Prudential 2012 Annual Report Download - page 90

Insurance regulators are reviewing life insurers’ use of captive reinsurance companies. We cannot predict what, if any, changes may
result from this review. If applicable insurance laws are changed in a way that impairs the use of captive reinsurance companies, our
financial results, liquidity and capital position may be adversely affected.
Liquidity
Liquidity management and stress testing are performed on a legal entity basis as the ability to transfer funds between subsidiaries is
limited due in part to regulatory restrictions. Liquidity needs are determined through daily and quarterly cash flow forecasting at the
holding company and within our operating subsidiaries. A target cash balance of $1.2 billion is maintained to ensure adequate liquidity is
available at Prudential Financial to cover fixed expenses in the event that we experience reduced cash flows from our operating
subsidiaries. This target balance is reviewed and approved annually by the Finance Committee of the Board of Directors.
To mitigate the risk of having limited or no access to financing due to stressed market conditions, we aim to prefund capital debt in
advance of maturity. We mitigate the refinancing risk associated with our debt that is used to fund operating needs by matching the term of
debt with the assets financed. Short term financing, such as commercial paper, is used to fund short term needs only. To ensure adequate
liquidity in stress scenarios, stress testing is performed on a quarterly basis for our major operating subsidiaries. Risks to liquidity are
further mitigated by our access to alternative sources of liquidity discussed below.
Liquidity of Prudential Financial
The principal sources of funds available to Prudential Financial, the parent holding company, are dividends and returns of capital from
its subsidiaries, repayments of operating loans from subsidiaries and cash and short-term investments. These sources of funds may be
supplemented by Prudential Financial’s access to the capital markets as well as the “—Alternative Sources of Liquidity” described below.
The primary uses of funds at Prudential Financial include servicing debt, operating expenses, capital contributions and loans to
subsidiaries, the payment of declared shareholder dividends, and repurchases of outstanding shares of Common Stock executed under
Board authority.
As of December 31, 2012, Prudential Financial had cash and short-term investments of $8,563 million, an increase of $3,619 million
from 2011. Included in the cash and short-term investments of Prudential Financial is $3,136 million held in an intercompany liquidity
account that is designed to optimize the use of cash by facilitating the lending and borrowing of funds between Prudential Financial and its
subsidiaries on a daily basis.
The following table sets forth Prudential Financial’s principal sources and uses of cash and short-term investments for the periods
indicated.
Year Ended December 31,
2012 2011
(in millions)
Sources:
Dividends and/or returns of capital from subsidiaries(1) .................................................... $ 2,862 $ 3,242
Proceeds from the issuance of junior subordinated debt (hybrid securities) ...................................... 3,075 0
Net receipts under intercompany loan agreements(2) ....................................................... 2,933 34
Repayment of funding agreements from Prudential Insurance ................................................ 525 468
Interest income from subsidiaries on intercompany agreements, net of interest paid .............................. 406 223
Proceeds from stock-based compensation and exercise of stock options ........................................ 308 270
Net proceeds under external financing agreement(3) ....................................................... 244 0
Proceeds from the issuance of long-term senior debt ....................................................... 0 1,516
Proceeds from sale of real estate and relocation business .................................................... 0 91
Other, net(4) ...................................................................................... 197 0
Total sources .................................................................................. 10,550 5,844
Uses:
Capital contributions to subsidiaries(5) ................................................................. 1,912 1,176
Repayment of retail medium-term notes ................................................................. 1,741 154
Interest paid on external debt ......................................................................... 1,010 987
Maturities of long term senior debt, excluding retail medium-term notes ....................................... 850 350
Common Stock dividends ............................................................................ 749 685
Share repurchases .................................................................................. 650 999
Class B Stock dividends ............................................................................. 19 19
Capital transactions to fund Star Edison acquisition ........................................................ 0 2,922
Net payment under external financing agreement(3) ....................................................... 0 244
Other, net ......................................................................................... 0 36
Total uses .................................................................................... 6,931 7,572
Net increase (decrease) in cash and short-term investments ...................................................... $ 3,619 $(1,728)
88 Prudential Financial, Inc. 2012 Annual Report