Prudential 2005 Annual Report Download - page 125

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
10. REINSURANCE
The Company participates in reinsurance in order to provide additional capacity for future growth and limit the maximum net
loss potential arising from large risks. In addition, the acquisition of the retirement business of CIGNA on April 1, 2004, required
the Company through its wholly owned subsidiary, PRIAC, to enter into certain reinsurance arrangements with CIGNA to effect the
transfer of the retirement business included in the transaction. These reinsurance arrangements include coinsurance-with-
assumption, modified-coinsurance-with-assumption, and modified-coinsurance-without-assumption and are more fully described in
Note 3.
Life and disability reinsurance is accomplished through various plans of reinsurance, primarily yearly renewable term, per
person excess and coinsurance. In addition, the Company has reinsured with unaffiliated third parties, 73% of the Closed Block
through various modified coinsurance arrangements. The Company accounts for these modified coinsurance arrangements under the
deposit method of accounting. Prior to the sale of the Company’s property and casualty insurance businesses, property and casualty
reinsurance was placed on a pro-rata basis and excess of loss, including stop-loss, basis. Reinsurance ceded arrangements do not
discharge the Company as the primary insurer. Ceded balances would represent a liability of the Company in the event the
reinsurers were unable to meet their obligations to the Company under the terms of the reinsurance agreements. Reinsurance
premiums, commissions, expense reimbursements, benefits and reserves related to reinsured long-duration contracts are accounted
for over the life of the underlying reinsured contracts using assumptions consistent with those used to account for the underlying
contracts. The cost of reinsurance related to short-duration contracts is accounted for over the reinsurance contract period. Amounts
recoverable from reinsurers, for both short-and long-duration reinsurance arrangements, are estimated in a manner consistent with
the claim liabilities and policy benefits associated with the reinsured policies.
The tables presented below exclude amounts pertaining to the Company’s discontinued operations.
Reinsurance amounts included in the Consolidated Statements of Operations for the years ended December 31, were as
follows:
2005 2004 2003
(in millions)
Direct premiums ....................................................................... $14,675 $13,245 $13,847
Reinsurance assumed ................................................................ 102 103 133
Reinsurance ceded .................................................................. (1,092) (889) (868)
Premiums ............................................................................. $13,685 $12,459 $13,112
Policyholders’ benefits ceded ............................................................. $ 1,128 $ 908 $ 840
Reinsurance recoverables at December 31, are as follows:
2005 2004
(in millions)
Individual and group annuities(1) ..................................................................... $2,917 $32,215
Life insurance ..................................................................................... 484 507
Other reinsurance .................................................................................. 135 61
Total reinsurance recoverable ........................................................................ $3,536 $32,783
(1) Primarily represents reinsurance recoverables at December 31, 2005 and 2004, under the modified coinsurance arrangement associated with the
acquisition of the retirement business of CIGNA. The Company has recorded a related reinsurance payable of $2,910 million and $32,198 million at
December 31, 2005 and 2004, respectively.
Excluding the reinsurance recoverable associated with the acquisition of the retirement business of CIGNA, three major
reinsurance companies account for approximately 62% of the reinsurance recoverable at December 31, 2005. The Company
periodically reviews the financial condition of its reinsurers and amounts recoverable therefrom in order to minimize its exposure to
loss from reinsurer insolvencies, recording an allowance when necessary for uncollectible reinsurance.
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