Prudential 2007 Annual Report Download - page 69

While delinquency rates on commercial mortgages have been stable in recent years, we recognized several market factors that
influenced our investment decisions on commercial mortgage-backed securities issued in 2006 and 2007, including less stringent loan
underwriting, higher levels of leverage, and rapid real estate price appreciation. The following tables set forth the amortized cost and fair
value of our commercial mortgage backed securities attributable to the Closed Block Business as of December 31, 2007 by credit quality
and by year of issuance (vintage).
Amortized Cost as of December 31, 2007
Lowest Rating Agency Rating
Vintage AAA AA A BBB
BB
and
below
Total
Amortized
Cost
(in millions)
2007 ........................................................................... $ 258 $— $ 19 $— $— $ 277
2006 ........................................................................... 1,207 — — — — 1,207
2005 ........................................................................... 1,375 — — — — 1,375
2004 ........................................................................... 397 — — — — 397
2003 & Prior .................................................................... 891 45 47 26 — 1,009
Total commercial mortgage backed securities ....................................... $4,128 $ 45 $ 66 $ 26 $— $4,265
Fair Value as of December 31, 2007
Lowest Rating Agency Rating
Vintage AAA AA A BBB
BB
and
below
Total
Fair
Value
(in millions)
2007 ........................................................................... $ 263 $— $ 16 $— $— $ 279
2006 ........................................................................... 1,221 — — — — 1,221
2005 ........................................................................... 1,375 — — — — 1,375
2004 ........................................................................... 392 — — — — 392
2003 & Prior .................................................................... 905 45 47 26 — 1,023
Total commercial mortgage backed securities ....................................... $4,156 $ 45 $ 63 $ 26 $— $4,290
The gross unrealized losses related to our fixed maturity portfolio attributable to the Closed Block Business were $0.9 billion as of
December 31, 2007 compared to $0.4 billion as of December 31, 2006. The gross unrealized losses as of December 31, 2007 were
concentrated primarily in asset-backed securities and the manufacturing, and services sectors of our corporate securities. The gross
unrealized losses as of December 31, 2006 were concentrated primarily in the manufacturing, utilities, and services sectors. Gross
unrealized losses related to our asset-backed securities collateralized by sub-prime mortgages attributable to the Closed Block Business
were $0.4 billion as of December 31, 2007. For additional information regarding sales and other-than-temporary impairments of asset-
backed securities collateralized by sub-prime mortgages see “—Realized Investment Gains” above.
Fixed Maturity Securities Credit Quality
The Securities Valuation Office, or SVO, of the National Association of Insurance Commissioners, or NAIC, evaluates the
investments of insurers for regulatory reporting purposes and assigns fixed maturity securities to one of six categories called “NAIC
Designations.” NAIC designations of “1” or “2” include fixed maturities considered investment grade, which include securities rated Baa3
or higher by Moody’s or BBB- or higher by Standard & Poor’s. NAIC Designations of “3” through “6” are referred to as below investment
grade, which include securities rated Ba1 or lower by Moody’s and BB+ or lower by Standard & Poor’s. As a result of time lags between
the funding of investments, the finalization of legal documents and the completion of the SVO filing process, the fixed maturity portfolio
generally includes securities that have not yet been rated by the SVO as of each balance sheet date. Pending receipt of SVO ratings, the
categorization of these securities by NAIC designation is based on the expected ratings indicated by internal analysis.
Investments of our international insurance companies are not subject to NAIC guidelines. Investments of our Japanese insurance
operations are regulated locally by the Financial Services Agency, an agency of the Japanese government. The Financial Services Agency
has its own investment quality criteria and risk control standards. Our Japanese insurance companies comply with the Financial Services
Agency’s credit quality review and risk monitoring guidelines. The credit quality ratings of the non-U.S. dollar denominated investments of
our Japanese insurance companies are based on ratings assigned by Moody’s, Standard & Poor’s, or rating equivalents based on ratings
assigned by Japanese credit ratings agencies.
Certain of the Company’s fixed maturity investments are supported by guarantees from monoline bond insurers. As of December 31,
2007, on an amortized cost basis, $2.7 billion ($2.6 billion fair value), or 2%, of general account available for sale fixed maturity
investments attributable to the Financial Services Businesses were supported by guarantees from monoline bond insurers. All of these
investments had AAA credit ratings as of December 31, 2007, reflecting the credit quality of the monoline bond insurers. Management
estimates, taking into account the structure and credit quality of the underlying investments and giving no effect to the support of these
securities by guarantees from monoline bond insurers, that 73% of the $2.7 billion total (based upon amortized cost) would have
investment grade credit ratings. Based on amortized cost, $1.6 billion of the $2.7 billion of securities supported by bond insurance were
Prudential Financial 2007 Annual Report 67