Prudential 2011 Annual Report Download - page 155

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS (continued)
value of anticipated gross profits, anticipated gross margins, or premiums less benefits and maintenance expenses, as applicable. DAC, for
applicable products, is adjusted for the impact of unrealized gains or losses on investments as if these gains or losses had been realized,
with corresponding credits or charges included in “Accumulated other comprehensive income (loss).”
For traditional participating life insurance included in the Closed Block, DAC is amortized over the expected life of the contracts (up
to 45 years) in proportion to gross margins based on historical and anticipated future experience, which is evaluated regularly. The effect of
changes in estimated gross margins on unamortized DAC is reflected in “Amortization of deferred policy acquisition costs” in the period
such estimated gross margins are revised. Policy acquisition costs related to interest-sensitive and variable life products and fixed and
variable deferred annuity products are deferred and amortized over the expected life of the contracts (periods ranging from 25 to 99 years)
in proportion to gross profits arising principally from investment results, mortality and expense margins, and surrender charges, based on
historical and anticipated future experience, which is updated periodically. The Company uses a reversion to the mean approach to derive
the blended future rate of return assumptions. However, if the projected future rate of return calculated using this approach is greater than
the maximum future rate of return assumption, the maximum future rate of return is utilized in deriving the blended future rate of return
assumption. In addition to the gross profit components previously mentioned, the impact of the embedded derivatives associated with
certain optional living benefit features of the Company’s variable annuity contracts and related hedging activities are also included in actual
gross profits used as the basis for calculating current period amortization and, in certain instances, in management’s estimate of total gross
profits used for setting the amortization rate. The effect of changes to estimated gross profits on unamortized DAC is reflected in
“Amortization of deferred policy acquisition costs” in the period such estimated gross profits are revised. DAC related to non-participating
traditional individual life insurance is amortized in proportion to gross premiums.
For group annuity contracts, acquisition expenses are deferred and amortized over the expected life of the contracts in proportion to
gross profits. For group corporate-, bank- and trust-owned life insurance contracts, acquisition costs are deferred and amortized in
proportion to lives insured. For group and individual long-term care contracts, acquisition expenses are deferred and amortized in
proportion to gross premiums. For single premium immediate annuities with life contingencies, and single premium group annuities and
single premium structured settlements with life contingencies, all acquisition costs are charged to expense immediately because generally
all premiums are received at the inception of the contract. For funding agreement notes contracts, single premium structured settlement
contracts without life contingencies, and single premium immediate annuities without life contingencies, acquisition expenses are deferred
and amortized over the expected life of the contracts using the interest method. For other group life and disability insurance contracts and
guaranteed investment contracts, acquisition costs are expensed as incurred.
For some products, policyholders can elect to modify product benefits, features, rights or coverages by exchanging a contract for a
new contract or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. These
transactions are known as internal replacements. If policyholders surrender traditional life insurance policies in exchange for life insurance
policies that do not have fixed and guaranteed terms, the Company immediately charges to expense the remaining unamortized DAC on the
surrendered policies. For other internal replacement transactions, except those that involve the addition of a nonintegrated contract feature
that does not change the existing base contract, the unamortized DAC is immediately charged to expense if the terms of the new policies
are not substantially similar to those of the former policies. If the new terms are substantially similar to those of the earlier policies, the
DAC is retained with respect to the new policies and amortized over the expected life of the new policies.
Separate Account Assets and Liabilities
Separate account assets are reported at fair value and represent segregated funds that are invested for certain policyholders, pension
funds and other customers. The assets consist primarily of equity securities, fixed maturities, real estate-related investments, real estate
mortgage loans, short-term investments and derivative instruments. The assets of each account are legally segregated and are generally not
subject to claims that arise out of any other business of the Company. Investment risks associated with market value changes are borne by
the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. Separate account
liabilities primarily represent the contractholder’s account balance in separate account assets and to a lesser extent borrowings of the
separate account, and will be equal and offsetting to total separate account assets. See Note 11 for additional information regarding separate
account arrangements with contractual guarantees. The investment income and realized investment gains or losses from separate account
assets generally accrue to the policyholders and are not included in the Company’s results of operations. Mortality, policy administration
and surrender charges assessed against the accounts are included in “Policy charges and fee income.” Asset management fees charged to
the accounts are included in “Asset management fees and other income.” Seed money that the Company invests in separate accounts is
reported in the appropriate general account asset line. Investment income and realized investment gains or losses from seed money invested
in separate accounts accrues to the Company and is included in the Company’s results of operations.
Other Assets and Other Liabilities
Other assets consist primarily of prepaid pension benefit costs, certain restricted assets, trade receivables, value of business acquired,
goodwill and other intangible assets, deferred sales inducements, the Company’s investments in operating joint ventures, which include the
Company’s indirect investment in China Pacific Insurance (Group) Co., Ltd. (“China Pacific Group”), property and equipment, reinsurance
recoverables, and receivables resulting from sales of securities that had not yet settled at the balance sheet date. Other liabilities consist
primarily of trade payables, pension and other employee benefit liabilities, derivative liabilities, reinsurance payables, and payables
resulting from purchases of securities that had not yet settled at the balance sheet date.
Prudential Financial, Inc. 2011 Annual Report 153