Prudential 2005 Annual Report Download - page 94

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
with certain group insurance policies. The extraordinary dividends payable to the policyholders of Gibraltar Life are based on 70%
of net realized investment gains, if any, over the value of real estate and loans included in Gibraltar Life’s reorganization plan, net
of transaction costs and taxes. As of December 31, 2005 and 2004, this dividend liability was $463 million and $975 million,
respectively.
Contingent Liabilities
Amounts related to contingent liabilities are accrued if it is probable that a liability has been incurred and an amount is
reasonably estimable. Management evaluates whether there are incremental legal or other costs directly associated with the ultimate
resolution of the matter that are reasonably estimable and, if so, they are included in the accrual.
Insurance Revenue and Expense Recognition
Premiums from life and health insurance policies, excluding interest-sensitive life contracts, are recognized when due. When
premiums are due over a significantly shorter period than the period over which benefits are provided, any excess premium is
deferred and recognized into revenue in a constant relationship to insurance in force. Benefits are recorded as an expense when they
are incurred. A liability for future policy benefits is recorded when premiums are recognized using the net level premium method.
Premiums from non-participating group annuities with life contingencies, structured settlements with life contingencies and
single premium immediate annuities with life contingencies are recognized when received. Benefits are recorded as an expense
when they are incurred. When premiums are due over a significantly shorter period than the period over which benefits are
provided, a liability for future policy benefits is recorded when premiums are recognized using the net level premium method and
any gross premium in excess of the net premium is deferred and recognized into income in a constant relationship to the amount of
expected future benefit payments.
Certain annuity contracts provide the holder a guarantee that the benefit received upon death will be no less than a minimum
prescribed amount that is based upon a combination of net deposits to the contract, net deposits to the contract accumulated at a
specified rate or the highest historical account value on a contract anniversary. These contracts are discussed in further detail in
Note 8. Also, as more fully discussed in Note 8, the liability for the guaranteed minimum death benefit under these contracts is
determined each period end by estimating the accumulated value of a percentage of the total assessments to date less the
accumulated value of death benefits in excess of the account balance.
Amounts received as payment for interest-sensitive life contracts, deferred annuities, structured settlements and other contracts
without life contingencies, and participating group annuities are reported as deposits to “Policyholders’ account balances.”
Revenues from these contracts are reflected in “Policy charges and fee income,” or as a reduction of “Interest credited to
policyholders’ account balances,” and consist primarily of fees assessed during the period against the policyholders’ account
balances for mortality charges, policy administration charges and surrender charges. Fees assessed that represent compensation to
the Company for services to be provided in future periods and certain other fees are deferred and amortized into revenue over the
life of the related contracts. Benefits and expenses for these products include claims in excess of related account balances, expenses
of contract administration, interest credited to policyholders’ account balances and amortization of DAC.
For group life and disability insurance, and property and casualty insurance, premiums are recognized over the period to which
the premiums relate in proportion to the amount of insurance protection provided. Claim and claim adjustment expenses are
recognized when incurred.
Premiums, benefits and expenses are stated net of reinsurance ceded to other companies, except for amounts associated with
certain modified coinsurance contracts which are reflected in the Company’s financial statements based on the application of the
deposit method of accounting. Estimated reinsurance recoverables and the cost of reinsurance are recognized over the life of the
reinsured policies using assumptions consistent with those used to account for the underlying policies.
Foreign Currency Translation Adjustments
Assets and liabilities of foreign operations and subsidiaries reported in currencies other than U.S. dollars are translated at the
exchange rate in effect at the end of the period. Revenues, benefits and other expenses are translated at the average rate prevailing
during the period. The effects of translating the statements of financial position of non-U.S. entities with functional currencies other
than the U.S. dollar are included, net of related hedge gains and losses and income taxes, in “Accumulated other comprehensive
income (loss).”
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