Prudential 2011 Annual Report Download - page 249

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
20. FAIR VALUE OF ASSETS AND LIABILITIES (continued)
December 31, 2010. As of December 31, 2011, such loans that were in nonaccrual status had fair values of $21 million and aggregate
contractual principal amounts of $23 million. None of the loans where the fair value option has been elected are more than 90 days past due
and still accruing.
The fair value of other long-term investments were $366 million and $258 million as of December 31, 2011 and 2010, respectively.
The fair value and aggregate contractual principal amounts of other liabilities, for which the fair value option has been elected, were
$282 million and $294 million, respectively, as of December 31, 2011.
Fair Value of Financial Instruments
The Company is required by U.S. GAAP to disclose the fair value of certain financial instruments including those that are not carried
at fair value. For the following financial instruments the carrying amount equals or approximates fair value: fixed maturities classified as
available-for-sale, trading account assets supporting insurance liabilities, other trading account assets, equity securities, securities
purchased under agreements to resell, short-term investments, cash and cash equivalents, accrued investment income, separate account
assets, investment contracts included in separate account liabilities, securities sold under agreements to repurchase, and cash collateral for
loaned securities, as well as certain items recorded within other assets and other liabilities such as broker-dealer related receivables and
payables. See Note 21 for a discussion of derivative instruments.
The following table discloses the Company’s financial instruments where the carrying amounts and fair values may differ:
December 31, 2011 December 31, 2010
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
(in millions)
Assets:
Fixed maturities, held-to-maturity ........................................ $ 5,107 $ 5,354 $ 5,226 $ 5,477
Commercial mortgage and other loans(1) .................................. 35,431 37,741 31,831 33,129
Policy loans ......................................................... 11,559 14,858 10,667 12,781
Liabilities:
Policyholders’ account balances—investment contracts ....................... $102,245 $103,184 $77,254 $78,757
Short-term and long-term debt(1) ........................................ 26,958 28,174 25,635 27,094
Debt of consolidated VIEs(1) ........................................... 524 493 382 265
Bank customer liabilities ............................................... 1,730 1,745 1,752 1,773
(1) Includes items carried at fair value under the fair value option.
The fair values presented above for those financial instruments where the carrying amounts and fair values may differ have been
determined by using available market information and by applying market valuation methodologies, as described in more detail below.
Fixed Maturities, held-to-maturity
The fair values of public fixed maturity securities are generally based on prices from third party pricing services, which are reviewed
to validate reasonability. However, for certain public fixed maturity securities and investments in private placement fixed maturity
securities, this information is either not available or not reliable. For these public fixed maturity securities the fair value is based on
non-binding broker quotes, if available, or determined using a discounted cash flow model or internally-developed values. For private fixed
maturities fair value is determined using a discounted cash flow model, which utilizes a discount rate based upon the average of spread
surveys collected from private market intermediaries who are active in both primary and secondary transactions and takes into account,
among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements. In
determining the fair value of certain fixed maturity securities, the discounted cash flow model may also use unobservable inputs, which
reflect the Company’s own assumptions about the inputs market participants would use in pricing the security.
Commercial Mortgage and Other Loans
The fair value of commercial mortgage loans is primarily based upon the present value of the expected future cash flows discounted at
the appropriate U.S. Treasury rate or Foreign Government Bond rate (for non-U.S. dollar-denominated loans) adjusted for appropriate
credit spread for similar quality loans. The quality ratings for these loans, a primary determinant of the credit spread and a significant
component of the pricing input, are based upon an internally-developed methodology. The internally derived credit spreads take into
account public corporate bond spreads of similar quality and maturity, public commercial mortgage-backed securities spreads, third-party
mortgage loan survey spreads and other relevant market information such as pricing indications from market participants on new
originations, and where applicable adjustments for property types and locations.
The fair value of certain commercial mortgage loans, for which a discounted cash flow model is not appropriate, is based on
internally-developed values that incorporate various factors, including the terms of the loans, the principal exit strategies for the loans,
prevailing interest rates, and credit risk.
The fair value of the other loans, which include collateralized and uncollateralized loans, is primarily based upon the present value of
the expected future cash flows discounted at the appropriate U.S. Treasury rate or Foreign Government Bond rate (for non-U.S. dollar-
denominated loans) or other observable inputs, such as local market swap rates and credit default swap spreads, adjusted for an appropriate
credit spread and liquidity premium. The credit spread and liquidity premium are a significant component of the pricing inputs, and are
based upon an internally-developed methodology, which takes into account, among other factors, the credit quality of the loans, the
property type of the collateral, the weighted average coupon, and the weighted average life of the loans.
Prudential Financial, Inc. 2011 Annual Report 247