Prudential 2001 Annual Report Download - page 108

Prudential Financial, Inc.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
Realized investment gains (losses), net are computed using the specific identification method. Costs of fixed
maturities and equity securities are adjusted for impairments considered to be other than temporary. Impairment
adjustments are included in “Realized investment gains (losses), net.” Factors considered in evaluating whether a
decline in value is other than temporary are: 1) whether the decline is substantial; 2) the Company’s ability and
intent to retain the investment for a period of time sufficient to allow for an anticipated recovery in value; 3) the
duration and extent to which the market value has been less than cost; and 4) the financial condition and near-term
prospects of the issuer. Provisions for losses on commercial loans are included in “Realized investment gains
(losses), net.” Decreases in the carrying value of investment real estate held for disposal or for the production of
income are recorded in “Realized investment gains (losses), net.”
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks, money market instruments and other debt
issues with a maturity of three months or less when purchased.
Deferred Policy Acquisition Costs
The costs that vary with and that are related primarily to the production of new insurance and annuity business are
deferred to the extent such costs are deemed recoverable from future profits. Such costs include commissions, costs of
policy issuance and underwriting, and variable field office expenses. Deferred policy acquisition costs (“DAC”) are
subject to recoverability testing at the end of each accounting period. Deferred policy acquisition costs, for certain
products, are 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 “Accumulated other comprehensive income (loss).”
For participating life insurance, DAC is amortized over the expected life of the contracts (up to 45 years) in
proportion to estimated gross margins based on historical and anticipated future experience, which is updated
periodically. The average rate of assumed future investment yield used in estimating expected gross margins was
7.28% at December 31, 2001 and gradually increases to 8.06% for periods after December 31, 2031. The effect of
changes in estimated gross margins on unamortized deferred acquisition costs is reflected in “General and
administrative expenses” in the period such estimated gross margins are revised. Policy acquisition costs related to
interest-sensitive and variable life products and certain investment-type products are deferred and amortized over
the expected life of the contracts (periods ranging from 7 to 30 years) in proportion to estimated gross profits arising
principally from investment results, mortality and expense margins, and surrender charges based on historical and
anticipated future experience, which is updated periodically. The effect of changes to estimated gross profits on
unamortized deferred acquisition costs is reflected in “General and administrative expenses” in the period such
estimated gross profits are revised. DAC related to non-participating term insurance is amortized over the expected
life of the contracts in proportion to premiums.
The Company has offered programs under which policyholders, for a selected product or group of products, can
exchange an existing policy or contract issued by the Company for another form of policy or contract. These
transactions are known as internal replacements. If policyholders surrender traditional life insurance policies in
exchange for life insurance policies that do not have fixed and guaranteed terms, the Company immediately charges
to expense the remaining unamortized DAC on the surrendered policies. For other internal replacement transactions,
the unamortized DAC on the surrendered policies is immediately charged to expense if the terms of the new policies
are not substantially similar to those of the former policies. If the new policies have terms that are substantially
similar to those of the earlier policies, the DAC is retained with respect to the new policies and amortized over the
life of the new policies.
For property and casualty insurance contracts, DAC is amortized over the period in which related premiums are
earned. Future investment income is considered in determining the recoverability of DAC.
For group life and disability insurance, group annuities and guaranteed investment contracts, acquisition costs are
expensed as incurred.
Separate Account Assets and Liabilities
Separate account assets and liabilities are reported at estimated fair value and represent segregated funds which are
invested for certain policyholders, pension funds and other customers. The assets consist of common stocks, fixed
maturities, real estate related securities, real estate mortgage loans and short-term investments. The assets of each
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