SEC Company Response from PRUDENTIAL FINANCIAL INC (PFH, PRH, PRS, PRU) (CIK 0001137774) (PFH) — May 1, 2009
PRUDENTIAL FINANCIAL INC (PFH, PRH, PRS, PRU) (CIK 0001137774)
Date: May 1, 2009 · CIK: 0001137774 · Accession: 0001193125-09-096306
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 001-13958
Referenced dates: April 16, 2009
Letter
Via EDGAR Securities and Exchange Commission Division of Corporation Finance Prudential Financial, Inc. (the “Company”) Definitive Proxy Statement on Schedule 14A, filed March 20, 2009 Form 10-K for the Fiscal Year Ended December 31, 2008 File No. 001-13958
Dear Mr. Rosenberg:
We received your letter dated April 16, 2009, addressed to Richard J. Carbone, setting forth comments of the staff of the Securities and Exchange Commission (the “Commission”) on the Company’s Definitive Proxy Statement on Schedule 14A filed on March 20, 2009 and Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (the “2008 Form 10-K”). As previously indicated in our letter to you dated April 29, 2009, in order to allow for appropriate review, we intend to respond to the comments relating to the Definitive Proxy Statement separately. This letter responds only to the comments relating to the 2008 Form 10-K. For your convenience, we have included the staff’s comments below and have keyed our response accordingly.
We have agreed as indicated in our response to enhance certain disclosures in future filings in order to address the staff’s comments. We are doing so in the spirit of cooperation with the staff, and any changes reflected in future filings should not be taken as an admission that prior disclosures were in any way deficient or inaccurate.
Form 10-K for the Fiscal Year Ended December 31, 2008
Item 1A. Risk Factors, page 43
Ratings downgrades and changes in credit spreads may require us to post collateral, thereby affecting our liquidity…, page 50
3. You state that as you continue to underwrite term and universal life business you expect to have borrowing needs in 2009 to finance statutory reserves required under Regulation XXX and Guideline AXXX, but that based on current market conditions you may not be able to finance those needs. Please expand your risk factor and your “Liquidity and Capital Resources” section to quantify those 2009 borrowing needs.
Mr. Jim B. Rosenberg
U.S. Securities and Exchange Commission
May 1, 2009
Page 2
Response:
The Company acknowledges the staff’s comment to provide quantification of our estimated 2009 borrowing needs as it relates to financing statutory reserves required under Regulation XXX and Guideline AXXX. The Company intends to include disclosure in the Risk Factors and “Liquidity and Capital Resources” sections of its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009 as follows:
As we continue to underwrite term and universal life business, we expect to have borrowing needs in 2009 to finance statutory reserves required under Regulation XXX and Guideline AXXX. Several strategies are currently under review to reduce the strain of increased AXXX and XXX statutory reserves associated with our term and universal life products. The activities we may undertake to mitigate or address these needs include obtaining letters of credit, entering into reinsurance transactions or executing other capital market strategies; however, our ability to successfully execute these strategies may depend on market conditions. Further, we have $300 million currently available under our XXX notes facility described above. Absent any successful mitigation efforts and assuming full usage of the XXX notes facility, we currently believe that our financing need for 2009 could be up to $xxx million for XXX and AXXX combined, but this amount may fluctuate due to changes in market conditions or product sales. If we are unsuccessful in satisfying or mitigating this strain as a result of market conditions or otherwise, this financing need could have an adverse effect on our overall liquidity and capital and could require us to increase prices and/or reduce our sales of term or universal life products.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Application of Critical Accounting Estimates
Policyholder Liabilities
Future Policy Benefit Reserves, other than Unpaid Claims and Claim Adjustment Expenses, page 82
4. Please expand your disclosure regarding the reserves for guaranteed minimum death and income benefits related to your variable annuity policies to discuss the methods and key assumptions as well as the historical and reasonably likely sensitivities inherent in these accounting estimates.
Response:
The Company acknowledges the staff’s comment to expand its disclosures within Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”), Application of Critical Accounting Estimates for Policyholder Liabilities to include disclosures regarding the methods and key assumptions used in accounting for the reserves for guaranteed minimum death and income benefits related to variable annuity policies.
