Prudential 2005 Annual Report Download - page 68

We believe that the cash flows from our insurance, annuity and guaranteed products operations are adequate to satisfy the current
liquidity requirements of these operations, including under reasonably foreseeable stress scenarios. The continued adequacy of this liquidity
will depend upon factors such as future securities market conditions, changes in interest rate levels and policyholder perceptions of our
financial strength, each of which could lead to reduced cash inflows or increased cash outflows.
Our domestic insurance operations’ cash flows from investment activities result from repayments of principal, proceeds from
maturities and sales of invested assets and investment income, net of amounts reinvested. The primary liquidity risks with respect to these
cash flows are the risk of default by debtors, our counterparties’ willingness to extend repurchase and/or securities lending arrangements,
and market volatility. We closely manage these risks through our credit risk management process and regular monitoring of our liquidity
position.
In managing the liquidity of our domestic insurance operations, we also consider the risk of policyholder and contractholder
withdrawals of funds earlier than our assumptions in selecting assets to support these contractual obligations. We use surrender charges and
other contract provisions to mitigate the extent, timing and profitability impact of withdrawals of funds by customers from annuity
contracts and deposit liabilities. The following table sets forth withdrawal characteristics of our general account annuity reserves and
deposit liabilities (based on statutory liability values) as of the dates indicated.
December 31, 2005 December 31, 2004
Amount % of Total Amount % of Total
($ in millions)
Not subject to discretionary withdrawal provisions ........................................... $24,749 38% $22,229 36%
Subject to discretionary withdrawal, with adjustment:
With market value adjustment ....................................................... 19,346 30 18,445 30
At market value .................................................................. 1,235 2 1,146 2
At contract value, less surrender charge of 5% or more ................................... 2,421 4 2,683 4
Subtotal .................................................................... 47,751 74 44,503 72
Subject to discretionary withdrawal at contract value with no surrender charge or surrender charge of
less than 5% ....................................................................... 17,274 26 17,130 28
Total annuity reserves and deposit liabilities ................................................ $65,025 100% $61,633 100%
Gross account withdrawals for our domestic insurance operations’ products amounted to $18.9 billion, including $9.0 billion
associated with the businesses of PRIAC, and $12.7 billion, including $4.3 billion associated with the businesses of PRIAC, for years
ended December 31, 2005 and 2004, respectively. These withdrawals include contractually scheduled maturities of general account
guaranteed investment contracts of $2,075 million and $1,601 million for the years ended December 31, 2005 and 2004, respectively.
Because these contractual withdrawals, as well as the level of surrenders experienced, were consistent with our assumptions in asset/
liability management, the associated cash outflows did not have a material adverse impact on our overall liquidity.
Individual life insurance policies are less susceptible to withdrawal than our annuity reserves and deposit liabilities because
policyholders may incur surrender charges and be subject to a new underwriting process in order to obtain a new insurance policy. Annuity
benefits under group annuity contracts are generally not subject to early withdrawal.
Liquid Assets
Liquid assets include cash, cash equivalents, short-term investments, fixed maturity and public equity securities. As of December 31,
2005 and December 31, 2004, our domestic insurance operations had liquid assets of $136.9 billion and $132.8 billion, respectively. The
portion of liquid assets comprised of cash and cash equivalents and short-term investments was $7.7 billion and $8.5 billion as of
December 31, 2005 and 2004, respectively. As of December 31, 2005, $114.2 billion, or 91%, of the fixed maturity investments held in our
domestic insurance company general account portfolios were rated investment grade. The remaining $11.8 billion, or 9%, of fixed maturity
investments were rated non-investment grade. We consider attributes of the various categories of liquid assets (for example, type of asset
and credit quality) in calculating internal liquidity measures in order to evaluate the adequacy of our domestic insurance operations’
liquidity under a variety of stress scenarios. We believe that the liquidity profile of our assets is sufficient to satisfy current liquidity
requirements, including under foreseeable stress scenarios.
Given the size and liquidity profile of our investment portfolios, we believe that claim experience varying from our projections does
not constitute a significant liquidity risk. Our asset/liability management process takes into account the expected maturity of investments
and expected claim payments as well as the specific nature and risk profile of the liabilities. Historically, there has been no significant
variation between the expected maturities of our investments and the payment of claims.
Our domestic insurance companies’ liquidity is managed through access to substantial investment portfolios as well as a variety of
instruments available for funding and/or managing short-term cash flow mismatches, including from time to time those arising from claim
levels in excess of projections. To the extent we need to pay claims in excess of projections, we may borrow temporarily or sell
investments sooner than anticipated to pay these claims, which may result in realized investment gains or losses or increased borrowing
costs affecting results of operations. For a further discussion of realized investment gains or losses, see “—Realized Investment Gains and
General Account Investments—Realized Investment Gains.” We believe that borrowing temporarily or selling investments earlier than
Prudential Financial 2005 Annual Report66