Prudential 2006 Annual Report Download - page 106

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Future Policy Benefits
The Company’s liability for future policy benefits is primarily comprised of the present value of estimated future payments to
or on behalf of policyholders, where the timing and amount of payment depends on policyholder mortality or morbidity, less the
present value of future net premiums. For individual traditional participating life insurance products, the mortality and interest rate
assumptions applied are those used to calculate the policies’ guaranteed cash surrender values. For life insurance, other than
individual traditional participating life insurance, and annuity products, expected mortality is generally based on the Company’s
historical experience or standard industry tables including a provision for the risk of adverse deviation. Interest rate assumptions are
based on factors such as market conditions and expected investment returns. Although mortality and interest rate assumptions are
“locked-in” upon the issuance of new insurance or annuity business with fixed and guaranteed terms, significant changes in
experience or assumptions may require the Company to provide for expected future losses on a product by establishing premium
deficiency reserves. Premium deficiency reserves, if required, are determined based on assumptions at the time the premium
deficiency reserve is established and do not include a provision for the risk of adverse deviation.
The Company’s liability for future policy benefits also includes a liability for unpaid claims and claim adjustment expenses.
The Company does not establish loss reserves until a loss has occurred. However, unpaid claims and claim adjustment expenses
includes estimates of claims that the Company believes have been incurred but have not yet been reported as of the balance sheet
date. The Company’s liability for future policy benefits also includes liabilities for guarantee benefits related to certain
nontraditional long-duration life and annuity contracts, which are discussed more fully in Note 9, and unearned revenues.
Policyholders’ Account Balances
The Company’s liability for policyholders’ account balances represents the contract value that has accrued to the benefit of the
policyholder as of the balance sheet date. This liability is generally equal to the accumulated account deposits, plus interest credited,
less policyholder withdrawals and other charges assessed against the account balance. These policyholders’ account balances also
include provision for benefits under non-life contingent payout annuities.
Policyholders’ Dividends
The Company’s liability for policyholders’ dividends includes its dividends payable to policyholders and its policyholder
dividend obligation associated with the participating policies included in the Closed Block that was established in connection with
the Company’s demutualization. The dividends payable for participating policies included in the Closed Block are determined at the
end of each year for the following year by the Board of Directors of Prudential Insurance based on its statutory results, capital
position, ratings, and the emerging experience of the Closed Block. The policyholder dividend obligation represents net unrealized
investment gains that have arisen subsequent to the establishment of the Closed Block and the excess of actual cumulative earnings
over the expected cumulative earnings, to be paid to Closed Block policyholders unless otherwise offset by future experience. The
dividends payable for policies other than the participating policies included in the Closed Block include extraordinary dividends to
certain policyholders of Gibraltar Life, a Japanese insurance company acquired in April 2001, and dividends payable in accordance
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 certain real estate and loans included in Gibraltar Life’s reorganization
plan, net of transaction costs and taxes. As of December 31, 2006 and 2005, this dividend liability was $324 million and $463
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.
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
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