Prudential 2007 Annual Report Download - page 74

The gross unrealized losses were primarily concentrated in the asset-backed securities sector as of December 31, 2007 while the gross
unrealized losses were primarily concentrated in the manufacturing sector as of December 31, 2006. We have not recognized the gross
unrealized losses shown in the table above as other-than-temporary impairments. See “—Other-Than-Temporary Impairments of Fixed
Maturity Securities” for a discussion of the factors we consider in making these determinations.
Other-Than-Temporary Impairments of Fixed Maturity Securities
We maintain separate monitoring processes for public and private fixed maturities and create watch lists to highlight securities that
require special scrutiny and management. Our public fixed maturity asset managers formally review all public fixed maturity holdings on a
quarterly basis and more frequently when necessary to identify potential credit deterioration whether due to ratings downgrades,
unexpected price variances, and/or industry specific concerns.
For private placements our credit and portfolio management processes help ensure prudent controls over valuation and management.
We have separate pricing and authorization processes to establish “checks and balances” for new investments. We apply consistent
standards of credit analysis and due diligence for all transactions, whether they originate through our own in-house origination staff or
through agents. Our regional offices closely monitor the portfolios in their regions. We set all valuation standards centrally, and we assess
the fair value of all investments quarterly.
Fixed maturity securities classified as held to maturity are those securities where we have the intent and ability to hold the securities
until maturity. These securities are reflected at amortized cost in our consolidated statements of financial position. Other fixed maturity
securities are considered available for sale, and, as a result, we record unrealized gains and losses to the extent that amortized cost is
different from estimated fair value. All held to maturity securities and all available for sale securities with unrealized losses are subject to
our review to identify other-than-temporary impairments in value. In evaluating whether a decline in value is other-than-temporary, we
consider several factors including, but not limited to, the following:
• the extent (generally if greater than 20%) and the duration (generally if greater than six months) of the decline;
• the reasons for the decline in value (credit event, currency or interest rate related);
• our ability and intent to hold our investment for a period of time to allow for a recovery of value; and
• the financial condition of and near-term prospects of the issuer.
In addition, for our impairment review of asset-backed fixed maturity securities with a credit rating below AA, we forecast the
prospective future cash flows of the security and determine if the present value of those cash flows, discounted using the effective yield of
the most recent interest accrual rate, has decreased from the previous reporting period. When a decrease from the prior reporting period has
occurred and the security’s market value is less than its carrying value, an other-than-temporary impairment is recognized by writing the
security down to fair value.
When we determine that there is an other-than-temporary impairment, we record a writedown to estimated fair value, which reduces
the cost basis. The new cost basis of an impaired security is not adjusted for subsequent increases in estimated fair value. In periods
subsequent to the recognition of an other-than-temporary impairment, the impaired security is accounted for as if it had been purchased on
the measurement date of the impairment. Accordingly, the discount (or reduced premium) based on the new cost basis is accreted into net
investment income, and included in adjusted operating income in future periods based upon the amount and timing of the expected future
cash flows of the security, if the recoverable value of the investment based on those cash flows is greater than the carrying value of the
investment after the impairment. Estimated fair values for fixed maturities, other than private placement securities, are generally based on
quoted market prices or prices obtained from independent pricing services. For private fixed maturities, fair value is determined typically
by using a discounted cash flow model, which relies upon the average of spread surveys collected from private market intermediaries who
are active in both primary and secondary transactions and takes into account, among other factors, the credit quality of the issuer and the
reduced liquidity associated with private placements. In determining the fair value of certain securities, the discounted cash flow model
may also use unobservable inputs, which reflect our own assumptions about the inputs market participants would use in pricing the asset.
Impairments on fixed maturity securities are included in “Realized investment gains (losses), net” and are excluded from adjusted operating
income.
Other-than-temporary impairments of fixed maturity securities attributable to the Financial Services Businesses were $121 million and
$23 million for the years ended December 31, 2007 and 2006, respectively. Included in the other-than-temporary impairments of fixed
maturities attributable to the Financial Services Businesses in 2007 were $65 million of other-than-temporary impairments on asset-backed
securities collateralized by sub-prime mortgages, primarily recorded in the second half of 2007. Other-than-temporary impairments of fixed
maturity securities attributable to the Closed Block Business were $48 million and $31 million for the years ended December 31, 2007 and
2006, respectively. Included in the other-than-temporary impairments of fixed maturities attributable to the Closed Block Business in 2007
were $15 million of other-than-temporary impairments on asset-backed securities collateralized by sub-prime mortgages, primarily
recorded in the second half of 2007. For a further discussion of impairments, see “—Realized Investment Gains” above.
Trading account assets supporting insurance liabilities
Certain products included in the retirement business we acquired from CIGNA, as well as certain products included in the
International Insurance segment, are experience-rated, meaning that the investment results associated with these products will ultimately
accrue to contractholders. The investments supporting these experience-rated products, excluding commercial loans, are classified as
72 Prudential Financial 2007 Annual Report