Prudential 2015 Annual Report Download - page 188

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
The significant inputs to the valuation models for these embedded derivatives include capital market assumptions, such as interest rate
levels and volatility assumptions, the Company’s market-perceived NPR, as well as actuarially determined assumptions, including
contractholder behavior, such as lapse rates, benefit utilization rates, withdrawal rates, and mortality rates. Since many of these
assumptions are unobservable and are considered to be significant inputs to the liability valuation, the liability included in future policy
benefits has been reflected within Level 3 in the fair value hierarchy.
Capital market inputs and actual policyholders’ account values are updated each quarter based on capital market conditions as of the
end of the quarter, including interest rates, equity markets and volatility. In the risk neutral valuation, the initial swap curve drives the total
return used to grow the policyholders’ account values. The Company’s discount rate assumption is based on the LIBOR swap curve
adjusted for an additional spread relative to LIBOR to reflect NPR.
Actuarial assumptions, including contractholder behavior and mortality, are reviewed at least annually, and updated based upon
emerging experience, future expectations and other data, including any observable market data. These assumptions are generally updated
annually unless a material change that the Company feels is indicative of a long term trend is observed in an interim period.
Transfers between Levels 1 and 2—Overall, transfers between levels are made to reflect changes in observability of inputs and
market activity. Transfers into or out of any level are generally reported as the value as of the beginning of the quarter in which the
transfers occur for any such assets still held at the end of the quarter. Periodically there are transfers between Level 1 and Level 2 for assets
held in the Company’s Separate Account. The fair value of foreign common stock held in the Company’s Separate Account may reflect
differences in market levels between the close of foreign trading markets and the close of U.S. trading markets for the respective day.
Dependent on the existence of such a timing difference, the assets may move between Level 1 and Level 2. During the year ended
December 31, 2015, $0.2 billion were transferred from Level 1 to Level 2 and $0.2 billion were transferred from Level 2 to Level 1. During
the year ended December 31, 2014, $2.1 billion were transferred from Level 1 to Level 2 and $0.1 billion were transferred from Level 2 to
Level 1.
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, 2015
Internal(1) External(2) Total
(in millions)
Obligations of U.S. states and their political subdivisions ............................................... $ 6 $ 0 $ 6
Foreign government bonds ....................................................................... 0 157 157
Corporate securities(3) .......................................................................... 1,085 340 1,425
Asset-backed securities(4) ....................................................................... 149 4,495 4,644
Commercial mortgage-backed securities ............................................................ 5 36 41
Residential mortgage-backed securities ............................................................. 37 150 187
Equity securities ............................................................................... 63 792 855
Other long-term investments ..................................................................... 33 1,347 1,380
Other assets ................................................................................... 12 0 12
Subtotal excluding separate account assets(3) .................................................... 1,390 7,317 8,707
Separate account assets .......................................................................... 26,326 1,330 27,656
Total assets ............................................................................... $27,716 $8,647 $36,363
Future policy benefits ........................................................................... $ 8,434 $ 0 $ 8,434
Other liabilities ................................................................................ 2 0 2
Notes issued by consolidated VIEs ................................................................. 0 8,597 8,597
Total liabilities ............................................................................ $ 8,436 $8,597 $17,033
As of December 31, 2014
Internal(1) External(2) Total
(in millions)
Obligations of U.S. states and their political subdivisions ............................................... $ 6 $ 0 $ 6
Foreign government bonds ....................................................................... 0 23 23
Corporate securities(3) .......................................................................... 752 675 1,427
Asset-backed securities(4) ....................................................................... 150 4,302 4,452
Commercial mortgage-backed securities ............................................................ 10 38 48
Residential mortgage-backed securities ............................................................. 57 203 260
Equity securities ............................................................................... 140 798 938
Other long-term investments ..................................................................... 1 1,546 1,547
Other assets ................................................................................... 9 0 9
Subtotal excluding separate account assets(3) .................................................... 1,125 7,585 8,710
Separate account assets .......................................................................... 23,632 1,030 24,662
Total assets ............................................................................... $24,757 $8,615 $33,372
Future policy benefits ........................................................................... $ 8,182 $ 0 $ 8,182
Other liabilities ................................................................................ 2 3 5
Notes issued by consolidated VIEs ................................................................. 0 6,033 6,033
Total liabilities ............................................................................ $ 8,184 $6,036 $14,220
186 Prudential Financial, Inc. 2015 Annual Report