Prudential 2012 Annual Report Download - page 161

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
14. SHORT-TERM AND LONG-TERM DEBT (continued)
Surplus Notes
As of December 31, 2012, Prudential Insurance had $940 million of fixed-rate surplus notes outstanding. These notes are subordinated
to other Prudential Insurance borrowings and policyholder obligations, and the payment of interest and principal may only be made with
the prior approval of NJDOBI. NJDOBI could prohibit the payment of the interest and principal on the surplus notes if certain statutory
capital requirements are not met. At December 31, 2012 and 2011, the Company met these statutory capital requirements.
Prudential Insurance’s fixed-rate surplus notes include $500 million of exchangeable surplus notes issued in a private placement in
2009 with an interest rate of 5.36% per annum and due September 2019. The surplus notes are exchangeable at the option of the holder, in
whole but not in part, for shares of Prudential Financial Common Stock beginning in September 2014, or earlier upon a fundamental
business combination involving Prudential Financial or a continuing payment default. The initial exchange rate for the surplus notes is
10.1235 shares of Common Stock per each $1,000 principal amount of surplus notes, which represents an initial exchange price per share
of Common Stock of $98.78; however, the exchange rate is subject to customary anti-dilution adjustments. The exchange rate is also
subject to a make-whole decrease in the event of an exchange prior to maturity (except upon a fundamental business combination or a
continuing payment default), that will result in a reduction in the number of shares issued upon exchange (per $1,000 principal amount of
surplus notes) determined by dividing a prescribed cash reduction value (which will decline over the life of the surplus notes, from $102.62
for an exercise on September 18, 2014 to zero for an exercise at maturity) by the price of the Common Stock at the time of exchange. In
addition, the exchange rate is subject to a customary make-whole increase in connection with an exchange of the surplus notes upon a
fundamental business combination where 10% or more of the consideration in that business combination consists of cash, other property or
securities that are not listed on a U.S. national securities exchange. These exchangeable surplus notes are not redeemable by Prudential
Insurance prior to maturity, except in connection with a fundamental business combination involving Prudential Financial, in which case
the surplus notes will be redeemable by Prudential Insurance, subject to the noteholders’ right to exchange the surplus notes instead, at par
or, if greater, a make-whole redemption price.
During 2011 and 2012, a captive reinsurance subsidiary of Prudential Insurance entered into agreements providing for the issuance
and sale of up to $1.5 billion of ten-year fixed-rate surplus notes. At December 31, 2012, $1,000 million of surplus notes were outstanding
under these agreements. Under the agreements, the subsidiary received debt securities, with a principal amount equal to the surplus notes
issued, which are redeemable under certain circumstances, including upon the occurrence of specified stress events affecting the subsidiary.
Because valid rights of set-off exist, interest and principal payments on the surplus notes and on the debt securities are settled on a net
basis, and the surplus notes are reflected in the Company’s total consolidated borrowings on a net basis. Prudential Financial has agreed to
make capital contributions to the captive reinsurance subsidiary in order to reimburse it for investment losses in excess of specified
amounts and has agreed to make payments of principal and interest on the surplus notes in certain cases if payments are not made by the
subsidiary. Surplus notes issued under this facility are subordinated to policyholder obligations, and the payment of principal on the surplus
notes may only be made with prior approval of the Arizona Department of Insurance. The payment of interest on the surplus notes has been
approved by the Arizona Department, subject to its ability of the regulator to withdraw that approval.
Other captive reinsurance subsidiaries have outstanding $3.2 billion of surplus notes that were issued in 2006 through 2008 with
unaffiliated institutions to finance reserves required under Regulation XXX and Guideline AXXX. Prudential Financial has agreed to
maintain the capital of these subsidiaries at or above a prescribed minimum level and has entered into arrangements (which are accounted
for as derivative instruments) that require it to make certain payments in the event of deterioration in the value of these surplus notes. As of
December 31, 2012 and 2011, there were no collateral postings made under these derivative instruments. These surplus notes are
subordinated to policyholder obligations, and the payment of principal on the surplus notes may only be made with prior approval of the
Arizona Department of Insurance. The payment of interest on the surplus notes has been approved by the Arizona Department, subject to
its ability to withdraw that approval.
Senior Notes
Medium-term notes. Prudential Financial maintains a Medium-term Notes, Series D program under its shelf registration statement
with an authorized issuance capacity of $20 billion. As of December 31, 2012, the outstanding balance of medium-term notes under this
program was $13.2 billion, a decrease of $0.9 billion from December 31, 2011, due to $850 million of maturities.
Retail medium-term notes. Prudential Financial also maintains a retail medium-term notes program, including the InterNotes®
program, under its shelf registration statement with an authorized issuance capacity of $5.0 billion. As of December 31, 2012, the
outstanding balance of retail notes was $0.9 billion. Retail notes outstanding decreased by $1.7 billion from December 31, 2011 due to $1.6
billion of redemptions by the Company during 2012, with an average interest rate of approximately 6.1%.
Asset-backed notes. On March 30, 2012, Prudential Insurance sold, in a Rule 144A private placement, $1.0 billion aggregate
principal amount of 2.997% notes with a final maturity of September 30, 2015. The notes are secured by the assets of a trust, consisting of
approximately $2.8 billion aggregate principal balance of residential mortgage-backed securities deposited into the trust by Prudential
Insurance. Payments of interest and principal on the notes will be made only to the extent of funds available to the trust in accordance with
a priority of payments set forth in the indenture governing the notes. Prudential Financial guaranteed to the holders of the notes the timely
payment of all principal and interest due on the notes and any “make-whole payments” that may become due as a result of the payment of
principal on the notes prior to the scheduled payment date.
Prudential Financial, Inc. 2012 Annual Report 159