Prudential 2012 Annual Report Download - page 116

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS (continued)
For those loans not reported at fair value, the allowance for losses includes a loan specific reserve for each impaired loan that has a
specifically identified loss and a portfolio reserve for probable incurred but not specifically identified losses. For impaired commercial
mortgage and other loans the allowances for losses are determined based on the present value of expected future cash flows discounted at
the loan’s effective interest rate, or based upon the fair value of the collateral if the loan is collateral dependent. The portfolio reserves for
probable incurred but not specifically identified losses in the commercial mortgage and agricultural loan portfolio segments considers the
current credit composition of the portfolio based on an internal quality rating, (as described above). The portfolio reserves are determined
using past loan experience, including historical credit migration, loss probability and loss severity factors by property type. These factors
are reviewed each quarter and updated as appropriate.
The allowance for losses on commercial mortgage and other loans can increase or decrease from period to period based on the factors
noted above. “Realized investment gains (losses), net” includes changes in the allowance for losses and changes in value for loans
accounted for under the fair value option. “Realized investment gains (losses), net” also includes gains and losses on sales, certain
restructurings, and foreclosures.
When a commercial mortgage or other loan is deemed to be uncollectible, any specific valuation allowance associated with the loan is
reversed and a direct write down to the carrying amount of the loan is made. The carrying amount of the loan is not adjusted for subsequent
recoveries in value.
Commercial mortgage and other loans are occasionally restructured in a troubled debt restructuring. These restructurings generally
include one or more of the following: full or partial payoffs outside of the original contract terms; changes to interest rates; extensions of
maturity; or additions or modifications to covenants. Additionally, the Company may accept assets in full or partial satisfaction of the debt
as part of a troubled debt restructuring. When restructurings occur, they are evaluated individually to determine whether the restructuring or
modification constitutes a “troubled debt restructuring” as defined by authoritative accounting guidance. If the borrower is experiencing
financial difficulty and the Company has granted a concession, the restructuring, including those that involve a partial payoff or the receipt
of assets in full satisfaction of the debt is deemed to be a troubled debt restructuring. Based on the Company’s credit review process
described above, these loans generally would have been deemed impaired prior to the troubled debt restructuring, and specific allowances
for losses would have been established prior to the determination that a troubled debt restructuring has occurred.
In a troubled debt restructuring where the Company receives assets in full satisfaction of the debt, any specific valuation allowance is
reversed and a direct write down of the loan is recorded for the amount of the allowance, and any additional loss, net of recoveries, or any
gain is recorded for the difference between the fair value of the assets received and the recorded investment in the loan. When assets are
received in partial settlement, the same process is followed, and the remaining loan is evaluated prospectively for impairment based on the
credit review process noted above. When a loan is restructured in a troubled debt restructuring, the impairment of the loan is remeasured
using the modified terms and the loan’s original effective yield, and the allowance for loss is adjusted accordingly. Subsequent to the
modification, income is recognized prospectively based on the modified terms of the loans in accordance with the income recognition
policy noted above. Additionally, the loan continues to be subject to the credit review process noted above.
In situations where a loan has been restructured in a troubled debt restructuring and the loan has subsequently defaulted, this factor is
considered when evaluating the loan for a specific allowance for losses in accordance with the credit review process noted above.
See Note 4 for additional information about commercial mortgage and other loans that have been restructured in a troubled debt
restructuring.
“Policy loans” are carried at unpaid principal balances. Interest income on policy loans is recognized in net investment income at the
contract interest rate when earned. Policy loans are fully collateralized by the cash surrender value of the associated insurance policies.
Securities repurchase and resale agreements and securities loaned transactions are used to earn spread income, to borrow funds, or to
facilitate trading activity. As part of securities repurchase agreements or securities loaned transactions, the Company transfers U.S. and
foreign debt and equity securities, as well as U.S. government and government agency securities, and receives cash as collateral. As part of
securities resale agreements, the Company invests cash and receives as collateral U.S. government securities or other debt securities. For
securities repurchase agreements and securities loaned transactions used to earn spread income, the cash received is typically invested in
cash equivalents, short-term investments or fixed maturities.
Securities repurchase and resale agreements that satisfy certain criteria are treated as secured borrowing or secured lending arrangements.
These agreements are carried at the amounts at which the securities will be subsequently resold or reacquired, as specified in the respective
transactions. For securities purchased under agreements to resell, the Company’s policy is to take possession or control of the securities either
directly or through a third party custodian. These securities are valued daily and additional securities or cash collateral is received, or returned,
when appropriate to protect against credit exposure. Securities to be resold are the same, or substantially the same, as the securities received.
For securities sold under agreements to repurchase, the market value of the securities to be repurchased is monitored, and additional collateral
is obtained where appropriate, to protect against credit exposure. Securities to be repurchased are the same, or substantially the same, as those
sold. Income and expenses related to these transactions executed within the insurance companies used to earn spread income are reported as
“Net investment income;” however, for transactions used for funding purposes, the associated borrowing cost is reported as interest expense
(included in “General and administrative expenses”). Income and expenses related to these transactions executed within the Company’s
derivative operations are reported in “Asset management fees and other income.” Income and expenses related to these transactions executed
within the Company’s global commodities group are reported in “Income from discontinued operations, net of taxes.”
114 Prudential Financial, Inc. 2012 Annual Report