Mr. Jim B. Rosenberg
U.S. Securities and Exchange Commission
May 1, 2009
Page 3
Within Note 9 on pages 288 and 290 of the 2008 Form 10-K, the Company disclosed the methods and key assumptions used in accounting for the reserves for guaranteed minimum death and income benefits related to variable annuity policies. In particular, these disclosures indicated that in accounting for these reserves the Company must make estimates and assumptions about equity market returns, the timing of annuitization, contract lapses, and contractholder mortality. Further, as part of the MD&A for the Individual Annuities segment, on pages 96 through 98 of the 2008 Form 10-K, the Company disclosed that changes in actual and estimated equity markets returns and changes in assumptions around contract lapses were the primary drivers of reserve increases related to the annual review ($265 million), market performance adjustment ($337 million) and quarterly adjustments for current period experience ($93 million) related to these reserves. There was no material impact on the reserves for guaranteed minimum death and income benefits related to changes in these estimates and assumptions for the years ended December 31, 2007 or 2006.
The Company will revise its disclosures in future Form 10-K filings to be similar to those included in Note 9 of the 2008 Form 10-K, as noted above. In addition, the Company will disclose in future Form 10-K filings any material impact on the reserves for guaranteed minimum death and income benefits of a hypothetical 100 basis point increase or decrease in the future rate of return assumption on assets held related to variable annuity products. This sensitivity reflects a near-term reasonably likely hypothetical change in equity market returns.
5. You refer to a feature in your variable annuity contracts, the automatic rebalancing element, whereby you transfer separate account assets to the general account in order to limit equity market risk. Please explain to us how this feature operates, particularly how you account for transfers between the separate account and general account and subsequent investment income generated by assets transferred to the general account under this feature. Ensure that your response quantifies the impact from this activity on general and separate account operating results for each period presented.
Response:
The Company acknowledges the staff’s comment to provide additional information regarding the automatic rebalancing element included in the design of certain variable annuity products. Within Item 1 on page 8 of the 2008 Form 10-K, the Company disclosed the operation of the automatic rebalancing element as follows:
The automatic rebalancing element included in the design of certain variable annuity products transfers assets between contractholder sub-accounts depending on a number of factors, including the investment performance of the sub-accounts. Negative investment performance may result in transfers to either a fixed-rate general account option or a separate account bond portfolio. In certain situations, assets may transfer back when investment performance improves.
Mr. Jim B. Rosenberg
U.S. Securities and Exchange Commission
May 1, 2009
Page 4
Under the automatic rebalancing element, when funds are transferred from a separate account to the general account, the “separate account assets” are removed at their market value (and the corresponding “separate account liability” is removed at its contract value, which equals market value) and the applicable general account assets (e.g. “fixed maturities - available-for-sale”) are increased with a corresponding increase in liabilities to “policyholders’ account balances”, within the Consolidated Statements of Financial Position. Funds transferred into the general account relating to the automatic rebalancing element are classified based on the type of asset purchased, and are generally reflected in “fixed maturities – available-for-sale.”
Because the separate accounts are carried at market value and the transfer to the general account is at market value there is no impact to the Consolidated Statements of Operations from these transfers. The general account portion of variable annuity contracts are classified as universal life-type contracts and follow accounting prescribed by SFAS 97 (deposit accounting).
Investment income generated by assets transferred to the general account under this feature is reflected in “Net investment income” on the Consolidated Statements of Operations. Investment gains (losses) on these general account assets are reported within “Realized investment gains (losses), net” on the Consolidated Statements of Operations. Mark-to-market adjustments on “fixed maturities - available for sale” are reflected in “Accumulated other comprehensive income” in the Consolidated Statements of Financial Position. Interest credited to contractholders is reflected in “Interest credited to policyholders’ account balances” on the Consolidated Statements of Operations.
