Prudential 2005 Annual Report Download - page 122

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
8. CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS (continued)
The present value of death benefits in excess of the projected account balance and the present value of total expected
assessments for GMDB’s were determined over a reasonable range of stochastically generated scenarios. For variable annuities and
variable universal life, 5,000 scenarios were stochastically generated and, from these, 200 scenarios were selected using a sampling
technique. For variable life, various scenarios covering a reasonable range were weighted based on a statistical lognormal model.
For universal life, 10,000 scenarios were stochastically generated and, from these, 100 were selected.
The GRO features predominantly provide for a guaranteed return of initial account value over a contractually defined period
equal to seven years. One other variation of the GRO feature has an additional optional benefit that will provide for a base guarantee
of account value seven years after the benefit is effective and every anniversary date thereafter and, if elected, an enhanced
guarantee equal to the account value seven years after the effective date of any “step-up” and every anniversary date thereafter. All
guaranteed amounts include any additional purchase payments and credits less withdrawals. Significant or prolonged declines in the
value of any variable investment options a customer may choose as part of their GRO benefit may result in all or a substantial
portion of their account values being allocated to fixed investment allocations, in conjunction with the Company’s automatic
rebalancing program associated with this feature.
The GMWB features provide the contractholder with 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 premiums 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 GMIWB feature provides a contractholder two optional methods to receive guaranteed minimum payments over time- a
“withdrawal” option or an “income” option. The withdrawal option guarantees that, upon the election of such benefit, a contract
holder can withdraw an amount each year until the cumulative withdrawals reach a total guaranteed balance. The guaranteed
remaining balance is generally equal to the protected value under the contract, which is initially established as the greater of: a) the
account value on the date of first withdrawal; b) cumulative premiums when withdrawals commence, less cumulative withdrawals
plus a minimum return; or c) the highest contract value on a specified anniversary date minus any withdrawals following the
contract anniversary to the date of such first withdrawal. The income option guarantees that a contract holder can, upon the election
of this benefit, withdraw a lesser amount based on the total guaranteed balance each year for the annuitant’s life. The withdrawal or
income benefit can be elected by the contract holder upon issuance of an appropriate deferred variable annuity contract or at any
time following contract issue prior to annuitization.
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: (i) 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, (ii) additional interest credits after a
certain number of years a contract is held and (iii) enhanced interest crediting rates that are higher than the normal general account interest
rate credited in certain product lines. Changes in deferred sales inducements are as follows:
Sales
Inducements
(in millions)
Balance at January 1, 2004 ............................................................................... $156
Capitalization ...................................................................................... 132
Amortization ...................................................................................... (24)
Balance at December 31, 2004 ............................................................................ 264
Capitalization ...................................................................................... 152
Amortization ...................................................................................... (35)
Balance at December 31, 2005 ............................................................................ $381
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