Prudential 2011 Annual Report Download - page 199

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
12. 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 U.S. The recorded assets and liabilities were allocated to the Closed Block at their historical
carrying amounts. The Closed Block forms the principal component of the Closed Block Business. For a discussion of the Closed Block
Business see Note 22.
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
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 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. In establishing the Closed
Block, 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 of the
Closed Block from its inception through the end of any given period are less than the expected cumulative earnings of the Closed Block,
the Company will recognize only the actual earnings in income. However, the Company may reduce policyholder dividend scales, which
would be intended to increase future actual earnings until the actual cumulative earnings equaled the expected cumulative earnings.
As of December 31, 2011 and 2010, the Company recognized a policyholder dividend obligation of $762 million and $126 million,
respectively, to Closed Block policyholders for the excess of actual cumulative earnings over the expected cumulative earnings.
Additionally, accumulated net unrealized investment gains that have arisen subsequent to the establishment of the Closed Block have been
reflected as a policyholder dividend obligation of $3,847 million and $2,117 million at December 31, 2011 and 2010, respectively, to be
paid to Closed Block policyholders unless offset by future experience, with an offsetting amount reported in “Accumulated other
comprehensive income (loss).” See the table below for changes in the components of the policyholder dividend obligation for the years
ended December 31, 2011 and 2010.
On December 13, 2011 and December 14, 2010, Prudential Insurance’s Board of Directors approved a continuation of the Closed
Block dividend scales in 2012 and 2011, respectively. On December 8, 2009, Prudential Insurance’s Board of Directors acted to reduce the
dividends payable in 2010 on Closed Block policies. This decrease reflected the deterioration in investment results and resulted in a $98
million reduction of the liability for policyholder dividends recognized in the year ended December 31, 2009.
Prudential Financial, Inc. 2011 Annual Report 197