Prudential 2015 Annual Report Download - page 150

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
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 also has the option, after a specified time period, to reset the guaranteed remaining balance
to the then current account value, if greater. The contractholder accesses the guaranteed remaining balance through payments over time,
subject to maximum annual limits. The GMWB liability is calculated as the present value of future expected payments to customers less the
present value of future expected rider fees attributable to the embedded derivative feature.
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 and
is no longer offered) 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 future expected rider fees attributable to the embedded
derivative feature.
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 DAC. DSI is included in “Other assets.” The Company has offered various types of sales inducements
including: (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 DSI, reported as “Interest credited
to policyholders’ account balances,” are as follows:
Sales
Inducements
(in millions)
Balance at December 31, 2012 ....................................................................................... $1,357
Capitalization ................................................................................................. 53
Amortization—Impact of assumption and experience unlocking and true-ups ............................................... 27
Amortization—All other ........................................................................................ 340
Change in unrealized investment gains and losses .................................................................... 36
Balance at December 31, 2013 ....................................................................................... 1,813
Capitalization ................................................................................................. 22
Amortization—Impact of assumption and experience unlocking and true-ups ............................................... 81
Amortization—All other ........................................................................................ (403)
Change in unrealized investment gains and losses .................................................................... 1
Balance at December 31, 2014 ....................................................................................... 1,514
Capitalization ................................................................................................. 8
Amortization—Impact of assumption and experience unlocking and true-ups ............................................... 43
Amortization—All other ........................................................................................ (392)
Change in unrealized investment gains and losses .................................................................... 16
Balance at December 31, 2015 ....................................................................................... $1,189
12. CLOSED BLOCK
On the date of demutualization, Prudential Insurance established a Closed Block for certain individual life insurance policies and
annuities issued in the U.S by Prudential Insurance. 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 division. See Note 22 for financial information on
the Closed Block division. The insurance policies and annuity contracts comprising the Closed Block are managed in accordance with the
Plan of Reorganization approved by the New Jersey Department of Banking and Insurance (“NJDOBI”) on December 18, 2001, and
Prudential Insurance is directly obligated for the insurance policies and annuity contracts in the Closed Block. The Class B Repurchase
discussed in Note 1 did not change the Closed Block assets allocated to support the Closed Block’s liabilities, policyholder dividend scales or
the methodology for determining policyholder dividends, or impact the guaranteed benefits, premiums or dividends for Closed Block
policyholders.
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
148 Prudential Financial, Inc. 2015 Annual Report