Prudential 2007 Annual Report Download - page 137

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 accumulation benefits
(“GMAB”), guaranteed minimum withdrawal benefits (“GMWB”), and guaranteed minimum income and withdrawal benefits (“GMIWB”)
features are considered to be bifurcated embedded derivatives under SFAS No. 133. Changes in the fair value of these derivatives, along
with any fees received or payments made relating to the derivative, are recorded in “Realized investment gains (losses), net.” The liabilities
for GMAB, GMWB and GMIWB are included in “Future policy benefits.” The Company maintains a portfolio of derivative investments
that serve as an economic hedge of the risks of these products, for which the changes in fair value are also recorded in “Realized
investment gains (losses), net.” This portfolio of derivatives investments does not qualify for hedge accounting treatment under U.S.
GAAP.
GMDB GMIB
GMAB/
GMWB/
GMIWB
(in millions)
Balance at January 1, 2005 ............................................................................. $ 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)
Incurred guarantee benefits(1) ....................................................................... 96 24 206
Paid guarantee benefits and other .................................................................... (65) 1 —
Impact of adoption of SOP 05-1 ..................................................................... (1) (1) —
Balance at December 31, 2007 .......................................................................... $159 $ 53 $168
(1) Incurred guarantee benefits include the portion of assessments established as additions to reserves as well as changes in estimates affecting 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 GMIB liability is determined each period 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 portion of assessments used is chosen such that, at issue (or, in the case of acquired contracts, at the
acquisition date), the present value of expected death benefits or expected income 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 Company regularly evaluates
the estimates used and adjusts the GMDB and GMIB liability balances, with an associated charge or credit to earnings, if actual experience
or other evidence suggests that earlier assumptions should be revised.
The GMAB features provide the contractholder with a guaranteed return of initial account value or an enhanced value if applicable.
The most significant of the Company’s GMAB features are the guaranteed return option (“GRO”) features, which includes an automatic
investment rebalancing element that reduces the Company’s exposure to these guarantees as the rebalancing element moves investments
from variable to fixed investment options when markets experience significant or prolonged declines. If the markets subsequently recover,
the rebalancing element will move investments from fixed to variable investment options. The GMAB liability is calculated as the present
value of future expected payments to customers less the present value of assessed rider fees attributable to the embedded derivative 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 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 GMWB liability is calculated as the present value of future expected payments to customers
less the present value of assessed rider fees attributable to the embedded derivative feature.
The GMIWB features predominantly present a benefit that 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
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