Prudential 2012 Annual Report Download - page 155

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
11. CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS (continued)
The GMIWB features, taken collectively, provide a contractholder two optional methods to receive guaranteed minimum payments
over time, a “withdrawal” option or an “income” option. The withdrawal option (which was available under only one of the GMIWBs the
Company no longer offers) guarantees that a contractholder can withdraw an amount each year until the cumulative withdrawals reach a
total guaranteed balance. The income option (which varies among the Company’s GMIWBs) in general guarantees the contractholder the
ability to withdraw an amount each year for life (or for joint lives, in the case of any spousal version of the benefit) where such amount is
equal to a percentage of a protected value under the benefit. The contractholder also has the potential to increase this annual amount, based
on certain subsequent increases in account value that may occur. The GMIWB can be elected by the contractholder 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, but not limited to, 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, 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 ......................................................... 20
Balance at December 31, 2011 ............................................................................ 1,001
Capitalization ...................................................................................... 259
Amortization—Impact of assumption and experience unlocking and true-ups ................................... 189
Amortization—All other ............................................................................. (109)
Change in unrealized investment gains and losses and other ................................................. 17
Balance at December 31, 2012 ............................................................................ $1,357
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.
Prudential Financial, Inc. 2012 Annual Report 153