Prudential 2015 Annual Report Download - page 157

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
From 2011 through 2013, a captive reinsurance subsidiary of Prudential Insurance entered into agreements providing for the issuance and
sale of up to $2.0 billion of ten-year fixed-rate surplus notes. Under the agreements, the captive receives in exchange for the surplus notes one or
more credit-linked notes issued by a special-purpose subsidiary of the Company in an aggregate principal amount equal to the surplus notes
issued. The captive holds the credit-linked notes as assets supporting non-economic reserves required to be held by the Company’s domestic
insurance subsidiaries under Regulation XXX in connection with the reinsurance of term life insurance policies through the captive. The
principal amount of the outstanding credit-linked notes is redeemable by the captive in cash upon the occurrence of, and in an amount necessary
to remedy, a specified liquidity stress event affecting the captive. Under the agreements, external counterparties have agreed to fund any such
payment under the credit-linked notes in return for a fee. Prudential Financial has agreed to make capital contributions to the captive to reimburse
it for investment losses in excess of specified amounts and has agreed to reimburse the external counterparties for any payments under the credit-
linked notes that are funded by those counterparties. As of December 31, 2015, an aggregate of $1.75 billion of surplus notes were outstanding
under these agreements and no such payments under the credit-linked notes have been required.
In December 2013, a captive reinsurance subsidiary entered into a twenty-year financing facility with external counterparties
providing for the issuance and sale of a surplus note for the financing of non-economic reserves required under Guideline AXXX. The
current financing capacity available under the facility is $3.5 billion. In December, 2015 the facility was amended to increase the maximum
potential size of the facility to $4.5 billion. Similar to the agreements described above, the captive receives in exchange for the surplus note
one or more credit-linked notes issued by a special-purpose affiliate in an aggregate principal amount equal to the surplus note. As above,
the principal amount of the outstanding credit-linked notes is redeemable by the captive in cash upon the occurrence of, and in an amount
necessary to remedy, a specified liquidity stress event, and the external counterparties have agreed to fund any such payment. Prudential
Financial has agreed to reimburse the captive for investment losses in excess of specified amounts; however, Prudential Financial has no
other reimbursement obligations to the external counterparties under this facility. As of December 31, 2015, an aggregate of $2.1 billion of
surplus notes were outstanding under the facility and no credit-linked note payments have been required.
In December 2014, a captive reinsurance subsidiary entered into a ten-year financing facility with certain unaffiliated financial institutions,
pursuant to which the captive agreed to issue and sell a surplus note in an aggregate principal amount of up to $1.75 billion in return for an equal
principal amount of credit-linked notes issued by a special-purpose affiliate. The term of the financing facility may be extended, at the captive’s
option, by up to five years. The captive holds the credit-linked notes as assets supporting non-economic reserves required to be held by the
Company’s domestic insurance subsidiaries under Regulation XXX in connection with the reinsurance of term life insurance policies through the
captive. The principal amount of the outstanding credit-linked notes is redeemable by the captive in cash upon the occurrence of, and in an
amount necessary to remedy, a specified liquidity stress event affecting the captive. Under the agreements, external counterparties have agreed to
fund any such payment under the credit-linked notes in return for a fee. Prudential Financial has agreed to make capital contributions to the
captive to reimburse it for investment losses in excess of specified amounts. As of December 31, 2015, an aggregate of $1.05 billion of surplus
notes were outstanding under the facility and no credit-linked note payments have been required.
In December 2014, a captive reinsurance subsidiary entered into a financing facility with an unaffiliated financial institution, pursuant to
which the captive issued and sold $3.0 billion in principal amount of surplus notes in return for an equal principal amount of credit-linked notes
issued by two special-purpose affiliates. One of the special-purpose affiliates also issued and sold to the unaffiliated financial institution $1.7
billion in principal amount of senior notes in exchange for cash. The maximum term of the financing is twenty years. The captive intends to hold
the credit-linked notes as assets supporting reserves required to be held by the Company’s domestic insurance subsidiaries under Regulation
XXX in connection with the reinsurance through the captive of term life insurance policies. This financing facility replaced the $3.0 billion
facility for this captive initially entered into in 2006. The captive can redeem the credit-linked notes in cash upon the occurrence of, and in an
amount necessary to remedy, a liquidity stress event affecting the captive. The unaffiliated financial institution has agreed to fund any such
payment under a portion of the credit-linked notes in an aggregate amount of up to $1.0 billion, in return for the receipt of fees. The remaining
obligations of the special-purpose affiliates to make such payments are supported by collateral held by those affiliates. Prudential Financial has
agreed to make capital contributions to the captive and to the special-purpose affiliates to reimburse them for investment losses in excess of
specified amounts. Prudential Financial has also agreed to reimburse the unaffiliated financial institution for any payments under the credit-linked
notes funded by it and for any payments due but otherwise unpaid under the senior notes issued by the special-purpose affiliates. In December
2015, the special-purpose affiliate redeemed $600 million of its outstanding senior notes, and unaffiliated financial institutions agreed to fund any
necessary payments on $600 million of the credit-linked notes in return for a fee. Prudential Financial has no reimbursement obligation with
respect to payments made under this $600 million of credit-linked notes.
Under each of the above transactions for the captive reinsurance subsidiaries, because valid rights of set-off exist, interest and
principal payments on the surplus notes and on the credit-linked notes are settled on a net basis, and the surplus notes are reflected in the
Company’s total consolidated borrowings on a net basis.
Another captive reinsurance subsidiary has $500 million of surplus notes outstanding that were issued in 2007 with unaffiliated
institutions to finance reserves required under Guideline AXXX. Prudential Financial has agreed to maintain the capital of this captive 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 the surplus notes. As of December 31, 2015 and 2014, there were no
collateral postings made under these derivative instruments.
The surplus notes for the captive reinsurance subsidiaries described above are subordinated to policyholder obligations, and the
payment of principal on the surplus notes may only be made with prior approval of the Arizona Department of Insurance. The payment of
interest on the surplus notes has been approved by the Arizona Department of Insurance, subject to its ability to withdraw that approval.
Prudential Financial, Inc. 2015 Annual Report 155