Prudential 2012 Annual Report Download - page 92

Liquidity is measured against internally-developed benchmarks that take into account the characteristics of both the asset portfolio and
the liabilities that they support. We consider attributes of the various categories of liquid assets (for example, type of asset and credit
quality) in calculating internal liquidity measures to evaluate our insurance operations’ liquidity under various stress scenarios, including
company-specific and market-wide events. We believe we have adequate liquidity in each of our insurance subsidiaries, including under
these stress scenarios.
Cash Flow
The principal sources of liquidity for our insurance subsidiaries are premiums and certain annuity considerations, investment and fee
income, and investment maturities and sales associated with our insurance and annuity operations, as well as internal and external
borrowings. The principal uses of that liquidity include benefits, claims, dividends paid to policyholders, and payments to policyholders
and contractholders in connection with surrenders, withdrawals and net policy loan activity. Other uses of liquidity include commissions,
general and administrative expenses, purchases of investments, hedging activity and payments in connection with financing activities.
In each of our major insurance subsidiaries, we believe that the cash flows from operations are adequate to satisfy current liquidity
requirements. The continued adequacy of this liquidity will depend upon factors such as future securities market conditions, changes in
interest rate levels, policyholder perceptions of our financial strength, policyholder behavior, catastrophic events and the relative safety and
attractiveness of competing products, each of which could lead to reduced cash inflows or increased cash outflows. Our insurance
operations’ cash flows from investment activities result from repayments of principal, proceeds from maturities and sales of invested assets
and investment income, net of amounts reinvested. The primary liquidity risks with respect to these cash flows are the risk of default by
debtors or bond insurers, our counterparties’ willingness to extend repurchase and/or securities lending arrangements, commitments to
invest and market volatility. We closely manage these risks through our credit risk management process and regular monitoring of our
liquidity position.
Domestic insurance operations. In managing the liquidity of our domestic insurance operations, we consider the risk of policyholder
and contractholder withdrawals of funds earlier than our assumptions when selecting assets to support these contractual obligations. We use
surrender charges and other contract provisions to mitigate the extent, timing and profitability impact of withdrawals of funds by
customers. The following table sets forth withdrawal characteristics of our general account annuity reserves and deposit liabilities (based
on statutory liability values) as of the dates indicated.
December 31, 2012 December 31, 2011
Amount % of Total Amount % of Total
($ in billions)
Not subject to discretionary withdrawal provisions ........................................... $39.8 46% $38.9 47%
Subject to discretionary withdrawal, with adjustment:
With market value adjustment ....................................................... 23.1 27 22.2 27
At market value .................................................................. 2.6 3 2.2 3
At contract value, less surrender charge of 5% or more ................................... 1.8 2 2.0 2
Subtotal .................................................................... 67.3 78 65.3 79
Subject to discretionary withdrawal at contract value with no surrender charge or surrender charge of
less than 5% ....................................................................... 17.8 22 17.8 21
Total annuity reserves and deposit liabilities ................................................ $85.1 100% $83.1 100%
Individual life insurance policies are less susceptible to withdrawal than our annuity reserves and deposit liabilities because
policyholders may incur surrender charges and be subject to a new underwriting process in order to obtain a new insurance policy. Our
annuity reserves with guarantee features may be less susceptible to withdrawal than historical experience indicates, due to the perceived
value of these guarantee features to policyholders as a result of market declines in recent years as well as the unavailability of comparable
products in the marketplace. Annuity benefits and guaranteed investment withdrawals under group annuity contracts are generally not
subject to early withdrawal. Gross account withdrawals for our domestic insurance operations’ products were consistent with our
assumptions in asset/liability management, and the associated cash outflows did not have a material adverse impact on our overall liquidity.
International insurance operations. As with our domestic operations, in managing the liquidity of our international insurance
operations, we consider the risk of policyholder and contractholder withdrawals of funds earlier than our assumptions in selecting assets to
support these contractual obligations. The following table sets forth the total general account insurance-related liabilities (other than
dividends payable to policyholders) of our international insurance subsidiaries, as of the dates indicated.
December 31,
2012 2011
(in billions)
Prudential of Japan(1) ............................................................................................ $ 36.4 $ 36.6
Gibraltar Life(2) ................................................................................................ 103.8 96.6
All other international insurance subsidiaries(3) ....................................................................... 10.6 8.6
Total general account insurance-related liabilities (other than dividends payable to policyholders) ............................ $150.8 $141.8
(1) As of December 31, 2012 and 2011, $5.7 billion and $4.5 billion, respectively, of the insurance-related liabilities for Prudential of Japan are associated
with U.S. dollar-denominated products that are coinsured to our domestic insurance operations and supported by U.S. dollar-denominated assets.
90 Prudential Financial, Inc. 2012 Annual Report