Prudential 2005 Annual Report Download - page 147

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PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
18. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The fair value of commercial loans held by the Company’s commercial mortgage operations is based upon various factors,
including the terms of the loans, the intended exit strategy for the loans based upon either a securitization pricing model or
commitments from investors, prevailing interest rates, and credit risk.
Policy Loans
The fair value of U.S. insurance policy loans is calculated using a discounted cash flow model based upon current U.S.
Treasury rates and historical loan repayment patterns, while Japanese insurance policy loans use the risk-free proxy based on the
Yen LIBOR. For group corporate- and trust-owned life insurance contracts and group universal life contracts, the fair value of the
policy loans is the amount due on demand as of the reporting date.
Investment Contracts
For guaranteed investment contracts, payout annuities and other similar contracts without life contingencies, fair values are
derived using discounted projected cash flows based on interest rates being offered for similar contracts with maturities consistent
with those of the contracts being valued. For individual deferred annuities and other deposit liabilities, carrying value approximates
fair value. Investment contracts are reflected within “Policyholders’ account balances.”
Debt
The fair value of short-term and long-term debt is derived by using discount rates based on the borrowing rates currently
available to the Company for debt and financial instruments with similar terms and remaining maturities.
The carrying amount approximates or equals fair value for the following instruments: fixed maturities classified as available
for sale, equity securities, short-term investments, cash and cash equivalents, restricted cash and securities, separate account assets
and liabilities, trading account assets supporting insurance liabilities, other trading account assets, broker-dealer related receivables
and payables, securities purchased under agreements to resell, securities sold under agreements to repurchase, cash collateral for
loaned securities, and securities sold but not yet purchased. The following table discloses the Company’s financial instruments
where the carrying amounts and fair values differ at December 31,
2005 2004
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
(in millions)
Fixed maturities, held to maturity ............................................. $ 3,362 $ 3,345 $ 2,747 $ 2,765
Commercial loans ......................................................... 24,441 25,095 25,488 26,655
Policy loans .............................................................. 8,370 9,416 8,373 9,794
Investment contracts ....................................................... 64,688 64,708 65,949 66,444
Short-term and long-term debt ............................................... 19,384 19,845 11,671 12,271
Prudential Financial 2005 Annual Report 145