Under the automatic rebalancing element, whenever funds are transferred back from the general account to the separate accounts, the general account liabilities are removed at stated contract value, which results in a decrease to the “policyholders’ account balances” within the Consolidated Statements of Financial Position. Market Value Adjustments (MVAs) are applied for certain products related to “policyholders’ account balances” to determine the amount of funds to be transferred to the separate account(s). The MVA adjustment is elected by a contractholder that chooses to either bear investment rate risks or receive an interest rate mark-to-market benefit upon transfer of contractholder assets from the general account to the separate account. For the Company’s products that use the automatic rebalancing element, the GRO rider (GMAB) employs the MVA adjustment feature while other products use a book value, with no market value adjustment approach. The MVA adjustment is recorded in “policy charges and fee income” on the Consolidated Statements of Operations. The “separate account assets” and “separate account liabilities” are increased within the Consolidated Statements of Financial Position by the amount of funds transferred from the general account. In addition, the sale of general account assets required to fund the transfers to the separate account(s) generates investment gains (losses) and are reported in “Realized investment gains (losses), net” on the Consolidated Statements of Operations.
Mr. Jim B. Rosenberg
U.S. Securities and Exchange Commission
May 1, 2009
Page 5
On pages 97 through 99 of the 2008 Form 10-K, within the MD&A for the Individual Annuities segment, the Company disclosed the impacts related to the automatic rebalancing element for the year ended December 31, 2008 compared to the year ended December 31, 2007. Specifically, approximately $10 billion of investments were transferred out of separate accounts and into the general account during 2008 related to the automatic rebalancing element, primarily due to equity market declines. The resulting increase in account values invested in our general account was the primary driver of a $220 million increase in net investment income and a $100 million increase in interest credited to policyholders’ account balances. Policy charges and fees and asset management fees and other income decreased $237 million due to a decline in variable annuity asset balances invested in separate accounts. About one third of this amount was driven by the automatic rebalancing element transfers, with the remaining amount resulting from market depreciation.
There were no material transfers back from the general account to the separate accounts related to the automatic rebalancing element and no material impact to the Consolidated Statements of Operations for MVA adjustments related to the automatic rebalancing element for the year ended December 31, 2008. The automatic rebalancing element did not have a material impact on results for the years ended December 31, 2007 or 2006.
Results of Operations for Financial Services Businesses by Segment
U.S. Retirement Solutions and Investment Management Division
Individual Annuities, page 95
6. Your operating results appear to be significantly affected by derivatives programs. Please expand your discussion and analysis to show the impact of these loss mitigation activities on your operating results, particularly minimum guarantees affecting your variable annuity products, for each period presented. Ensure that this disclosure is linked to Notes 9 and 19. Also, quantify the reasonably likely impact of continuing market volatility on the cost and effectiveness of your loss mitigation programs.
Response:
The Company acknowledges the staff’s comment to provide additional disclosure regarding the derivative loss mitigation activities relating to minimum guarantees affecting its variable annuity products. To address the staff’s comment, in future Form 10-Q and Form 10-K filings the Company will expand its disclosure to separately show the gross impacts of the embedded derivatives associated with its living benefits features and the related hedge positions. For example, disclosures around the net charge of $438 million related to our hedging results for 2008, included within the MD&A for the Individual Annuities segment in the second paragraph on page 97 of the 2008 Form 10-K, would be expanded to show the $2,932 million charge related to the change in the fair value of the embedded derivatives, and the $2,494 million benefit related to the change in the fair value of the related hedge positions.
Mr. Jim B. Rosenberg
U.S. Securities and Exchange Commission
May 1, 2009
Page 6
The $2,932 million increase in the fair value of the embedded derivative liabilities for the Individual Annuities segment in 2008 is included within the $3,061 million change in GMAB, GMWB and GMIWB liabilities disclosed within Note 9 on page 290 of the 2008 Form 10-K, together with similar liabilities related to the Company’s other segments. The $2,494 million increase in the fair value of the related hedge positions in 2008 is included within the $3,444 million change in non-qualifying interest rate hedges and $1,191 million change in non-qualifying equity hedges disclosed within Note 19 on page 339 of the 2008 Form 10-K, together with other non-qualifying hedges.
