Prudential 2015 Annual Report Download - page 23

In addition to the impact of mortality experience relative to our assumptions, other factors may also drive variability in amortization
expense, particularly when our annual assumption updates are performed. As noted above, however, the impact on our results of operations
of changes in these assumptions can be offsetting and we are unable to predict their movement or offsetting impact over time. In 2015,
updates to mortality assumptions drove the most significant changes to amortization expense. For a discussion of DAC adjustments related
to our Individual Life segment for the years ended December 31, 2015, 2014 and 2013, see “—Results of Operations by Segment—U.S.
Individual Life and Group Insurance Division—Individual Life.”
For the variable annuity contracts of our Individual Annuities segment, DAC and DSI are more sensitive to changes in our future rate
of return assumptions due primarily to the significant portion of our gross profits that is dependent upon the total rate of return on assets
held in separate account investment options. The DAC and DSI balances associated with our domestic variable annuity contracts were $4.9
billion and $1.2 billion, respectively, as of December 31, 2015. The following table provides a demonstration of the sensitivity of each of
these balances relative to our future rate of return assumptions by quantifying the adjustments to each balance that would be required
assuming both an increase and decrease in our future rate of return by 100 bps. The information below is for illustrative purposes only and
considers only the direct effect of changes in our future rate of return on the DAC and DSI balances and not changes in any other
assumptions such as persistency, mortality, or expenses included in our evaluation of DAC and DSI. Further, this information does not
reflect changes in reserves, such as the reserves for the guaranteed minimum death and optional living benefit features of our variable
annuity products, or the impact that changes in such reserves may have on the DAC and DSI balances.
December 31, 2015
Increase/
(Decrease) in DAC
Increase/
(Decrease) in DSI
(in millions)
Decrease in future rate of return by 100 bps ....................................................... $(196) $(76)
Increase in future rate of return by 100 bps ....................................................... $169 $70
In addition to the impact of market performance relative to our future rate of return assumptions, other factors may also drive
variability in amortization expense, particularly when our annual assumption updates are performed. As noted above, however, the impact
on our results of operations of changes in these assumptions can be offsetting and we are unable to predict their movement or offsetting
impact over time. In 2015, updates to projected interest rate assumptions and mapping of funds to related indices drove the most significant
changes to amortization expense. For a discussion of DAC and DSI adjustments related to our Individual Annuities segment for the years
ended December 31, 2015, 2014 and 2013, see “—Results of Operations by Segment—U.S. Retirement Solutions and Investment
Management Division—Individual Annuities.”
Value of Business Acquired
In addition to DAC and DSI, we also recognize an asset for value of business acquired (“VOBA”). VOBA is an intangible asset which
represents an adjustment to the stated value of acquired inforce insurance contract liabilities to present them at fair value, determined as of
the acquisition date. VOBA is amortized over the expected life of the acquired contracts in proportion to either gross premiums or
estimated gross profits, depending on the type of contract. VOBA is also subject to recoverability testing. As of December 31, 2015,
VOBA was $2.8 billion, and included $1.3 billion related to the acquisition from AIG of the Star and Edison Businesses on February 1,
2011, and $1.3 billion related to the acquisition of The Hartford Financial Services Group’s individual life insurance business (“the
Hartford Life Business”) on January 2, 2013. See Note 3 to the Consolidated Financial Statements for additional information on these
acquisitions. The remaining $0.2 billion primarily relates to previously-acquired traditional life, deferred annuity, defined contribution and
defined benefit businesses.
The VOBA associated with the Hartford Life Business is primarily amortized over the expected life of the acquired contracts in
proportion to estimates of gross profits. 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 are used to estimate
future death claims over the life of these policies and may be developed based on Company experience, industry experience and/or other
factors. 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. 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 following table provides a demonstration of
the sensitivity of that VOBA 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%. The information below is for illustrative purposes only and
considers only the direct effect of changes in our mortality assumptions on the VOBA balance, with no changes in any other assumptions
such as persistency, future rate of return, or expenses included in our evaluation of VOBA, and does not reflect changes in reserves.
December 31, 2015
Increase/(Decrease) in VOBA
(in millions)
Decrease in future mortality by 1% ...................................................................... $ 9
Increase in future mortality by 1% ...................................................................... $(10)
In addition to the impact of mortality experience relative to our assumptions, other factors may also drive variability in amortization
expense, particularly when our annual assumption updates are performed. As noted above, however, the impact on our results of operations
of changes in these assumptions can be offsetting and we are unable to predict their movement or offsetting impact over time. In 2015,
updates to investment-related assumptions drove the most significant changes to amortization expense. For a discussion of the drivers of
results related to our Individual Life segment for the years ended December 31, 2015, 2014 and 2013, see “—Results of Operations by
Segment—U.S. Individual Life and Group Insurance Division—Individual Life.”
Prudential Financial, Inc. 2015 Annual Report 21