ $1,001
196 Prudential Financial, Inc. 2011 Annual Report