For 2008, the $2,494 million benefit related to the change in the fair value of the hedge positions effectively offset about 85% of the $2,932 million charge related to the change in the fair value of the embedded derivatives. All else being equal, the Company would expect its derivative loss mitigatio
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CORRESP 1 filename1.htm Response Letter Peter B. Sayre Senior Vice President and Controller 213 Washington Street, Newark NJ 07102-2917 Tel 973 802-6309 Fax 973 802-9065 May 1, 2009 Via EDGAR Mr. Jim B. Rosenberg Senior Assistant Chief Accountant Securities and Exchange Commission Division of Corporation Finance Mail Stop 6010 100 F Street, N.E. Washington, DC 20549 RE: Prudential Financial, Inc. (the “Company”) Definitive Proxy Statement on Schedule 14A, filed March 20, 2009 Form 10-K for the Fiscal Year Ended December 31, 2008 File No. 001-13958 Dear Mr. Rosenberg: We received your letter dated April 16, 2009, addressed to Richard J. Carbone, setting forth comments of the staff of the Securities and Exchange Commission (the “Commission”) on the Company’s Definitive Proxy Statement on Schedule 14A filed on March 20, 2009 and Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (the “2008 Form 10-K”). As previously indicated in our letter to you dated April 29, 2009, in order to allow for appropriate review, we intend to respond to the comments relating to the Definitive Proxy Statement separately. This letter responds only to the comments relating to the 2008 Form 10-K. For your convenience, we have included the staff’s comments below and have keyed our response accordingly. We have agreed as indicated in our response to enhance certain disclosures in future filings in order to address the staff’s comments. We are doing so in the spirit of cooperation with the staff, and any changes reflected in future filings should not be taken as an admission that prior disclosures were in any way deficient or inaccurate. Form 10-K for the Fiscal Year Ended December 31, 2008 Item 1A. Risk Factors, page 43 Ratings downgrades and changes in credit spreads may require us to post collateral, thereby affecting our liquidity…, page 50 3. You state that as you continue to underwrite term and universal life business you expect to have borrowing needs in 2009 to finance statutory reserves required under Regulation XXX and Guideline AXXX, but that based on current market conditions you may not be able to finance those needs. Please expand your risk factor and your “Liquidity and Capital Resources” section to quantify those 2009 borrowing needs. Mr. Jim B. Rosenberg U.S. Securities and Exchange Commission May 1, 2009 Page 2 Response: The Company acknowledges the staff’s comment to provide quantification of our estimated 2009 borrowing needs as it relates to financing statutory reserves required under Regulation XXX and Guideline AXXX. The Company intends to include disclosure in the Risk Factors and “Liquidity and Capital Resources” sections of its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009 as follows: As we continue to underwrite term and universal life business, we expect to have borrowing needs in 2009 to finance statutory reserves required under Regulation XXX and Guideline AXXX. Several strategies are currently under review to reduce the strain of increased AXXX and XXX statutory reserves associated with our term and universal life products. The activities we may undertake to mitigate or address these needs include obtaining letters of credit, entering into reinsurance transactions or executing other capital market strategies; however, our ability to successfully execute these strategies may depend on market conditions. Further, we have $300 million currently available under our XXX notes facility described above. Absent any successful mitigation efforts and assuming full usage of the XXX notes facility, we currently believe that our financing need for 2009 could be up to $xxx million for XXX and AXXX combined, but this amount may fluctuate due to changes in market conditions or product sales. If we are unsuccessful in satisfying or mitigating this strain as a result of market conditions or otherwise, this financing need could have an adverse effect on our overall liquidity and capital and could require us to increase prices and/or reduce our sales of term or universal life products. Management’s Discussion and Analysis of Financial Condition and Results of Operations Application of Critical Accounting Estimates Policyholder Liabilities Future Policy Benefit Reserves, other than Unpaid Claims and Claim Adjustment Expenses, page 82 4. Please expand your disclosure regarding the reserves for guaranteed minimum death and income benefits related to your variable annuity policies to discuss the methods and key assumptions as well as the historical and reasonably likely sensitivities inherent in these accounting estimates. Response: The Company acknowledges the staff’s comment to expand its disclosures within Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”), Application of Critical Accounting Estimates for Policyholder Liabilities to include disclosures regarding the methods and key assumptions used in accounting for the reserves for guaranteed minimum death and income benefits related to variable annuity policies. Mr. Jim