Prudential 2007 Annual Report Download - page 112

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
proportion to gross premiums or in proportion to the face amount of insurance in force, as applicable. For acquired annuity contracts,
VOBA is amortized in proportion to gross profits arising from the contracts and anticipated future experience, which is evaluated regularly.
For acquired defined contribution and defined benefit businesses, the majority of VOBA is amortized in proportion to gross profits arising
principally from investment spreads and fees in excess of actual expense based upon historical and estimated future experience, which is
updated periodically. The remainder of this VOBA is amortized based on gross revenues, fees, or the change in policyholders’ account
balances, as applicable. The effect of changes in gross profits on unamortized VOBA is reflected in the period such estimates of expected
future profits are revised.
As a result of certain acquisitions, the Company recognizes an asset for goodwill representing the excess of cost over the net fair value
of the assets acquired and liabilities assumed. The Company tests goodwill for impairment annually as of December 31 and more
frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its
carrying amount. See Note 7 for additional information regarding goodwill.
The Company offers various types of sales inducements. The Company defers sales inducements and amortizes them over the
anticipated life of the policy using the same methodology and assumptions used to amortize deferred policy acquisition costs. The
Company amortizes deferred sales inducements in “Interest credited to policyholders’ account balances.” See Note 9 for additional
information regarding sales inducements.
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 and disability products, expected mortality and morbidity 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 morbidity 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 claim liabilities 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 net liabilities for guarantee benefits related to certain nontraditional long-
duration life and annuity contracts, which are discussed more fully in Note 9, and certain 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 and certain unearned revenues.
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. 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 special 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 special dividends payable to the policyholders of Gibraltar Life are based on 70% of the net increase
in the fair value of certain real estate and loans included in Gibraltar Life’s reorganization plan, net of transaction costs and taxes. As of
December 31, 2007 and 2006, this dividend liability was $421 million and $324 million, respectively.
110 Prudential Financial 2007 Annual Report