Prudential 2003 Annual Report Download - page 29

classified as available for sale or held to maturity are subject to our review to identify when a decline in value is other
than temporary. Factors we consider in determining whether a decline in value is other than temporary include:
whether the decline is substantial; the duration of the decline, generally greater than six months; the reasons for the
decline in value, credit event or interest rate related; our ability and intent to hold the investment for a period of time
that will allow for a recovery of value; and the financial condition and near-term prospects of the issuer. When it is
determined that a decline in value is other than temporary, the carrying value of the security is reduced to its estimated
fair value, with a corresponding charge to earnings. This corresponding charge is referred to as an impairment and is
reflected in “Realized investment gains (losses), net” in the statements of operations. The level of impairment losses
can be expected to increase when economic conditions worsen and decrease when economic conditions improve.
“Commercial loans,” which comprise 11% of our investments as of December 31, 2003, are carried primarily at
unpaid principal balances, net of unamortized discounts and an allowance for losses. This allowance includes a loan
specific portion as well as a portfolio reserve for incurred but not specifically identified losses. The loan specific
portion is based on management’s judgment as to ultimate collectibility of loan principal. The portfolio reserve is based
on a number of factors, such as historical experience and portfolio diversification. Similar to impairment losses
discussed above, the allowance for losses can be expected to increase when economic conditions worsen and decrease
when economic conditions improve.
See “—Realized Investment Gains and General Account Investments” for a discussion of our investment portfolio
and related results, including policies regarding other than temporary declines in investment value.
Policyholder Liabilities
The liability for “Future policy benefits” is the largest liability included in our statements of financial position,
32% of total liabilities as of December 31, 2003. Changes in this liability are generally reflected in the “Policyholders’
benefits” caption in our statements of operations. This liability is primarily comprised of the present value of estimated
future payments to holders of life insurance and annuity products where the timing and amount of payment depends on
policyholder mortality, surrender or retirement experience. For traditional participating life insurance products of our
Closed Block Business, the mortality and interest rate assumptions we apply are those used to calculate the policies’
guaranteed cash surrender values. For life insurance and annuity products of our Financial Services Businesses,
expected mortality is generally based on the Company’s historical experience or standard industry tables. Interest rate
assumptions are based on factors such as market conditions and expected investment returns. Although mortality 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 us to provide for expected future
losses on a product by establishing premium deficiency reserves.
Our liability for “Unpaid claims and claim adjustment expenses,” which is less than 1% of total liabilities as of
December 31, 2003, includes estimates of claims that we believe have been incurred, but have not yet been reported
(“IBNR”) as of the balance sheet date, primarily attributable to our Group Insurance segment. Consistent with industry
accounting practice, we do not establish loss reserves until a loss has occurred. These IBNR estimates, and estimates of
the amounts of loss we will ultimately incur on reported claims, which are based in part on our historical experience,
are regularly adjusted to reflect actual claims experience. When actual experience differs from our previous estimate,
the resulting difference will be included in our reported results for the period of the change in estimate in the
“Policyholders’ benefits” caption in our statements of operations. On an ongoing basis, trends in actual experience are
a significant factor in the determination of claim reserve levels.
Deferred Policy Acquisition Costs
For most life insurance and annuity products that we sell, we defer costs that vary with and are related primarily to
the production of new business to the extent these costs are deemed recoverable from future profits, and we record
these costs as an asset known as “Deferred policy acquisition costs” or “DAC”, which is 2% of total assets as of
December 31, 2003. We amortize this DAC asset over the expected lives of the contracts, based on the level and timing
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