B. Rosenberg U.S. Securities and Exchange Commission May 1, 2009 Page 3 Within Note 9 on pages 288 and 290 of the 2008 Form 10-K, the Company disclosed the methods and key assumptions used in accounting for the reserves for guaranteed minimum death and income benefits related to variable annuity policies. In particular, these disclosures indicated that in accounting for these reserves the Company must make estimates and assumptions about equity market returns, the timing of annuitization, contract lapses, and contractholder mortality. Further, as part of the MD&A for the Individual Annuities segment, on pages 96 through 98 of the 2008 Form 10-K, the Company disclosed that changes in actual and estimated equity markets returns and changes in assumptions around contract lapses were the primary drivers of reserve increases related to the annual review ($265 million), market performance adjustment ($337 million) and quarterly adjustments for current period experience ($93 million) related to these reserves. There was no material impact on the reserves for guaranteed minimum death and income benefits related to changes in these estimates and assumptions for the years ended December 31, 2007 or 2006. The Company will revise its disclosures in future Form 10-K filings to be similar to those included in Note 9 of the 2008 Form 10-K, as noted above. In addition, the Company will disclose in future Form 10-K filings any material impact on the reserves for guaranteed minimum death and income benefits of a hypothetical 100 basis point increase or decrease in the future rate of return assumption on assets held related to variable annuity products. This sensitivity reflects a near-term reasonably likely hypothetical change in equity market returns. 5. You refer to a feature in your variable annuity contracts, the automatic rebalancing element, whereby you transfer separate account assets to the general account in order to limit equity market risk. Please explain to us how this feature operates, particularly how you account for transfers between the separate account and general account and subsequent investment income generated by assets transferred to the general account under this feature. Ensure that your response quantifies the impact from this activity on general and separate account operating results for each period presented. Response: The Company acknowledges the staff’s comment to provide additional information regarding the automatic rebalancing element included in the design of certain variable annuity products. Within Item 1 on page 8 of the 2008 Form 10-K, the Company disclosed the operation of the automatic rebalancing element as follows: The automatic rebalancing element included in the design of certain variable annuity products transfers assets between contractholder sub-accounts depending on a number of factors, including the investment performance of the sub-accounts. Negative investment performance may result in transfers to either a fixed-rate general account option or a separate account bond portfolio. In certain situations, assets may transfer back when investment performance improves. Mr. Jim B. Rosenberg U.S. Securities and Exchange Commission May 1, 2009 Page 4 Under the automatic rebalancing element, when funds are transferred from a separate account to the general account, the “separate account assets” are removed at their market value (and the corresponding “separate account liability” is removed at its contract value, which equals market value) and the applicable general account assets (e.g. “fixed maturities - available-for-sale”) are increased with a corresponding increase in liabilities to “policyholders’ account balances”, within the Consolidated Statements of Financial Position. Funds transferred into the general account relating to the automatic rebalancing element are classified based on the type of asset purchased, and are generally reflected in “fixed maturities – available-for-sale.” Because the separate accounts are carried at market value and the transfer to the general account is at market value there is no impact to the Consolidated Statements of Operations from these transfers. The general account portion of variable annuity contracts are classified as universal life-type contracts and follow accounting prescribed by SFAS 97 (deposit accounting). Investment income generated by assets transferred to the general account under this feature is reflected in “Net investment income” on the Consolidated Statements of Operations. Investment gains (losses) on these general account assets are reported within “Realized investment gains (losses), net” on the Consolidated Statements of Operations. Mark-to-market adjustments on “fixed maturities - available for sale” are reflected in “Accumulated other comprehensive income” in the Consolidated Statements of Financial Position. Interest credited to contractholders is reflected in “Interest credited to policyholders’ account balances” on the Consolidated Statements of Operations. Under the automatic rebalancing element, whenever funds are transferred back from the general account to the separate accounts, the general account liabilities are removed at stated contract value, which results in a decrease to the “policyholders’ account balances” within the Consolidated Statements of Financial Position. Market Value