Business Context and Reporting Period
Company: Prudential Financial, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: August 5, 2009
Reporting Period: Second Quarter 2009 (ended June 30, 2009)
Context: The filing announces second-quarter 2009 results and provides detailed disclosures regarding liquidity, capital resources, credit derivative activities, and ratings-driven contingencies.
Key Financial Metrics and Liquidity
Parent Company Liquidity (as of June 30, 2009):
- Cash and Short-term Investments: $4.735 billion (includes $701 million of subsidiary funds).
- Short-term Borrowings: $647 million total, comprising $505 million commercial paper, $87 million convertible debt, and $55 million current portion of long-term debt.
- Commercial Paper Maturity: Weighted average of 10 days (40% overnight).
Subsidiary Liquidity (Prudential Funding, LLC):
- Outstanding Commercial Paper: $1.718 billion.
- Usage: $577 million held in cash; $1.141 billion used for affiliate working capital.
- Commercial Paper Maturity: Weighted average of 38 days (11% overnight).
Asset-Based Financing:
- Financial Services Businesses: $5.929 billion in liabilities (3.2% of $184.1 billion total investments).
- Closed Block Business: $5.130 billion in liabilities (8.6% of $59.6 billion total investments).
Credit Facilities:
- Unsecured Committed Lines of Credit: $4.34 billion total (no outstanding borrowings as of June 30, 2009).
- Covenants: Requires Prudential Insurance adjusted capital of at least $5.5 billion and Prudential Financial consolidated net worth of at least $12.5 billion (both met as of June 30, 2009).
Material Changes and Derivative Positions
Credit Derivatives (Sold Protection):
| Segment | Notional (June 30, 2009) | Fair Value (June 30, 2009) | Notional (Dec 31, 2008) | Fair Value (Dec 31, 2008) |
|---|---|---|---|---|
| Financial Services | $1,104 million | $(78) million | $1,161 million | $(146) million |
| Closed Block | $64 million | $0 | $61 million | $(2) million |
| Total | $1,168 million | $(78) million | $1,222 million | $(148) million |
Credit Derivatives (Purchased Protection):
| Segment | Notional (June 30, 2009) | Fair Value (June 30, 2009) | Notional (Dec 31, 2008) | Fair Value (Dec 31, 2008) |
|---|---|---|---|---|
| Financial Services | $1,575 million | $155 million | $1,069 million | $189 million |
| Closed Block | $480 million | $80 million | $309 million | $64 million |
| Total | $2,055 million | $235 million | $1,378 million | $253 million |
FHLBNY Borrowings: Prudential Insurance had $3.5 billion in outstanding borrowings ($1.0 billion short-term, $1.0 billion long-term, $1.5 billion in policyholder accounts).
Outlook, Risks, and Contingencies
Ratings Outlook:
- Parent Company: Commercial paper rated A-1 (S&P), P-2 (Moody's), F2 (Fitch). Fitch outlook is negative. Parent cannot access the Commercial Paper Funding Facility (CPFF).
- Prudential Funding: Commercial paper rated A-1+ (S&P), P-1 (Moody's), F1 (Fitch). Moody's rating under review for possible downgrade; Fitch outlook negative. Eligible for CPFF (max $9.815 billion).
Ratings-Driven Contingencies:
- Three-Level Downgrade: Estimated additional collateral requirements of approximately $200 million.
- A.M. Best Downgrade to "A-": Would require posting a $1.4 billion letter of credit, estimated to result in $70 million annual cash outflows.
- Universal Life Collateral: $53 million posted as of June 30, 2009, based on 10-year credit default swap spreads of ~490 basis points.
Regulatory Changes: New Jersey Department of Banking and Insurance increased the maximum qualifying assets Prudential Insurance may pledge to FHLBNY from 5% to 7% (resetting to 5% on Dec 31, 2010), potentially allowing up to $9.0 billion in borrowing capacity.
Investor Verification Checklist
- Exhibit 99.0: Review the full news release for specific revenue, profit, and margin figures not detailed in this 8-K summary.
- Exhibit 99.2: Verify the composition and risk exposure of investments in mortgage-backed and asset-backed securities.
- Rating Actions: Monitor Moody's review of Prudential Funding's rating and Fitch's negative outlook for potential liquidity impacts.
- CPFF Access: Note that the parent company cannot access the Federal Reserve's CPFF, while the subsidiary can; monitor the February 1, 2010 termination date for the facility.
- Covenant Compliance: Confirm continued adherence to the $5.5 billion adjusted capital and $12.5 billion net worth covenants for credit facility access.