Prudential 2012 Annual Report Download - page 95

their profitability, which is impacted by market conditions and our investment management performance. We believe the cash flows from
our fee-based asset management businesses are adequate to satisfy the current liquidity requirements of these operations, as well as
requirements that could arise under reasonably foreseeable stress scenarios, which are monitored through the use of internal measures.
The principal sources of liquidity for our strategic investments and interim loans held in our asset management businesses are cash
flows from investments, the ability to liquidate investments, and available borrowing lines from internal sources, including Prudential
Funding and Prudential Financial. The primary liquidity risks include the inability to sell assets in a timely manner, declines in the value of
assets and credit defaults.
In support of our real estate business, certain real estate funds under management are held for the benefit of clients in insurance
company separate accounts sponsored by Prudential Insurance. In the normal course of business, Prudential Insurance, on behalf of these
separate accounts, may contractually agree to various funding commitments which may include, among other things, commitments to
purchase real estate, to invest in real estate partnerships (both existing and to-be-formed) to acquire or develop real estate, and/or to fund
additional construction or other expenditures on previously-acquired real estate investments. These contractual commitments are typically
entered into by Prudential Insurance on behalf of the particular separate account. As of December 31, 2012, total outstanding funding
commitments related to such separate account activity was $1.9 billion, of which $1.2 billion was on-balance sheet and $0.7 billion was
off-balance sheet. In the majority of cases (all but $0.2 billion), the commitments specify that Prudential Insurance’s recourse liability for
the obligation is limited to the assets of the applicable separate account, with no recourse to Prudential Insurance. We believe that the
separate accounts have sufficient resources to meet future obligations, including $1.1 billion of maturities in 2013. However, there is a risk
that the separate accounts may not be able to timely fund all maturing obligations from regular sources such as asset sales, operating cash
flow, deposits from clients, debt refinancing or, as mentioned in Note 14 to our Consolidated Financial Statements, from portfolio level
credit facilities. In cases where the separate account is not able to fund maturing obligations, Prudential Insurance may be called upon or
required to provide interim funding solutions. To date, Prudential Insurance has not been required to provide any such funding.
Alternative Sources of Liquidity
In addition to the sources of liquidity discussed throughout this section, Prudential Financial and certain subsidiaries have access to the
alternative sources of liquidity described below.
Asset-based Financing
We conduct asset-based or secured financing within our insurance and other subsidiaries, including transactions such as securities
lending, repurchase agreements and mortgage dollar rolls to earn spread income, to borrow funds, or to facilitate trading activity. These
programs are primarily driven by portfolio holdings of securities that are lendable based on counterparty demand for these securities in the
marketplace. The collateral received in connection with these programs is primarily used to purchase securities in the short-term spread
portfolios of our insurance entities. Investments held in the short-term spread portfolios include cash and cash equivalents, short-term
investments, mortgage loans and fixed maturities, including mortgage- and asset-backed securities, with a weighted average life at time of
purchase by the short-term portfolios of four years or less. Floating rate assets comprise the majority of our short-term spread portfolio.
These short-term portfolios are subject to specific investment policy statements, which among other things, do not allow for significant
asset/liability interest rate duration mismatch.
The following table sets forth our liabilities under asset-based or secured financing programs attributable to the Financial Services
Businesses and Closed Block Business as of the dates indicated.
December 31, 2012 December 31, 2011
Financial
Services
Businesses
Closed
Block
Business Consolidated
Financial
Services
Businesses
Closed
Block
Business Consolidated
(in millions)
Securities sold under agreements to repurchase .................. $3,436 $2,382 $5,818 $3,118 $3,100 $6,218
Cash collateral for loaned securities ........................... 2,864 1,077 3,941 2,254 719 2,973
Securities sold but not yet purchased .......................... 0 0 0 5 0 5
Total(1) ............................................. $6,300 $3,459 $9,759 $5,377 $3,819 $9,196
Portion of above securities that may be returned to the Company
overnight requiring immediate return of the cash collateral ....... $4,536 $1,566 $6,102 $3,438 $2,012 $5,450
Weighted average maturity, in days(2) ......................... 25 67 62 72
(1) The daily weighted average outstanding for the twelve months ended December 31, 2012 and 2011 was $6,695 million and $4,651 million, respectively,
for the Financial Services Businesses and $4,303 million and $4,301 million, respectively, for the Closed Block Business.
(2) Excludes securities that may be returned to the Company overnight.
The $565 million increase in the outstanding liabilities under these programs during 2012 was driven by attractive financing and
investment opportunities.
As of December 31, 2012, our domestic insurance entities had assets eligible for the asset-based or secured financing programs of
$81.6 billion, of which $9.4 billion were on loan. Taking into account market conditions and outstanding loan balances as of December 31,
2012, we believe approximately $30.3 billion of the remaining eligible assets are readily lendable, of which approximately $21.6 billion
relates to the Financial Services Businesses; however, these amounts are subject to potential regulatory constraints and to changes in
market conditions.
Prudential Financial, Inc. 2012 Annual Report 93