Prudential 2005 Annual Report Download - page 56

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The majority of referenced names in the credit derivatives where we have sold credit protection, as well as all the counterparties to
these agreements, are investment grade credit quality and our credit derivatives generally have maturities of five years or less. As of
December 31, 2005 and 2004, we had approximately $1,608 million and $628 million, respectively, in outstanding notional amounts of
credit derivative contracts where we have sold credit protection. The Financial Services Businesses had approximately $1,182 million and
$360 million of outstanding notional as of December 31, 2005 and 2004, respectively. The Closed Block Business had approximately $426
million and $268 million, as of December 31, 2005 and 2004, respectively. Credit derivative contracts are recorded at fair value with
changes in fair value, including the premium received, recorded in “Realized investment gains (losses), net.” The premium received for the
credit derivatives we sell is included in adjusted operating income as an adjustment to “Realized investment gains (losses), net” over the
life of the derivative.
The following table sets forth our exposure where we have sold credit protection through credit derivatives in the Financial Services
Businesses by NAIC rating of the underlying credits as of the dates indicated.
(1) December 31, 2005 December 31, 2004
NAIC
Designation Rating Agency Equivalent Notional Fair Value Notional Fair Value
(in millions)
1 Aaa, Aa, A ............................................................. $1,040 $ (1) $360 $ 3
2 Baa ................................................................... 132 (1) — —
Subtotal Investment Grade ................................................. 1,172 (2) 360 3
3 Ba .................................................................... 10 — — —
4 B..................................................................... — — — —
5 C and lower ............................................................ — — — —
6 In or near default ........................................................ — — — —
Subtotal Below Investment Grade ........................................... 10 — — —
. Total .................................................................. $1,182 $ (2) $360 $ 3
(1) First to default credit swap baskets, which may include credits of varying qualities, are grouped above based on the lowest credit in the basket.
However, such basket swaps may entail greater credit risk than the rating level of the lowest credit.
The following table sets forth our exposure where we have sold credit protection through credit derivatives in the Closed Block
Business portfolios by NAIC rating of the underlying credits as of the dates indicated.
(1) December 31, 2005 December 31, 2004
NAIC
Designation Rating Agency Equivalent Notional Fair Value Notional Fair Value
(in millions)
1 Aaa, Aa, A ............................................................. $396 $ 3 $268 $ 1
2 Baa ................................................................... 30 — — —
. Subtotal Investment Grade ................................................. 426 3 268 1
3 Ba .................................................................... — — — —
4 B..................................................................... — — — —
5 C and lower ............................................................ — — — —
6 In or near default ........................................................ — — — —
Subtotal Below Investment Grade ........................................... — — — —
. Total .................................................................. $426 $ 3 $268 $ 1
(1) First to default credit swap baskets, which may include credits of varying qualities, are grouped above based on the lowest credit in the basket.
However, such basket swaps may entail greater credit risk than the rating level of the lowest credit.
In addition to selling credit protection, in limited instances we have purchased credit protection using credit derivatives in order to
hedge specific credit exposures in our investment portfolio. Similar to the above, the premium paid for the credit derivatives we purchase is
included in adjusted operating income as an adjustment to “Realized investment gains (losses), net” over the life of the derivative.
Prudential Financial 2005 Annual Report54