Prudential 2015 Annual Report Download - page 43

2014 to 2013 Annual Comparison. Revenues decreased $161 million. Excluding a favorable impact of $51 million resulting from
our annual reviews and updates of assumptions and other refinements, as discussed above, revenues decreased $212 million. The decrease
reflected $239 million lower premiums and policy charges and fee income in both our group life and group disability businesses driven by
lapses resulting from continued pricing discipline on contract renewals. Partially offsetting the decrease was a $28 million increase in net
investment income driven by higher income from non-coupon investments.
Benefits and expenses decreased $27 million. Excluding an unfavorable impact of $203 million resulting from our annual reviews and
updates of assumptions and other refinements, as discussed above, benefits and expenses decreased $230 million. Policyholders’ benefits,
including the change in reserves, decreased $287 million, driven by declines in both our group life and group disability businesses,
reflecting fewer claims as a result of lapses. The decline in our group life business also reflected improved claim experience for experience-
rated contracts. The decline in our disability business also reflected higher claim resolutions, partially offset by higher claim severity for
long-term contracts. Partially offsetting these decreases was an increase of $41 million in general and administrative expenses, including
higher compensation costs, costs associated with our claims management process, and other costs to support business initiatives.
Sales Results
The following table sets forth the Group Insurance segment’s annualized new business premiums, as defined under “—Segment
Measures” above, for the periods indicated.
Year ended December 31,
2015 2014 2013
(in millions)
Annualized new business premiums(1):
Group life ........................................................................................ $204 $189 $240
Group disability ................................................................................... 69 67 73
Total ........................................................................................ $273 $256 $313
(1) Amounts exclude new premiums resulting from rate changes on existing policies, from additional coverage under our Servicemembers’ Group Life
Insurance contract and from excess premiums on group universal life insurance that build cash value but do not purchase face amounts.
2015 to 2014 Annual Comparison. Total annualized new business premiums increased $17 million primarily driven by sales to new
and existing clients for our group life and group disability businesses, respectively.
2014 to 2013 Annual Comparison. Total annualized new business premiums decreased $57 million reflecting our pricing discipline
efforts for both group life and group disability products.
International Insurance Division
Foreign Currency Exchange Rate Movements and Related Hedging Strategies
As a U.S.-based company with significant business operations outside the U.S., particularly in Japan, we are subject to foreign
currency exchange rate movements that could impact our U.S. dollar-equivalent shareholder return on equity. We seek to mitigate this
impact through various hedging strategies, including the use of derivative contracts and by holding U.S. dollar-denominated assets in
certain of our foreign subsidiaries.
The operations of our International Insurance division are subject to currency fluctuations that can materially affect our U.S. dollar-
equivalent earnings from period to period, even if earnings on a local currency basis are relatively constant. We enter into forward currency
derivative contracts as part of our strategy to effectively fix the currency exchange rates for a portion of our prospective non-U.S. dollar-
denominated earnings streams, thereby reducing earnings volatility from foreign currency exchange rate movements. The forward currency
hedging program is primarily associated with our insurance operations in Japan and Korea.
Separately, our Japanese insurance operations offer a variety of non-yen denominated products, primarily comprised of U.S. and
Australian dollar-denominated products that are supported by investments in corresponding currencies. While these non-yen denominated
assets and liabilities are economically matched, prior to 2015, differences in the accounting for changes in the value of these assets and
liabilities due to changes in foreign currency exchange rate movements resulted in volatility in reported U.S. GAAP earnings. As a result of
continued growth in these portfolios, effective in the first quarter of 2015, we implemented a new structure in Gibraltar Life that
disaggregated the U.S. and Australian dollar-denominated businesses into separate divisions, each with its own functional currency that
aligns with the underlying products and investments.
For further information on the hedging strategies used to mitigate the risks of foreign currency exchange rate movements on earnings
as well as the U.S. GAAP earnings impact from products denominated in non-local currencies, see “—Impact of foreign currency exchange
rate movements on earnings.”
We utilize a yen hedging strategy that calibrates the hedge level to preserve the relative contribution of our yen-based business to the
Company’s overall return on equity on a leverage neutral basis. We implement this hedging strategy utilizing a variety of instruments,
including foreign currency derivative contracts, as discussed above, as well as U.S. dollar-denominated assets and, to a lesser extent, “dual
currency” and “synthetic dual currency” assets held locally in our Japanese insurance subsidiaries. We may also hedge using instruments
held in our U.S. domiciled entities, such as U.S. dollar-denominated debt that has been swapped to yen. The total hedge level may vary
based on our periodic assessment of the relative contribution of our yen-based business to the Company’s overall return on equity.
Prudential Financial, Inc. 2015 Annual Report 41