PRU

Business Context and Reporting Period

Company: Prudential Financial, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: February 4, 2009
Reporting Period: Fourth Quarter 2008 (ended December 31, 2008)
Purpose: Disclosure of fourth quarter 2008 results, quarterly financial supplements, and detailed liquidity and capital resources information.

Key Financial Metrics and Liquidity

Parent Company Liquidity (as of Dec 31, 2008):

• Cash and Short-term Investments: $4.434 billion (includes $537 million in subsidiary funds).
• Short-term Borrowings: $4.474 billion total.
• Commercial Paper: $1.243 billion outstanding.
• Convertible Debt Securities: $2.151 billion principal amount.
• Foreign Currency Bridge Loans: $816 million.
• Current Portion of Long-term Debt: $264 million.

Subsidiary Liquidity (Prudential Funding, LLC):

• Outstanding Commercial Paper/Master Notes: $4.354 billion.
• Invested Proceeds: $1.632 billion in short-term instruments.

Asset-Based Financing:

• Financial Services Businesses: $7.455 billion in liabilities (4.1% of total investments).
• Closed Block Business: $5.096 billion in liabilities (8.7% of total investments).

Credit Derivatives:

• Sold Protection (Notional): $1.222 billion (Liability: $146 million for Financial Services; $2 million for Closed Block).
• Purchased Protection (Notional): $1.378 billion total (Asset: $189 million for Financial Services; $64 million for Closed Block).

Material Changes and Investment Exposures

Monoline Bond Insurer Exposure:

• Financial Services Businesses: $1.506 billion (1% of fixed maturities) supported by bond insurance. Management estimates 62% would retain investment-grade ratings without insurer support.
• Closed Block Business: $685 million (2% of fixed maturities) supported by bond insurance. Management estimates 75% would retain investment-grade ratings without insurer support.
• Sub-prime Exposure: Within insured securities, $812 million (Financial Services) and $471 million (Closed Block) are asset-backed securities collateralized by sub-prime mortgages.

Commercial Paper Funding Facility (CPFF):

• Prudential Financial and Prudential Funding received approval to participate in the Federal Reserve's CPFF.
• Eligible issuance limits: $1.297 billion (Parent) and $9.815 billion (Funding).
• Outstanding CPFF borrowings as of Dec 31, 2008: $898 million (Parent) and $450 million (Funding).

Credit Facility Adjustments:

• Unsecured committed lines of credit reduced from $4.5 billion to $4.34 billion following the removal of Lehman Commercial Paper Inc. and Lehman Brothers Bank, FSB, as participants.

Outlook, Risks, and Contingencies

Ratings-Driven Contingencies:

• A three-level credit rating downgrade could trigger approximately $200 million in collateral requirements.
• An A.M. Best downgrade to A- for domestic life insurance companies would require a $1.6 billion letter of credit, estimated to result in $130 million in annual cash outflows.
• Universal life capital management agreements require cash collateral based on credit default swap (CDS) spreads. At 575 basis points (Dec 31, 2008), $125 million was posted; requirements could reach $400 million if spreads widen to 2,000 basis points.

Liquidity Facilities:

• FHLBNY Facility: Estimated borrowing capacity of $6.3 billion; $3.0 billion outstanding as of Dec 31, 2008.
• Lines of Credit: No outstanding borrowings under the $4.34 billion committed facilities as of Dec 31, 2008. Borrowing is conditioned on maintaining specific capital thresholds ($5.5 billion statutory capital for Prudential Insurance; $12.5 billion GAAP equity for Prudential Financial).

Management Commentary:

• Management believes potential collateral posting requirements would not constitute a material liquidity event.
• Short-term debt is rated A-1, P-2, and F1 (Parent) and A-1+, P-1, and F1+ (Funding).

Investor Verification Checklist

• Monoline Exposure: Verify the actual credit quality of the $2.191 billion in securities supported by monoline insurers, specifically the sub-prime collateralized portions.
• CPFF Utilization: Monitor the maturity profile of commercial paper and reliance on the Federal Reserve's CPFF, which terminates October 30, 2009.
• CDS Spread Sensitivity: Assess the impact of widening credit default swap spreads on the $400 million potential collateral requirement for universal life products.
• Rating Downgrade Triggers: Confirm current credit ratings to evaluate the risk of triggering the $200 million collateral posting or the $1.6 billion letter of credit requirement.
• Lehman Exposure: Confirm the full impact of the removal of Lehman entities from credit facilities and any residual exposure.