The Prudential Series Fund

Pruco Life Insurance Company
Notes to Consolidated Financial Statements
9. STATUTORY NET INCOME AND SURPLUS AND DIVIDEND RESTRICTIONS
The Company is required to prepare statutory financial statements in accordance with accounting practices prescribed or
permitted by the Arizona Department of Insurance. Statutory accounting practices primarily differ from GAAP by charging
policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions
and valuing investments, deferred taxes, and certain assets on a different basis.
Statutory net income (loss) for the Company amounted to $(566) million, $61 million, and $499 million for the years ended
December 31, 2008, 2007, and 2006, respectively. Statutory surplus of the Company amounted to $601 million and $773
million at December 31, 2008 and 2007, respectively. The Company obtained reinsurance in October 2006 on the portion of
Universal life business containing no lapse guarantees, from an affiliate. This affiliated reinsurance agreement mitigates surplus
strain and is discussed further in Note 13 to the Consolidated Financial Statements.
The Company prepares its statutory financial statements in accordance with accounting practices prescribed or permitted by the
Arizona Department of Insurance. Prescribed statutory accounting practices include publications of the NAIC, state laws,
regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so
prescribed.
The Company is subject to Arizona law, which limits the amount of dividends that insurance companies can pay to stockholders
without approval of the Arizona Department of Insurance. The maximum dividend, which may be paid in any twelve-month
period without notification or approval, is limited to the lesser of 10% of statutory surplus as of December 31 of the preceding
year or the net gain from operations of the preceding calendar year. Cash dividends may only be paid out of surplus derived from
realized net profits. Based on these limitations, there is no capacity to pay a dividend in 2009 without prior approval. The
Company paid a dividend of $102 million, and returned capital of $198 million, to its parent company in 2007. In 2006 and
2008, there were no dividends paid or a return of capital to the parent company.
10. FAIR VALUE OF ASSETS AND LIABILITIES
Fair Value Measurement – Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. SFAS No. 157 establishes a framework for
measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes
the inputs to valuation techniques used to measure fair value into three levels. The level in the fair value hierarchy within which
the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement.
The levels of the fair value hierarchy are as follows:
Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets
or liabilities. These generally provide the most reliable evidence and are used to measure fair value whenever available.Active
markets are defined as having the following for the measured asset/liability: i) many transactions, ii) current prices, iii) price
quotes not varying substantially among market makers, iv) narrow bid/ask spreads and v) most information publicly available.
The Company’s Level 1 assets and liabilities primarily include certain cash equivalents and short-term investments, equity
securities and derivative contracts that are traded in an active exchange market. Prices are obtained from readily available sources
for market transactions involving identical assets or liabilities.
Level 2 – Fair value is based on significant inputs, other than Level 1 inputs, that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data.
Level 2 inputs include quoted market prices in active markets for similar assets and liabilities, quoted market prices in markets
that are not active for identical or similar assets or liabilities and other observable inputs. The Company’s Level 2 assets and
liabilities include: fixed maturities (corporate public and private bonds, most government securities, certain asset-backed and
mortgage-backed securities, etc.), certain equity securities, short-term investments and cash equivalents (primarily commercial
paper), and certain over-the-counter derivatives. Valuations are generally obtained from third party pricing services for identical
or comparable assets or liabilities through the use of valuation methodologies using observable market inputs.
Prices from pricing services are sourced from multiple vendors, and a vendor hierarchy is maintained by asset type based on
historical pricing experience and vendor expertise. The Company generally receives prices from multiple pricing services for
each security, but ultimately use the price from the pricing service highest in the vendor hierarchy based on the respective asset
type. In order to validate reasonability, prices are reviewed by internal asset managers through comparison with directly observed
recent market trades and internal estimates of current fair value, developed using market observable inputs and economic
indicators.
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