Prudential 2007 Annual Report Download - page 55

(1) The Financial Services Businesses include $76 million of losses on sales in 2007, and $65 million of other-than-temporary impairments in 2007, related
to asset-backed securities collateralized by sub-prime mortgages. The Closed Block Business includes $11 million of losses on sales in 2007, and $15
million of other-than-temporary impairments in 2007, related to asset-backed securities collateralized by sub-prime mortgages.
(2) Includes $171 million of losses on embedded derivatives associated with certain externally managed investments in the European market in 2007.
(3) Related adjustments include that portion of realized investment gains (losses), net that are included in adjusted operating income, including those related
to our Asset Management segment’s commercial mortgage operations and proprietary investing business, as well as gains and losses pertaining to
certain derivatives contracts including losses on embedded derivatives associated with certain externally managed investments in the European market.
Related adjustments also include that portion of “Asset management fees and other income” that are excluded from adjusted operating income,
including the change in value due to the impact of changes in foreign currency exchange rates during the period on certain assets and liabilities for
which we economically hedge the foreign currency exposure. See Note 20 to the Consolidated Financial Statements for additional information on these
adjustments.
(4) Reflects charges that are related to realized investment gains (losses), net, and excluded from adjusted operating income, as described more fully in Note
20 to the Consolidated Financial Statements.
2007 to 2006 Annual Comparison
Financial Services Businesses
The Financial Services Businesses’ net realized investment gains in 2007 were $24 million, compared to net realized investment gains
of $293 million in 2006. Net realized losses on fixed maturity securities were $64 million in 2007 and reflect impairments of $139 million
and credit-related losses of $11 million, partially offset by net gains on sales and maturities of fixed maturity securities of $46 million and
private bond prepayment premiums of $40 million. Net gains on sales and maturities of fixed maturity securities in 2007 included gross
losses of $219 million, mainly in the Retirement and International Insurance segments, and were primarily related to credit spread increases
in the credit markets resulting generally from concerns over sub-prime mortgage exposures, and interest rates. Gross losses include $76
million related to sales of asset-backed securities collateralized by sub-prime mortgages, primarily in the second half of 2007. See
“—General Account Investments—Fixed Maturity Securities” for additional information regarding our exposure to sub-prime mortgages.
Net realized losses on fixed maturity securities were $219 million in 2006 and reflect net losses on sales and maturities of fixed maturity
securities of $203 million, fixed maturity other-than-temporary impairments of $23 million and credit-related losses of $25 million partially
offset by private bond prepayment premiums of $32 million. Net losses on sales and maturities of fixed maturity securities in 2006 included
gross losses of $517 million, mainly in the Retirement, Individual Annuities, and International Insurance segments, which were primarily
interest-rate related. Interest-rate related losses on fixed maturities primarily reflect sales of lower yielding bonds in a higher rate
environment, primarily in the first half of 2006, in order to meet various cash flow needs and manage portfolio duration, and reflect our
strategy for maximizing portfolio yield while minimizing the amount of taxes on realized capital gains. Interest-rate related losses, which
are excluded from adjusted operating income, where the proceeds from the sale of the securities are reinvested, will generally result in
higher net investment income to be included in adjusted operating income in future periods. See “—General Account Investments—
Investment Results” for a discussion of current period yields of the Financial Services Businesses.
Net realized gains on equity securities were $297 million in 2007, of which net trading gains on sales of equity securities were $340
million, partially offset by other-than-temporary impairments of $43 million. Net realized gains on equity securities were $122 million in
2006, of which net trading gains on sales of equity securities were $136 million, partially offset by other-than-temporary impairments of
$14 million. Net realized gains on equity securities for both periods were primarily due to sales of Japanese equities in our Gibraltar Life
and Japanese Life Planner operations from portfolio restructuring and equity sales in our Korean Life Planner operations.
Net realized losses on derivatives were $336 million in 2007, compared to net derivative gains of $171 million in 2006. The net
derivative losses in 2007 primarily reflect net losses of $171 million on embedded derivatives associated with certain externally managed
investments in the European market, net losses of $101 million from interest rate derivative contracts mainly used to manage the duration
of the U.S. dollar fixed maturity investment portfolio, and net losses of $77 million due to the impact of increased credit spreads on credit
derivatives used to enhance the return on our investment portfolio by creating credit exposure. The derivative gains in 2006 primarily relate
to net gains of $86 million from interest rate derivative contracts mainly used to manage the duration of the U.S. dollar fixed maturity
investment portfolio, net gains of $37 million from foreign currency forward contracts used to hedge the future income of non-U.S.
businesses, mainly driven by the strengthening of the U.S. dollar against the Japanese yen, and net gains of $27 million on credit
derivatives used to enhance the return on our investment portfolio by creating credit exposure. For information regarding our externally
managed investments in the European market, see “—General Account Investments—Fixed Maturity Securities—Fixed Maturity
Securities and Unrealized Gains and Losses by Industry Category.”
Net realized investment gains on other investments were $127 million in 2007, primarily related to gains from real estate related
investments. Net realized investment gains on other investments were $219 million in 2006, primarily related to gains from real estate
related investments and loan securitizations.
During 2007, we recorded total other-than-temporary impairments of $185 million attributable to the Financial Services Businesses,
compared to total other-than-temporary impairments of $46 million attributable to the Financial Services Businesses in 2006. The other-
than-temporary impairments in 2007 consisted of $139 million relating to fixed maturities, $43 million relating to equity securities, and $3
million relating to other invested assets, which include real estate investments and investments in joint ventures and partnerships. The
other-than-temporary impairments in 2006 consisted of $23 million relating to fixed maturities, $14 million relating to equity securities,
and $9 million relating to other invested assets, as defined above.
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