Prudential 2012 Annual Report Download - page 80

For private placements, our credit and portfolio management processes help ensure prudent controls over valuation and management.
We have separate pricing and authorization processes to establish “checks and balances” for new investments. We apply consistent
standards of credit analysis and due diligence for all transactions, whether they originate through our own in-house origination staff or
through agents. Our regional offices closely monitor the portfolios in their regions. We set all valuation standards centrally, and we assess
the fair value of all investments quarterly. Our private fixed maturity asset managers formally review all private 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.
Fixed maturity securities classified as held-to-maturity are those securities where we have the intent and ability to hold the securities
until maturity. These securities are reflected at amortized cost in our consolidated statements of financial position. Other fixed maturity
securities are considered available-for-sale and, as a result, we record unrealized gains and losses to the extent that amortized cost is
different from estimated fair value. All held-to-maturity securities and all available-for-sale securities with unrealized losses are subject to
our review to identify other-than-temporary impairments in value.
In evaluating whether a decline in value is other-than-temporary, we consistently consider several factors including, but not limited to,
the following:
• the reasons for the decline in value (credit event, currency or interest rate related, including general credit spread widening);
• the financial condition of and near-term prospects of the issuer; and
• the extent and duration of the decline.
In determining whether a decline in value is other-than-temporary, we place greater emphasis on our analysis of the underlying credit
versus the extent and duration of a decline in value. Our credit analysis of an investment includes determining whether the issuer is current
on its contractual payments, evaluating whether it is probable that we will be able to collect all amounts due according to the contractual
terms of the security, and analyzing our overall ability to recover the amortized cost of the investment. We continue to utilize valuation
declines as a potential indicator of credit deterioration, and apply additional levels of scrutiny in our analysis as the severity and duration of
the decline increases.
In addition, we recognize an other-than-temporary impairment in earnings for a debt security in an unrealized loss position when (a) we
have the intent to sell the debt security, or (b) it is more likely than not we will be required to sell the debt security before its anticipated recovery
or (c) a foreign currency denominated security with a foreign currency translation loss approaches maturity. For all debt securities in unrealized
loss positions that do not meet any of these criteria, we analyze our ability to recover the amortized cost by comparing the net present value of
our best estimate of projected future cash flows with the amortized cost of the security. If the net present value is less than the amortized cost of
the investment, an other-than-temporary impairment is recorded. The determination of the assumptions used in these projections requires the use
of significant management judgment. See Note 2 to the Consolidated Financial Statements for additional information regarding these
assumptions and our policies for recognizing other-than-temporary impairments for debt securities.
Other-than-temporary impairments of general account fixed maturity securities attributable to the Financial Services Businesses that
were recognized in earnings were $253 million and $431 million for the years ended December 31, 2012 and 2011, respectively. Included
in the other-than-temporary impairments of general account fixed maturities attributable to the Financial Services Businesses for the years
ended December 31, 2012 and 2011, were $56 million and $118 million, respectively, of other-than-temporary impairments on asset-
backed securities collateralized by sub-prime mortgages.
Other-than-temporary impairments of fixed maturity securities attributable to the Closed Block Business that were recognized in
earnings were $74 million and $104 million for the years ended December 31, 2012 and 2011, respectively. Included in the other-than-
temporary impairments of fixed maturities attributable to the Closed Block Business for the years ended December 31, 2012 and 2011,
were $40 million and $67 million, respectively, of other-than-temporary impairments on asset-backed securities collateralized by sub-prime
mortgages. For a further discussion of other-than-temporary impairments, see “—Realized Investment Gains and Losses” above.
Trading Account Assets Supporting Insurance Liabilities
Certain products included in the Retirement and International Insurance segments are experience-rated, meaning that we expect the
investment results associated with these products will ultimately accrue to contractholders. The investments supporting these experience-
rated products, excluding commercial mortgage and other loans, are primarily classified as trading and are reflected on the balance sheet as
“Trading account assets supporting insurance liabilities, at fair value.” Realized and unrealized gains and losses for these investments are
reported in “Asset management fees and other income,” and excluded from adjusted operating income. Investment income for these
investments is reported in “Net investment income,” and is included in adjusted operating income. The following table sets forth the
composition of this portfolio as of the dates indicated.
December 31, 2012 December 31, 2011(1)
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(in millions)
Short-term investments and cash equivalents ................................................ $ 938 $ 938 $ 951 $ 951
Fixed maturities:
Corporate securities ................................................................ 11,076 12,107 10,369 11,113
Commercial mortgage-backed securities ................................................ 2,096 2,229 2,157 2,247
Residential mortgage-backed securities ................................................. 1,965 2,026 1,786 1,844
Asset-backed securities ............................................................. 1,179 1,116 1,504 1,367
Foreign government bonds ........................................................... 683 708 599 608
U.S. government authorities and agencies and obligations of U.S. states ....................... 369 426 413 440
Total fixed maturities ................................................................... 17,368 18,612 16,828 17,619
Equity securities ....................................................................... 943 1,040 1,050 911
Total trading account assets supporting insurance liabilities ............................. $19,249 $20,590 $18,829 $19,481
(1) Prior period’s amounts are presented on a basis consistent with the current period presentation.
78 Prudential Financial, Inc. 2012 Annual Report