Prudential 2015 Annual Report Download - page 120

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
In accordance with accounting guidance, the Company may first perform a qualitative goodwill assessment to determine whether
events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying
amount. Factors such as macroeconomic conditions; industry and market considerations; cost factors and other are used to assess the
validity of goodwill. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not that
the fair value of a reporting unit is less than its carrying amount, then performing the two-step goodwill impairment test, as described
above, is not necessary. If, however, the Company concludes otherwise, then the Company must perform the first step of the two-step
impairment test by comparing the reporting unit’s fair value with its carrying value including goodwill. If the carrying value exceeds fair
value, then the Company must perform the second step of the goodwill impairment test to measure the impairment loss, if any. See Note 9
for additional information regarding goodwill.
The Company offers various types of sales inducements to policyholders related to fixed and variable deferred annuity contracts. The
Company defers sales inducements and amortizes them over the anticipated life of the policy using the same methodology and assumptions
used to amortize DAC. Sales inducements balances are subject to periodic recoverability testing. The Company records amortization of
DSI in “Interest credited to policyholders’ account balances.” DSI, 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 11
for additional information regarding sales inducements.
The majority of the Company’s reinsurance recoverables and payables are associated with the reinsurance arrangements used to effect
the Company’s acquisition of the retirement business of CIGNA and the Hartford Life Business. The remaining amounts relate to other
reinsurance arrangements entered into by the Company. For each of its reinsurance contracts, the Company determines if the contract
provides indemnification against loss or liability relating to insurance risk in accordance with applicable accounting standards. The
Company reviews all contractual features, particularly those that may limit the amount of insurance risk to which the reinsurer is subject or
features that delay the timely reimbursement of claims. See Note 13 for additional information about the Company’s reinsurance
arrangements.
Identifiable intangible assets primarily include customer relationships and mortgage servicing rights and are recorded net of
accumulated amortization. The Company tests identifiable intangible assets for impairment on an annual basis as of December 31 of each
year or whenever events or circumstances suggest that the carrying value of an identifiable intangible asset may exceed the sum of the
undiscounted cash flows expected to result from its use and eventual disposition. If this condition exists and the carrying value of an
identifiable intangible asset exceeds its fair value, the excess is recognized as an 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. 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 are generally based on Company experience, industry data
and/or other factors. 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 are established, if necessary, when the liability for
future policy benefits plus the present value of expected future gross premiums are determined to be insufficient to provide for expected
future policy benefits and expenses. Premium deficiency reserves do not include a provision for the risk of adverse deviation. In
determining if a premium deficiency related to short-duration contracts exists, the Company considers, among other factors, anticipated
investment income. Any adjustments to future policy benefit reserves related to net unrealized gains on securities classified as available-
for-sale are included in AOCI. 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 been incurred. 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 long-duration life and
annuity contracts, which are discussed more fully in Note 11, and deferred profits.
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 primarily associated with the accumulated account deposits, plus interest credited,
less policyholder withdrawals and other charges assessed against the account balance, as applicable. 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.
118 Prudential Financial, Inc. 2015 Annual Report