Prudential 2015 Annual Report Download - page 27

Sensitivity for Future Policy Benefit Reserves
We expect the future benefit reserves in our Individual Annuities segment that are based on current best estimate assumptions, and
those that represent embedded derivatives recorded at fair value to be the ones most likely to drive variability in earnings from period to
period.
For the GMDB and GMIB features of our variable annuities in our Individual Annuities segment, the reserves for these contracts are
significantly influenced by the future rate of return assumptions. The following table provides a demonstration of the sensitivity of the
reserves for GMDBs and GMIBs related to variable annuity contracts relative to our future rate of return assumptions by quantifying the
adjustments to these reserves that would be required assuming both a 100 basis point increase and decrease in our future rate of return. The
information below is for illustrative purposes only and considers only the direct effect of changes in our future rate of return on operating
results due to the change in the reserve balance and not changes in any other assumptions such as persistency or mortality included in our
evaluation of the reserves, or any changes on DAC or other balances, discussed above in “—Deferred Policy Acquisition and Other Costs.”
December 31, 2015
Increase/(Decrease) in
GMDB/GMIB Reserves
(in millions)
Decrease in future rate of return by 100 bps .................................................................... $189
Increase in future rate of return by 100 bps .................................................................... $(140)
In addition to the impact of market performance relative to our future rate of return assumptions, other factors may also drive
variability in the change in reserves, 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 utilization rate assumptions, partially offset by updates to projected interest rate assumptions, drove
the most significant changes to these reserves. For a discussion of adjustments to the reserves for GMDBs and GMIBs 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.”
For certain living benefit features of the variable annuities in our Individual Annuities segment that are accounted for as embedded
derivatives, the changes in reserves are significantly impacted by changes in both the capital markets assumptions and actuarial
assumptions. Capital market inputs and actual policyholders’ account values are updated each quarter based on capital market conditions as
of the end of the quarter, while actuarial assumptions are reviewed at least annually, and updated based upon emerging experience, future
expectations and other data. For additional information about the impacts of capital markets assumptions, including interest rates, NPR
credit spreads and equity returns, refer to “Quantitative and Qualitative Disclosures About Market Risk” below. In 2015, updates to
mapping of funds to related indices, partially offset by updates to mortality rate assumptions drove the most significant changes to these
reserves. Other factors may also drive variability in the change in reserves, 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. For a discussion of the drivers of the changes in our optional living benefit features
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.”
Unearned revenue reserve
Our unearned revenue reserve (“URR”), reported as a component of “Policyholders’ account balances,” is $2.2 billion as of
December 31, 2015. This reserve primarily relates to variable and universal life products within our Individual Life segment and represents
policy charges for services to be provided in future periods. The charges are deferred as unearned revenue and are generally amortized over
the expected life of the contract in proportion to the product’s estimated gross profits, similar to DAC as discussed above.
For the variable and universal life policies of our Individual Life segment, 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 are 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 URR balance associated with the variable and universal life policies of our Individual Life segment as of December 31, 2015 was
$1.9 billion. The following table provides a demonstration of the sensitivity of that URR 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 URR balance and not changes in any other assumptions such as persistency, future rate of return, or expenses included in our evaluation
of URR. It does not reflect changes in assets, such as DAC, which would partially offset the adjustments to the URR balance reflected
below. The impact of DAC is discussed in more detail above in “—Deferred Policy Acquisition and Other Costs.”
December 31, 2015
Increase/(Decrease) in URR
(in millions)
Decrease in future mortality by 1% ....................................................................... $37
Increase in future mortality by 1% ........................................................................ $(38)
Prudential Financial, Inc. 2015 Annual Report 25