Prudential 2005 Annual Report Download - page 55

Private Fixed Maturities—Credit Quality
The following table sets forth our private fixed maturity portfolios by NAIC rating attributable to the Financial Services Businesses as
of the dates indicated.
(1)(2) December 31, 2005 December 31, 2004
NAIC
Designation Rating Agency Equivalent
Amortized
Cost
Gross
Unrealized
Gains(3)
Gross
Unrealized
Losses(3)
Fair
Value
Amortized
Cost
Gross
Unrealized
Gains(3)
Gross
Unrealized
Losses(3)
Fair
Value
(in millions)
1 Aaa, Aa, A ........................... $ 5,626 $270 $ 27 $ 5,869 $ 4,917 $ 321 $19 $ 5,219
2 Baa ................................. 9,436 522 62 9,896 9,831 695 25 10,501
Subtotal Investment Grade ............... 15,062 792 89 15,765 14,748 1,016 44 15,720
3 Ba .................................. 1,107 44 7 1,144 1,520 102 1 1,621
4 B ................................... 507 33 5 535 396 42 3 435
5 C and lower ........................... 339 22 2 359 288 32 1 319
6 In or near default ....................... 70 8 2 76 224 9 6 227
Subtotal Below Investment Grade ......... 2,023 107 16 2,114 2,428 185 11 2,602
Total Private Fixed Maturities ............ $17,085 $899 $105 $17,879 $17,176 $1,201 $55 $18,322
(1) Reflects equivalent ratings for investments of the international insurance operations that are not rated by U.S. insurance regulatory authorities.
(2) Includes, as of December 31, 2005 and 2004, respectively, 187 securities with amortized cost of $3,494 million (fair value, $3,542 million) and 196
securities with amortized cost of $2,759 million (fair value, $2,820 million) that have been categorized based on expected NAIC designations pending
receipt of SVO ratings.
(3) Includes $1 million of gross unrealized gains and zero million of gross unrealized losses as of December 31, 2005, compared to $1 million of gross
unrealized gains and zero million of gross unrealized losses as of December 31, 2004 on securities classified as held to maturity that are not reflectedin
other comprehensive income.
The following table sets forth our private fixed maturity portfolios by NAIC rating attributable to the Closed Block Business as of the
dates indicated.
(1) December 31, 2005 December 31, 2004
NAIC
Designation Rating Agency Equivalent
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
(in millions)
1 Aaa, Aa, A ........................... $ 3,079 $208 $ 16 $ 3,271 $ 3,059 $ 338 $ 4 $ 3,393
2 Baa ................................. 7,487 549 39 7,997 7,817 813 11 8,619
Subtotal Investment Grade ............... 10,566 757 55 11,268 10,876 1,151 15 12,012
3 Ba .................................. 1,195 69 8 1,256 1,213 102 2 1,313
4 B ................................... 570 15 2 583 448 26 1 473
5 C and lower ........................... 157 17 1 173 234 18 — 252
6 In or near default ....................... 60 21 — 81 72 9 1 80
Subtotal Below Investment Grade ......... 1,982 122 11 2,093 1,967 155 4 2,118
Total Private Fixed Maturities ............ $12,548 $879 $ 66 $13,361 $12,843 $1,306 $ 19 $14,130
(1) Includes, as of December 31, 2005 and 2004, respectively, 111 securities with amortized cost of $1,479 million (fair value, $1,543 million) and 150
securities with amortized cost of $1,430 million (fair value, $1,490 million) that have been categorized based on expected NAIC designations pending
receipt of SVO ratings.
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 basket of names in a first to default structure, and in return
receive a quarterly premium. With single name credit default derivatives, this premium or credit spread generally corresponds to the
difference between the yield on the referenced name’s public fixed maturity cash instruments and swap rates, at the time the agreement is
executed. With first-to-default baskets, because of the additional credit risk inherent in a basket of named credits, the premium generally
corresponds to a high proportion of the sum of the credit spreads of the names in the basket. If there is an event of default by the referenced
name or one of the referenced names in a basket, as defined by the agreement, then we are obligated to pay the counterparty the referenced
amount of the contract and receive in return the referenced defaulted security or similar security. Subsequent defaults within such
instruments require no further payment to counterparties.
Prudential Financial 2005 Annual Report 53