Prudential 2006 Annual Report Download - page 67

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. In periods
subsequent to the recognition of an other-than-temporary impairment, the impaired security is accounted for as if it had been purchased on
the measurement date of the impairment. Accordingly, the discount (or reduced premium) based on the new cost basis is accreted into net
investment income over the remaining life of the security based upon the amount and timing of expected future cash flows and is included
in adjusted operating income. 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 factors, 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 on fixed maturity securities are included in “Realized investment gains (losses), net” and are
excluded from adjusted operating income.
Impairments of fixed maturity securities attributable to the Financial Services Businesses were $23 million in 2006 and $69 million in
2005. Impairments of fixed maturity securities attributable to the Closed Block Business were $31 million in 2006 and $32 million in 2005.
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 is reported in “Net investment income.” The following table sets forth the composition of this
portfolio as of the dates indicated.
December 31, 2006 December 31, 2005
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(in millions)
Short-term Investments and Cash Equivalents ................................................ $ 299 $ 299 $ 317 $ 317
Fixed Maturities:
U.S. Government .................................................................. 173 175 206 208
Foreign Government ................................................................ 316 319 329 330
Corporate Securities ................................................................ 10,089 9,904 9,207 8,980
Asset-Backed Securities ............................................................. 609 603 685 679
Mortgage Backed .................................................................. 1,933 1,905 2,300 2,255
Total Fixed Maturities .................................................................. 13,120 12,906 12,727 12,452
Equity Securities ....................................................................... 833 1,057 811 1,012
Total trading account assets supporting insurance liabilities ............................. $14,252 $14,262 $13,855 $13,781
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
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