Prudential 2012 Annual Report Download - page 100

to two years) in credit fundamentals, which if continued, may lead to a rating change. These indicators are not necessarily a precursor of a
rating change nor do they preclude a rating agency from changing a rating at any time without notice. Currently, Moody’s has all of the
Company’s ratings on positive outlook; A.M. Best and Fitch have all of the Company’s ratings on stable outlook; and S&P has the ratings
of our U.S.-domiciled entities on stable outlook and the ratings of The Prudential Life Insurance Company Ltd. and Gibraltar Life
Insurance Company Ltd. on negative outlook as part of S&P’s decision to put the sovereign debt ratings of Japan on negative outlook.
Requirements to post collateral or make other payments as a result of ratings downgrades under certain agreements, including
derivative agreements, can be satisfied in cash or by posting permissible securities held by the subsidiaries subject to the agreements. A
ratings downgrade of three ratings levels from the ratings levels as of December 31, 2012 (relating to financial strength ratings in certain
cases and credit ratings in other cases) would result in estimated additional collateral posting requirements or payments under such
agreements of approximately $77 million. The amount of collateral required to be posted for derivative agreements is also dependent on the
fair value of the derivative positions as of the balance sheet date. For additional information regarding the potential impacts of a ratings
downgrade on our derivative agreements see Note 21 to our Consolidated Financial Statements. In addition, a ratings downgrade by A.M.
Best to “A-” for our domestic life insurance companies would require Prudential Insurance to post a letter of credit in the amount of
approximately $1.7 billion, based on the level of statutory reserves related to the variable annuity business acquired from Allstate, that we
estimate would result in annual cash outflows of approximately $14 million, or collateral posting in the form of cash or securities to be held
in a trust. We believe that the posting of such collateral would not be a material liquidity event for Prudential Insurance.
In view of the difficulties experienced recently by many financial institutions, the rating agencies have heightened the level of scrutiny that
they apply to such institutions, have increased the frequency and scope of their credit reviews, have requested additional information from the
companies that they rate, and may adjust upward the capital and other requirements employed in the rating agency models for maintenance of
certain ratings levels, such as the financial strength ratings currently held by our life insurance subsidiaries. In addition, actions we might take to
access third party financing or to realign our capital structure may in turn cause rating agencies to reevaluate our ratings.
Contractual Obligations
The table below summarizes the future estimated cash payments related to certain contractual obligations as of December 31, 2012.
The estimated payments reflected in this table are based on management’s estimates and assumptions about these obligations. Because
these estimates and assumptions are necessarily subjective, the actual cash outflows in future periods will vary, possibly materially, from
those reflected in the table. In addition, we do not believe that our cash flow requirements can be adequately assessed based solely upon an
analysis of these obligations, as the table below does not contemplate all aspects of our cash inflows, such as the level of cash flow
generated by certain of our investments, nor all aspects of our cash outflows.
Estimated Payments Due by Period
Total 2013 2014-2015 2016-2017
2018 and
thereafter
(in millions)
Short-term and long-term debt obligations(1) .................................... $ 42,993 $ 3,769 $ 7,873 $ 5,214 $ 26,137
Operating lease obligations(2) ............................................... 519 135 189 99 96
Purchase obligations:
Commitments to purchase or fund investments(3) ............................ 4,167 2,994 1,024 50 99
Commercial mortgage loan commitments(4) ................................ 2,552 2,018 338 116 80
Other liabilities:
Insurance liabilities(5) .................................................. 1,161,725 46,026 79,481 80,513 955,705
Other(6) ............................................................. 10,548 10,515 33 0 0
Total ........................................................... $1,222,504 $65,457 $88,938 $85,992 $982,117
(1) The estimated payments due by period for long-term debt reflects the contractual maturities of principal, as disclosed in Note 14 to the Consolidated
Financial Statements, as well as estimated future interest payments. The payment of principal and estimated future interest for short-term debt are
reflected in estimated payments due in less than one year. The estimate for future interest payments includes the effect of derivatives that qualify for
hedge accounting treatment. See Note 14 to the Consolidated Financial Statements for additional information concerning our short-term and long-term
debt.
(2) The estimated payments due by period for operating leases reflect the future minimum lease payments under non-cancelable operating leases, as
disclosed in Note 23 to the Consolidated Financial Statements. We have no significant capital lease obligations.
(3) As discussed in Note 23 to the Consolidated Financial Statements, we have commitments to purchase or fund investments, some of which are contingent
upon events or circumstances not under our control, including those at the discretion of our counterparties. The timing of the fulfillment of certain of these
commitments cannot be estimated, therefore the settlement of these obligations are reflected in estimated payments due in less than one year.
Commitments to purchase or fund investments include $0.757 billion that we anticipate will ultimately be funded from our separate accounts. Of these
separate account commitments, $0.007 billion have recourse to Prudential Insurance if the separate accounts are unable to fund the amounts when due. For
further discussion of these separate account commitments, see “—Liquidity—Liquidity associated with other activities—Asset Management operations.”
(4) As discussed in Note 23 to the Consolidated Financial Statements, loan commitments of our commercial mortgage operations, which are legally binding
commitments to extend credit to a counterparty, have been reflected in the contractual obligations table above principally based on the expiration date of
the commitment; however, it is possible these loan commitments could be funded prior to their expiration. In certain circumstances the counterparty
may also extend the date of the expiration in exchange for a fee.
(5) The estimated payments due by period for insurance liabilities reflect future estimated cash payments to be made to policyholders and others for future
policy benefits, policyholders’ account balances, policyholder’s dividends, reinsurance payables and separate account liabilities. These future estimated
cash outflows are based on mortality, morbidity, lapse and other assumptions comparable with our experience, consider future premium receipts on
98 Prudential Financial, Inc. 2012 Annual Report