Prudential 2012 Annual Report Download - page 79

The following table sets forth our fixed maturity portfolio by NAIC Designation attributable to the Closed Block Business as of the
dates indicated.
Fixed Maturity Securities—Closed Block Business
(1) December 31, 2012 December 31, 2011
NAIC Designation
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses(2)
Fair
Value
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses(2)
Fair
Value
(in millions)
1 $23,197 $3,353 $114 $26,436 $24,749 $3,084 $ 381 $27,452
2 14,581 2,091 58 16,614 13,499 1,698 150 15,047
Subtotal High or Highest Quality Securities(3) .......... 37,778 5,444 172 43,050 38,248 4,782 531 42,499
3 1,989 156 94 2,051 2,164 125 92 2,197
4 1,015 35 92 958 1,426 25 261 1,190
5 271 13 34 250 584 6 174 416
6 84 27 1 110 218 13 17 214
Subtotal Other Securities(4)(5) ...................... 3,359 231 221 3,369 4,392 169 544 4,017
Total Fixed Maturities ......................... $41,137 $5,675 $393 $46,419 $42,640 $4,951 $1,075 $46,516
(1) Includes, as of December 31, 2012 and 2011, 51 securities with amortized cost of $885 million (fair value, $941 million) and 67 securities with
amortized cost of $937 million (fair value, $981 million), respectively, that have been categorized based on expected NAIC Designations pending
receipt of SVO ratings.
(2) As of December 31, 2012, includes gross unrealized losses of $207 million on public fixed maturities and $14 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 $497 million on public fixed
maturities and $47 million on private fixed maturities considered to be other than high or highest quality.
(3) On an amortized cost basis, as of December 31, 2012, includes $23,884 million of public fixed maturities and $13,894 million of private fixed
maturities and, as of December 31, 2011, includes $25,736 million of public fixed maturities and $12,512 million of private fixed maturities.
(4) On an amortized cost basis, as of December 31, 2012, includes $1,603 million of public fixed maturities and $1,756 million of private fixed maturities
and, as of December 31, 2011, includes $2,346 million of public fixed maturities and $2,046 million of private fixed maturities.
(5) On an amortized cost basis, as of December 31, 2012, securities considered below investment grade based on lowest of external rating agency ratings,
totaled $4.4 billion, or 11% of the total fixed maturities, and include securities considered high or highest quality by the NAIC based on the rules
described above.
Credit Derivative Exposure to Public Fixed Maturities
In addition to the credit exposure from public fixed maturities noted above, we sell credit derivatives to enhance the return on our
investment portfolio by creating credit exposure similar to an investment in public fixed maturity cash instruments.
In a credit derivative, we sell credit protection on an identified name or a broad-based index, and in return receive a quarterly
premium. This premium or credit spread generally corresponds to the difference between the yield on the referenced name’s (or an index’s
underlying reference names) public fixed maturity cash instruments and swap rates at the time the agreement is executed.
The majority of the underlying reference names in single name and index credit derivatives where we have sold credit protection, as
well as all the counterparties to these agreements, are investment grade credit quality and our credit derivatives have a remaining term to
maturity of five years or less. Credit derivative contracts are recorded at fair value with changes in fair value, including the premium
received, recorded in “Realized investment gains (losses), net.” The premium received for the credit derivatives we sell attributable to the
Financial Services Businesses was $3 million and $6 million for the years ended December 31, 2012 and 2011, respectively, and is
included in adjusted operating income as an adjustment to “Realized investment gains (losses), net.”
As of December 31, 2012 and 2011, the Financial Services Businesses had $1,065 million and $770 million of outstanding notional
amounts, respectively, each reported at fair value as an asset of $2 million, where we have sold credit protection through credit derivatives.
These amounts exclude a credit derivative related to surplus notes issued by a subsidiary of Prudential Insurance and embedded derivatives
contained in certain externally-managed investments in the European market. See Note 21 to the Consolidated Financial Statements for
additional information regarding these derivatives.
As of December 31, 2012 and 2011, the Closed Block Business had $5 million and $50 million of outstanding notional amounts,
respectively, each reported at fair value as an asset of less than $1 million of exposure where we have sold credit protection through credit
derivatives.
In addition to selling credit protection, we have purchased credit protection using credit derivatives in order to hedge specific credit
exposures in our investment portfolio, including exposures relating to certain guarantees from monoline bond insurers. As of December 31,
2012 and 2011, the Financial Services Businesses had $1,370 million and $1,598 million of outstanding notional amounts, reported at fair
value as a liability of $27 million and an asset of $2 million, respectively. As of December 31, 2012 and 2011, the Closed Block Business
had $309 million and $381 million of outstanding notional amounts, reported at fair value as a liability of $8 million and an asset of less
than $1 million, respectively. The premium paid for the credit derivatives we purchase attributable to the Financial Services Businesses was
$38 million and $43 million for the years ended December 31, 2012 and 2011, respectively, and is included in adjusted operating income as
an adjustment to “Realized investment gains (losses), net.” See Note 21 to the Consolidated Financial Statements for additional information
regarding credit derivatives and an overall description of our derivative activities.
Other-Than-Temporary Impairments of Fixed Maturity Securities
We maintain separate monitoring processes for public and private fixed maturities and create watch lists to highlight securities that
require special scrutiny and management. Our public fixed maturity asset managers formally review all public fixed maturity holdings on a
quarterly basis and more frequently when necessary to identify potential credit deterioration whether due to ratings downgrades,
unexpected price variances, and/or company or industry specific concerns.
Prudential Financial, Inc. 2012 Annual Report 77