Prudential 2012 Annual Report Download - page 78

Fixed Maturity Securities Credit Quality
The Securities Valuation Office, or SVO, of the National Association of Insurance Commissioners, or NAIC, evaluates the
investments of insurers for statutory reporting purposes and assigns fixed maturity securities to one of six categories called “NAIC
Designations.” In general, NAIC Designations of “1” highest quality, or “2” high quality, include fixed maturities considered investment
grade, which include securities rated Baa3 or higher by Moody’s or BBB- or higher by Standard & Poor’s. NAIC Designations of “3”
through “6” generally include fixed maturities referred to as below investment grade, which include securities rated Ba1 or lower by
Moody’s and BB+ or lower by Standard & Poor’s. The NAIC Designations for commercial mortgage-backed securities and non-agency
residential mortgage-backed securities, including our asset-backed securities collateralized by sub-prime mortgages, are based on security
level expected losses as modeled by an independent third party (engaged by the NAIC) and the statutory carrying value of the security,
including any purchase discounts or impairment charges previously recognized.
As a result of time lags between the funding of investments, the finalization of legal documents, and the completion of the SVO filing
process, the fixed maturity portfolio generally includes securities that have not yet been rated by the SVO as of each balance sheet date.
Pending receipt of SVO ratings, the categorization of these securities by NAIC Designation is based on the expected ratings indicated by
internal analysis.
Investments of our international insurance companies are not subject to NAIC guidelines. Investments of our Japanese insurance
operations are regulated locally by the Financial Services Agency, an agency of the Japanese government. The Financial Services Agency
has its own investment quality criteria and risk control standards. Our Japanese insurance companies comply with the Financial Services
Agency’s credit quality review and risk monitoring guidelines. The credit quality ratings of the investments of our Japanese insurance
companies are based on ratings assigned by nationally recognized credit rating agencies, including Moody’s, Standard & Poor’s, or rating
equivalents based on ratings assigned by Japanese credit ratings agencies.
The following table sets forth our fixed maturity portfolio by NAIC Designation attributable to the Financial Services Businesses as of
the dates indicated.
Fixed Maturity Securities—Financial Services Businesses
(1)(2) December 31, 2012 December 31, 2011
NAIC Designation
Amortized
Cost
Gross
Unrealized
Gains(3)
Gross
Unrealized
Losses(3)(4)
Fair
Value
Amortized
Cost
Gross
Unrealized
Gains(3)
Gross
Unrealized
Losses(3)(4)
Fair
Value
(in millions)
1 $189,129 $16,564 $1,037 $204,656 $158,718 $11,873 $1,840 $168,751
2 42,424 3,688 656 45,456 32,864 2,571 1,159 34,276
Subtotal High or Highest Quality Securities(5) ...... 231,553 20,252 1,693 250,112 191,582 14,444 2,999 203,027
3 6,086 301 233 6,154 5,978 200 617 5,561
4 1,982 133 129 1,986 2,043 48 316 1,775
5 650 27 74 603 933 11 216 728
6 186 39 17 208 349 46 108 287
Subtotal Other Securities(6)(7) ................... 8,904 500 453 8,951 9,303 305 1,257 8,351
Total Fixed Maturities ..................... $240,457 $20,752 $2,146 $259,063 $200,885 $14,749 $4,256 $211,378
(1) Reflects equivalent ratings for investments of the international insurance operations.
(2) Includes, as of December 31, 2012 and 2011, 104 securities with amortized cost of $793 million (fair value, $847 million) and 110 securities with
amortized cost of $817 million (fair value, $852 million), respectively, that have been categorized based on expected NAIC Designations pending
receipt of SVO ratings.
(3) Includes $310 million of gross unrealized gains and $67 million gross unrealized losses as of December 31, 2012, compared to $345 million of gross
unrealized gains and $98 million of gross unrealized losses as of December 31, 2011, on securities classified as held-to-maturity.
(4) As of December 31, 2012, includes gross unrealized losses of $401 million on public fixed maturities and $52 million on private fixed maturities
considered to be other than high or highest quality and, as of December 31, 2011, includes gross unrealized losses of $1,149 million on public fixed
maturities and $108 million on private fixed maturities considered to be other than high or highest quality.
(5) On an amortized cost basis, as of December 31, 2012, includes $206,966 million of public fixed maturities and $24,587 million of private fixed
maturities and, as of December 31, 2011, includes $168,717 million of public fixed maturities and $22,865 million of private fixed maturities.
(6) On an amortized cost basis, as of December 31, 2012, includes $5,416 million of public fixed maturities and $3,488 million of private fixed maturities
and, as of December 31, 2011, includes $5,436 million of public fixed maturities and $3,867 million of private fixed maturities.
(7) On an amortized cost basis, as of December 31, 2012, securities considered below investment grade based on lowest of external rating agency ratings,
totaled $11.0 billion, or 5% of the total fixed maturities, and include securities considered high or highest quality by the NAIC based on the rules
described above.
76 Prudential Financial, Inc. 2012 Annual Report