Prudential 2012 Annual Report Download - page 76

Commercial Mortgage-Backed Securities
The commercial real estate market was severely impacted by the financial crisis and the subsequent recession; however, market
fundamentals appear to have bottomed and have shown signs of improvement since late 2010. Commercial real estate vacancy rates have
declined from their peak, rent growth has turned positive, and prices of commercial real estate have stabilized. Additionally, the elevated
delinquency rate on mortgages in the commercial mortgage-backed securities market has slowed and refinancing activity has increased,
reflecting the improvement in these fundamentals. The loans included in new issues seem to reflect better underwriting and lower levels of
leverage compared to 2007.
Although there are positive signs in commercial real estate, there are still some significant challenges for this market, including
numerous future loan workouts, a large wave of refinancings for over-leveraged properties and numerous legislative changes. To ensure
our investment objectives and asset strategies are maintained, we consider these market factors in making our investment decisions on
commercial mortgage-backed securities.
The following tables set forth the amortized cost and fair value of our commercial mortgage-backed securities attributable to the
Financial Services Businesses as of the dates indicated, by credit quality and by year of issuance (vintage).
Commercial Mortgage-Backed Securities at Amortized Cost—Financial Services Businesses
December 31, 2012
Lowest Rating Agency Rating(1)
Vintage AAA AA A BBB
BB and
below
Total
Amortized
Cost
Total
December 31,
2011
(in millions)
2012—2008 .................................................... $ 298 $248 $ 0 $ 3 $17 $ 566 $ 418
2007 .......................................................... 1,148 35 12 0 1 1,196 1,887
2006 .......................................................... 2,676 101 0 4 0 2,781 2,955
2005 .......................................................... 2,036 67 10 0 0 2,113 1,804
2004 & Prior ................................................... 605 103 30 12 7 757 1,133
Total commercial mortgage-backed securities(2)(3)(4) .................. $6,763 $554 $52 $19 $25 $7,413 $8,197
(1) The table above provides ratings as assigned by nationally recognized rating agencies as of December 31, 2012, including Standard & Poor’s, Moody’s,
Fitch and Realpoint.
(2) Excluded from the table above are commercial mortgage-backed securities held outside the general account in other entities and operations. Also
excluded from the table above are commercial mortgage-backed securities classified as trading.
(3) Included in the table above, as of December 31, 2012, are downgraded super senior securities with amortized cost of $134 million in AA, $42 million in
A and $3 million in BBB.
(4) Included in the table above, as of December 31, 2012, are agency commercial mortgage-backed securities with amortized cost of $283 million, all rated
AA.
Commercial Mortgage-Backed Securities at Fair Value—Financial Services Businesses
December 31, 2012
Lowest Rating Agency Rating(1)
Vintage AAA AA A BBB
BB and
below
Total Fair
Value
Total
December 31,
2011
(in millions)
2012—2008 .................................................... $ 306 $283 $ 0 $ 4 $16 $ 609 $ 447
2007 .......................................................... 1,202 39 12 0 22 1,275 1,958
2006 .......................................................... 2,943 114 0 5 0 3,062 3,214
2005 .......................................................... 2,179 72 10 0 0 2,261 1,930
2004 & Prior ................................................... 633 105 31 11 7 787 1,117
Total commercial mortgage-backed securities(2)(3) ..................... $7,263 $613 $53 $20 $45 $7,994 $8,666
(1) The table above provides ratings as assigned by nationally recognized rating agencies as of December 31, 2012, including Standard & Poor’s, Moody’s,
Fitch and Realpoint.
(2) Excluded from the table above are commercial mortgage-backed securities held outside the general account in other entities and operations. Also
excluded from the table above are commercial mortgage-backed securities classified as trading.
(3) Included in the table above, as of December 31, 2012, are agency commercial mortgage-backed securities with fair value of $322 million, all rated AA.
Included in the tables above are commercial mortgage-backed securities collateralized by non-U.S. properties, all related to Japanese
commercial mortgage-backed securities held by our Japanese insurance operations, with an amortized cost of $12 million in AAA, $4
million in BBB and $18 million in BB and below as of December 31, 2012, and $13 million in AAA, $4 million in A, $17 million in BBB
and $13 million in BB and below as of December 31, 2011.
Included in the tables above are commercial mortgage-backed securities collateralized by U.S. properties, all related to commercial
mortgage-backed securities held by our Japanese insurance operations, with an amortized cost of $674 million in AAA, $116 million in
AA, $40 million in A and $9 million in BBB as of December 31, 2012, and $875 million in AAA, $190 million in AA, $125 million in A,
and $5 million in BBB as of December 31, 2011.
The following table sets forth the amortized cost of our AAA commercial mortgage-backed securities attributable to the Financial
Services Businesses as of the dates indicated, by type and by year of issuance (vintage).
74 Prudential Financial, Inc. 2012 Annual Report