Prudential 2012 Annual Report Download - page 121

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS (continued)
impairment and is recorded as a charge against net income. Measuring intangibles requires the use of estimates. Significant estimates
include the projected net cash flow attributable to the intangible asset and the risk rate at which future net cash flows are discounted for
purposes of estimating fair value, as applicable. Identifiable intangible assets primarily include customer relationships and mortgage
servicing rights. See Note 9 for additional information regarding identifiable intangible assets.
Investments in operating joint ventures are generally accounted for under the equity method. The carrying value of these investments
is written down, or impaired, to fair value when a decline in value is considered to be other-than-temporary. See Note 7 for additional
information on investments in operating joint ventures.
Future Policy Benefits
The Company’s liability for future policy benefits is primarily comprised of the present value of estimated future payments to or on
behalf of policyholders, where the timing and amount of payment depends on policyholder mortality or morbidity, less the present value of
future net premiums. For individual traditional participating life insurance products, the mortality and interest rate assumptions applied are
those used to calculate the policies’ guaranteed cash surrender values. For life insurance, other than individual traditional participating life
insurance, and annuity and disability products, expected mortality and morbidity is generally based on the Company’s historical experience
or standard industry tables including a provision for the risk of adverse deviation. Interest rate assumptions are based on factors such as
market conditions and expected investment returns. Although mortality and morbidity and interest rate assumptions are “locked-in” upon
the issuance of new insurance or annuity business with fixed and guaranteed terms, significant changes in experience or assumptions may
require the Company to provide for expected future losses on a product by establishing premium deficiency reserves. Premium deficiency
reserves, if required, are determined based on assumptions at the time the premium deficiency reserve is established and do not include a
provision for the risk of adverse deviation. See Note 10 for additional information regarding future policy benefits.
The Company’s liability for future policy benefits also includes a liability for unpaid claims and claim adjustment expenses. The
Company does not establish claim liabilities until a loss has occurred. However, unpaid claims and claim adjustment expenses includes
estimates of claims that the Company believes have been incurred but have not yet been reported as of the balance sheet date. The
Company’s liability for future policy benefits also includes net liabilities for guarantee benefits related to certain nontraditional long-
duration life and annuity contracts, which are discussed more fully in Note 11, and certain unearned revenues.
Policyholders’ Account Balances
The Company’s liability for policyholders’ account balances represents the contract value that has accrued to the benefit of the
policyholder as of the balance sheet date. This liability is generally equal to the accumulated account deposits, plus interest credited, less
policyholder withdrawals and other charges assessed against the account balance. These policyholders’ account balances also include
provision for benefits under non-life contingent payout annuities and certain unearned revenues. See Note 10 for additional information
regarding policyholders’ account balances.
Policyholders’ Dividends
The Company’s liability for policyholders’ dividends includes its dividends payable to policyholders and its policyholder dividend
obligation associated with the participating policies included in the Closed Block. The dividends payable for participating policies included
in the Closed Block are determined at the end of each year for the following year by the Board of Directors of Prudential Insurance based
on its statutory results, capital position, ratings, and the emerging experience of the Closed Block. The policyholder dividend obligation
represents amounts to be paid to Closed Block policyholders as an additional policyholder dividend unless otherwise offset by future
Closed Block performance that is less favorable than originally expected, the components of which are discussed more fully in Note 12.
The dividends payable for policies other than the participating policies included in the Closed Block include dividends payable in
accordance with certain group and individual insurance policies.
Contingent Liabilities
Amounts related to contingent liabilities are accrued if it is probable that a liability has been incurred and an amount is reasonably
estimable. Management evaluates whether there are incremental legal or other costs directly associated with the ultimate resolution of the
matter that are reasonably estimable and, if so, they are included in the accrual.
Insurance Revenue and Expense Recognition
Premiums from individual life products, other than interest-sensitive life contracts, and health insurance and long-term care products
are recognized when due. When premiums are due over a significantly shorter period than the period over which benefits are provided, any
gross premium in excess of the net premium (i.e., the portion of the gross premium required to provide for all expected future benefits and
expenses) is deferred and recognized into revenue in a constant relationship to insurance in force. Benefits are recorded as an expense when
they are incurred. A liability for future policy benefits is recorded when premiums are recognized using the net level premium method.
Premiums from non-participating group annuities with life contingencies, single premium structured settlements with life contingencies
and single premium immediate annuities with life contingencies are recognized when due. When premiums are due over a significantly
shorter period than the period over which benefits are provided, any gross premium in excess of the net premium is deferred and recognized
into revenue in a constant relationship to the amount of expected future benefit payments. Benefits are recorded as an expense when they are
incurred. A liability for future policy benefits is recorded when premiums are recognized using the net premium method.
Prudential Financial, Inc. 2012 Annual Report 119