Prudential 2007 Annual Report Download - page 85

Prudential Funding, LLC
Prudential Funding, LLC, or Prudential Funding, a wholly owned subsidiary of Prudential Insurance, serves as an additional source of
financing to meet the working capital needs of Prudential Insurance and its subsidiaries. Prudential Funding also lends to other subsidiaries
of Prudential Financial up to limits established with the New Jersey Department of Banking and Insurance. To the extent that other
subsidiaries of Prudential Financial have financing needs in excess of these limits, these needs are met through financing from Prudential
Financial directly or from third parties. Prudential Funding operates under a support agreement with Prudential Insurance whereby
Prudential Insurance has agreed to maintain Prudential Funding’s positive tangible net worth at all times. Prudential Funding borrows funds
primarily through the direct issuance of commercial paper. The impact of Prudential Funding’s financing capacity on liquidity is
considered in the internal liquidity measures of the domestic insurance operations.
As of December 31, 2007, Prudential Financial, Prudential Insurance and Prudential Funding had unsecured committed lines of credit
totaling $5.0 billion. There were no outstanding borrowings under these facilities as of December 31, 2007. For a further discussion of lines
of credit, see “—Lines of Credit and Other Credit Facilities.”
International Insurance Subsidiaries
In our international insurance operations, liquidity is provided through ongoing operations as well as portfolios of liquid assets. In
managing the liquidity and the interest and credit risk profiles of our international insurance portfolios, we employ a discipline similar to
the discipline employed for domestic insurance subsidiaries. We monitor liquidity through the use of internal liquidity measures, taking
into account the liquidity of the asset portfolios.
As with our domestic operations, in managing the liquidity of these operations, we consider the risk of policyholder and
contractholder withdrawals of funds earlier than our assumptions in selecting assets to support these contractual obligations. As of
December 31, 2007 and 2006, our international insurance subsidiaries had total general account insurance related liabilities (other than
dividends payable to policyholders) of $54.4 billion and $49.1 billion, respectively. Of those amounts, $29.5 billion and $27.8 billion,
respectively, were associated with Gibraltar Life. Concurrent with our acquisition of Gibraltar Life in April 2001, substantially all of its
insurance liabilities were restructured under a plan of reorganization to include special surrender penalties on existing policies. These
charges mitigate the extent, timing, and profitability impact of withdrawals of funds by customers and apply to $21.1 billion and $21.2
billion of Gibraltar Life’s insurance related reserves as of December 31, 2007 and 2006, respectively.
The following table sets forth the schedule (for each fiscal year ending March 31) of special surrender charges on Gibraltar Life
policies that are in force:
2007 2008 2009
6% 4% 2%
Policies issued by Gibraltar Life post-acquisition are not subject to the above restructured policy surrender charge schedule. Policies
issued post-acquisition are generally subject to discretionary withdrawal at contract value, less applicable surrender charges, which
currently start at 5% or more.
A special dividend to certain Gibraltar Life policyholders was payable in 2005 and will again be payable in 2009. The special dividend
is based on 70% of the net increase in the fair value of certain real estate and loans, net of transaction costs and taxes, included in the
Gibraltar Life reorganization plan. As of December 31, 2007, a liability of $421 million related to the special dividend is included in
“Policyholders’ dividends.” The special dividend will take the form of either additional policy values or cash. Gibraltar Life’s investment
portfolio is structured to provide adequate liquidity for the special dividend.
Prudential of Japan had $19.2 billion and $16.8 billion of general account insurance related liabilities, other than dividends to
policyholders, as of December 31, 2007 and 2006, respectively. Prudential of Japan did not have a material amount of general account
annuity reserves or deposit liabilities subject to discretionary withdrawal as of December 31, 2007 or 2006. Additionally, we believe that
the individual life insurance policies sold by Prudential of Japan do not have significant withdrawal risk because policyholders may incur
surrender charges and must undergo a new underwriting process in order to obtain a new insurance policy.
As of December 31, 2007 and 2006, our international insurance subsidiaries had cash and short-term investments of approximately
$1.1 billion, and fixed maturity investments, other than those designated as held to maturity, with fair values of $42.1 billion and $37.0
billion, respectively. As of December 31, 2007, $40.9 billion, or 97%, of the fixed maturity investments that are not designated as held to
maturity within our international insurance subsidiaries were rated investment grade. The remaining $1.2 billion, or 3%, of these fixed
maturity investments were rated non-investment grade. Of those amounts, $22.9 billion of the investment grade fixed maturity investments
and $0.7 billion of the non-investment grade fixed maturity investments were associated with Gibraltar Life. We consider attributes of the
various categories of liquid assets (for example, type of asset and credit quality) in calculating internal liquidity measures to evaluate the
adequacy of our international insurance operations’ liquidity under stress scenarios. We believe that ongoing operations and the liquidity
profile of our international insurance assets provide sufficient liquidity under reasonably foreseeable stress scenarios.
We employ various hedging strategies to manage potential exposure to foreign currency exchange rate movements as discussed in
“—Results of Operations for Financial Services Businesses by Segment—International Insurance and Investments Division.” Cash
settlements from this hedging activity result in cash flows to or from Prudential Financial and is dependent on changes in foreign currency
exchange rates and the notional amount of the exposures hedged.
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