Prudential 2011 Annual Report Download - page 22

For a discussion of DAC adjustments related to our Individual Life segment for the years ended December 31, 2011, 2010 and 2009,
see “—Results of Operations for Financial Services Businesses by Segment—U.S. Individual Life and Group Insurance Division—
Individual Life.”
For variable annuity contracts, DAC and DSI are more sensitive to changes in our future rate of return assumptions due primarily to
the significant portion of our gross profits that is dependent upon the total rate of return on assets held in separate account investment
options, and the shorter average life of the contracts. The DAC and DSI balances associated with our domestic variable annuity contracts
were $2.7 billion and $1.0 billion, respectively, as of December 31, 2011. The following table provides a demonstration of the sensitivity of
each of these balances relative to our future rate of return assumptions by quantifying the adjustments to each balance that would be
required assuming both an increase and decrease in our future rate of return by 100 basis points. The sensitivity includes an increase and
decrease of 100 basis points to both the near-term future rate of return assumptions used over the next four years, and the long-term
expected rate of return used thereafter. While the information below is for illustrative purposes only and does not reflect our expectations
regarding future rate of return assumptions, it is a near-term, reasonably likely hypothetical change that illustrates the potential impact of
such a change. This information considers only the direct effect of changes in our future rate of return on the DAC and DSI balances and
not changes in any other assumptions such as persistency, mortality, or expenses included in our evaluation of DAC and DSI. Further, this
information does not reflect changes in reserves, such as the reserves for the guaranteed minimum death and optional living benefit features
of our variable annuity products, or the impact that changes in such reserves may have on the DAC and DSI balances.
December 31, 2011
Increase/(Reduction) in DAC(1) Increase/(Reduction) in DSI
(in millions)
Decrease in future rate of return by 100 basis points ............................ $(67) $(27)
Increase in future rate of return by 100 basis points ............................. $62 $26
(1) The sensitivity balances reflected in the table are based on DAC accounting guidance as of December 31, 2011. As noted previously, new authoritative
guidance was adopted effective January 1, 2012, which will reduce our DAC balances and corresponding sensitivities.
For a discussion of DAC and DSI adjustments related to our Individual Annuities segment for the years ended December 31, 2011,
2010 and 2009, see “—Results of Operations for Financial Services Businesses by Segment—U.S. Retirement Solutions and Investment
Management Division—Individual Annuities.”
Value of Business Acquired
In addition to DAC and DSI, we also recognize an asset for value of business acquired, or VOBA. VOBA includes an explicit
adjustment to reflect the cost of capital attributable to the acquired insurance contracts, and represents an adjustment to the stated value of
inforce insurance contract liabilities to present them at fair value, determined as of the acquisition date. As of December 31, 2011, VOBA
was $3,845 million, and included $3,490 million related to the acquisition from AIG of the Star and Edison Businesses on February 1,
2011. See Note 3 for additional information on the acquisition from AIG of the Star and Edison Businesses. The remaining $355 million
relates to previously-acquired traditional life, deferred annuity, defined contribution and defined benefit businesses. VOBA is amortized
over the effective life of the acquired contracts. For additional information about VOBA including details on items included in our
estimates of future cash flows for the various acquired businesses and its bases for amortization, see Note 2 and Note 8 to the Consolidated
Financial Statements. VOBA is also subject to recoverability testing at the end of each reporting period to ensure that the balance does not
exceed the present value of anticipated gross profits. Based on this recoverability testing, in 2009 we impaired the entire remaining VOBA
asset related to the variable annuity contracts acquired from Allstate. For additional information regarding this charge, see “—Results of
Operations for Financial Services Businesses by Segment—U.S. Retirement Solutions and Investment Management Division—Individual
Annuities.”
Goodwill
As of December 31, 2011, our goodwill balance of $888 million is reflected in the following four reporting units: $444 million related
to our Retirement Full Service business, $238 million related to our Asset Management business, $184 million related to our International
Insurance Gibraltar business and $22 million related to our International Insurance Life Planner business.
We test goodwill for impairment on an annual basis as of December 31 of each year and more frequently if events occur or
circumstances change that would indicate the potential for impairment is more likely than not. The test is performed at the reporting unit
level which is equal to or one level below our operating segments.
Accounting guidance allows a reporting unit to perform a qualitative assessment to determine if its goodwill is impaired. Factors such
as macroeconomic conditions; industry and market considerations; cost factors; and others are used to assess the validity of the goodwill. If
it is determined that the reporting unit’s fair value is not more likely than not below its carrying amount (equity attributed to a business to
support its risk), the test is complete and no impairment is recorded. If this assertion cannot be made, a quantitative analysis must be
performed. A reporting unit may bypass the qualitative analysis and begin their impairment analysis with the quantitative calculation. This
option is unconditional and a reporting unit may resume performing the qualitative assessment in any subsequent period.
The quantitative analysis consists of two steps. Step 1 requires that the fair value of the reporting unit be calculated and compared to
the reporting unit’s carrying value. If the fair value is greater than the carrying value, it is concluded there is no impairment and the analysis
is complete. If the fair value is less than the carrying value, Step 2 of the process is completed to determine the amount of impairment, if
any. Step 2 utilizes business combination acquisition accounting guidance and requires the fair value calculation of all individual assets and
liabilities of the reporting unit (excluding goodwill, but including any unrecognized intangible assets). The net fair value of assets less
20 Prudential Financial, Inc. 2011 Annual Report