Prudential 2015 Annual Report Download - page 94

of notes outstanding as of December 31, 2015. The weighted average interest rate on Prudential Financial’s outstanding senior notes,
including the effect of interest rate hedging activity, was 5.03% and 5.18% for the years ended December 31, 2015 and 2014, respectively,
excluding the effect of debt issued to consolidated subsidiaries.
Prudential Financial had $5.9 billion of junior subordinated notes outstanding as of December 31, 2015 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.
Prudential Financial borrowings of $17.3 million decreased $1.1 billion from December 31, 2014, driven primarily by maturities of
$2.2 billion of medium-term notes and retail notes, partially offset by the issuance of $1.0 billion of junior subordinated notes and $0.2
billion of retail notes.
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. Subsidiary borrowings of $3.6 billion decreased $1.7
billion from December 31, 2014, primarily driven by maturities of $0.7 billion of asset-backed notes, maturities of $0.3 billion of FHLBNY
advances, maturities of $0.1 billion of surplus notes and prepayments of $0.6 billion of senior debt.
Financing of regulatory reserves associated with domestic life insurance products
Term and Universal Life Reserve Financing
As discussed above under “Capital—Captive Reinsurance Companies,” we use captive reinsurance subsidiaries to finance the portion
of the statutory reserves required to be held by our domestic life insurance companies under Regulation XXX and Guideline AXXX that
we consider to be non-economic. The financing arrangements involve the reinsurance of term and universal life business to our captive
reinsurers and the issuance of surplus notes by those captives that are treated as capital for statutory purposes. These surplus notes are
subordinated to policyholder obligations, and the payment of principal on the surplus notes may only be made with prior insurance
regulatory approval.
To date, we have entered into agreements with external counterparties providing for the issuance of up to an aggregate of $8.85 billion
of surplus notes by our captive reinsurers in return for the receipt of credit-linked notes (“Credit-Linked Note Structures”), of which $6.50
billion of surplus notes was outstanding as of December 31, 2015. Under the agreements, the captive receives in exchange for the surplus
notes one or more credit-linked notes issued by a special-purpose affiliate of the Company with an aggregate principal amount equal to the
surplus notes outstanding. The captive holds the credit-linked notes as assets supporting Regulation XXX or Guideline AXXX non-
economic reserves, as applicable. The captive can redeem the principal amount of the outstanding credit-linked notes for cash upon the
occurrence of, and in an amount necessary to remedy, a specified liquidity stress event affecting the captive. Under the agreements, the
external counterparties have agreed to fund any such payments under the credit-linked notes in return for the receipt of fees. Prudential
Financial has agreed to make capital contributions to the captive to reimburse it for investment losses in excess of specified amounts and,
under certain of the transactions, Prudential Financial has agreed to reimburse the external counterparties for any payments made under the
credit-linked notes. To date, no such payments under the credit-linked notes have been required. Under these transactions, because valid
rights of set-off exist, interest and principal payments on the surplus notes and on the credit-linked notes are settled on a net basis, and the
surplus notes are reflected in the Company’s total consolidated borrowings on a net basis.
The following table summarizes our Credit-Linked Note Structures, which are reported on a net basis, as of December 31, 2015:
Surplus Note Outstanding
as of
December 31,
2015
Facility
Size
Credit Linked
Note Structures:
Original
Issue Dates
Maturity
Dates
($ in millions)
XXX ........................................................................... 2011-2014 2021-2024 $1,750(1) $2,000
AXXX ......................................................................... 2013 2033 2,100 3,500
XXX ........................................................................... 2014 2034 1,600(1)(2) 1,600
XXX ........................................................................... 2014 2024 1,050 1,750
Total Credit Linked Note Structures ...................................................................... $6,500 $8,850
(1) Prudential Financial has agreed to reimburse any amounts paid under the credit-linked notes issued in these structures.
(2) The $1.6 billion surplus note represents an intercompany transaction that eliminates upon consolidation.
As of December 31, 2015, we also had outstanding an aggregate of $3.1 billion of debt issued for the purpose of financing Regulation
XXX and Guideline AXXX non-economic reserves, of which approximately $1.5 billion relates to Regulation XXX reserves and
approximately $1.6 billion relates to Guideline AXXX reserves, all of which was issued directly by or guaranteed by Prudential Financial.
Under certain of the financing arrangements pursuant to which this debt was issued, Prudential Financial has agreed to make capital
contributions to the applicable captive reinsurance subsidiary to reimburse it for investment losses or to maintain its capital above
prescribed minimum levels. In addition, as of December 31, 2015, for purposes of financing Guideline AXXX reserves, our captives had
outstanding approximately $4.0 billion of surplus notes that were issued to affiliates.
As discussed under “Business—Regulation” included in Prudential Financial’s 2015 Annual Report on Form 10-K, in December
2014, the NAIC adopted a new actuarial guideline, known as “AG 48,” that governs the reinsurance of term and universal life insurance
business to captives by prescribing requirements for the types of assets that may be held by captives to support the reserves. The
92 Prudential Financial, Inc. 2015 Annual Report