Prudential 2002 Annual Report Download - page 27
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Please find page 27 of the 2002 Prudential annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.the capital previously included in the former Traditional Participating Products segment in excess of the amount
necessary to support the Closed Block Business. The Financial Services Businesses also includes other traditional
insurance products previously included in the former Traditional Participating Products segment but which are not
included in the Closed Block. The Class B Stock reflects the financial performance of our Closed Block Business.
Application of Critical Accounting Policies
The preparation of financial statements in conformity with U.S. generally accepted accounting principles
(“GAAP”) requires the application of accounting policies that often involve a significant degree of judgment.
Management, on an ongoing basis, reviews estimates and assumptions used in the preparation of financial
statements. If management determines that modifications in assumptions and estimates are appropriate given
current facts and circumstances, results of operations and financial position as reported in the Consolidated
Financial Statements may change significantly.
The following sections discuss the accounting policies applied in preparing our financial statements that
management believes are most dependent on the application of estimates and assumptions.
Valuation of Investments
A large portion of our investments is reflected at fair value in the statements of financial position based on
quoted market prices or estimates from independent pricing services. However, when such information is not
available, for example, with respect to private placement fixed maturity securities, which comprise 18% of our
investments as of December 31, 2002, fair value is estimated, typically by using a discounted cash flow model,
which considers current market credit spreads for publicly traded issues with similar terms by companies of
comparable credit quality. Consequently, changes in estimated future cash flows or in our assessment of the issuer’s
credit quality will result in changes in fair value estimates. For fixed maturities and equity securities classified as
available for sale, the impact of such changes is recorded in “Accumulated other comprehensive income (loss),” a
separate component of equity. However, the carrying value of these securities is reduced, with a corresponding
charge to earnings, when a decline in value is considered to be other than temporary. Factors we consider in
determining whether a decline in value is other than temporary include: whether the decline is substantial; the length
of time the fair value has been less than cost, generally six months; and the financial condition and near-term
prospects of the issuer. This corresponding charge is referred to as an impairment and is reflected in “Realized
investment gains (losses), net” in the statements of operations. The level of impairment losses can be expected to
increase when economic conditions worsen and decrease when economic conditions improve.
“Commercial loans,” which comprise 11% of our investments as of December 31, 2002, are carried at unpaid
principal balances, net of unamortized discounts and an allowance for losses. This allowance includes a loan
specific portion as well as a portfolio reserve for incurred but not specifically identified losses. The loan specific
portion is based on management’s judgment as to ultimate collectibility of loan principal. The portfolio reserve is
based on a number of factors, such as historical experience and portfolio diversification. Similar to impairment
losses discussed above, the allowance for losses can be expected to increase when economic conditions worsen
and decrease when economic conditions improve.
Policyholder Liabilities and Deferred Policy Acquisition Costs
The liability for “Future policy benefits” is the largest liability included in our statements of financial
position, 33% of total liabilities as of December 31, 2002. Changes in this liability are generally reflected in the
“Policyholders’ benefits” caption in our statements of operations. This liability is primarily comprised of the
present value of estimated future payments to holders of life insurance and annuity products where the timing and
amount of payment depends on policyholder mortality, surrender or retirement experience. For traditional
participating life insurance products of our Closed Block Business, the mortality and interest rate assumptions we
apply are those used to calculate the policies’ guaranteed cash surrender values. For life insurance and annuity
products of our Financial Services Businesses, expected mortality is generally based on the Company’s historical
experience or standard industry tables. Interest rate assumptions are based on factors such as market conditions
Growing and Protecting Your Wealth26