Prudential 2006 Annual Report Download - page 138

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
10. 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. For a discussion
of the Closed Block Business see Note 20.
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 of the policyholder dividend scales in effect in 2000, assuming experience underlying such scales
continues. To the extent that, over time, cash flows from the assets allocated to the Closed Block and claims and other experience
related to the Closed Block are, in the aggregate, more or less favorable than what was assumed when the Closed Block was
established, total dividends paid to Closed Block policyholders in the future may be greater than or less than the total dividends that
would have been paid to these policyholders if the policyholder dividend scales in effect in 2000 had been continued. Any cash
flows in excess of amounts assumed will be available for distribution over time to Closed Block policyholders and will not be
available to stockholders. If the Closed Block has insufficient funds to make guaranteed policy benefit payments, such payments
will be made from assets outside of the Closed Block. The Closed Block will continue in effect as long as any policy in the Closed
Block remains in force unless, with the consent of the New Jersey insurance regulator, it is terminated earlier.
The excess of Closed Block Liabilities over Closed Block Assets at the date of the demutualization (adjusted to eliminate the
impact of related amounts in “Accumulated other comprehensive income (loss)”) represented the estimated maximum future
earnings at that date from the Closed Block expected to result from operations attributed to the Closed Block after income taxes. In
establishing the Closed Block, the Company developed an actuarial calculation of the timing of such maximum future earnings. If
actual cumulative earnings of the Closed Block from inception through the end of any given period are greater than the expected
cumulative earnings, only the expected earnings will be recognized in income. Any excess of actual cumulative earnings over
expected cumulative earnings will represent undistributed accumulated earnings attributable to policyholders, which are recorded as
a policyholder dividend obligation. The policyholder dividend obligation represents amounts to be paid to Closed Block
policyholders as an additional policyholder dividend unless otherwise offset by future Closed Block performance that is less
favorable than originally expected. If the actual cumulative earnings of the Closed Block from its inception through the end of any
given period are less than the expected cumulative earnings of the Closed Block, the Company will recognize only the actual
earnings in income. However, the Company may reduce policyholder dividend scales in the future, which would be intended to
increase future actual earnings until the actual cumulative earnings equaled the expected cumulative earnings. The Company
recognized a policyholder dividend obligation of $483 million and $326 million at December 31, 2006 and 2005, respectively, to
Closed Block policyholders for the excess of actual cumulative earnings over the expected cumulative earnings. Additionally, net
unrealized investment gains that have arisen subsequent to the establishment of the Closed Block were reflected as a policyholder
dividend obligation of $1.865 billion and $2.302 billion at December 31, 2006 and 2005, respectively, to be paid to Closed Block
policyholders unless otherwise offset by future experience, with an offsetting amount reported in “Accumulated other
comprehensive income (loss).”
On December 14, 2004, Prudential Insurance’s Board of Directors acted to reduce dividends, effective January 1, 2005 on Closed
Block policies to reflect changes in the economic environment, primarily the persistent low levels of fixed income interest rates
experienced in recent years, as well as poor equity returns. These actions resulted in a $91 million reduction of the liability for
policyholder dividends recognized in the year ended December 31, 2004. There was no change to the dividend scale for 2006 or 2007.
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
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