Prudential 2005 Annual Report Download - page 58

our review to identify other-than-temporary impairments in value. In evaluating whether a decline in value is other-than-temporary, we
consider several factors including, but not limited to, the following:
• the extent (generally if greater than 20%) and the duration (generally if greater than six months) of the decline;
• the reasons for the decline in value (credit event or interest rate related);
• our ability and intent to hold our investment for a period of time to allow for a recovery of value; and
• the financial condition of and near-term prospects of the issuer.
When we determine that there is an other-than-temporary impairment, we record a writedown to estimated fair value, which reduces
the cost basis. The new cost basis of an impaired security is not adjusted for subsequent increases in estimated fair value. Estimated fair
values for fixed maturities, other than private placement securities, are based on quoted market prices or prices obtained from independent
pricing services. For these private fixed maturities, fair value is determined typically by using a discounted cash flow model, which relies
upon the average of spread surveys collected from private market intermediaries who are active in both primary and secondary transactions
and takes into account, among other things, the credit quality of the issuer and the reduced liquidity associated with private placements. The
estimated fair value of certain non-performing private placement fixed maturities is based on management’s estimates.
Impairments of fixed maturity securities attributable to the Financial Services Businesses were $69 million in 2005 and $122 million
in 2004. Impairments of fixed maturity securities attributable to the Closed Block Business were $32 million in 2005 and $61 million in
2004. For a further discussion of impairments, see “—Realized Investment Gains” above.
Trading account assets supporting insurance liabilities
Certain products included in the retirement business we acquired from CIGNA, as well as certain products included in the
International Insurance segment, are experience-rated, meaning that the investment results associated with these products will ultimately
accrue to contractholders. The investments supporting these experience-rated products, excluding commercial loans, are classified as
trading. These trading investments are reflected on the balance sheet as “Trading account assets supporting insurance liabilities, at fair
value.” Realized and unrealized gains and losses for these investments are reported in “Asset management fees and other income.”
Investment income for these investments are reported in “Net investment income.” The following table sets forth the composition of this
portfolio as of the dates indicated.
December 31, 2005 December 31, 2004
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(in millions)
Short-term Investments and Cash Equivalents ................................................ $ 317 $ 317 $ 951 $ 951
Fixed Maturities:
U.S. Government .................................................................. 206 208 311 306
Foreign Government ................................................................ 329 330 387 390
Corporate Securities ................................................................ 9,630 9,369 8,866 8,765
Asset-Backed Securities ............................................................. 685 679 617 613
Mortgage Backed .................................................................. 2,300 2,255 1,494 1,492
Total Fixed Maturities .................................................................. 13,150 12,841 11,675 11,566
Equity Securities ....................................................................... 388 623 378 447
Total trading account assets supporting insurance liabilities ............................. $13,855 $13,781 $13,004 $12,964
As of December 31, 2005, as a percentage of amortized cost, 71% of the portfolio was comprised of publicly traded securities, versus
67% of the portfolio as of December 31, 2004. As of December 31, 2005, 97% of the fixed maturity portion of the portfolio was classified
as investment grade, versus 98% of the fixed maturity portion of the portfolio as of December 31, 2004. Net change in unrealized gains
(losses) from trading account assets supporting insurance liabilities still held at period end, recorded within “Asset management fees and
other income,” were $(34) million and $(39) million for the years ended December 31, 2005 and 2004, respectively.
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