Prudential 2012 Annual Report Download - page 87

As of December 31, 2012, we hold no commercial real estate held-for-sale related to foreclosed interim loans. The mortgage loans of
our commercial mortgage operations are included in “Commercial mortgage and other loans,” with related derivatives and other hedging
instruments primarily included in “Other trading account assets” and “Other long-term investments.”
Other Long-Term Investments
Other long-term investments primarily include strategic investments made as part of our asset management operations. We make these
strategic investments in real estate, as well as fixed income, public equity and real estate securities, including controlling interests. Certain
of these investments are made primarily for purposes of co-investment in our managed funds and structured products. Other strategic
investments are made with the intention to sell or syndicate to investors, including our general account, or for placement in funds and
structured products that we offer and manage (seed investments). As part of our asset management operations, we also make loans to our
managed funds that are secured by equity commitments from investors or assets of the funds.
Liquidity and Capital Resources
Overview
Liquidity refers to the ability to generate sufficient cash resources to meet the payment obligations of the Company. Capital refers to the
long term financial resources available to support the operations of our businesses, fund business growth, and provide a cushion to withstand
adverse circumstances. Our ability to generate and maintain sufficient liquidity and capital depends on the profitability of our businesses,
general economic conditions and our access to the capital markets and the alternate sources of liquidity and capital described herein.
Effective and prudent liquidity and capital management is a priority across the organization. Management monitors the liquidity of
Prudential Financial and its subsidiaries on a daily basis and projects borrowing and capital needs over a multi-year time horizon through
our quarterly planning process. We believe that cash flows from the sources of funds available to us are sufficient to satisfy the current
liquidity requirements of Prudential Financial and its subsidiaries, including under reasonably foreseeable stress scenarios. We have a
capital management framework in place that facilitates the allocation of capital and approval of capital uses, and we forecast capital sources
and uses on a quarterly basis. Furthermore, we employ a “Capital Protection Framework” to ensure the availability of sufficient capital
resources to maintain adequate capitalization on a consolidated basis and competitive risk-based capital ratios and solvency margins for our
insurance subsidiaries under reasonably foreseeable stress scenarios.
The Dodd-Frank Act may result in the imposition on us of new capital and liquidity standards, including requirements regarding risk-
based capital, leverage, liquidity, stress-testing and other matters. We are currently under consideration by the Financial Stability Oversight
Council for a proposed determination that we should be subject to these and other regulatory standards and to supervision by the Board of
Governors of the Federal Reserve System under the Dodd Frank Act. See “Business—Regulation” and “Risk Factors” included in
Prudential Financial’s 2012 Annual Report on Form 10-K for information regarding the potential impact of the Dodd-Frank Act.
During 2012, we took the following significant actions that impacted our liquidity and capital position:
• We repositioned our capital structure by issuing an aggregate of $3.1 billion of junior subordinated debt in public offerings;
• In addition to maturing debt, we repaid $1.6 billion of senior debt through optional redemptions of retail notes;
• We repurchased $650 million of shares of our Common Stock and paid shareholder dividends of $749 million; and
• We made substantial investments in our businesses, including the expansion of our Retirement business through two significant
pension risk transfer transactions and an agreement to acquire The Hartford’s Individual Life Insurance Business, which closed in
January 2013.
Capital
Our capital management framework is primarily based on statutory risk-based capital and solvency margin measures. Due to our
diverse mix of businesses and applicable regulatory requirements, we apply certain refinements to the framework that are designed to more
appropriately reflect risks associated with our businesses on a consistent basis across the Company. In addition, we use an economic capital
framework to inform capital decisions.
We seek to capitalize all of our subsidiaries and businesses in accordance with their ratings targets, and we believe Prudential
Financial’s capitalization and use of financial leverage are consistent with those ratings targets. Our long-term senior debt rating targets for
Prudential Financial are “A” for Standard & Poor’s Rating Services, or S&P, Moody’s Investors Service, Inc., or Moody’s, and Fitch
Ratings Ltd., or Fitch, and “a” for A.M. Best Company, or A.M. Best. Our financial strength rating targets for our life insurance companies
are “AA/Aa/AA” for S&P, Moody’s and Fitch, respectively, and “A+” for A.M. Best. Currently, some of our ratings are below these
targets. For a description of the potential impacts of ratings downgrades, see “—Ratings.”
Capital Governance
Our capital management framework is ultimately reviewed and approved by the Company’s Board of Directors. Prior to Board
review, our Capital and Financial Controls Committee (“CFCC”) reviews the use and allocation of capital above certain threshold amounts
to ensure that capital is efficiently deployed and earns returns consistent with our strategic objectives, ratings aspirations and other goals
and targets. This management committee provides a multi-disciplinary due diligence review of specific initiatives or transactions requiring
the use of capital, including all mergers and acquisitions, as well as new products, initiatives and transactions that present substantial
reputational, legal, regulatory, operating, accounting or tax risk. The CFCC also evaluates the Company’s Annual Capital and Financing
Plan (and quarterly updates to this plan) and the Company’s capital, liquidity and financial position, borrowing plans, and related matters
prior to the discussion of these items with the Company’s Board of Directors.
Under our capital management policy approved by the Board of Directors, our Chairman and Chief Executive Officer and Vice
Chairman are authorized to approve capital actions on behalf of the Company and to further delegate authority with respect to capital
actions to appropriate officers. Any capital commitment that exceeds the authority granted to senior management is separately authorized
by the Board.
Capitalization
The primary components of capitalization for the Financial Services Businesses consist of the equity we attribute to the Financial
Services Businesses and outstanding capital debt, including junior subordinated debt, of the Financial Services Businesses. As shown in the
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