Prudential 2005 Annual Report Download - page 99

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
net impact of converting large group annuity contracts and certain market value adjusted individual annuity contracts from separate
account accounting treatment to general account accounting treatment, including carrying the related liabilities at accreted value,
and the effect of establishing reserves for guaranteed minimum death benefit provisions of the Company’s variable annuity and
variable life contracts. The Company also recognized a cumulative effect of accounting change related to unrealized investment
gains within “Other comprehensive income, net of taxes” of $73 million, net of $42 million of taxes, for the year ended
December 31, 2004. Upon adoption of SOP 03-1, $3.3 billion in “Separate account assets” were reclassified resulting in a $2.8
billion increase in “Fixed maturities, available for sale” and a $0.6 billion increase in “Trading account assets supporting insurance
liabilities, at fair value,” as well as changes in other non-separate account assets. Similarly, upon adoption, $3.3 billion in “Separate
account liabilities” were reclassified resulting in increases in “Policyholders’ account balances” and “Future policy benefits,” as
well as changes in other non-separate account liabilities.
In June 2004, the FASB issued FSP No. 97-1, “Situations in Which Paragraphs 17(b) and 20 of FASB Statement No. 97,
Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from
the Sale of Investments, Permit or Require Accrual of an Unearned Revenue Liability.” FSP 97-1 clarifies the accounting for
unearned revenue liabilities of certain universal-life type contracts under SOP 03-1. The Company’s adoption of FSP 97-1 on
July 1, 2004 did not change the accounting for unearned revenue liabilities and, therefore, had no impact on the Company’s
consolidated financial position or results of operations. In September 2004, the AICPA SOP 03-1 Implementation Task Force issued
a Technical Practice Aid (“TPA”) to clarify certain aspects of SOP 03-1. The TPA did not have a material impact on the Company’s
consolidated financial position or results of operations.
In April 2003, the FASB issued Statement No. 133 Implementation Issue No. B36, “Embedded Derivatives: Modified
Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially
Related to the Creditworthiness of the Obligor Under Those Instruments.” Implementation Issue No. B36 indicates that a modified
coinsurance arrangement (“modco”), in which funds are withheld by the ceding insurer and a return on those withheld funds is paid
based on the ceding company’s return on certain of its investments, generally contains an embedded derivative feature that is not
clearly and closely related to the host contract and should be bifurcated in accordance with the provisions of SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” Effective October 1, 2003, the Company adopted the guidance
prospectively for existing contracts and all future transactions. As permitted by SFAS No. 133, all contracts entered into prior to
January 1, 1999, were grandfathered and are exempt from the provisions of SFAS No. 133 that relate to embedded derivatives. The
application of Implementation Issue No. B36 in 2003 had no impact on the consolidated financial position or results of operations
of the Company.
Reclassifications
Certain amounts in prior years have been reclassified to conform to the current year presentation.
3. ACQUISITIONS AND DISPOSITIONS
Acquisition of Aoba Life Insurance Company, Ltd.
On November 1, 2004, the Company acquired Aoba Life Insurance Company, Ltd. (“Aoba Life”) for $191 million of total
consideration from Tawa S.A., a subsidiary of Artemis S.A. Aoba Life is a Japanese life insurer with a run-off book of insurance
and is not selling new policies. In recording the transaction, $6.4 billion was allocated to assets acquired and $6.2 billion to
liabilities assumed. Pro forma information for this acquisition is omitted as the impact is not material.
Acquisition of CIGNA Corporation’s Retirement Business
On April 1, 2004, the Company purchased the retirement business of CIGNA for $2.1 billion, including $2.1 billion of cash
consideration and $20 million of transaction costs. The assets acquired and liabilities assumed and the results of operations have
been included in the Company’s consolidated financial statements as of that date. The acquisition of this business included the
purchase by the Company of all the shares of CIGNA Life Insurance Company (“CIGNA Life”), which became an indirect wholly
owned subsidiary of the Company. Prior to the acquisition, CIGNA Life entered into reinsurance arrangements with CIGNA to
effect the transfer of the retirement business included in the transaction to CIGNA Life. Subsequent to its acquisition, the Company
changed the name of CIGNA Life to Prudential Retirement Insurance and Annuity Company (“PRIAC”).
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