Prudential 2012 Annual Report Download - page 154

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
11. CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS (continued)
Liabilities For Guarantee Benefits
The table below summarizes the changes in general account liabilities for guarantees. The liabilities for guaranteed minimum death
benefits (“GMDB”) and guaranteed minimum income benefits (“GMIB”) are included in “Future policy benefits” and the related changes
in the liabilities are included in “Policyholders’ benefits.” Guaranteed minimum accumulation benefits (“GMAB”), guaranteed minimum
withdrawal benefits (“GMWB”), and guaranteed minimum income and withdrawal benefits (“GMIWB”) features are considered to be
bifurcated embedded derivatives and are recorded at fair value. Changes in the fair value of these derivatives, including changes in the
Company’s own risk of non-performance, along with any fees attributed or payments made relating to the derivative, are recorded in
“Realized investment gains (losses), net.” See Note 20 for additional information regarding the methodology used in determining the fair
value of these embedded derivatives. The liabilities for GMAB, GMWB and GMIWB are included in “Future policy benefits.” As
discussed below, the Company maintains a portfolio of derivative investments that serve as a partial hedge of the risks associated with
these products, for which the changes in fair value are also recorded in “Realized investment gains (losses), net.” This portfolio of
derivative investments does not qualify for hedge accounting treatment under U.S. GAAP.
GMDB GMIB
GMAB/
GMWB/
GMIWB
Variable Life,
Variable
Universal Life
and
Universal Life Annuity Annuity Annuity
(in millions)
Balance at December 31, 2009 ......................................................... $176 $ 296 $ 201 $ 55
Incurred guarantee benefits—Impact of assumption and experience unlocking and true-ups(1) . . (29) (116) (20) 0
Incurred guarantee benefits—All other(1) ............................................ 55 137 55 (259)
Paid guarantee benefits and other ................................................... 0 (129) (122) 0
Balance at December 31, 2010 ......................................................... 202 188 114 (204)
Incurred guarantee benefits—Impact of assumption and experience unlocking and true-ups(1) . . 8 94 5 0
Incurred guarantee benefits—All other(1) ............................................ 71 147 26 3,061
Paid guarantee benefits and other ................................................... (2) (113) (42) 0
Other(2) ...................................................................... 9 3 302 29
Balance at December 31, 2011 ......................................................... 288 319 405 2,886
Incurred guarantee benefits—Impact of assumption and experience unlocking and true-ups(1) . . 18 73 48 0
Incurred guarantee benefits—All other(1) ............................................ 85 199 54 463
Paid guarantee benefits ........................................................... (14) (104) (32) 0
Other ......................................................................... (6) 1 (16) (1)
Balance at December 31, 2012 ......................................................... $371 $ 488 $ 459 $3,348
(1) Incurred guarantee benefits include the portion of assessments established as additions to reserves as well as changes in estimates affecting the reserves.
Also includes changes in the fair value of features considered to be derivatives.
(2) Primarily represents amounts acquired from Star and Edison.
The GMDB liability is determined each period end by estimating the accumulated value of a portion of the total assessments to date
less the accumulated value of the death benefits in excess of the account balance. The GMIB liability associated with variable annuities is
determined each period by estimating the accumulated value of a portion of the total assessments to date less the accumulated value of the
projected income benefits in excess of the account balance. The portion of assessments used is chosen such that, at issue the present value
of expected death benefits or expected income benefits in excess of the projected account balance and the portion of the present value of
total expected assessments over the lifetime of the contracts are equal. The GMIB liability associated with fixed annuities is determined
each period by estimating the present value of projected income benefits in excess of the account balance. The Company regularly
evaluates the estimates used and adjusts the GMDB and GMIB liability balances, with an associated charge or credit to earnings, if actual
experience or other evidence suggests that earlier assumptions should be revised.
The GMAB features provide the contractholder with a guaranteed return of initial account value or an enhanced value if applicable.
The most significant of the Company’s GMAB features are the guaranteed return option (“GRO”) features, which includes an automatic
rebalancing element that reduces the Company’s exposure to these guarantees. The GMAB 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.
The GMWB features provide the contractholder with access to a guaranteed remaining balance if the account value is reduced to zero
through a combination of market declines and withdrawals. The guaranteed remaining balance is generally equal to the protected value
under the contract, which is initially established as the greater of the account value or cumulative deposits when withdrawals commence,
less cumulative withdrawals. The contractholder accesses the guaranteed remaining balance through defined annual payments. The
contractholder also has the option, after a specified time period, to reset the guaranteed remaining balance to the then-current account
value, if greater. The GMWB 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.
152 Prudential Financial, Inc. 2012 Annual Report