Prudential 2015 Annual Report Download - page 115

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
“Trading account assets supporting insurance liabilities, at fair value” includes invested assets that support certain products included in
the Retirement and International Insurance segments which are experience-rated, meaning that the investment results associated with these
products are expected to ultimately accrue to contractholders. Realized and unrealized gains and losses for these investments are reported in
“Other income.” Interest and dividend income from these investments is reported in “Net investment income.”
“Other trading account assets, at fair value” consist primarily of fixed maturities, equity securities, including certain perpetual
preferred stock, and certain derivatives. Realized and unrealized gains and losses on these investments are reported in “Other income,” and
interest and dividend income from these investments is reported in “Net investment income.” See “Derivative Financial Instruments” below
for additional information regarding the accounting for derivatives.
“Equity securities available-for-sale, at fair value” are comprised of common stock, mutual fund shares and non-redeemable preferred
stock, and are carried at fair value. The associated unrealized gains and losses, net of tax, and the effect on DAC, VOBA, DSI, future
policy benefits, policyholders’ account balances and policyholders’ dividends that would result from the realization of unrealized gains and
losses, are included in AOCI. The cost of equity securities is written down to fair value when a decline in value is considered to be other-
than-temporary. See the discussion below on realized investment gains and losses for a description of the accounting for impairments.
Dividends from these investments are recognized in “Net investment income” when earned.
“Commercial mortgage and other loans” consist of commercial mortgage loans, agricultural loans, loans backed by residential
properties, as well as certain other collateralized and uncollateralized loans. Loans backed by residential properties primarily include
recourse loans held by the Company’s international insurance businesses. Uncollateralized loans primarily represent reverse dual currency
loans and corporate loans held by the Company’s international insurance businesses.
Commercial mortgage and other loans originated and held for investment are generally carried at unpaid principal balance, net of
unamortized deferred loan origination fees and expenses, and net of an allowance for losses. The Company carries certain commercial
mortgage loans originated within the Company’s commercial mortgage operations at fair value where the fair value option has been
elected. Loans held for sale where the Company has not elected the fair value option are carried at the lower of cost or fair value.
Commercial mortgage and other loans acquired, including those related to the acquisition of a business, are recorded at fair value when
purchased, reflecting any premiums or discounts to unpaid principal balances.
Interest income, as well as prepayment fees and the amortization of the related premiums or discounts, related to commercial
mortgage and other loans, are included in “Net investment income.”
Impaired loans include those loans for which it is probable that amounts due will not all be collected according to the contractual
terms of the loan agreement. The Company defines “past due” as principal or interest not collected at least 30 days past the scheduled
contractual due date. Interest received on loans that are past due, including impaired and non-impaired loans as well as loans that were
previously modified in a troubled debt restructuring, is either applied against the principal or reported as net investment income based on
the Company’s assessment as to the collectability of the principal. See Note 4 for additional information about the Company’s past due
loans.
The Company discontinues accruing interest on loans after the loans become 90 days delinquent as to principal or interest payments,
or earlier when the Company has doubts about collectability. When the Company discontinues accruing interest on a loan, any accrued but
uncollectible interest on the loan and other loans backed by the same collateral, if any, is charged to interest income in the same period.
Generally, a loan is restored to accrual status only after all delinquent interest and principal are brought current and, in the case of loans
where the payment of interest has been interrupted for a substantial period, or the loan has been modified, a regular payment performance
has been established.
The Company reviews the performance and credit quality of the commercial mortgage and other loan portfolio on an on-going basis.
Loans are placed on watch list status based on a predefined set of criteria and are assigned one of three categories. Loans are placed on
“early warning” status in cases where, based on the Company’s analysis of the loan’s collateral, the financial situation of the borrower or
tenants or other market factors, it is believed a loss of principal or interest could occur. Loans are classified as “closely monitored” when it
is determined that there is a collateral deficiency or other credit events that may lead to a potential loss of principal or interest. Loans “not
in good standing” are those loans where the Company has concluded that there is a high probability of loss of principal, such as when the
loan is delinquent or in the process of foreclosure. As described below, in determining the allowance for losses, the Company evaluates
each loan on the watch list to determine if it is probable that amounts due will not be collected according to the contractual terms of the
loan agreement.
Loan-to-value and debt service coverage ratios are measures commonly used to assess the quality of commercial mortgage loans. The
loan-to-value ratio compares the amount of the loan to the fair value of the underlying property collateralizing the loan, and is commonly
expressed as a percentage. Loan-to-value ratios greater than 100% indicate that the loan amount exceeds the collateral value. A smaller
loan-to-value ratio indicates a greater excess of collateral value over the loan amount. The debt service coverage ratio compares a
property’s net operating income to its debt service payments. Debt service coverage ratios less than 1.0 times indicate that property
operations do not generate enough income to cover the loan’s current debt payments. A larger debt service coverage ratio indicates a
greater excess of net operating income over the debt service payments. The values utilized in calculating these ratios are developed as part
of the Company’s periodic review of the commercial mortgage loan and agricultural loan portfolio, which includes an internal appraisal of
the underlying collateral value. The Company’s periodic review also includes a quality re-rating process, whereby the internal quality
rating originally assigned at underwriting is updated based on current loan, property and market information using a proprietary quality
Prudential Financial, Inc. 2015 Annual Report 113