Prudential 2006 Annual Report Download - page 64

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, 2006 December 31, 2005
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 ........................... $ 6,214 $248 $ 49 $ 6,413 $ 5,596 $269 $ 27 $ 5,838
2 Baa ................................. 9,463 377 73 9,767 9,437 522 63 9,896
Subtotal Investment Grade ............... 15,677 625 122 16,180 15,033 791 90 15,734
3 Ba .................................. 1,422 50 11 1,461 1,105 44 7 1,142
4 B ................................... 645 12 7 650 507 33 5 535
5 C and lower ........................... 321 18 4 335 339 23 2 360
6 In or near default ....................... 139 11 1 149 70 8 2 76
Subtotal Below Investment Grade ......... 2,527 91 23 2,595 2,021 108 16 2,113
Total Private Fixed Maturities ............ $18,204 $716 $145 $18,775 $17,054 $899 $106 $17,847
(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, 2006 and December 31, 2005, respectively, 221 securities with amortized cost of $3,465 million (fair value, $3,537
million) and 187 securities with amortized cost of $3,494 million (fair value, $3,542 million) that have been categorized based on expected NAIC
designations pending receipt of SVO ratings.
(3) Includes $2 million of gross unrealized gains and $6 million of gross unrealized losses as of December 31, 2006, compared to $1 million of gross
unrealized gains and zero million of gross unrealized losses as of December 31, 2005 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, 2006 December 31, 2005
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 ........................... $ 3,098 $180 $ 26 $ 3,252 $ 3,079 $208 $16 $ 3,271
2 Baa ................................. 6,620 355 47 6,928 7,487 549 39 7,997
Subtotal Investment Grade ............... 9,718 535 73 10,180 10,566 757 55 11,268
3 Ba .................................. 1,173 75 7 1,241 1,195 69 8 1,256
4 B ................................... 413 18 7 424 570 15 2 583
5 C and lower ........................... 131 14 2 143 157 17 1 173
6 In or near default ....................... 26 7 — 33 60 21 — 81
Subtotal Below Investment Grade ......... 1,743 114 16 1,841 1,982 122 11 2,093
Total Private Fixed Maturities ............ $11,461 $649 $ 89 $12,021 $12,548 $879 $66 $13,361
(1) Includes, as of December 31, 2006 and December 31, 2005, respectively, 119 securities with amortized cost of $1,386 million (fair value, $1,421
million) and 111 securities with amortized cost of $1,479 million (fair value, $1,543 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 on the remaining
names within such instruments require no further payment to counterparties.
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
62