Prudential 2012 Annual Report Download - page 157

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
12. CLOSED BLOCK (continued)
Information regarding the policyholder dividend obligation is as follows:
2012 2011
(in millions)
Balance, January 1 .................................................................................. $4,609 $2,243
Impact from earnings allocable to policyholder dividend obligation ....................................... 123 636
Change in net unrealized investment gains (losses) allocated to policyholder dividend obligation ................ 1,631 1,730
Balance, December 31 ............................................................................... $6,363 $4,609
Closed Block revenues and benefits and expenses for the years ended December 31, were as follows:
2012 2011 2010
(in millions)
Revenues
Premiums ............................................................................ $2,817 $2,918 $3,007
Net investment income ................................................................. 2,919 2,976 2,994
Realized investment gains (losses), net ..................................................... 243 855 804
Other income ......................................................................... 31 38 38
Total Closed Block revenues ......................................................... 6,010 6,787 6,843
Benefits and Expenses
Policyholders’ benefits ................................................................. 3,445 3,482 3,512
Interest credited to policyholders’ account balances ........................................... 137 139 140
Dividends to policyholders .............................................................. 2,021 2,571 2,071
General and administrative expenses ...................................................... 492 519 540
Total Closed Block benefits and expenses .............................................. 6,095 6,711 6,263
Closed Block revenues, net of Closed Block benefits and expenses, before income taxes and discontinued
operations ............................................................................. (85) 76 580
Income tax expense (benefit) ................................................................. (103) 67 (38)
Closed Block revenues, net of Closed Block benefits and expenses and income taxes, before discontinued
operations ............................................................................. 18 9 618
Income (loss) from discontinued operations, net of taxes ........................................... (2) 0 1
Closed Block revenues, net of Closed Block benefits and expenses, income taxes and discontinued
operations ............................................................................. $ 16 $ 9 $ 619
13. REINSURANCE
The Company participates in reinsurance with third parties primarily to provide additional capacity for future growth, to limit the
maximum net loss potential arising from large risks and in acquiring or disposing of businesses.
In 2011 and 2012, the Company entered into several reinsurance agreements to assume pension liabilities in the United Kingdom.
Under these arrangements, the Company assumes the longevity risk associated with the pension benefits of certain named beneficiaries.
In 2006, the Company acquired the variable annuity business of The Allstate Corporation (“Allstate”) through a reinsurance
transaction. The reinsurance arrangements with Allstate include a coinsurance arrangement associated with the general account liabilities
assumed and a modified coinsurance arrangement associated with the separate account liabilities assumed. The reinsurance payable, which
represents the Company’s obligation under the modified coinsurance arrangement, is netted with the reinsurance receivable in the
Company’s Consolidated Statement of Financial Position.
In 2004, the Company acquired the retirement business of CIGNA and as a result, entered into various reinsurance arrangements. The
Company still has indemnity coinsurance and modified coinsurance without assumption arrangements in effect related to this acquisition.
For the domestic business, life and disability reinsurance is accomplished through various plans of reinsurance, primarily yearly
renewable term, per person excess, excess of loss, and coinsurance. The Company currently reinsures 90% of the mortality risk for most
products. Placement of reinsurance is accomplished primarily on an automatic basis with some specific risks reinsured on a facultative
basis. The Company has historically retained up to $30 million per life, but will reduce its retention limit to $20 million in 2013 on
individual contracts. In addition, the Company has reinsured with unaffiliated third parties, 83% of the Closed Block through various
modified coinsurance arrangements. The Company accounts for these modified coinsurance arrangements using the deposit method of
accounting.
For the international business, some reinsurance is used to manage risk and volatility, as necessary. A more significant use of
reinsurance is to obtain experience with respect to new product offerings.
Reinsurance ceded arrangements do not discharge the Company as the primary insurer. Ceded balances would represent a liability of
the Company in the event the reinsurers were unable to meet their obligations to the Company under the terms of the reinsurance
agreements. Reinsurance premiums, commissions, expense reimbursements, benefits and reserves related to reinsured long-duration
contracts are accounted for over the life of the underlying reinsured contracts using assumptions consistent with those used to account for
the underlying contracts. The cost of reinsurance related to short-duration contracts is accounted for over the reinsurance contract period.
Amounts recoverable from reinsurers, for both short-and long-duration reinsurance arrangements, are estimated in a manner consistent with
the claim liabilities and policy benefits associated with the reinsured policies.
Prudential Financial, Inc. 2012 Annual Report 155