Prudential 2005 Annual Report Download - page 91

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
carrying value may not be recoverable. Real estate held for disposal is carried at the lower of depreciated cost or fair value less
estimated selling costs and is not further depreciated once classified as such. An impairment loss is recognized when the carrying
value of the investment real estate exceeds the estimated undiscounted future cash flows (excluding interest charges) from the
investment. At that time, the carrying value of the investment real estate is written down to fair value. Decreases in the carrying
value of investment real estate and impairments are recorded in “Realized investment gains (losses), net.” Depreciation on real
estate held for the production of income is computed using the straight-line method over the estimated lives of the properties, and is
included in “Net investment income.”
“Short-term investments” consists of highly liquid debt instruments with a maturity of greater than three months and less than
twelve months when purchased, other than those debt instruments meeting this definition that are included in “Trading account
assets supporting insurance liabilities, at fair value.” These investments are carried at amortized cost which, because of their short
term, approximates fair value.
Realized investment gains (losses) are computed using the specific identification method. Adjustments to the costs of fixed
maturities and equity securities for other than temporary impairments are included in “Realized investment gains (losses), net.” In
evaluating whether a decline in value is other than temporary, the Company considers several factors including, but not limited to
the following: (1) the extent (generally if greater than 20%) and the duration (generally if greater than six months) of the decline;
(2) the reasons for the decline in value (credit event, interest related or market fluctuation); (3) the Company’s ability and intent to
hold the investment for a period of time to allow for a recovery of value; and (4) the financial condition of and near-term prospects
of the issuer. Realized investment gains (losses) are generated from numerous sources, including the sale of fixed maturity
securities, equity securities, real estate investments, investments in joint ventures and limited partnerships and other types of
investments, as well as adjustments to the cost of investments for other than temporary impairments. “Realized investment gains
(losses), net” also include prepayment premiums received on private fixed maturity securities, recoveries of principal on previously
impaired securities, provisions for losses on commercial loans, fair value changes on commercial mortgage operations’ loans, gains
on commercial loans in connection with securitization transactions, fair value changes on embedded derivatives and derivatives that
do not qualify for hedge accounting treatment, except those derivatives used in the Company’s capacity as a broker or dealer.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks, money market instruments and other debt
instruments with maturities of three months or less when purchased, other than cash equivalents that are included in “Trading
account assets supporting insurance liabilities, at fair value.”
Reinsurance Recoverables and Payables
Reinsurance recoverables and payables primarily include receivables and corresponding payables associated with the modified
coinsurance arrangements used to effect the Company’s acquisition of the retirement businesses of CIGNA Corporation
(“CIGNA”). The reinsurance recoverables and the reinsurance payables associated with this acquisition are each $2.9 billion and
$32.2 billion at December 31, 2005 and 2004, respectively. See Note 3 for additional information about these arrangements. The
remaining amounts relate to other reinsurance arrangements entered into by the Company.
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. DAC, for applicable products, is 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 included in the Closed Block, DAC is amortized over the expected life of the contracts (up to
45 years) in proportion to gross margins based on historical and anticipated future experience, which is evaluated regularly. The
average rate per annum of assumed future investment yield used in estimating expected gross margins was 7.37% at December 31,
2005 and gradually increases to 8.06% for periods after December 31, 2031. The effect of changes in estimated gross margins on
Prudential Financial 2005 Annual Report 89