Prudential 2007 Annual Report Download - page 76

The following table sets forth our private fixed maturities included in our trading account assets supporting insurance liabilities
portfolio by NAIC rating as of the dates indicated.
(1) (2) December 31, 2007 December 31, 2006
NAIC
Designation Rating Agency Equivalent
Amortized
Cost
Gross
Unrealized
Gains(3)
Gross
Unrealized
Losses(3)
Fair
Value
Amortized
Cost
Gross
Unrealized
Gains(3)
Gross
Unrealized
Losses(3)
Fair
Value
(in millions)
1 Aaa, Aa, A ........................... $ 887 $ 6 $ 12 $ 881 $ 861 $ 3 $27 $ 837
2 Baa ................................. 2,411 33 26 2,418 2,242 13 62 2,193
Subtotal Investment Grade ............... 3,298 39 38 3,299 3,103 16 89 3,030
3 Ba .................................. 263 3 8 258 266 3 8 261
4 B ................................... 144 — 2 142 12 — — 12
5 C and lower ........................... 10 — — 10 79 — 2 77
6 In or near default ....................... 33 1 2 32 7 4 — 11
Subtotal Below Investment Grade ......... 450 4 12 442 364 7 10 361
Total Private Trading Account Assets
Supporting Insurance Liabilities ......... $3,748 $ 43 $ 50 $3,741 $3,467 $23 $99 $3,391
(1) See “—Fixed Maturity Securities Credit Quality” above for a discussion on NAIC designations.
(2) Reflects equivalent ratings for investments of the international insurance operations that are not rated by U.S. insurance regulatory authorities.
(3) Amounts are reported in “Asset management fees and other income.”
Commercial Loans
Investment Mix
We originate domestic commercial mortgages using dedicated investment staff and a network of independent companies through our
various regional offices across the country. All loans are underwritten consistently to our standards using a proprietary quality rating
system that has been developed from our experience in real estate and mortgage lending. Our loan portfolio strategy emphasizes
diversification by property type and geographic location.
Consumer loans are loans extended by Gibraltar Life to individuals for financing purchases of consumer goods and services and are
guaranteed by third party guarantor companies.
Ongoing surveillance of the portfolio is performed and loans are placed on watch list status based on a predefined set of criteria. We
place loans on early warning status in cases where we detect that the physical condition of the property, the financial situation of the
borrower or tenant or other market factors could lead to a loss of principal or interest. We classify loans as closely monitored when there is
a collateral deficiency or other credit events that will lead to a potential loss of principal or interest. Loans not in good standing are those
loans where there is a high probability of loss of principal, such as when the loan is in the process of foreclosure or the borrower is in
bankruptcy. In our domestic operations, our workout and special servicing professionals manage the loans on the watch list. In our
international portfolios, we monitor delinquency in consumer loans on a pool basis and evaluate any servicing relationship and guarantees
the same way we do for commercial loans.
As of December 31, 2007 and December 31, 2006 respectively, we held approximately 12% and 11% of our general account
investments in commercial loans. This percentage is net of a $0.1 billion allowance for losses as of both December 31, 2007 and
December 31, 2006. The increase in our general account investments in commercial loans as of December 31, 2007 reflects higher
origination activity in 2007. Unfavorable credit market conditions during the second half of 2007 led to decreased activity by securitization
lenders in the commercial loan market, and therefore greater opportunities for increased originations by portfolio lenders such as our
general account. The average loan-to-value ratio on 2007 general account originations was below 65%, and the average debt service
coverage ratio on these originations was above 1.8 times, both consistent with originations over the last several years. As of December 31,
2007, our general account investments in commercial loans had an average debt service coverage ratio of 1.9 times, and an average
loan-to-value ratio of 53%, which is lower than our origination loan to value ratio due to principal payments on the loan balances and
appreciation of the underlying collateral value.
74 Prudential Financial 2007 Annual Report