Prudential 2012 Annual Report Download - page 152

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
10. POLICYHOLDERS’ LIABILITIES (continued)
Policyholders’ account balances represent an accumulation of account deposits plus credited interest less withdrawals, expenses and
mortality charges, if applicable. These policyholders’ account balances also include provisions for benefits under non-life contingent payout
annuities. Included in “Funding agreements” at December 31, 2012 and 2011 are $1,788 million and $3,244 million, respectively, related to
the Company’s Funding Agreement Notes Issuance Program (“FANIP”). Under this program, which has a maximum authorized amount of
$15 billion, a Delaware statutory trust issues medium-term notes to investors that are secured by funding agreements issued to the trust by
Prudential Insurance. The outstanding notes have fixed or floating interest rates that range from 0.5% to 5.5% and original maturities ranging
from five to ten years. Included in the amounts at December 31, 2012 and 2011 is the medium-term note liability, which is carried at
amortized cost, of $1,780 million and $3,197 million, respectively, as well as the fair value of qualifying derivative financial instruments
associated with these notes of $8 million and $27 million, respectively. For additional details on the FANIP program, see Note 5.
Also included in “Funding agreements” are collateralized funding agreements issued to the Federal Home Loan Bank of New York
(“FHLBNY”) of $1,947 million and $1,503 million, as of December 31, 2012 and 2011, respectively. These obligations, which are carried
at amortized cost, have fixed or floating interest rates that range from 0.7% to 3.5% and original maturities ranging from three to eight
years. For additional details on the FHLBNY program, see Note 14. Interest crediting rates range from 0% to 12.0% for interest-sensitive
life contracts and from 0% to 13.4% for contracts other than interest-sensitive life. Less than 1% of policyholders’ account balances have
interest crediting rates in excess of 8%.
11. CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS
The Company issues traditional variable annuity contracts through its separate accounts for which investment income and investment
gains and losses accrue directly to, and investment risk is borne by, the contractholder. The Company also issues variable annuity contracts
with general and separate account options where the Company contractually guarantees to the contractholder a return of no less than
(1) total deposits made to the contract less any partial withdrawals (“return of net deposits”), (2) total deposits made to the contract less any
partial withdrawals plus a minimum return (“minimum return”), or (3) the highest contract value on a specified date minus any withdrawals
(“contract value”). These guarantees include benefits that are payable in the event of death, annuitization or at specified dates during the
accumulation period and withdrawal and income benefits payable during specified periods. The Company also issues annuity contracts
with market value adjusted investment options (“MVAs”), which provide for a return of principal plus a fixed rate of return if held-to-
maturity, or, alternatively, a “market adjusted value” if surrendered prior to maturity or if funds are reallocated to other investment options.
The market value adjustment may result in a gain or loss to the Company, depending on crediting rates or an indexed rate at surrender, as
applicable. The company also issues fixed deferred annuity contracts without MVA that have a guaranteed credited rate and annuity
benefit.
In addition, the Company issues variable life, variable universal life and universal life contracts where the Company contractually
guarantees to the contractholder a death benefit even when there is insufficient value to cover monthly mortality and expense charges,
whereas otherwise the contract would typically lapse (“no lapse guarantee”). Variable life and variable universal life contracts are offered
with general and separate account options.
The assets supporting the variable portion of both traditional variable annuities and certain variable contracts with guarantees are
carried at fair value and reported as “Separate account assets” with an equivalent amount reported as “Separate account liabilities.”
Amounts assessed against the contractholders for mortality, administration, and other services are included within revenue in “Policy
charges and fee income” and changes in liabilities for minimum guarantees are generally included in “Policyholders’ benefits.”
For those guarantees of benefits that are payable in the event of death, the net amount at risk is generally defined as the current
guaranteed minimum death benefit in excess of the current account balance at the balance sheet date. The Company’s primary risk
exposures for these contracts relates to actual deviations from, or changes to, the assumptions used in the original pricing of these products,
including equity market returns, contract lapses and contractholder mortality.
For guarantees of benefits that are payable at annuitization, the net amount at risk is generally defined as the present value of the
minimum guaranteed annuity payments available to the contractholder determined in accordance with the terms of the contract in excess of
the current account balance. The Company’s primary risk exposures for these contracts relates to actual deviations from, or changes to, the
assumptions used in the original pricing of these products, including fixed income and equity market returns, timing of annuitization,
contract lapses and contractholder mortality.
For guarantees of benefits that are payable at withdrawal, the net amount at risk is generally defined as the present value of the
minimum guaranteed withdrawal payments available to the contractholder determined in accordance with the terms of the contract in
excess of the current account balance. For guarantees of accumulation balances, the net amount at risk is generally defined as the
guaranteed minimum accumulation balance minus the current account balance. The Company’s primary risk exposures for these contracts
relates to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including equity market
returns, interest rates, market volatility or contractholder behavior used in the original pricing of these products.
150 Prudential Financial, Inc. 2012 Annual Report