Prudential 2012 Annual Report Download - page 146

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
4. INVESTMENTS (continued)
At December 31, 2012, $6 million of the gross unrealized losses represented declines of greater than 20%, $4 million of which had
been in that position for less than six months. At December 31, 2011, $236 million of the gross unrealized losses represented declines of
greater than 20%, $225 million of which had been in that position for less than six months. In accordance with its policy described in Note
2, the Company concluded that an adjustment for other-than-temporary impairments for these equity securities was not warranted at
December 31, 2012 and 2011.
Securities Pledged, Restricted Assets and Special Deposits
The Company pledges as collateral investment securities it owns to unaffiliated parties through certain transactions, including
securities lending, securities sold under agreements to repurchase, collateralized borrowings and postings of collateral with derivative
counterparties. At December 31, the carrying value of investments pledged to third parties as reported in the Consolidated Statements of
Financial Position included the following:
2012 2011
(in millions)
Fixed maturities(1) ................................................................................ $12,134 $13,070
Trading account assets supporting insurance liabilities .................................................... 542 738
Other trading account assets ........................................................................ 38 46
Separate account assets ............................................................................ 3,435 4,073
Equity securities .................................................................................. 70 103
Total securities pledged ........................................................................ $16,219 $18,030
(1) Includes $4 million of fixed maturity securities classified as short-term investments at December 31, 2011.
As of December 31, 2012, the carrying amount of the associated liabilities supported by the pledged collateral was $15,621 million. Of
this amount, $5,818 million was “Securities sold under agreements to repurchase,” $3,535 million was “Separate account liabilities,”
$3,941 million was “Cash collateral for loaned securities,” $280 million was “Long-term debt,” $100 million was “Short-term debt,” and
$1,947 million was “Policyholders’ account balances.” As of December 31, 2011, the carrying amount of the associated liabilities supported
by the pledged collateral was $17,408 million. Of this amount, $6,218 million was “Securities sold under agreements to repurchase,”
$4,160 million was “Separate account liabilities,” $2,973 million was “Cash collateral for loaned securities,” $725 million was “Long-term
debt,” $199 million was “Short-term debt,” $1,500 million was “Policyholders’ account balances,” and $1,388 million was “Other liabilities.”
In the normal course of its business activities, the Company accepts collateral that can be sold or repledged. The primary sources of
this collateral are securities in customer accounts and securities purchased under agreements to resell. The fair value of this collateral was
approximately $2,996 million and $2,258 million at December 31, 2012 and 2011, respectively, all of which, for both periods, had either
been sold or repledged.
Assets of $80 million and $50 million at December 31, 2012 and 2011, respectively, were on deposit with governmental authorities or
trustees. Additionally, assets carried at $594 million and $596 million at December 31, 2012 and 2011, were held in voluntary trusts
established primarily to fund guaranteed dividends to certain policyholders and to fund certain employee benefits. Securities restricted as to
sale amounted to $183 million and $191 million at December 31, 2012 and 2011, respectively. These amounts include member and
activity-based stock associated with memberships in the Federal Home Loan Bank of New York and Boston. Restricted cash and securities
of $67 million and $56 million at December 31, 2012 and 2011, respectively, were included in “Other assets.”
5. VARIABLE INTEREST ENTITIES
In the normal course of its activities, the Company enters into relationships with various special purpose entities and other entities that are
deemed to be variable interest entities (“VIEs”). A VIE is an entity that either (1) has equity investors that lack certain essential characteristics
of a controlling financial interest (including the ability to control activities of the entity, the obligation to absorb the entity’s expected losses
and the right to receive the entity’s expected residual returns) or (2) lacks sufficient equity to finance its own activities without financial
support provided by other entities, which in turn would be expected to absorb at least some of the expected losses of the VIE.
If the Company determines that it is the VIE’s “primary beneficiary” it consolidates the VIE. There are currently two models for
determining whether or not the Company is the “primary beneficiary” of a VIE. The first relates to those VIEs that have the characteristics
of an investment company and for which certain other conditions are true. These conditions are that (1) the Company does not have the
implicit or explicit obligation to fund losses of the VIE and (2) the VIE is not a securitization entity, asset-backed financing entity or an
entity that was formerly considered a qualified special-purpose entity. In this model the Company is the primary beneficiary if it stands to
absorb a majority of the VIE’s expected losses or to receive a majority of the VIE’s expected residual returns and would be required to
consolidate the VIE.
For all other VIEs, the Company is the primary beneficiary if the Company has (1) the power to direct the activities of the VIE that
most significantly impact the economic performance of the entity and (2) the obligation to absorb losses of the entity that could be
potentially significant to the VIE or the right to receive benefits from the entity that could be potentially significant. If both conditions are
present the Company would be required to consolidate the VIE.
144 Prudential Financial, Inc. 2012 Annual Report