Prudential 2007 Annual Report Download - page 58

were primarily driven by interest rates, downgrades in credit, bankruptcy or other adverse financial conditions of the respective issuers.
Included in private fixed maturity other-than-temporary impairments for 2006 were impairments relating to an amusement ride
manufacturer. Other-than-temporary impairments in 2005 were concentrated in the manufacturing and utilities sectors and were primarily
driven by downgrades in credit, bankruptcy or other adverse financial conditions of the respective issuers. Included in private fixed
maturity other-than-temporary impairments for 2005 were impairments relating to an electric power plant and an electronic test equipment
distributor.
General Account Investments
We maintain a diversified investment portfolio in our insurance companies to support our liabilities to customers in our Financial
Services Businesses and the Closed Block Business, as well as our other general liabilities. Our general account does not include: (1) assets
of our securities brokerage, securities trading, banking operations, real estate and relocation services, and (2) assets of our asset
management operations, including assets managed for third parties, and (3) those assets classified as “separate account assets” on our
balance sheet.
The general account portfolio is managed pursuant to the distinct objectives of the Financial Services Businesses and the Closed Block
Business. The primary investment objectives of the Financial Services Businesses include:
• matching the liability characteristics of the major products and other obligations of the Company;
• maximizing the portfolio book yield within risk constraints; and
• for certain portfolios, maximizing total return, including both investment yield and capital gains, and preserving principal, within
risk constraints, while matching the liability characteristics of their major products.
Our strategies for maximizing the portfolio book yield of the Financial Services Businesses include: (1) the investment of proceeds
from investment sales, repayments and prepayments, and operating cash flows, into optimally yielding investments, and (2) where
appropriate, the sale of the portfolio’s lower yielding investments, either to meet various cash flow needs or to manage the portfolio's
duration, credit, currency and other risk constraints, all while minimizing the amount of taxes on realized capital gains.
The primary investment objectives of the Closed Block Business include:
• providing for the reasonable dividend expectations of the participating policyholders within the Closed Block Business and the
Class B shareholders; and
• maximizing total return and preserving principal, within risk constraints, while matching the liability characteristics of the major
products in the Closed Block Business.
Management of Investments
We design asset mix strategies for our general account to match the characteristics of our products and other obligations and seek to
closely approximate the interest rate sensitivity, but not necessarily the exact cash flow characteristics, of the assets with the estimated
interest rate sensitivity of the product liabilities. In certain markets, primarily outside the U.S., capital market limitations hinder our ability
to closely approximate the duration of some of our liabilities. We achieve income objectives through asset/liability management and
strategic and tactical asset allocations within a disciplined risk management framework. For a discussion of our risk management process
see “Quantitative and Qualitative Disclosures About Market Risk—Risk Management, Market Risk and Derivative Instruments and—
Other Than Trading Activities—Insurance and Annuity Products Asset/Liability Management.” Our asset allocation also reflects our desire
for broad diversification across asset classes, sectors and issuers. The Asset Management segment manages virtually all of our investments,
other than those managed by our International Insurance segment, under the direction and oversight of the Asset Liability Management and
Risk Management groups. Our International Insurance segment manages the majority of its investments locally, in some cases using the
international asset management capabilities of our International Investments segment.
The Investment Committee of our Board of Directors oversees our proprietary investments. It also reviews performance and risk
positions quarterly. Our Asset Liability Management and Risk Management groups develop the investment policy for the general account
assets of our insurance subsidiaries and oversee the investment process for our general account and have the authority to initiate tactical
shifts within exposure ranges approved annually by the Investment Committee.
The Asset Liability Management and Risk Management groups work closely with each of our business units to develop investment
objectives, performance factors and measures and asset allocation ranges and to ensure that the specific characteristics of our products are
incorporated into their processes. We adjust this dynamic process as products change, as customer behavior changes and as changes in the
market environment occur. We develop asset strategies for specific classes of product liabilities and attributed or accumulated surplus, each
with distinct risk characteristics. Most of our products can be categorized into the following three classes:
• interest-crediting products for which the rates credited to customers are periodically adjusted to reflect market and competitive
forces and actual investment experience, such as fixed annuities and universal life insurance;
• participating individual and experience rated group products in which customers participate in actual investment and business
results through annual dividends, interest or return of premium; and
• guaranteed products for which there are price or rate guarantees for the life of the contract, such as GICs.
56 Prudential Financial 2007 Annual Report