Prudential 2003 Annual Report Download - page 92

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We assess interest rate sensitivity for “other than trading” financial assets, financial liabilities and derivatives
using hypothetical test scenarios that assume either upward or downward 100 basis point parallel shifts in the yield
curve from prevailing interest rates. The following tables set forth the potential loss in fair value from a hypothetical
100 basis point upward shift as of December 31, 2003 and 2002, because this scenario results in the greatest net
exposure to interest rate risk of the hypothetical scenarios tested at those dates. While the test scenario is for illustrative
purposes only and does not reflect our expectations regarding future interest rates or the performance of fixed-income
markets, it is a near-term, reasonably possible hypothetical change that illustrates the potential impact of such events.
These test scenarios do not measure the changes in value that could result from non-parallel shifts in the yield curve,
which we would expect to produce different changes in discount rates for different maturities. As a result, the actual
loss in fair value from a 100 basis point change in interest rates could be different from that indicated by these
calculations.
As of December 31, 2003
Notional
Value of
Derivatives
Estimated
Fair
Value
Hypothetical Fair
Value After + 100
Basis Point Parallel
Yield Curve Shift
Hypothetical
Change in
Fair Value
(in millions)
Financial assets with interest rate risk:
Fixed maturities:
Available for sale ......................................... $128,943 $120,886 $(8,057)
Held to maturity .......................................... 3,084 2,980 (104)
Commercial loans ............................................. 21,037 20,140 (897)
Mortgage securitization inventory ................................ 1,058 1,049 (9)
Policy loans .................................................. 9,706 9,123 (583)
Derivatives:
Swaps .................................................. $11,231 (379) (349) 30
Futures .................................................. 2,148 1 (68) (69)
Options ................................................. 278 11 3 (8)
Forwards ................................................ 12,791 (13) (116) (103)
Financial liabilities with interest rate risk:
Short-term and long-term debt(1) ............................. (10,844) (10,421) 423
Investment contracts ....................................... (41,450) (40,865) 585
Net estimated potential loss ......................................... $(8,792)
As of December 31, 2002
Notional
Value of
Derivatives
Estimated
Fair
Value
Hypothetical Fair
Value After + 100
Basis Point Parallel
Yield Curve Shift
Hypothetical
Change in
Fair Value
(in millions)
Financial assets with interest rate risk:
Fixed maturities:
Available for sale ......................................... $125,463 $118,100 $(7,363)
Held to maturity .......................................... 2,673 2,598 (75)
Commercial loans ............................................. 21,335 20,214 (1,121)
Mortgage securitization inventory ................................ 708 703 (5)
Policy loans .................................................. 10,714 10,044 (670)
Derivatives:
Swaps .................................................. $8,306 (63) (8) 55
Futures .................................................. 1,012 (31) 14 45
Options ................................................. 233 8 3 (5)
Forwards ................................................ 7,584 (195) (194) 1
Financial liabilities with interest rate risk:
Short-term and long-term debt ............................... (8,804) (8,447) 357
Investment contracts ....................................... (38,765) (38,203) 562
Guaranteed beneficial interest in Trust holding solely debentures of
Parent(1) ...................................................... (755) (730) 25
Net estimated potential loss ......................................... $(8,194)
(1) As of December 31, 2003, “Short-term and long-term debt” includes long-term debt related to our equity security units. As of December 31,
2002, our equity security units were included in “Guaranteed beneficial interest in Trust holding solely debentures of Parent.”
Growing and Protecting Your Wealth90