Prudential 2006 Annual Report Download - page 136

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
9. CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS (continued)
Liabilities For Guarantee Benefits
The table below summarizes the changes in general account liabilities for guarantees on variable contracts. 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 withdrawal
benefits (“GMWB”), guaranteed minimum income and withdrawal benefits (“GMIWB”) and guaranteed minimum accumulation
benefits (“GMAB”) features are considered to be derivatives under SFAS No. 133, and changes in the fair value of the derivative
are recognized through “Realized investment gains (losses), net.” The liabilities for GMWB, GMIWB and GMAB are included in
“Future policy benefits.”
GMDB GMIB
GMWB/
GMIWB/
GMAB
(in millions)
Balance at January 1, 2004 ............................................................................. $ 70 $ 2 $—
Incurred guarantee benefits(1) ....................................................................... 86 6 —
Paid guarantee benefits and other .................................................................... (68) — —
Balance at December 31, 2004 .......................................................................... 88 8 $—
Incurred guarantee benefits(1) ....................................................................... 58 7 (2)
Paid guarantee benefits and other .................................................................... (55) — —
Balance at December 31, 2005 .......................................................................... 91 15 (2)
Acquisition ..................................................................................... — — 2
Incurred guarantee benefits(1) ....................................................................... 85 14 (38)
Paid guarantee benefits and other .................................................................... (47) — —
Balance at December 31, 2006 .......................................................................... $129 $ 29 $ (38)
(1) Incurred guarantee benefits include the portion of assessments established as additions to reserves as well as changes in estimates effecting the reserves.
Also includes changes in the fair value of features considered to be derivatives.
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 portion of assessments used is chosen
such that, at issue (or, in the case of acquired Allstate and American Skandia contracts, at the acquisition date), the present value of
expected death 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 was determined 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
Company regularly evaluates the estimates used and adjusts the GMDB and GMIB liability balances, with a related charge or credit
to earnings, if actual experience or other evidence suggests that earlier assumptions should be revised.
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, 1,000 scenarios were stochastically generated and selected.
The most significant of the Company’s GMAB features are the guaranteed return option (“GRO”) features. 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. In addition to GRO, during 2006, the Company has assumed the rights and obligations of Allstate’s
GMAB feature. The GMAB feature guarantees a maturity value. The rider allows the policyholder to select a maturity period
ranging from 8 to 20 years. For longer maturity periods, policyholders are given a stronger accumulation benefit. Two options are
provided; each has a different asset allocation requirement. Guaranteed maturity values range from 100% to 250% of the initial
premium. The guaranteed amount is determined based on the maturity period and which of the two asset allocation models are
selected.
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
134