CLOSED BLOCK

On the date of demutualization, Prudential Insurance established a closed block for certain in force participating insurance policies and annuity products, along with corresponding assets used for the payment of benefits and policyholders’ dividends on these products, (collectively the “Closed Block”), and ceased offering these participating products. 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 division. See Note 22 for financial information on the Closed Block division. The insurance policies and annuity contracts comprising the Closed Block are managed in accordance with the Plan of Reorganization approved by the New Jersey Department of Banking and Insurance (“NJDOBI”) on December 18, 2001, and Prudential Insurance is directly obligated for the insurance policies and annuity contracts in the Closed Block.

The policies included in the Closed Block are specified individual life insurance policies and individual annuity contracts that were in force on the date of demutualization 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 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 shareholders. If the Closed Block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from Prudential Insurance’s 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 AOCI) 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.

As of December 31, 2017 and 2016, the Company recognized a policyholder dividend obligation of $1,790 million and $1,647 million, respectively, to Closed Block policyholders for the excess of actual cumulative earnings over the expected cumulative earnings. Additionally, accumulated net unrealized investment gains that have arisen subsequent to the establishment of the Closed Block have been reflected as a policyholder dividend obligation of $3,656 million and $3,011 million at December 31, 2017 and 2016, respectively, to be paid to Closed Block policyholders unless offset by future experience, with a corresponding amount reported in AOCI.

On December 4, 2015, Prudential Insurance’s Board of Directors acted to increase the 2016 dividends payable on Closed Block policies. On December 9, 2016, Prudential Insurance’s Board of Directors approved a continuation of the dividends payable on Closed Block policies for 2017. On December 8, 2017, Prudential Insurance’s Board of Directors acted to decrease the 2018 dividends payable on Closed Block policies. These actions resulted in an increase of approximately $58 million and $32 million and a decrease of approximately $86 million in the liability for policyholders dividends recognized for the years ended December 31, 2015, 2016 and 2017, respectively.

Closed Block liabilities and assets designated to the Closed Block at December 31, as well as maximum future earnings to be recognized from Closed Block liabilities and Closed Block assets, are as follows:



	2017			2016

	(in millions)
Closed Block liabilities
Future policy benefits	$	48,870		$	49,281
Policyholders’ dividends payable	829			932
Policyholders’ dividend obligation	5,446			4,658
Policyholders’ account balances	5,146			5,204
Other Closed Block liabilities	5,070			4,262
Total Closed Block liabilities	65,361			64,337
Closed Block assets
Fixed maturities, available-for-sale, at fair value	41,043			38,696
Other trading account assets, at fair value	339			283
Equity securities, available-for-sale, at fair value	2,340			2,572
Commercial mortgage and other loans	9,017			9,437
Policy loans	4,543			4,660
Other long-term investments	3,159			3,020
Short-term investments	632			837
Total investments	61,073			59,505
Cash and cash equivalents	789			1,310
Accrued investment income	474			491
Other Closed Block assets	249			206
Total Closed Block assets	62,585			61,512
Excess of reported Closed Block liabilities over Closed Block assets	2,776			2,825
Portion of above representing accumulated other comprehensive income:
Net unrealized investment gains (losses)	3,627			2,990
Allocated to policyholder dividend obligation	(3,656		)	(3,011		)
Future earnings to be recognized from Closed Block assets and Closed Block liabilities	$	2,747		$	2,804

Information regarding the policyholder dividend obligation is as follows:



	2017		2016

	(in millions)
Balance, January 1	$	4,658	$	4,509
Impact from earnings allocable to policyholder dividend obligation	142		(48		)
Change in net unrealized investment gains (losses) allocated to policyholder dividend obligation	646		197
Balance, December 31	$	5,446	$	4,658

Closed Block revenues and benefits and expenses for the years ended December 31, are as follows:



	2017		2016			2015

	(in millions)
Revenues
Premiums	$	2,524	$	2,619		$	2,668
Net investment income	2,669		2,597			2,709
Realized investment gains (losses), net	534		433			834
Other income (loss)	113		36			23
Total Closed Block revenues	5,840		5,685			6,234
Benefits and Expenses
Policyholders’ benefits	3,220		3,283			3,366
Interest credited to policyholders’ account balances	133		132			135
Dividends to policyholders	2,007		1,941			2,130
General and administrative expenses	382		402			423
Total Closed Block benefits and expenses	5,742		5,758			6,054
Closed Block revenues, net of Closed Block benefits and expenses, before income taxes	98		(73		)	180
Income tax expense (benefit)	43		(120		)	136
Closed Block revenues, net of Closed Block benefits and expenses and income taxes	$	55	$	47		$	44