Prudential 2015 Annual Report Download - page 16

As of December 31, 2015, these operations have approximately $171 billion of insurance liabilities and policyholder account balances.
Of this amount, approximately $52 billion represents contracts with crediting rates that may be adjusted over the life of the contract, subject
to guaranteed minimums. Although we may have the ability to lower crediting rates for those contracts above guaranteed minimums, our
willingness to do so may be limited by competitive pressures.
The following table sets forth the related account values by range of guaranteed minimum crediting rates and the related range of the
difference, in basis points (“bps”), between rates being credited to contractholders as of December 31, 2015, and the respective guaranteed
minimums.
Account Values with Adjustable Crediting Rates
Subject to Guaranteed Minimums:
At
guaranteed
minimum
1-49
bps above
guaranteed
minimum
50 - 99
bps above
guaranteed
minimum
100 - 150
bps above
guaranteed
minimum
Greater than
150
bps above
guaranteed
minimum Total
($ in billions)
Range of Guaranteed Minimum Crediting Rates:
Less than 1.00% ........................................... $ 0.7 $ 0.5 $0.4 $0.0 $0.0 $ 1.6
1.00%—1.99% ............................................ 1.5 9.0 5.8 0.9 0.1 17.3
2.00%—2.99% ............................................ 2.3 0.2 1.8 0.6 0.3 5.2
3.00%—4.00% ............................................ 26.2 0.8 0.2 0.2 0.0 27.4
Greater than 4.00% ......................................... 0.8 0.0 0.0 0.0 0.0 0.8
Total .................................................... $31.5 $10.5 $8.2 $1.7 $0.4 $52.3
Percentage of total ......................................... 60% 20% 16% 3% 1% 100%
Also included in the table above is approximately $1.4 billion related to contracts that impose a market value adjustment if the
invested amount is not held to maturity.
These operations also have approximately $15 billion of insurance liabilities and policyholder account balances representing
participating contracts for which the investment income risk is expected to ultimately accrue to contractholders. The crediting rates for
these contracts are periodically adjusted based on the yield earned on the related assets. The remaining $104 billion of the $171 billion of
insurance liabilities and policyholder account balances in these operations represents long-duration products such as group annuities,
structured settlements and other insurance products that have fixed and guaranteed terms, for which underlying assets may have to be
reinvested at interest rates that are lower than portfolio rates. We seek to mitigate the impact of a prolonged low interest rate environment
on these contracts through asset/liability management, as discussed further below.
Assuming a hypothetical scenario where the average 10-year U.S. Treasury rate is 2.25% for the period from January 1, 2016 through
December 31, 2017, and credit spreads remain unchanged from levels as of December 31, 2015, we estimate that the unfavorable impact to
net interest margins included in pre-tax adjusted operating income of reinvesting in such an environment, compared to reinvesting at
current average portfolio yields, would be approximately $20 million in 2016 and $55 million in 2017. This impact is most significant in
the Retirement, Individual Life and Individual Annuities segments. This hypothetical scenario only reflects the impact related to the
approximately $52 billion of contracts shown in the table above, and does not reflect: i) any benefit from potential changes to the crediting
rates on the corresponding contractholder liabilities where the Company has the contractual ability to do so, or other potential mitigants
such as changes in investment mix that we may implement as funds are reinvested; ii) any impact related to assets that do not directly
support our liabilities; iii) any impact from other factors, including but not limited to, new business, contractholder behavior, changes in
competitive conditions, and changes in capital markets; or iv) any impact from other factors described below.
In order to mitigate the unfavorable impact that the current interest rate environment has on our net interest margins, we employ a
proactive asset/liability management program, which includes strategic asset allocation and derivative strategies within a disciplined risk
management framework. These strategies seek to match the characteristics of our products, and to closely approximate the interest rate
sensitivity of the assets with the estimated interest rate sensitivity of the product liabilities. Our asset/liability management program also
helps manage duration gaps, currency and other risks between assets and liabilities through the use of derivatives. We adjust this dynamic
process as products change, as customer behavior changes and as changes in the market environment occur. As a result, our asset/liability
management process has permitted us to manage the interest rate risk associated with our products through several market cycles. Our
interest rate exposure is also mitigated by our business mix, which includes lines of business for which fee-based and insurance
underwriting earnings play a more prominent role in product profitability.
Closed Block Division
Substantially all of the $60 billion of general account assets in the Closed Block division support obligations and liabilities relating to
the Closed Block policies only. See Note 12 to the Consolidated Financial Statements for further information on the Closed Block.
14 Prudential Financial, Inc. 2015 Annual Report