Prudential 2012 Annual Report Download - page 25

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, 2012 was
$0.8 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, 2012
Increase/(Reduction) in URR
(in millions)
Decrease in future mortality by 1% ...................................................................... $32
Increase in future mortality by 1% ....................................................................... $(32)
For a discussion of URR adjustments related to our Individual Life segment for the years ended December 31, 2012, 2011, and 2010,
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 2012 was 6.75% for our domestic pension plans and 7.00% for our other postretirement benefit plans. Given the amount of plan
assets as of December 31, 2011, 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, 2012
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 ............................. $(117) $(13)
Decrease in expected rate of return by 100 basis points ............................ $117 $13
We determine our discount rate, used to value the pension and postretirement benefit obligations, based upon rates commensurate with
current yields on high quality corporate bonds. See Note 18 to our Consolidated Financial Statements for information regarding the
December 31, 2011 methodology we employed to determine our discount rate for 2012. Our assumed discount rate for 2012 was 4.85% for
our domestic pension plans and 4.60% for our other postretirement benefit plans. Given the amount of pension and postretirement
obligations as of December 31, 2011, the beginning of the measurement year, if we had assumed a discount rate 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 discount rate without consideration of possible changes in any of the other assumptions described above that could ultimately
accompany any changes in our assumed discount rate.
For the year ended December 31, 2012
Increase/(Decrease) in Net
Periodic Pension Cost
Increase/(Decrease) in Net
Periodic Other Postretirement
Cost
(in millions)
Increase in discount rate by 100 basis points ..................................... $ 8 $(4)
Decrease in discount rate by 100 basis points .................................... $18 $1
Given the application of the authoritative guidance for accounting for pensions, and the deferral and amortization of actuarial gains
and losses arising from changes in our assumed discount rate, the change in net periodic pension cost arising from an increase in the
assumed discount rate by 100 basis points would not be expected to equal the change in net periodic pension cost arising from a decrease in
the assumed discount rate by 100 basis points.
Prudential Financial, Inc. 2012 Annual Report 23