Prudential 2012 Annual Report Download - page 98

Prudential Financial has $4.6 billion of junior subordinated notes outstanding as of December 31, 2012 that are considered hybrid
securities and receive enhanced equity treatment from the rating agencies. See Note 14 to our Consolidated Financial Statements for a
description of the key terms of our junior subordinated notes.
During 2012, $850 million of medium-term notes matured, and we redeemed $1,631 million of outstanding retail notes financed in
part by our issuance of $3,075 million of junior subordinated notes. As part of our overall liquidity and capital management, we may
continue to redeem some or all of the remaining retail notes outstanding. As of December 31, 2012, $0.9 billion of outstanding retail notes
were redeemable by the Company at par.
Subsidiary Borrowings
Subsidiary borrowings principally consist of surplus note issuances done within our insurance and captive reinsurance subsidiaries,
commercial paper borrowings by Prudential Funding and asset-based financing.
During 2012, Prudential Insurance issued $1.0 billion of asset-backed notes. These notes are secured by a trust holding approximately
$2.8 billion of residential mortgage-backed securities deposited by Prudential Insurance. The deposit of these securities into the trust did
not result in the recognition of gains or losses on the securities, or de-recognition of the securities from the balance sheet under statutory
accounting principles or U.S. GAAP, but is consistent with our tax planning strategies to monetize statutory deferred tax assets. For
additional detail on these notes, see Note 14 to our Consolidated Financial Statements.
Financing of regulatory reserves associated with domestic life insurance products
As discussed above under “Capital—Insurance Subsidiaries—Captive Reinsurance Companies,” we use captive reinsurance
companies to implement reinsurance and capital management actions, including financing regulatory non-economic reserves through
internal and external solutions. These activities are described below.
During 2012 and 2011, a captive reinsurance subsidiary entered into agreements with external counterparties providing for the
issuance and sale of up to $1.5 billion of ten-year fixed-rate surplus notes in order to finance non-economic reserves required under
Regulation XXX. 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 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. As of
December 31, 2012, no capital contributions have been made by Prudential Financial under this agreement. In addition, during 2011 and
2012, another captive reinsurance subsidiary issued $2.5 billion of surplus notes to an affiliate to finance non-economic reserves required
under Guideline AXXX.
Other captive reinsurance subsidiaries have outstanding an additional $3.2 billion of surplus notes that were issued in 2006 through
2008 with unaffiliated institutions to finance non-economic 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 December 31, 2011, there were no collateral postings made under these derivative instruments.
The surplus notes described above are subordinated to policyholder obligations, and the payment of principal on the surplus notes may
only be made with prior insurance regulatory approval. The payment of interest on the surplus notes has been approved by the regulator,
subject to its ability to withdraw that approval.
As we continue to underwrite term and universal life business, including as part of The Hartford’s individual life business acquired by
us in early 2013, we expect to have additional borrowing needs to finance non-economic statutory reserves required under Regulation XXX
and Guideline AXXX. However, we believe we have sufficient financing resources available, including those internal and external
resources described above, to meet our financing needs under Regulation XXX and under Guideline AXXX through 2013, assuming that
the volume of new business remains consistent with current sales projections.
Ratings
Financial strength ratings (which are sometimes referred to as “claims-paying” ratings) and credit ratings are important factors
affecting public confidence in an insurer and its competitive position in marketing products. Nationally Recognized Statistical Ratings
Organizations continually review the financial performance and financial condition of the entities they rate, including Prudential Financial
and its rated subsidiaries. Our credit ratings are also important for our ability to raise capital through the issuance of debt and for the cost of
such financing.
A downgrade in the credit or financial strength ratings of Prudential Financial or its rated subsidiaries could potentially, among other
things, limit our ability to market products, reduce our competitiveness, increase the number or value of policy surrenders and withdrawals,
increase our borrowing costs and potentially make it more difficult to borrow funds, adversely affect the availability of financial guarantees,
such as letters of credit, cause additional collateral requirements or other required payments under certain agreements, allow counterparties to
terminate derivative agreements and/or hurt our relationships with creditors, distributors, or trading counterparties thereby potentially
negatively affecting our profitability, liquidity, and/or capital. In addition, we consider our own risk of non-performance in determining the
fair value of our liabilities. Therefore, changes in our credit or financial strength ratings may affect the fair value of our liabilities.
96 Prudential Financial, Inc. 2012 Annual Report