Prudential 2006 Annual Report Download - page 77

We believe that the cash flows from our insurance and annuity 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, 2006 December 31, 2005
Amount % of Total Amount % of Total
($ in millions)
Not subject to discretionary withdrawal provisions ........................................... $30,209 42% $24,749 38%
Subject to discretionary withdrawal, with adjustment:
With market value adjustment ....................................................... 20,540 28 19,346 30
At market value .................................................................. 1,169 2 1,235 2
At contract value, less surrender charge of 5% or more ................................... 1,953 3 2,421 4
Subtotal .................................................................... 53,871 75 47,751 74
Subject to discretionary withdrawal at contract value with no surrender charge or surrender charge of
less than 5% ....................................................................... 18,096 25 17,274 26
Total annuity reserves and deposit liabilities ................................................ $71,967 100% $65,025 100%
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.
Gross account withdrawals for our domestic insurance operations’ products amounted to $21.2 billion and $18.9 billion for the years
ended December 31, 2006 and 2005, respectively. Because these withdrawals were consistent with our assumptions in asset/liability
management, the associated cash outflows did not have a material adverse impact on our overall liquidity.
Liquid Assets
Liquid assets include cash, cash equivalents, short-term investments, fixed maturities that are not designated as held to maturity, and
public equity securities. As of December 31, 2006 and 2005, our domestic insurance operations had liquid assets of $140.9 billion and
$136.9 billion, respectively. The portion of liquid assets comprised of cash and cash equivalents and short-term investments was $8.4
billion and $8.0 billion as of December 31, 2006 and 2005, respectively. As of December 31, 2006, $114.9 billion, or 90%, of the fixed
maturity investments that are not designated as held to maturity within our domestic insurance company general account portfolios were
rated investment grade. The remaining $13.3 billion, or 10%, of these 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
anticipated will not have a material impact on the liquidity of our domestic insurance companies. Payment of claims and sale of
investments earlier than anticipated would have an impact on the reported level of cash flow from operating and investing activities,
respectively, in our financial statements.
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
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