Prudential 2011 Annual Report Download - page 26

termination factors are based on standard industry tables and the Company’s historical experience. Our interest rate assumptions are based
on factors such as market conditions and expected investment returns. Of these assumptions, our claim termination assumptions have
historically had the most significant effect on our level of liability. We review our claim termination assumptions compared to actual
terminations annually. These studies review actual claim termination experience over a number of years with more weight placed on the
actual experience in the more recent years. Recently, our claim termination experience has been impacted by increased volatility driven by
the economic downturn. If actual experience results in a different assumption, we adjust our liability for unpaid claims and claims
adjustment expenses accordingly with a charge or credit to current period earnings.
Unearned revenue reserves for universal life and investment contracts
Our unearned revenue reserve, or URR, reported as a component of “Policyholders’ account balances,” is $1.7 billion as of
December 31, 2011. This reserve primarily relates to variable and universal life products within our Individual Life segment and represents
policy charges for services to be provided in future periods. The charges are deferred as unearned revenue and amortized over the expected
life of the contract in proportion to the product’s estimated gross profits, similar to DAC as discussed above.
For the variable and universal life policies of our Individual Life segment, a significant portion of our gross profits is derived from
mortality margins. As a result, our estimates of future gross profits are significantly influenced by our mortality assumptions. Our mortality
assumptions represent our expected claims experience over the life of these policies and are developed based on Company experience or
standard industry tables. Unless a material change in mortality experience that we feel is indicative of a long term trend is observed in an
interim period, we generally update our mortality assumptions annually in the third quarter. Updates to our mortality assumptions in future
periods could have a significant adverse or favorable effect on the results of our operations in the Individual Life segment.
The URR balance associated with the variable and universal life policies of our Individual Life segment as of December 31, 2011 was
$1.0 billion. The following table provides a demonstration of the sensitivity of that URR balance relative to our future mortality
assumptions by quantifying the adjustments that would be required, assuming both an increase and decrease in our future mortality rate by
1%. While the information below is for illustrative purposes only and does not reflect our expectations regarding future mortality
assumptions, it is a near-term, reasonably likely hypothetical change that illustrates the potential impact of such a change on the URR
balance and does not reflect the offsetting impact of such a change on the DAC balance as discussed above in “—Deferred Policy
Acquisition and Other Costs.” This information considers only the direct effect of changes in our mortality assumptions on the URR
balance and not changes in any other assumptions such as persistency, future rate of return, or expenses included in our evaluation of URR.
December 31, 2011
Increase/(Reduction) in URR
(in millions)
Decrease in future mortality by 1% ...................................................................... $28
Increase in future mortality by 1% ....................................................................... $(28)
For a discussion of URR 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.”
Pension and Other Postretirement Benefits
We sponsor pension and other postretirement benefit plans covering employees who meet specific eligibility requirements. Our net
periodic costs for these plans consider an assumed discount (interest) rate, an expected rate of return on plan assets and expected increases
in compensation levels and trends in health care costs. Of these assumptions, our expected rate of return assumptions, and to a lesser extent
our discount rate assumptions, have historically had the most significant effect on our net period costs associated with these plans.
We determine our expected rate of return on plan assets based upon a building block approach that considers inflation, real return,
term premium, credit spreads, equity risk premium and capital appreciation as well as expenses, expected asset manager performance and
the effect of rebalancing for the equity, debt and real estate asset mix applied on a weighted average basis to our pension asset portfolio.
See Note 18 to our Consolidated Financial Statements for our actual asset allocations by asset category and the asset allocation ranges
prescribed by our investment policy guidelines for both our pension and other postretirement benefit plans. Our assumed long-term rate of
return for 2011 was 7.00% for our pension plans and 7.00% for our other postretirement benefit plans. Given the amount of plan assets as
of December 31, 2010, the beginning of the measurement year, if we had assumed an expected rate of return for both our pension and other
postretirement benefit plans that was 100 basis points higher or 100 basis points lower than the rates we assumed, the change in our net
periodic costs would have been as shown in the table below. The information provided in the table below considers only changes in our
assumed long-term rate of return given the level and mix of invested assets at the beginning of the measurement year, without consideration
of possible changes in any of the other assumptions described above that could ultimately accompany any changes in our assumed long-
term rate of return.
For the year ended December 31, 2011
Increase/(Decrease) in Net
Periodic Pension Cost
Increase/(Decrease) in
Net Periodic Other
Postretirement Cost
(in millions)
Increase in expected rate of return by 100 basis points .................................... $(101) $(14)
Decrease in expected rate of return by 100 basis points ................................... $101 $14
24 Prudential Financial, Inc. 2011 Annual Report