Prudential 2015 Annual Report Download - page 15

U.S. Businesses
Financial and Economic Environment. Global market conditions and uncertainty continue to be factors in the markets in which we
operate. As discussed further under “Impact of a Low Interest Rate Environment” below, interest rates in the U.S. remain lower than
historical levels, which continue to negatively impact our portfolio income yields and our net investment spread results.
Regulatory Environment. See “Business—Regulation” included in Prudential Financial’s 2015 Annual Report on Form 10-K for a
discussion of regulatory developments that may impact the Company, including the Dodd-Frank Wall Street Reform and Consumer
Protection Act and the U.S. Department of Labor’s proposed fiduciary rules. See “Risk Factors—Regulatory and Legal Risks” included in
Prudential Financial’s 2015 Annual Report on Form 10-K for a discussion of the risks associated with these and other developments.
Demographics. Income protection, wealth accumulation and the needs of retiring baby boomers continue to shape the insurance
industry. Retirement security is one of the most critical issues in the U.S. for individuals and the investment professionals and institutions
that support them. The risk and responsibility of retirement savings continues to shift to employees, away from the government and
employers. Life insurance ownership among U.S. households remains low, with consumers citing other financial priorities and cost of
insurance as reasons for the lack of coverage.
Competitive Environment. See “Business—Competition,” “Business—U.S. Retirement Solutions and Investment Management
Division” and “Business—U.S. Individual Life and Group Insurance Division” included in Prudential Financial’s 2015 Annual Report on
Form 10-K for a discussion of the competitive environment and the basis on which we compete.
International Businesses
Financial and Economic Environment. Our international insurance operations, especially in Japan, continue to operate in a low
interest rate environment. Although the local market in Japan has adapted to the low interest rate environment, as discussed under “Impact
of a Low Interest Rate Environment” below, the current reinvestment yields for certain blocks of business in our international insurance
operations are now generally lower than the current portfolio yield supporting these blocks of business, which may negatively impact our
net investment spread results. The continued low interest rate environment in the U.S. may also impact the relative attractiveness of U.S.
dollar-denominated products to yen-denominated products in Japan. In addition, we are subject to financial impacts associated with
movements in foreign currency rates, particularly the Japanese yen. Fluctuations in the value of the yen will continue to impact the relative
attractiveness of both yen-denominated and non-yen denominated products.
Regulatory Environment. See “Business—Regulation” and “Risk Factors—Regulatory and Legal Risks” included in Prudential
Financial’s 2015 Annual Report on Form 10-K for a discussion of regulatory developments that may impact the Company and associated
risks.
Demographics. Japan has an aging population as well as a large pool of household assets invested in low-yielding deposit and
savings vehicles. The aging of Japan’s population, along with strains on government pension programs, have led to a growing demand for
insurance products with a significant savings element to meet savings and retirement needs as the population prepares for retirement. We
are seeing a similar shift to retirement-oriented products across Asian markets, including Korea and Taiwan, each of which also has an
aging population.
Competitive Environment. See “Business—Competition,” and “Business—International Insurance Division” included in Prudential
Financial’s 2015 Annual Report on Form 10-K for a discussion of the competitive environment and the basis on which we compete.
Impact of a Low Interest Rate Environment
U.S. Operations excluding the Closed Block Division
Interest rates in the U.S. continue to remain lower than historical levels, despite the Federal Reserve Board’s decision to raise short-
term interest rates in December 2015. Our current reinvestment yields continue to be lower than the overall portfolio yield, primarily for
our investments in fixed maturity securities and commercial mortgage loans.
For the general account supporting our U.S. Retirement Solutions and Investment Management division, our U.S. Individual Life and
Group Insurance division and our Corporate and Other operations, we expect annual scheduled payments and prepayments to be
approximately 10% of the fixed maturity security and commercial mortgage loan portfolios through 2017. The general account for these
operations has approximately $168 billion of such assets (based on net carrying value) as of December 31, 2015. As these assets mature,
the current average portfolio yield for fixed maturities and commercial mortgage loans of approximately 4.5%, as of December 31, 2015, is
expected to decline due to reinvesting in a lower interest rate environment. Included in the $168 billion of fixed maturity securities and
commercial mortgage loans are approximately $83 billion that are subject to call or redemption features at the issuer’s option and have a
weighted average interest rate of approximately 5%.
As of December 31, 2015, approximately 75% of these assets contain provisions for prepayment premiums. The reinvestment of
scheduled payments and prepayments at rates below the current portfolio yield, including in some cases at rates below those guaranteed
under our insurance contracts, will impact future operating results to the extent we do not, or are unable to, reduce crediting rates on in
force blocks of business, or effectively utilize other asset/liability management strategies described below, in order to maintain current net
interest margins.
Prudential Financial, Inc. 2015 Annual Report 13