Prudential 2006 Annual Report Download - page 102

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investments
Fixed maturities are comprised of bonds, notes and redeemable preferred stock. Fixed maturities classified as “available for
sale” are carried at fair value. Fixed maturities that the Company has both the positive intent and ability to hold to maturity are
carried at amortized cost and classified as “held to maturity.” The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Interest income, as well as the related amortization of premium and accretion of
discount is included in “Net investment income.” The amortized cost of fixed maturities is written down to fair value when a
decline in value is considered to be other than temporary. See the discussion below on realized investment gains and losses for a
description of the accounting for impairments. Unrealized gains and losses on fixed maturities classified as “available for sale,” net
of tax and the effect on deferred policy acquisition costs, valuation of business acquired, future policy benefits and policyholders’
dividends that would result from the realization of unrealized gains and losses, are included in “Accumulated other comprehensive
income (loss).”
“Trading account assets supporting insurance liabilities, at fair value” includes invested assets that support certain products
included in the Retirement segment, as well as certain products included in the International Insurance segment, which are
experience rated, meaning that the investment results associated with these products will ultimately accrue to contractholders.
Realized and unrealized gains and losses for these investments are reported in “Asset management fees and other income.” Interest
and dividend income from these investments is reported in “Net investment income.”
“Other trading account assets, at fair value” consist primarily of investments and certain derivatives used by the Company
either in its capacity as a broker-dealer or for asset and liability management activities. These instruments are carried at fair value.
Realized and unrealized gains and losses on other trading account assets are reported in “Asset management fees and other
income.”
Equity securities are comprised of common stock and non-redeemable preferred stock and are carried at fair value. The
associated unrealized gains and losses, net of tax and the effect on deferred policy acquisition costs, valuation of business acquired,
future policy benefits and policyholders’ dividends that would result from the realization of unrealized gains and losses, are
included in “Accumulated other comprehensive income (loss).” The cost of equity securities is written down to fair value when a
decline in value is considered to be other than temporary. See the discussion below on realized investment gains and losses for a
description of the accounting for impairments. Dividend income from these investments is reported in “Net investment income.”
Commercial loans originated and held within the Company’s insurance operations are carried at unpaid principal balances, net
of an allowance for losses. Commercial loans originated and held within the Company’s commercial mortgage operations for sale
are reported at the lower of cost or fair market value, while other mortgage loan investments are carried at amortized cost, net of
unamortized deferred loan origination fees and expenses. Commercial loans acquired are recorded at fair value when purchased,
reflecting any premiums or discounts to unpaid principal balances. Interest income, as well as prepayment fees and the amortization
of the related premiums or discounts, is included in “Net investment income.” The allowance for losses includes a loan specific
reserve for non-performing loans and a portfolio reserve for probable incurred but not specifically identified losses. Non-performing
loans include those loans for which it is probable that amounts due according to the contractual terms of the loan agreement will not
all be collected. These loans are measured at the present value of expected future cash flows discounted at the loan’s effective
interest rate, or at the fair value of the collateral if the loan is collateral dependent. Interest received on non-performing loans,
including loans that were previously modified in a troubled debt restructuring, is either applied against the principal or reported as
net investment income, based on the Company’s assessment as to the collectibility of the principal. The Company discontinues
accruing interest on non-performing loans after the loans are 90 days delinquent as to principal or interest, or earlier when the
Company has doubts about collectibility. When a loan is deemed non-performing, any accrued but uncollectible interest is charged
to interest income in the period the loan is deemed non-performing. Generally, a loan is restored to accrual status only after all
delinquent interest and principal are brought current and, in the case of loans where the payment of interest has been interrupted for
a substantial period, a regular payment performance has been established. The portfolio reserve for incurred but not specifically
identified losses considers the Company’s past loan loss experience, the current credit composition of the portfolio, historical credit
migration, property type diversification, default and loss severity statistics and other relevant factors. The gains and losses from the
sale of loans, which are recognized when the Company relinquishes control over the loans, as well as changes in the allowance for
loan losses, are reported in “Realized investment gains (losses), net.”
Policy loans are carried at unpaid principal balances.
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
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