Prudential 2015 Annual Report Download - page 95

requirements in AG 48 became effective on January 1, 2015, and apply in respect of term and universal life insurance policies written from
and after January 1, 2015, or written prior to January 1, 2015 but not included in a captive reserve financing arrangement as of
December 31, 2014. AG 48 will require us to hold cash and rated securities in greater amounts than we previously held to support
economic reserves for certain of our term and universal life policies. While we continue to work with regulators and industry participants
on potential long-term solutions, we expect to fund the additional requirement for 2015, in an amount of approximately $400 million, using
a combination of existing assets and newly purchased assets sourced from affiliated financing, and believe we have sufficient internal
resources to finance reserves through 2016.
Other Insurance Financing
In 2014, Prudential Financial entered into financing transactions pursuant to which it issued $500 million of limited recourse notes
and, in return, obtained $500 million of asset-backed notes issued by a designated series of a Delaware master trust. The asset-backed notes
mature from 2019 through 2021; however, the maturity date of a portion of the notes may be extended by us for up to three years, subject to
certain conditions. The asset-backed notes were ultimately contributed to PRIAC, an insurance subsidiary, to finance statutory surplus, and
PRIAC, in turn, paid cash dividends totaling $500 million to its parent, Prudential Insurance.
The master trust’s payment obligations under each of the asset-backed notes are secured by corresponding payment obligations of a
third-party financial institution and a portfolio of specified assets that have an aggregate value at least equal to the principal amount of the
applicable asset-backed note. The principal amount of each asset-backed note is payable to PRIAC in cash at any time upon demand by
PRIAC or, if not earlier paid, at maturity. Each of the limited recourse notes obligates Prudential Financial to reimburse the applicable
third-party financial institution for any principal payments received on the corresponding asset-backed note, but there is no obligation to
reimburse any portion of a principal payment that is needed by PRIAC to pay then current claims to its policyholders. Each limited
recourse note bears interest at a rate equal to the rate on the corresponding asset-backed note, plus an amount representing fees payable to
the applicable third-party financial institution. As of December 31, 2015, no principal payments have been received or are currently due on
the asset-backed notes and, as a result, there was no payment obligation under the limited recourse notes. Accordingly, the notes are not
reflected in the Company’s Consolidated Financial Statements as of that date.
On February 18, 2015, PLIC entered into a twenty year financing facility with certain unaffiliated financial institutions and a special-
purpose company affiliate, pursuant to which PLIC may, at its option and subject to the satisfaction of customary conditions, issue and sell
to the affiliate up to $4.0 billion in aggregate principal amount of surplus notes, in return for an equal principal amount of credit linked
notes. Upon issuance, PLIC would hold any credit linked notes as assets to finance future statutory surplus needs within PLIC.
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. Our credit ratings are also important for our
ability to raise capital through the issuance of debt and for the cost of such financing. 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.
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.
Prudential Financial, Inc. 2015 Annual Report 93