The Prudential Series Fund

Pruco Life Insurance Company
Notes to Consolidated Financial Statements
8. CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS (continued)
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 Company’s GMAB feature (HD GRO) includes an automatic investment rebalancing element that reduces the
Company’s exposure to these guarantees. The GMAB liability is calculated as the present value of future expected payments to
customers less the present value of assessed rider fees attributed 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 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. 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.
As part of risk management strategy in addition to reinsurance, Pruco Re. hedges or limits exposure to these risks through a
combination of product design elements, such as an automatic rebalancing element, and externally purchased hedging
instruments, such as equity options and interest rate swaps. The automatic rebalancing element included in the design of certain
variable annuity products transfers assets between contractholder sub-accounts depending on a number of factors, including the
investment performance of the sub-accounts. Negative investment performance may result in transfers to either a fixed-rate
general account option or a separate account bond portfolio. In certain situations, assets may transfer back when investment
performance improves. Other product design elements we utilize for certain products to manage these risks include asset
allocation and minimum purchase age requirements. For risk management purposes the Company segregates the variable annuity
living benefit features into three broad categories, (1) those that utilize both an automatic rebalancing element and capital
markets hedging, such as for certain GMIWB riders; (2) those that utilize only capital markets hedging , such as for certain
legacy GMIWB and GMAB riders; and (3) those with risks we have deemed suitable to retain, such as for GMDB and GMIB
riders. Riders in category 1 from above also include GMDB riders, and as such the GMDB risk in these riders benefits from the
automatic investment rebalancing element.
Deferred Sales Inducements
The Company defers sales inducements and amortizes them over the anticipated life of the annuity using the same methodology
and assumptions used to amortize deferred policy acquisition costs. 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 and (ii) additional interest credits after a certain number of years a contract
is held. Changes in deferred sales inducements are as follows:
2008 2007 2006
((in thousands)
Balance, beginning of year $215,057 $182,578 $ 139,012
Capitalization 71,899 57,253 57,302
Amortization (17,646) (24,774) (13,736)
Balance, end of year $269,310 $215,057 $ 182,578
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