Prudential 2015 Annual Report Download - page 33

The following table sets forth the risk profile of our living benefits and GMDB features as of the periods indicated.
December 31,
2015 2014 2013
Account Value
%of
Total Account Value
%of
Total Account Value
%of
Total
(in millions)
Living benefit/GMDB features(1):
Both hedging program and automatic rebalancing(2) ............. $106,018 71% $110,953 72% $105,630 71%
Hedging program only ..................................... 9,994 7% 11,395 7% 12,229 8%
Automatic rebalancing only ................................. 1,393 1% 1,771 1% 2,280 2%
External reinsurance(3) .................................... 1,513 1% 0 0% 0 0%
PDI .................................................... 4,664 3% 2,777 2% 793 0%
Other Products ........................................... 2,870 2% 3,324 2% 3,666 3%
Total living benefit/GMDB features ...................... $126,452 $130,220 $124,598
GMDB features and other(4): ................................... 22,989 15% 24,863 16% 25,869 16%
Total variable annuity account value ...................... $149,441 $155,083 $150,467
(1) All contracts with living benefit guarantees also contain GMDB features, covering the same insured contract.
(2) Contracts with living benefits that are included in our hedging program, and have an automatic rebalancing feature.
(3) Represents contracts subject to reinsurance transaction with external counterparty effective April 1, 2015. These contracts with living benefits also have
an automatic rebalancing feature.
(4) Includes contracts that have a GMDB feature and do not have an automatic rebalancing feature.
The risk profile of our variable annuity account values as of the periods above reflect our product risk diversification strategy and the
runoff of legacy products over time.
Variable Annuity Hedging Program Results
Under U.S. GAAP, the liability for certain living benefit features is accounted for as an embedded derivative and recorded at fair
value, based on assumptions a market participant would use in valuing these features. The fair value is calculated as the present value of
future expected benefit payments to contractholders less the present value of assessed rider fees attributable to the applicable living benefit
features using option pricing techniques. See Note 20 to the Consolidated Financial Statements for additional information regarding the
methodology and assumptions used in calculating the fair value under U.S. GAAP.
As noted within “—Variable Annuity Risks and Risk Mitigants” above, we maintain a hedging program to help manage certain capital
market risks associated with certain of these guarantees. Our hedging program utilizes an internally-defined hedge target. We review our
hedge target and hedging program on an ongoing basis, and may periodically adjust them based on our evaluation of the risks associated
with the guarantees and other factors. As currently defined, our hedge target includes the following modifications to the assumptions used
in the U.S. GAAP valuation:
• The impact of NPR is excluded to maximize protection against the entire projected claim irrespective of the possibility of our own
default.
• The assumptions used in the projection of customer account values for fixed income and equity funds and the discounted net living
benefits (claims less fees) are adjusted to reflect returns in excess of risk-free rates equal to our expectations of credit risk
premiums.
• Actuarial assumptions are adjusted to remove risk margins and reflect our best estimates.
Due to these modifications, we expect differences each period between the change in the value of the embedded derivative as defined
by U.S. GAAP and the change in the value of the hedge positions used to manage the hedge target, thus potentially increasing volatility in
U.S. GAAP earnings. Application of the valuation methodologies described above could result in either a liability or contra-liability
balance for the fair value of the embedded derivative under U.S. GAAP and/or the value of the hedge target, given changing capital market
conditions and various actuarial assumptions. The following table provides a reconciliation between the fair value of the embedded
derivative as defined by U.S. GAAP and the value of our hedge target as of the periods indicated.
As of December 31,
2015 2014
(in billions)
Embedded derivative liability as defined by U.S. GAAP ............................................................ $ 8.4 $ 8.1
Less: NPR Adjustment ...................................................................................... (8.9) (6.7)
Embedded derivative liability as defined by U.S. GAAP, excluding NPR .......................................... 17.3 14.8
Less: Amount of embedded derivative liability, excluding NPR, excluded from hedge target liability ........................ 6.4 6.1
Hedge target liability (contra-liability) ...................................................................... $10.9 $ 8.7
Prudential Financial, Inc. 2015 Annual Report 31