Prudential 2006 Annual Report Download - page 85
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Deferred Policy Acquisition Costs
We capitalize costs that vary with and are related primarily to the acquisition of new and renewal insurance and annuities contracts.
The costs include commissions, costs to issue and underwrite the policies and certain variable field office expenses. The capitalized
amounts are known as deferred policy acquisition costs, or DAC. Our total DAC, including the impact of the unrealized investment gains
and losses, amounted to $10.9 billion and $9.4 billion as of December 31, 2006 and 2005, respectively. As of December 31, 2006, 40% of
our total DAC related to our International Insurance segment, 33% related to our Individual Life segment, 15% related to our Individual
Annuities segment, and 9% related to our Closed Block Business.
If we were to experience a significant decrease in asset values or increase in lapse or surrender rates on policies for which we amortize
DAC based on gross margins or gross profits, such as participating and variable life insurance, we would expect acceleration of the
amortization of DAC for the effected blocks of policies. Additionally, for all policies on which we have outstanding DAC, we would be
required to evaluate whether this experience called into question our ability to recover all or a portion of the DAC, and we would be
required to accelerate the amortization for some or all of the DAC if we concluded that we could not recover it. An accelerated
amortization of DAC would negatively effect our reported earnings under generally accepted accounting principles.
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
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