Prudential 2015 Annual Report Download - page 17

International Insurance Operations
While our international insurance operations have experienced a low interest rate environment for many years, the current
reinvestment yields for certain blocks of business in our largest insurance operations are generally lower than the current portfolio yield
supporting these blocks of business. For example, if interest rates on investments supporting our Japanese operations, including those sold
in currencies other than Japanese yen, remain below the current yield on investments supporting these blocks of business, reinvestment at
such rates will negatively impact future operating results. As of December 31, 2015, our Japanese operations have $121 billion of insurance
liabilities and policyholder account balances. Included in the $121 billion is approximately $21 billion related to contracts that impose a
market value adjustment if the invested amount is not held to maturity, and $8 billion of insurance liabilities and policyholder account
balances with crediting rates that may be adjusted over the life of the contract, subject to guaranteed minimums. However, for these
contracts, most of the current crediting rates are at or near contractual minimums. Although we have the ability to lower crediting rates in
some cases for those contracts that are above guaranteed minimum crediting rates, the majority of this business has interest crediting rates
that are determined by formula. The remaining $92 billion of insurance liabilities and policyholder account balances are predominantly
comprised of long-duration 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. Our international insurance operations employ a proactive asset/liability management
program in order to mitigate, to the extent possible, the unfavorable impact that the current interest rate environment has on our net interest
margins. This asset/liability management program includes strategies similar to those described above for U.S. insurance operations
excluding the Closed Block division.
Outlook
Management expects that results in 2016 will continue to reflect the quality of our individual businesses and their prospects, as well as
our overall business mix and effective capital management. We also expect our results to continue to reflect the impacts of product
diversification strategies we have implemented over the last few years, particularly in our Individual Annuities and Individual Life
businesses, and to include seasonally-higher expenses in the fourth quarter and seasonally-lower international insurance income in the
second half of the year. Our strategic initiatives will continue to focus on growth opportunities, enhanced capital and risk management, and
further developing our digital, data and infrastructure capabilities and cross-business synergies. In addition, initiatives for each of our
divisions include the following:
•U.S. Retirement and Investment Management Market. We will continue to seek to capitalize on the growing need of baby
boomers for products that provide guaranteed income for longer retirement periods, and to focus on our clients’ increasing needs for
retirement income security. We will also seek to provide products that respond to the needs of plan sponsors to manage risk and
control their benefit costs, while ensuring we maintain appropriate pricing and return expectations under changing market
conditions. In addition, in 2016, we expect to recapture the risks related to our variable annuity living benefit riders that were
previously reinsured to a captive reinsurance company, and begin managing all of the product risks associated with our variable
annuities in our statutory insurance entities. We expect this recapture to reduce the capital volatility associated with our Individual
Annuities business.
•U.S. Insurance Market. We will continue to focus on writing high-quality business and expect to continue to benefit from
expansion of our distribution channels and deepening our relationships with third-party distributors. In our Individual Life business,
we expect to continue to work with regulators on long-term solutions to finance new statutory reserve requirements for our term and
universal life policies. We will also seek to capitalize on opportunities for additional voluntary life purchases in the group insurance
market, as institutional clients are focused on controlling their benefit costs.
•International Markets. We will continue to concentrate on deepening our presence in the markets in which we currently operate,
such as Japan, and expanding our distribution capabilities in emerging markets. We will also seek to capitalize on opportunities
arising in international markets as changing demographics and public policy continue to contribute to a growing demand for
retirement income products. In particular, in 2016, we expect to close on our acquisition of an indirect ownership interest in
Administradora de Fondos de Pensiones Habitat S.A. (“AFP Habitat”), a leading provider of retirement services in Chile. We also
plan to create a presence in Africa by investing in a private equity fund that will primarily invest in African life insurers over the
next three to five years.
Results of Operations
Net income attributable to Prudential Financial, Inc. for the year ended December 31, 2015 was $5,642 million compared to $1,381
million for the year ended December 31, 2014 and a net loss of $(667) million for the year ended December 31, 2013.
We analyze performance of our segments and Corporate and Other operations using a measure called adjusted operating income. As
discussed in “—Overview,” for the year ended December 31, 2015, the Closed Block division is accounted for as a divested business under
our definition of adjusted operating income. For the years ended December 31, 2014 and 2013, the former Closed Block Business was
analyzed using accounting principles generally accepted in the United States of America (“U.S. GAAP”). Under both the current reporting
for the Closed Block division and the former reporting for the Closed Block Business, its results are excluded from adjusted operating
income. See “—Consolidated Results of Operations—Segment Measures” for a discussion of adjusted operating income and its use as a
measure of segment operating performance.
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