Prudential 2012 Annual Report Download - page 119

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS (continued)
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 (other than single premium group annuities with life contingencies), acquisition costs 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 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.
Value of Business Acquired
As a result of certain acquisitions and the application of purchase accounting, the Company reports a financial asset representing the
value of business acquired (“VOBA”). VOBA includes an explicit adjustment to reflect the cost of capital attributable to the acquired
insurance contracts. VOBA represents an adjustment to the stated value of inforce insurance contract liabilities to present them at fair
value, determined as of the acquisition date. VOBA balances are subject to recoverability testing, in the manner in which it was acquired, at
the end of each reporting period to ensure that the balance does not exceed the present value of anticipated gross profits. The Company has
established a VOBA asset primarily for its acquired traditional life insurance products, accident and health products with fixed benefits,
deferred annuity contracts, and defined contribution and defined benefit businesses. The majority of the VOBA balance relates to the
business acquired as part of the acquisition of the Star and Edison Businesses in 2011. The Company amortizes VOBA over the effective
life of the acquired contracts in “General and administrative expenses.” For acquired traditional life insurance products and accident and
health products with fixed benefits, VOBA is amortized in proportion to estimated gross premiums or in proportion to the face amount of
insurance in force, as applicable. For acquired annuity contracts, VOBA is amortized in proportion to estimated gross profits arising from
the contracts and anticipated future experience, which is evaluated regularly. For acquired defined contribution and defined benefit
businesses, the majority of VOBA is amortized in proportion to estimated gross profits arising principally from investment spreads and fees
in excess of actual expense based upon historical and estimated future experience, which is updated periodically. The remainder of VOBA
is amortized based on estimated gross revenues, fees, or the change in policyholders’ account balances, as applicable. The effect of changes
in estimated gross profits on unamortized VOBA is reflected in the period such estimates of expected future profits are revised. VOBA, 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 AOCI. See Note 8 for additional information regarding VOBA and Note 3 for additional
information regarding the VOBA asset related to the acquisition of the Star and Edison Businesses.
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 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. See Note 11 for additional
information regarding separate account arrangements with contractual guarantees. 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. 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.
Prudential Financial, Inc. 2012 Annual Report 117