Adjustments (MVAs) are applied for certain products related to “policyholders’ account balances” to determine the amount of funds to be transferred to the separate account(s). The MVA adjustment is elected by a contractholder that chooses to either bear investment rate risks or receive an interest rate mark-to-market benefit upon transfer of contractholder assets from the general account to the separate account. For the Company’s products that use the automatic rebalancing element, the GRO rider (GMAB) employs the MVA adjustment feature while other products use a book value, with no market value adjustment approach. The MVA adjustment is recorded in “policy charges and fee income” on the Consolidated Statements of Operations. The “separate account assets” and “separate account liabilities” are increased within the Consolidated Statements of Financial Position by the amount of funds transferred from the general account. In addition, the sale of general account assets required to fund the transfers to the separate account(s) generates investment gains (losses) and are reported in “Realized investment gains (losses), net” on the Consolidated Statements of Operations. Mr. Jim B. Rosenberg U.S. Securities and Exchange Commission May 1, 2009 Page 5 On pages 97 through 99 of the 2008 Form 10-K, within the MD&A for the Individual Annuities segment, the Company disclosed the impacts related to the automatic rebalancing element for the year ended December 31, 2008 compared to the year ended December 31, 2007. Specifically, approximately $10 billion of investments were transferred out of separate accounts and into the general account during 2008 related to the automatic rebalancing element, primarily due to equity market declines. The resulting increase in account values invested in our general account was the primary driver of a $220 million increase in net investment income and a $100 million increase in interest credited to policyholders’ account balances. Policy charges and fees and asset management fees and other income decreased $237 million due to a decline in variable annuity asset balances invested in separate accounts. About one third of this amount was driven by the automatic rebalancing element transfers, with the remaining amount resulting from market depreciation. There were no material transfers back from the general account to the separate accounts related to the automatic rebalancing element and no material impact to the Consolidated Statements of Operations for MVA adjustments related to the automatic rebalancing element for the year ended December 31, 2008. The automatic rebalancing element did not have a material impact on results for the years ended December 31, 2007 or 2006. Results of Operations for Financial Services Businesses by Segment U.S. Retirement Solutions and Investment Management Division Individual Annuities, page 95 6. Your operating results appear to be significantly affected by derivatives programs. Please expand your discussion and analysis to show the impact of these loss mitigation activities on your operating results, particularly minimum guarantees affecting your variable annuity products, for each period presented. Ensure that this disclosure is linked to Notes 9 and 19. Also, quantify the reasonably likely impact of continuing market volatility on the cost and effectiveness of your loss mitigation programs. Response: The Company acknowledges the staff’s comment to provide additional disclosure regarding the derivative loss mitigation activities relating to minimum guarantees affecting its variable annuity products. To address the staff’s comment, in future Form 10-Q and Form 10-K filings the Company will expand its disclosure to separately show the gross impacts of the embedded derivatives associated with its living benefits features and the related hedge positions. For example, disclosures around the net charge of $438 million related to our hedging results for 2008, included within the MD&A for the Individual Annuities segment in the second paragraph on page 97 of the 2008 Form 10-K, would be expanded to show the $2,932 million charge related to the change in the fair value of the embedded derivatives, and the $2,494 million benefit related to the change in the fair value of the related hedge positions. Mr. Jim B. Rosenberg U.S. Securities and Exchange Commission May 1, 2009 Page 6 The $2,932 million increase in the fair value of the embedded derivative liabilities for the Individual Annuities segment in 2008 is included within the $3,061 million change in GMAB, GMWB and GMIWB liabilities disclosed within Note 9 on page 290 of the 2008 Form 10-K, together with similar liabilities related to the Company’s other segments. The $2,494 million increase in the fair value of the related hedge positions in 2008 is included within the $3,444 million change in non-qualifying interest rate hedges and $1,191 million change in non-qualifying equity hedges disclosed within Note 19 on page 339 of the 2008 Form 10-K, together with other non-qualifying hedges. For 2008, the $2,494 million benefit related to the change in the fair value of the hedge positions effectively offset about 85% of the $2,932 million charge related to the change in the fair value of the embedded derivatives. All else being equal, the Company would expect its derivative loss mitigatio