Prudential 2006 Annual Report Download - page 127

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
4. INVESTMENTS (continued)
Consolidated Variable Interest Entities
The Company is the primary beneficiary of certain VIEs in which the Company has invested, as part of its investment
activities, but over which the Company does not exercise control. The table below reflects the carrying amount and balance sheet
caption in which the assets of these consolidated VIEs are reported. The liabilities of consolidated VIEs are included in “Other
liabilities” and are also reflected in the table below. These liabilities primarily comprise obligations under debt instruments issued
by the VIEs, that are non-recourse to the Company. The creditors of each consolidated VIE have recourse only to the assets of that
VIE.
At December 31,
2006 2005
(in millions)
Fixed maturities, available for sale ................................................................................. $ 130 $ 186
Fixed maturities, held to maturity .................................................................................. 771 779
Commercial loans .............................................................................................. 421 —
Other long-term investments ...................................................................................... 102 113
Short-term investments .......................................................................................... — 8
Cash and cash equivalents ....................................................................................... 71 3
Accrued investment income ...................................................................................... 6 4
Other assets ................................................................................................... 10 33
Total assets of consolidated VIEs .............................................................................. $1,511 $1,126
Total liabilities of consolidated VIEs ........................................................................... $ 500 $ 91
In addition, the Company has created a trust that is a VIE, to facilitate Prudential Insurance’s Funding Agreement Notes
Issuance Program (“FANIP”). The trust issues medium-term notes secured by funding agreements issued to the trust by Prudential
Insurance with the proceeds of such notes. The Company is the primary beneficiary of the trust, which is therefore consolidated.
The funding agreements represent an intercompany transaction that is eliminated upon consolidation. However, in recognition of
the security interest in such funding agreements, the trust’s medium-term note liability of $6,537 million and $4,172 million at
December 31, 2006 and 2005, respectively, is classified on the Consolidated Statements of Financial Position within
“Policyholders’ account balances.” See Note 8 for more information on FANIP.
Significant Variable Interests in Unconsolidated Variable Interest Entities
The Company is the collateral manager for certain asset backed investment vehicles (commonly referred to as collateralized
debt obligations, or “CDOs”), for which the Company earns fee income. Additionally, the Company may invest in debt or equity
securities issued by these CDOs. CDOs raise capital by issuing debt and equity securities, and use the proceeds to purchase
investments, typically interest-bearing financial instruments. The Company has determined that it is the primary beneficiary of one
CDO it manages which is consolidated and reflected in the table above. The Company’s maximum exposure to loss resulting from
its relationship with unconsolidated CDOs it manages is limited to its investment in the CDOs, which was $94 million and $97
million at December 31, 2006 and 2005, respectively. Those investments are reflected in “Fixed maturities, available for sale.”
In addition, in the normal course of its activities, the Company will invest in structured investments, some of which are VIEs.
These structured investments typically invest in fixed income investments and are managed by third parties. The Company’s
maximum exposure to loss on these structured investments, both VIEs and non-VIEs, is limited to the amount of its investment.
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
125