Prudential 2005 Annual Report Download - page 47

The impairments recorded on fixed maturities in 2004 consisted of $48 million on public securities and $74 million on private
securities, compared with fixed maturity impairments of $61 million on public securities and $205 million on private securities in 2003.
Impairments on fixed maturities in 2004 were concentrated in the financial services, manufacturing and services sectors, were primarily
driven by downgrades in credit, bankruptcy or other adverse financial conditions of the respective issuers and included a private fixed
maturity impairment relating to a Korean financial services company. Impairments on fixed maturities in 2003 were concentrated in the
manufacturing, retail and wholesale and finance sectors and were primarily driven by downgrades in credit, bankruptcy or other adverse
financial conditions of the respective issuers. Included in private fixed maturity impairments for 2003 were impairments related to a Korean
financial services company, a U.S. mining company and an Australian mining company.
We also recognized $19 million of equity security impairments in 2004 compared with $101 million of impairments in 2003. The
impairments in 2003 primarily related to our Gibraltar Life operations and were the result of equity market declines over a prolonged
period.
Closed Block Business
For the Closed Block Business, net realized investment gains were $715 million in 2004, compared to net realized investment gains of
$426 million in 2003. Realized gains in 2004 and 2003 included net realized gains on sales of fixed maturity securities and, to a lesser
extent, private bond prepayment premiums. Partially offsetting these gains were fixed maturity impairments of $61 million and credit-
related losses of $6 million, and fixed maturity impairments of $123 million and credit-related losses of $46 million in 2004 and 2003,
respectively. For further information on these impairments, see the discussion below. We realized net gains on equity securities of $317
million in 2004, net of $9 million of impairments, compared to losses of $33 million in 2003, including $59 million of impairments that are
discussed below. The net realized gains on equity securities in 2004 were primarily the result of sales as we shifted from a passive index to
active management strategy. Net gains on derivatives were $45 million in 2004, compared to gains of $64 million in 2003. Derivative gains
in 2004 and 2003 included $37 million and $45 million, respectively, of gains on treasury futures contracts used to manage the duration of
the Company’s fixed maturity investment portfolio. Derivative gains in 2003 also included gains of $24 million on equity futures contracts.
Realized investment gains in 2004 and 2003 also included $37 million and $41 million, respectively, of gains in connection with the partial
divestiture of an equity investment in a real estate operating company.
During 2004, we recorded total other than temporary impairments of $81 million attributable to the Closed Block Business, compared
to total other than temporary impairments of $198 million attributable to the Closed Block Business in 2003. The impairments in 2004
consisted of $61 million relating to fixed maturities, $9 million relating to equity securities and $11 million relating to other invested assets
as defined above. The impairments in 2003 consisted of $123 million relating to fixed maturities, $59 million relating to equity securities
and $16 million relating to other invested assets as defined above.
The impairments recorded on fixed maturities in 2004 consist of $14 million on public securities and $47 million on private securities,
compared with fixed maturity impairments of $39 million on public securities and $84 million on private securities in 2003. Impairments in
2004 were concentrated in the services, manufacturing and asset-backed securities sectors and were primarily driven by downgrades in
credit, bankruptcy or other adverse financial conditions of the respective issuers. Included in private fixed maturity impairments for 2004
were impairments relating to a U.K. facilities management company and an electronic test equipment distributor. Impairments in 2003
were concentrated in the retail and wholesale, manufacturing and other sectors and were primarily driven by downgrades in credit,
bankruptcy or other adverse financial conditions of the respective issuers. Included in private fixed maturity impairments for 2003 were
impairments relating to a European dairy and bakery goods producer, an Australian mining company and an aerospace parts manufacturer.
We also recognized $9 million of equity security impairments in 2004, compared with $59 million of impairments in 2003. The
impairments in 2003 were the result of declines in the U.S. stock market over a prolonged period.
General Account Investments
We maintain a diversified investment portfolio in our insurance companies to support our liabilities to customers in our Financial
Services Businesses and the Closed Block Business, as well as our other general liabilities. Our general account does not include: (1) assets
of our securities brokerage, securities trading, banking operations, real estate and relocation services, and (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 portfolio is managed pursuant to the distinct objectives of the Financial Services Businesses and the Closed
Block Business. The primary investment objectives of the Financial Services Businesses include:
• matching the liability characteristics of the major products and other obligations of the Company; and
• maximizing the portfolio book yield within risk constraints.
Our strategies for maximizing the portfolio book yield of the Financial Services Businesses include: a) the investment of proceeds
from investment sales, repayments and prepayments, and operating cash flows, into optimally yielding investments, and b) the sale of the
portfolio’s lower yielding investments, either to meet various cash flow needs or for reinvestment purposes, all while managing within the
portfolio’s duration, credit, currency and other risk constraints.
The primary investment objectives of the Closed Block Business include:
• providing for the reasonable dividend expectations of the participating policyholders within the Closed Block Business and the
Class B shareholders; and
• maximizing total return and preserving principal, within risk constraints, while matching the liability characteristics of the major
products in the Closed Block Business.
Prudential Financial 2005 Annual Report 45