Prudential 2012 Annual Report Download - page 200

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
20. FAIR VALUE OF ASSETS AND LIABILITIES (continued)
(1) Carrying values presented herein differ from those in the Company’s Consolidated Statement of Financial Position because certain items within the
respective financial statement captions are not considered financial instruments or out of scope under authoritative guidance relating to disclosures of
the fair value of financial instruments. Financial statement captions excluded from the above table are not considered financial instruments.
(2) Amount included in “Other liabilities” in the Company’s Consolidated Statement of Financial Position.
The fair values presented above 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 reasonableness. 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
indicative 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. 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 most commercial mortgage loans is 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) plus an appropriate credit spread
for similar quality loans. The quality ratings for these loans, a primary determinant of the credit spreads and a significant component of the
pricing process, are based on an internally-developed methodology.
Certain commercial mortgage loans are valued incorporating other factors, including the terms of the loans, the principal exit
strategies for the loans, prevailing interest rates and credit risk. Other loan valuations are primarily based upon the present value of the
expected future cash flows discounted at the appropriate Japanese government bond rate and local market swap rates or credit default swap
spreads, plus 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.
Policy Loans
The fair value of U.S. insurance policy loans is calculated using a discounted cash flow model based upon current U.S. Treasury rates
and historical loan repayment patterns, while Japanese insurance policy loans use the risk-free proxy based on the yen LIBOR. For group
corporate-, bank- and trust-owned life insurance contracts and group universal life contracts, the fair value of the policy loans is the amount
due, excluding interest, as of the reporting date.
Short-Term Investments, Cash & Equivalents, Accrued Investment Income and Other Assets
The Company believes that due to the short-term nature of certain assets, the carrying value approximates fair value. These assets
include: certain short-term investments which are not securities, are recorded at amortized cost and include quality loans; cash and cash
equivalent instruments; accrued investment income; and other assets that meet the definition of financial instruments, including receivables,
such as reinsurance recoverables, unsettled trades, accounts receivable and restricted cash.
Policyholders’ Account Balances—Investment Contracts
Only the portion of policyholders’ account balances related to products that are investment contracts (those without significant
mortality or morbidity risk) are reflected in the table above. For fixed deferred annuities, single premium endowments, payout annuities
and other similar contracts without life contingencies, fair values are derived using discounted projected cash flows based on interest rates
that are representative of the Company’s financial strength ratings, and hence reflect the Company’s own non-performance risk. For
guaranteed investment contracts, funding agreements, structured settlements without life contingencies and other similar products, fair
values are derived using discounted projected cash flows based on interest rates being offered for similar contracts with maturities
consistent with those of the contracts being valued. For those balances that can be withdrawn by the customer at any time without prior
notice or penalty, the fair value is the amount estimated to be payable to the customer as of the reporting date, which is generally the
carrying value. For defined contribution and defined benefit contracts and certain other products, the fair value is the market value of the
assets supporting the liabilities.
Securities Sold Under Agreements to Repurchase
The Company receives collateral for selling securities under agreements to repurchase, or pledges collateral under agreements to
resell. Repurchase and resale agreements are also generally short-term in nature, and therefore, the carrying amounts of these instruments
approximate fair value.
198 Prudential Financial, Inc. 2012 Annual Report