Prudential 2001 Annual Report Download - page 123

Prudential Financial, Inc.
Notes to Consolidated Financial Statements
8. Policyholders’ Liabilities (continued)
The accident and health reinsurance recoverable balance at December 31, 2001, 2000 and 1999 includes $117
million, $239 million and $371 million, respectively, attributable to the Company’s discontinued healthcare
business. The accident and health balance at January 1, 1999 includes $1,026 million attributable to the Company’s
discontinued healthcare business.
The unpaid claims and claim adjustment expenses presented above include estimates for liabilities associated with
reported claims and for incurred but not reported claims based, in part, on the Company’s experience. Changes in
the estimated cost to settle unpaid claims are charged or credited to the Consolidated Statements of Operations
periodically as the estimates are revised. Accident and health unpaid claims liabilities are discounted using interest
rates ranging from 3.5% to 7.5%.
The amounts incurred for claims and claim adjustment expenses for property and casualty related to prior years
were primarily driven by lower than anticipated losses for the auto line of business. The amounts incurred for claims
and claim adjustment expenses for accident and health related to prior years were primarily due to improved long-
term disability claim termination experience.
9. Closed Block
Effective with demutualization, the Company adopted the American Institute of Certified Public Accountants
Statement of Position (“SOP”) 00-3, “Accounting by Insurance Enterprises for Demutualizations and Formations of
Mutual Insurance Holding Companies and For Certain Long-Duration Participating Contracts.” SOP 00-3 addresses
financial statement presentation and accounting for certain participating policies after demutualization, accounting
for demutualization expenses, and accounting for retained earnings and other comprehensive income at the date of
demutualization.
On the date of demutualization, Prudential Insurance established a Closed Block for certain individual life insurance
policies and annuities issued by Prudential Insurance in the United States. The Closed Block forms the principal
component of the Closed Block Business. For a discussion of the Closed Block Business see Note 20. The Company
established a separate closed block for participating individual life insurance policies issued by the Canadian branch
of Prudential Insurance. Because of the substantially smaller number of outstanding Canadian policies, this separate
closed block is insignificant in size and is not included in the information presented below.
The policies included in the Closed Block are specified individual life insurance policies and individual annuity
contracts that were in force on the effective date of the Plan of Reorganization and for which Prudential Insurance is
currently paying or expects to pay experience-based policy dividends. Assets have been allocated to the Closed
Block in an amount that has been determined to produce cash flows which, together with revenues from policies
included in the Closed Block, are expected to be sufficient to support obligations and liabilities relating to these
policies, including provision for payment of benefits, certain expenses, and taxes and to provide for continuation of
the policyholder dividend scales in effect in 2000, assuming experience underlying such scales continues. To the
extent that, over time, cash flows from the assets allocated to the Closed Block and claims and other experience
related to the Closed Block are, in the aggregate, more or less favorable than what was assumed when the Closed
Block was established, total dividends paid to Closed Block policyholders in the future may be greater than or less
than the total dividends that would have been paid to these policyholders if the policyholder dividend scales in
effect in 2000 had been continued. Any cash flows in excess of amounts assumed will be available for distribution
over time to Closed Block policyholders and will not be available to stockholders. If the Closed Block has
insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside of
the Closed Block. The Closed Block will continue in effect as long as any policy in the Closed Block remains in
force unless, with the consent of the New Jersey insurance regulator, it is terminated earlier.
The recorded assets and liabilities were allocated to the Closed Block at their historical carrying amounts. The
excess of Closed Block Liabilities over Closed Block Assets at the effective date of the demutualization (adjusted to
eliminate the impact of related amounts in “Accumulated other comprehensive income (loss)”) represents the
estimated maximum future earnings from the Closed Block expected to result from operations attributed to the
Closed Block after income taxes. As required by SOP 00-3, the Company developed an actuarial calculation of the
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