Prudential 2007 Annual Report Download - page 57

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. Gross realized gains on sales of fixed maturity securities in 2006
included $60 million in our International Investment segment on a private fixed maturity relating to a Korean financial services company
and a $22 million recovery in our Corporate and other operations from a U.S. telecommunications company. Net realized losses on fixed
maturity securities were $22 million in 2005 and reflect net losses on sales and maturities of fixed maturity securities of $48 million,
impairments of $69 million and credit losses of $31 million, partially offset by private bond prepayment premiums of $96 million and a
$33 million recovery of impaired principal on a previously defaulted bond. Net realized losses on fixed maturity securities include gross
losses on sales and maturities of fixed maturity securities of $349 million mainly in the International Insurance and Retirement segments,
which were primarily interest-rate related.
Realized net gains on equity securities were $122 million in 2006, compared to net realized gains of $181 million in 2005, primarily
due to sales of yen denominated equity securities in our Gibraltar Life and Japanese Life Planner operations. Realized gains in 2006 include
net derivative gains of $171 million, compared to net derivative gains of $376 million in 2005. The derivative gains in 2006 were primarily
the result of net gains of $86 million from interest rate swap contracts mainly used to manage the duration of the 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. The derivative net gains in 2005 were primarily the result of net gains of
$290 million from 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. Net realized investment gains on other investments were $219 million in 2006, which were
primarily related to net gains from real estate related investments and loan securitizations. Net realized investment gains on other
investments were $207 million in 2005 which included a $110 million net gain for a Gibraltar Life settlement with Dai Ichi Fire and
Marine Insurance Company related to certain capital investments made by Gibraltar Life’s predecessor, Kyoei Life Insurance Company
Ltd., in Dai Ichi. This amount was partially offset in our Consolidated Statements of Operations by a $68 million increase in “Dividends to
policyholders” in accordance with the reorganization plan entered into at the time of the Company’s acquisition of Gibraltar Life, which is
reflected as a related charge.
During 2006, we recorded total other-than-temporary impairments of $46 million attributable to the Financial Services Businesses,
compared to total other-than-temporary impairments of $80 million attributable to the Financial Services Businesses in 2005. 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 which include real estate investments and investments in joint ventures and partnerships. The other-
than-temporary impairments in 2005 consisted of $69 million relating to fixed maturities, $4 million relating to equity securities and $7
million relating to other invested assets as defined above.
The other-than-temporary impairments recorded on fixed maturities in 2006 consisted of $16 million on public securities and $7
million on private securities, compared with fixed maturity other-than-temporary impairments of $64 million on public securities and $5
million on private securities in 2005. Included in public fixed maturity other-than-temporary impairments for 2005 were impairments
related to a Japanese electronic products supplier. Other-than-temporary impairments on fixed maturities in both 2006 and 2005 were
concentrated in the manufacturing sector and were primarily driven by interest rates, downgrades in credit, bankruptcy or other adverse
financial conditions of the respective issuers.
Closed Block Business
For the Closed Block Business, net realized investment gains in 2006 were $481 million, compared to net realized investment gains of
$636 million in 2005. Net realized gains on fixed maturity securities were $279 million in 2006 and reflect net gains on sales and maturities
of fixed maturity securities of $284 million, including a recovery of $29 million from a U.S. telecommunications company, and private
bond prepayment premiums of $49 million, partially offset by other-than-temporary impairments of $31 million and credit losses of $23
million. Net realized gains on fixed maturity securities were $335 million in 2005 and relate primarily to net gains on sales of fixed
maturity securities of $311 million and private bond prepayment premiums of $68 million, partially offset by other-than-temporary
impairments of $32 million and credit-related losses of $12 million.
Realized net gains on equity securities were $187 million in 2006, compared to net gains of $250 million in 2005. The net realized
gains on equity securities in 2006 and 2005 were primarily the result of sales pursuant to our active management strategy. Derivative losses
were $68 million in 2006, compared to derivative gains of $40 million in 2005. Derivative losses in 2006 were primarily the result of
currency derivatives used to hedge foreign fixed maturity investments. The derivative gains in 2005 were primarily related to net gains on
interest rate derivatives used to manage the duration of the fixed maturity investment portfolio. Net realized investment gains on other
investments were $83 million in 2006 compared to net gains of $11 million in 2005. Net realized investment gains on other investment
gains in 2006 were primarily related to net gains from real estate related investments.
During 2006, we recorded total other-than-temporary impairments of $51 million attributable to the Closed Block Business, compared
to total other-than-temporary impairments of $47 million attributable to the Closed Block Business in 2005. The other-than-temporary
impairments in 2006 consisted of $31 million relating to fixed maturities, $17 million relating to equity securities and $3 million relating to
other invested assets as defined above. The other-than-temporary impairments in 2005 consisted of $32 million relating to fixed maturities,
$10 million relating to equity securities and $5 million relating to other invested assets as defined above.
The other-than-temporary impairments recorded on fixed maturities in 2006 consist of $7 million on public securities and $24 million
on private securities, compared with fixed maturity other-than-temporary impairments of $7 million on public securities and $25 million on
private securities in 2005. Other-than-temporary impairments in 2006 were concentrated in the services and manufacturing sectors and
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