Prudential 2012 Annual Report Download - page 189

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
20. FAIR VALUE OF ASSETS AND LIABILITIES (continued)
Level 3 Assets and Liabilities by Price Source—The table below presents the balances of Level 3 assets and liabilities measured at
fair value with their corresponding pricing sources.
As of December 31, 2012
Internal(1) External(2) Total
(in millions)
U.S. Treasury securities and obligations of U.S. government authorities and agencies ......................... $ 0 $ 0 $ 0
Foreign government bonds ....................................................................... 0 0 0
Corporate securities ............................................................................ 889 875 1,764
Asset-backed securities .......................................................................... 338 3,796 4,134
Commercial mortgage-backed securities ............................................................ 68 64 132
Residential mortgage-backed securities ............................................................. 3 10 13
Equity securities ............................................................................... 101 1,327 1,428
Commercial mortgage and other loans .............................................................. 48 0 48
Other long-term investments ..................................................................... 9 1,044 1,053
Other assets ................................................................................... 33 0 33
Subtotal excluding separate account assets(3) .................................................... 1,489 7,116 8,605
Separate account assets .......................................................................... 20,422 710 21,132
Total assets ............................................................................... $21,911 $7,826 $29,737
Future policy benefits ........................................................................... $ 3,348 $ 0 $ 3,348
Other liabilities and notes of consolidated VIEs ....................................................... 0 1,406 1,406
Total liabilities ............................................................................ $ 3,348 $1,406 $ 4,754
(1) Represents valuations reflecting both internally-derived and market inputs, as well as third-party pricing information or quotes. See below for additional
information related to internally-developed valuation for significant items in the above table.
(2) Represents unadjusted prices from independent pricing services and independent indicative broker quotes where pricing inputs are not readily available.
(3) Includes assets classified as fixed maturities available-for-sale, trading account assets supporting insurance liabilities and other trading account assets.
Quantitative Information Regarding Internally-Priced Level 3 Assets and Liabilities—The table below presents quantitative
information on significant internally-priced Level 3 assets and liabilities for which the investment risks associated with market value
changes are borne by the Company.
As of December 31, 2012
Fair Value
Valuation
Techniques Unobservable Inputs Range (Weighted Average)
Impact of
Increase in
Input on
Fair
Value(1)
(in millions)
Assets:
Corporate securities ................... $ 889 Discounted cash flow Discount rate 1.7% – 17.5% (9.92%) Decrease
Market comparables EBITDA multiples(2) 5.0X – 8.5X (6.2X) Increase
Cap at call price Call price 100% –101% (100.24%) Increase
Liquidation Liquidation value 49% – 100% (83.06%) Increase
Asset-backed securities ................ $ 338 Discounted cash flow Prepayment rate(3) 2.8% – 29% (9.84%) Increase
Default rate(3) 0.5% – 2.52% (0.84%) Decrease
Loss severity(3) 35% – 43.88% (35.76%) Decrease
Liquidity premium 1.0% – 2.50% (1.83%) Decrease
Average life (years) 0.1 years – 15 years (5.61 years) Increase
Comparable spreads 0.1% – 20% (2.81%) Decrease
Comparable security yields 0.4% – 15% (7.59%) Decrease
Liabilities:
Future policy benefits ................. $3,348 Discounted cash flow Lapse rate(4) 0% – 14% Decrease
NPR spread(5) 0.20% – 1.60% Decrease
Utilization rate(6) 70% – 94% Increase
Withdrawal rate(7) 85% – 100% Increase
Mortality rate(8) 0% – 13% Decrease
Equity volatility curve 19% – 34% Increase
(1) Conversely, the impact of a decrease in input would have the opposite impact for the fair value as that presented in the table.
(2) EBITDA multiples represent multiples of earnings before interest, taxes, depreciation and amortization, and are amounts used when the reporting entity
has determined that market participants would use such multiples when pricing the investments.
(3) In isolation, an increase in prepayment rate or a decrease in default rate or loss severity would generally result in an increase in fair value, although the
interrelationships between these inputs depend on specific market conditions.
(4) Base lapse rates are adjusted at the contract level based on a comparison of the actuarially calculated guaranteed amount and the current policyholder
account value as well as other factors, such as the applicability of any surrender charges. A dynamic lapse adjustment reduces the base lapse rate when
the guaranteed amount is greater than the account value, as in-the-money contracts are less likely to lapse. Lapse rates are also generally assumed to be
lower for the period where surrender charges apply.
Prudential Financial, Inc. 2012 Annual Report 187