Prudential 2007 Annual Report Download - page 113

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Insurance Revenue and Expense Recognition
Premiums from individual life and health insurance products, other than interest-sensitive life contracts, are recognized when due.
When premiums are due over a significantly shorter period than the period over which benefits are provided, any gross premium in excess
of the net premium (i.e., the portion of the gross premium required to provide for all expected future benefits and expenses) is deferred and
recognized into revenue in a constant relationship to insurance in force. Benefits are recorded as an expense when they are incurred. A
liability for future policy benefits is recorded when premiums are recognized using the net level premium method.
Premiums from non-participating group annuities with life contingencies, single premium structured settlements with life
contingencies and single premium immediate annuities with life contingencies are recognized when due. When premiums are due over a
significantly shorter period than the period over which benefits are provided, any gross premium in excess of the net premium is deferred
and recognized into revenue in a constant relationship to the amount of expected future benefit payments. Benefits are recorded as an
expense when they are incurred. A liability for future policy benefits is recorded when premiums are recognized using the net level
premium method.
Certain individual annuity contracts provide the holder a guarantee that the benefit received upon death or annuitization will be no less
than a minimum prescribed amount. These benefits are accounted for as insurance contracts and are discussed in further detail in Note 9.
The Company also provides contracts with certain living benefits which are considered embedded derivatives. These contracts are
discussed in further detail in Note 9.
Amounts received as payment for interest-sensitive group and individual life contracts, deferred fixed annuities, structured settlements
and other contracts without life contingencies, and participating group annuities are reported as deposits to “Policyholders’ account
balances.” Revenues from these contracts are reflected in “Policy charges and fee income” consisting primarily of fees assessed during the
period against the policyholders’ account balances for mortality charges, policy administration charges and surrender charges. In addition
to fees, the Company earns investment income from the investment of policyholders’ deposits in the Company’s general account portfolio.
Fees assessed that represent compensation to the Company for services to be provided in future periods and certain other fees are deferred
and amortized into revenue over the life of the related contracts in proportion to gross profits. Benefits and expenses for these products
include claims in excess of related account balances, expenses of contract administration, interest credited to policyholders’ account
balances and amortization of DAC.
For group life, other than interest-sensitive group life contracts, and disability insurance, premiums are recognized over the period to
which the premiums relate in proportion to the amount of insurance protection provided. Claim and claim adjustment expenses are
recognized when incurred.
Premiums, benefits and expenses are stated net of reinsurance ceded to other companies, except for amounts associated with certain
modified coinsurance contracts which are reflected in the Company’s financial statements based on the application of the deposit method of
accounting. Estimated reinsurance recoverables and the cost of reinsurance are recognized over the life of the reinsured policies using
assumptions consistent with those used to account for the underlying policies.
Foreign Currency
Assets and liabilities of foreign operations and subsidiaries reported in currencies other than U.S. dollars are translated at the exchange
rate in effect at the end of the period. Revenues, benefits and other expenses are translated at the average rate prevailing during the period.
The effects of translating the statements of financial position of non-U.S. entities with functional currencies other than the U.S. dollar are
included, net of related hedge gains and losses and income taxes, in “Accumulated other comprehensive income (loss).” Gains and losses
from foreign currency transactions are reported in either “Accumulated other comprehensive income (loss)” or current earnings in “Asset
management fees and other income” depending on the nature of the related foreign currency denominated asset or liability.
Asset Management Fees and Other Income
Asset management fees and other income principally include asset management fees and securities and commodities commission
revenues, which are recognized in the period in which the services are performed. Realized and unrealized gains from investments
classified as “trading” such as “Trading account assets supporting insurance liabilities” and “Other trading account assets,” and from
Prudential Financial 2007 Annual Report 111