Prudential 2015 Annual Report Download - page 65

(1) Excludes the portion of OTTI recorded in “Other comprehensive income (loss),” representing any difference between the fair value of the impaired debt
security and the net present value of its projected future cash flows at the time of impairment.
(2) Represents circumstances where we believe credit events or other adverse conditions of the respective issuers have caused, or will lead to, a deficiency
in the contractual cash flows related to the investment. The amount of the impairment recorded in earnings is the difference between the amortized cost
of the debt security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior
to impairment.
Fixed maturity security OTTI in 2014 were concentrated in the consumer cyclical and foreign government securities sectors within
corporate securities and in asset-backed securities collateralized by sub-prime mortgages. Fixed maturity security OTTI in 2013 were
concentrated in asset-backed securities collateralized by sub-prime mortgages and in the utility and consumer non-cyclical sectors within
corporate securities.
Equity security OTTI in 2014 and 2013 were primarily due to circumstances where the decline in value was maintained for one year
or greater or due to the extent and duration of declines in values.
General Account Investments
We maintain diversified investment portfolios in our general account to support our liabilities to customers as well as our other general
liabilities. Our general account does not include: (1) assets of our derivative operations; (2) assets of our asset management operations,
including assets managed for third parties; and (3) those assets classified as “Separate account assets” on our balance sheet.
The general account portfolios are managed pursuant to the distinct objectives and investment policy statements of PFI excluding the
Closed Block division and the Closed Block division. The primary investment objectives of PFI excluding the Closed Block division
include:
• hedging the market risk characteristics of the major product liabilities and other obligations of the Company;
• optimizing investment income yield within risk constraints over time; and
• for certain portfolios, optimizing total return, including both investment income yield and capital appreciation, within risk
constraints over time, while managing the market risk exposures associated with the corresponding product liabilities.
We pursue our objective to optimize investment income yield for PFI excluding the Closed Block division over time through: (1) the
investment of net operating cash flow, including new product premium inflows, and proceeds from investment sales, repayments and
prepayments, into investments with attractive risk-adjusted yields, and (2) where appropriate, the sale of lower-yielding investments, either
to meet various cash flow needs or to manage the portfolio's risk exposure profile with respect to duration, credit, currency and other risk
factors, while considering the impact on taxes and capital.
The primary investment objectives of the Closed Block division include:
• providing for the reasonable dividend expectations of the participating policyholders within the Closed Block division; and
• optimizing total return, including both investment income yield and capital appreciation, within risk constraints, while managing the
market risk exposures associated with the major products in the Closed Block division.
Our portfolio management approach, while emphasizing our investment income yield and asset/liability risk management objectives,
also takes into account the capital and tax implications of portfolio activity, our assertions regarding our ability and intent to hold equity
securities to recovery, and our lack of any intention or requirement to sell debt securities before anticipated recovery. For a further
discussion of our policies regarding other-than-temporary impairments, including our assertions regarding our ability and intent to hold
equity securities to recovery and any intention or requirement to sell debt securities before anticipated recovery, see “—Fixed Maturity
Securities—Other-than-Temporary Impairments of Fixed Maturity Securities” and “—Equity Securities—Other-than-Temporary
Impairments of Equity Securities,” below.
Management of Investments
The Investment Committee of our Board of Directors oversees our proprietary investments, including our general account portfolios.
It also regularly reviews performance and risk positions. Our Chief Investment Officer Organization (“CIO Organization”) works with our
Risk Management group to develop the investment policies for the general account portfolios of our domestic and international insurance
subsidiaries, and directs and oversees management of the general account portfolios within risk limits and exposure ranges approved
annually by the Investment Committee.
The CIO Organization, including related functions within our insurance subsidiaries, works closely with product actuaries and Risk
Management to understand the characteristics of our products and their associated market risk exposures. This information is incorporated
into the development of target asset portfolios that hedge market risk exposures associated with the liability characteristics and establish
investment risk exposures, within tolerances prescribed by Prudential’s investment risk limits, on which we expect to earn an attractive
risk-adjusted return. We develop asset strategies for specific classes of product liabilities and attributed or accumulated surplus, each with
distinct risk characteristics. Market risk exposures associated with the liabilities include interest rate risk which is addressed through the
duration characteristics of the target asset mix, and currency risk which is addressed by the currency profile of the target asset mix. In
certain of our smaller markets, outside of the U.S. and Japan, capital markets limitations hinder our ability to hedge interest rate exposure to
the same extent we do for our U.S. and Japan businesses and lead us to accept a higher degree of interest rate risk in these smaller
portfolios. General account portfolios typically include allocations to credit and other investment risks as a means to enhance investment
yields and returns over time.
Prudential Financial, Inc. 2015 Annual Report 63