Prudential 2015 Annual Report Download - page 25

determination of fair value of fixed maturity and equity securities, as well as derivative instruments, embedded derivatives and other
investments, see Note 20 to the Consolidated Financial Statements and “—Valuation of Assets and Liabilities—Fair Value of Assets and
Liabilities.”
For our investments classified as available-for-sale, the impact of changes in fair value is recorded as an unrealized gain or loss in
accumulated other comprehensive income (loss) (“AOCI”), a separate component of equity. For our investments classified as trading, the
impact of changes in fair value is recorded within “Other income.” In addition, investments classified as available-for-sale, as well as those
classified as held-to-maturity, are subject to impairment reviews to identify when a decline in value is other-than-temporary. For a
discussion of our policies regarding other-than-temporary declines in investment value and the related methodology for recording other-
than-temporary impairments of fixed maturity and equity securities, see Note 2 to the Consolidated Financial Statements.
Commercial mortgage and other loans are carried primarily at unpaid principal balances, net of unamortized deferred loan origination
fees and expenses and unamortized premiums or discounts and a valuation allowance for losses. For a discussion of our policies regarding
the valuation allowance for commercial mortgage and other loans, see Note 2 to the Consolidated Financial Statements.
Policyholder Liabilities
Future Policy Benefit Reserves, including Unpaid Claims and Claim Adjustment Expenses
We establish reserves for future policy benefits to, or on behalf of, policyholders in the same period in which the policy is issued or
acquired, using methodologies prescribed by U.S. GAAP. The reserving methodologies used include the following:
• For most long-duration contracts, we utilize best estimate assumptions as of the date the policy is issued or acquired with provisions
for the risk of adverse deviation, as appropriate. After the liabilities are initially established, we perform premium deficiency tests
using best estimate assumptions as of the testing date without provisions for adverse deviation. If the liabilities determined based on
these best estimate assumptions are greater than the net reserves (i.e., GAAP reserves net of any DAC, DSI or VOBA asset), the
existing net reserves are adjusted by first reducing these assets by the amount of the deficiency or to zero through a charge to
current period earnings. If the deficiency is more than these asset balances for insurance contracts, we then increase the net reserves
by the excess, again through a charge to current period earnings. If a premium deficiency is recognized, the assumptions as of the
premium deficiency test date are locked in and used in subsequent valuations.
• For certain reserves, such as our contracts with guaranteed minimum death benefits (“GMDB”), guaranteed minimum income
benefits (“GMIB”) and no-lapse guarantees, we utilize current best estimate assumptions in establishing reserves. The reserves are
subject to adjustments based on annual reviews of assumptions and quarterly adjustments for experience, including market
performance, and the reserves may be adjusted through a benefit or charge to current period earnings.
• For certain product guarantees, primarily certain living benefit features of the variable annuity products in our Individual Annuities
segment, the benefits are accounted for as embedded derivatives, with fair values calculated as the present value of expected future
benefit payments to contractholders less the present value of assessed rider fees attributable to the embedded derivative feature.
Under U.S. GAAP, the fair values of these benefit features are based on assumptions a market participant would use in valuing
these embedded derivatives. Changes in the fair value of the embedded derivatives are recorded quarterly through a benefit or
charge to current period earnings.
The assumptions used in establishing reserves are generally based on the Company’s experience, industry experience and/or other
factors, as applicable. We typically update our actuarial assumptions, such as mortality, morbidity, retirement and policyholder behavior
assumptions, annually, unless a material change is observed in an interim period that we feel is indicative of a long-term trend. Generally,
we do not expect trends to change significantly in the short-term and, to the extent these trends may change, we expect such changes to be
gradual over the long-term. In a sustained low interest rate environment, there is an increased likelihood that the reserves determined based
on best estimate assumptions may be greater than the net liabilities.
The following paragraphs provide additional details about the reserves established by each of our segments.
The future policy benefit reserves for our International Insurance segment, which as of December 31, 2015, represented 41% of our
total future policy benefit reserves, primarily relate to non-participating whole life and term life products and endowment contracts, and are
generally determined as the present value of expected future benefits to, or on behalf of, policyholders plus the present value of future
maintenance expenses less the present value of future net premiums. For these reserves, we utilize best estimate assumptions as of the date
the policy is issued or acquired with provisions for the risk of adverse deviation, as described above. The primary assumptions used in
determining expected future benefits and expenses include mortality, lapse, morbidity, investment yield and maintenance expense
assumptions. In addition, future policy benefit reserves for certain contracts also include amounts related to our deferred profit liability.
The reserves for future policy benefits of our Retirement segment, which as of December 31, 2015 represented 24% of our total future
policy benefit reserves, primarily relate to our non-participating life contingent group annuity and structured settlement products. These
reserves are generally determined as the present value of expected future benefits and expenses. For these reserves, we utilize best estimate
assumptions as of the date the policy is issued or acquired with provisions for the risk of adverse deviation, as described above. For
contracts that have recorded a premium deficiency reserve, we use assumptions as of the most recent premium deficiency reserve
establishment. The primary assumptions used in establishing these reserves include mortality, retirement, maintenance expense, and
interest rate assumptions. In addition, future policy benefit reserves for certain contracts also include amounts related to our deferred profit
liability.
The reserves for future policy benefits of our Individual Annuities segment, which as of December 31, 2015 represented 5% of our
total future policy benefit reserves, primarily relate to reserves for the GMDB and GMIB features of our variable annuities, and for the
Prudential Financial, Inc. 2015 Annual Report 23