Prudential 2007 Annual Report Download - page 166

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values presented below have been determined by using available market information and by applying valuation
methodologies. Considerable judgment is applied in interpreting data to develop the estimates of fair value. These fair values may not be
realized in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a material
effect on the fair values. The methods and assumptions discussed below were used in calculating the fair values of the instruments. See
Note 19 for a discussion of derivative instruments.
Fixed Maturities
The fair values of public fixed maturity securities are based on quoted market prices or estimates from independent pricing services.
However, for investments in private placement fixed maturity securities, this information is not available. For these private fixed maturities,
the fair value is determined typically by using a discounted cash flow model, which relies upon the average of spread surveys collected
from private market intermediaries who are active in both primary and secondary transactions and takes into account, among other things,
the credit quality of the issuer and the reduced liquidity associated with private placements. In determining the fair value of certain fixed
maturity securities, the discounted cash flow model may also use unobservable inputs, which reflect the Company’s own assumptions about
the inputs market participants would use in pricing the security. Historically, changes in estimated future cash flows or the assessment of an
issuer’s credit quality have been the more significant factors in determining fair values.
Commercial Loans
The fair value of commercial loans, other than those held by the Company’s commercial mortgage operations, is primarily based upon
the present value of the expected future cash flows discounted at the appropriate U.S. Treasury rate or Japanese Government Bond rate for
yen based loans, adjusted for the current market spread for similar quality loans.
The fair value of commercial loans held by the Company’s commercial mortgage operations is based upon various factors, including
the terms of the loans, the intended exit strategy for the loans based upon either a securitization pricing model or commitments from
investors, prevailing interest rates, and credit risk.
Policy Loans
The fair value of U.S. insurance policy loans is calculated using a discounted cash flow model based upon current U.S. Treasury rates
and historical loan repayment patterns, while Japanese insurance policy loans use the risk-free proxy based on the Yen LIBOR. For group
corporate- and trust-owned life insurance contracts and group universal life contracts, the fair value of the policy loans is the amount due as
of the reporting date.
Investment Contracts
For guaranteed investment contracts, payout annuities and other similar contracts without life contingencies, fair values are derived
using discounted projected cash flows based on interest rates being offered for similar contracts with maturities consistent with those of the
contracts being valued. For individual deferred annuities and other deposit liabilities, carrying value approximates fair value. Investment
contracts are reflected within “Policyholders’ account balances.”
Debt
The fair value of short-term and long-term debt is derived by using discount rates based on the borrowing rates currently available to
the Company for debt and financial instruments with similar terms and remaining maturities.
164 Prudential Financial 2007 Annual Report