Prudential 2007 Annual Report Download - page 138

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
9. CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS (continued)
guaranteed remaining balance is generally equal to the protected value under the contract, which is initially established as the greater of:
(1) the account value on the date of first withdrawal; (2) cumulative deposits when withdrawals commence, less cumulative withdrawals
plus a minimum return; or (3) the highest contract value on a specified date minus any withdrawals. The income option guarantees that a
contract holder can, upon the election of this benefit, withdraw a lesser amount each year for the annuitant’s life based on the total
guaranteed balance. 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. Certain GMIWB features include 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 GMIWB 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.
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: (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 deferred sales inducements are as follows:
Sales
Inducements
(in millions)
Balance at January 1, 2005 ............................................................................... $264
Capitalization ...................................................................................... 152
Amortization ...................................................................................... (35)
Balance at December 31, 2005 ............................................................................ 381
Capitalization ...................................................................................... 233
Amortization ...................................................................................... (51)
Balance at December 31, 2006 ............................................................................ 563
Capitalization ...................................................................................... 326
Amortization ...................................................................................... (86)
Impact of adoption of SOP 05-1 ....................................................................... (5)
Balance at December 31, 2007 ............................................................................ $798
136 Prudential Financial 2007 Annual Report