Prudential 2011 Annual Report Download - page 206

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
14. SHORT-TERM AND LONG-TERM DEBT (continued)
Other
In order to modify exposure to interest rate and currency exchange rate movements, the Company utilizes derivative instruments,
primarily interest rate swaps, in conjunction with some of its debt issues. The impact of these derivative instruments are not reflected in the
rates presented in the tables above. For those derivative instruments that qualify for hedge accounting treatment, interest expense was
increased by $12 million, by $5 million, and by $13 million for the years ended December 31, 2011, 2010, and 2009, respectively. See
Note 21 for additional information on the Company’s use of derivative instruments.
Interest expense for short-term and long-term debt was $1,315 million, $1,224 million and $1,168 million for the years ended
December 31, 2011, 2010 and 2009, respectively. This includes interest expense of $17 million, $39 million and $93 million for the years
ended December 31, 2011, 2010 and 2009, respectively, reported in “Net investment income.”
Included in “Policyholders’ account balances” are additional debt obligations of the Company. See Notes 5 and 10 for further
discussion.
Prudential Holdings, LLC Notes
On December 18, 2001, the date of demutualization, Prudential Holdings, LLC (“PHLLC”), a wholly-owned subsidiary of Prudential
Financial, issued $1,750 million in senior secured notes (the “IHC debt”). PHLLC owns the capital stock of Prudential Insurance and does
not have any operating businesses of its own. The IHC debt represents senior secured obligations of PHLLC with limited recourse; neither
Prudential Financial, Prudential Insurance nor any other affiliate of PHLLC is an obligor or guarantor on the IHC debt. The IHC debt is
collateralized by 13.8% of the outstanding common stock of Prudential Insurance and other items specified in the indenture, primarily the
“Debt Service Coverage Account” (the “DSCA”) discussed below.
PHLLC’s ability to meet its obligations under the IHC debt is dependent principally upon sufficient available funds being generated
by the Closed Block Business and the ability of Prudential Insurance, the sole direct subsidiary of PHLLC, to dividend such funds to
PHLLC. The payment of scheduled principal and interest on the Series A notes and the Series B notes is insured by a financial guarantee
insurance policy. The payment of principal and interest on the Series C notes is not insured. The IHC debt is redeemable prior to its stated
maturity at the option of PHLLC and, in the event of certain circumstances, the IHC debt bond insurer can require PHLLC to redeem the
IHC debt.
Net proceeds from the IHC debt amounted to $1,727 million, of which, $1,218 million was distributed to Prudential Financial through
a dividend on the date of demutualization for use in the Financial Services Businesses. In addition, $72 million was used to purchase a
guaranteed investment contract to fund a portion of the financial guarantee insurance premium related to the IHC debt. The remainder of
the net proceeds was deposited to a restricted account within PHLLC, referred to as the DSCA, and constitutes collateral for the IHC debt.
The balance in the DSCA was $764 million as of December 31, 2011.
Summarized consolidated financial data for Prudential Holdings, LLC is presented below.
As of December 31,
2011 2010
(in millions)
Consolidated Statements of Financial Position:
Total assets ..................................................................... $401,559 $374,655
Total liabilities ................................................................... $380,644 $354,409
Total member’s equity ............................................................. 20,906 20,223
Noncontrolling interests ........................................................... 9 23
Total equity ..................................................................... 20,915 20,246
Total liabilities and equity .......................................................... $401,559 $374,655
Years Ended December 31,
2011 2010 2009
(in millions)
Consolidated Statements of Operations:
Total revenues ................................................................... $ 25,239 $ 23,959 $20,223
Total benefits and expenses ......................................................... 24,229 21,300 19,934
Income from continuing operations before income taxes and equity in earnings of operating joint
ventures ...................................................................... 1,010 2,659 289
Net income ..................................................................... 801 1,955 2,241
Less: Income (loss) attributable to noncontrolling interests ................................ (13) 1 1
Net income attributable to Prudential Holdings, LLC. .................................... $ 814 $ 1,954 $ 2,240
204 Prudential Financial, Inc. 2011 Annual Report