Prudential 2007 Annual Report Download - page 84

such as future securities market conditions, changes in interest rate levels and policyholder perceptions of our financial strength, each of
which could lead to reduced cash inflows or increased cash outflows. In addition, market volatility can impact the level of capital required
to support our businesses, particularly in our annuity business.
Our domestic insurance operations’ cash flows from investment activities result from repayments of principal, proceeds from
maturities and sales of invested assets and investment income, net of amounts reinvested. The primary liquidity risks with respect to these
cash flows are the risk of default by debtors or bond insurers, our counterparties’ willingness to extend repurchase and/or securities lending
arrangements and market volatility. As of December 31, 2007 and 2006, our domestic insurance entities had lendable assets of $76 billion
and $78 billion, respectively. Of this amount, $16 billion and $18 billion, as of December 31, 2007 and 2006, respectively, was on loan, the
remainder of which, depending on market conditions, are available to be financed through repurchase agreements or securities lending
arrangements. We closely manage these risks through our credit risk management process and regular monitoring of our liquidity position.
In managing the liquidity of our domestic insurance operations, we also consider the risk of policyholder and contractholder
withdrawals of funds earlier than our assumptions when selecting assets to support these contractual obligations. We use surrender charges
and other contract provisions to mitigate the extent, timing and profitability impact of withdrawals of funds by customers from annuity
contracts and deposit liabilities. The following table sets forth withdrawal characteristics of our general account annuity reserves and
deposit liabilities (based on statutory liability values) as of the dates indicated.
December 31, 2007 December 31, 2006
Amount % of Total Amount % of Total
($ in millions)
Not subject to discretionary withdrawal provisions ........................................... $33,837 46% $30,209 42%
Subject to discretionary withdrawal, with adjustment:
With market value adjustment ........................................................... 18,636 26 20,540 28
At market value ...................................................................... 1,162 2 1,169 2
At contract value, less surrender charge of 5% or more ....................................... 1,594 2 1,953 3
Subtotal ............................................................................ 55,229 76 53,871 75
Subject to discretionary withdrawal at contract value with no surrender charge or surrender charge of
less than 5% ....................................................................... 17,506 24 18,096 25
Total annuity reserves and deposit liabilities ................................................ $72,735 100% $71,967 100%
Individual life insurance policies are less susceptible to withdrawal than our annuity reserves and deposit liabilities because
policyholders may incur surrender charges and be subject to a new underwriting process in order to obtain a new insurance policy. Annuity
benefits under group annuity contracts are generally not subject to early withdrawal.
Gross account withdrawals for our domestic insurance operations’ products amounted to approximately $19.4 billion and $21.2 billion
for the years ended December 31, 2007 and 2006, respectively. Because these withdrawals were consistent with our assumptions in asset/
liability management, the associated cash outflows did not have a material adverse impact on our overall liquidity.
Liquid Assets
Liquid assets include cash, cash equivalents, short-term investments, fixed maturities that are not designated as held to maturity and
public equity securities. As of December 31, 2007 and 2006, our domestic insurance operations had liquid assets of $137.0 billion and
$140.9 billion, respectively. The portion of liquid assets comprised of cash and cash equivalents and short-term investments was $7.1
billion and $8.4 billion as of December 31, 2007 and 2006, respectively. As of December 31, 2007, $112.5 billion, or 90%, of the fixed
maturity investments that are not designated as held to maturity within our domestic insurance company general account portfolios were
rated investment grade. The remaining $13.0 billion, or 10%, of these fixed maturity investments were rated non-investment grade. We
consider attributes of the various categories of liquid assets (for example, type of asset and credit quality) in calculating internal liquidity
measures in order to evaluate the adequacy of our domestic insurance operations’ liquidity under a variety of stress scenarios. We believe
that the liquidity profile of our assets is sufficient to satisfy current liquidity requirements, including under foreseeable stress scenarios.
Given the size and liquidity profile of our investment portfolios, we believe that claim experience varying from our projections does
not constitute a significant liquidity risk. Our asset/liability management process takes into account the expected maturity of investments
and expected claim payments as well as the specific nature and risk profile of the liabilities. Historically, there has been no significant
variation between the expected maturities of our investments and the payment of claims.
Our domestic insurance companies’ liquidity is managed through access to substantial investment portfolios as well as a variety of
instruments available for funding and/or managing short-term cash flow mismatches, including from time to time those arising from claim
levels in excess of projections. To the extent we need to pay claims in excess of projections, we may borrow temporarily or sell
investments sooner than anticipated to pay these claims, which may result in realized investment gains or losses or increased borrowing
costs affecting results of operations. For a further discussion of realized investment gains or losses, see “—Realized Investment Gains and
General Account Investments—Realized Investment Gains.” We believe that borrowing temporarily or selling investments earlier than
anticipated will not have a material impact on the liquidity of our domestic insurance companies. Payment of claims and sale of
investments earlier than anticipated would have an impact on the reported level of cash flow from operating and investing activities,
respectively, in our financial statements.
82 Prudential Financial 2007 Annual Report