Prudential 2015 Annual Report Download - page 116

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
rating system. The loan-to-value ratio is the most significant of several inputs used to establish the internal credit rating of a loan which in
turn drives the allowance for losses. Other key factors considered in determining the internal credit rating include debt service coverage
ratios, amortization, loan term, estimated market value growth rate and volatility for the property type and region. See Note 4 for additional
information related to the loan-to-value ratios and debt service coverage ratios related to the Company’s commercial mortgage and
agricultural loan portfolios.
Loans backed by residential properties and uncollateralized loans are also reviewed periodically. Each loan is assigned an internal or
external credit rating. Internal credit ratings take into consideration various factors including financial ratios and qualitative assessments
based on non-financial information. In cases where there are personal or third-party guarantors, the credit quality of the guarantor is also
reviewed. These factors are used in developing the allowance for losses. Based on the diversity of the loans in these categories and their
immateriality, the Company has not disclosed the credit quality indicators related to these loans in Note 4.
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 portfolios consider 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.
“Other long-term investments” consist of the Company’s non-coupon investments in joint ventures and limited partnerships, other
than operating joint ventures, as well as wholly-owned investment real estate and other investments. Joint venture and partnership interests
are either accounted for using the equity method of accounting or under the cost method when the Company’s partnership interest is so
minor (generally less than 3%) that it exercises virtually no influence over operating and financial policies. The Company’s income from
investments in joint ventures and partnerships accounted for using the equity method or the cost method, other than the Company’s
investment in operating joint ventures, is included in “Net investment income.” 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. In applying the equity method or the cost method
(including assessment for OTTI), the Company uses financial information provided by the investee, generally on a one to three month lag.
The Company consolidates joint ventures and limited partnerships in certain other instances where it is deemed to exercise control, or is
considered the primary beneficiary of a variable interest entity. See Note 5 for additional information about variable interest entities.
114 Prudential Financial, Inc. 2015 Annual Report