Prudential 2015 Annual Report Download - page 44

The table below presents the aggregate amount of instruments that serve to hedge the impact of foreign currency exchange movements
on our U.S. dollar-equivalent shareholder return on equity from our Japanese insurance subsidiaries for the periods indicated.
December 31,
2015 2014
(in billions)
Instruments hedging foreign currency exchange rate exposure on U.S. dollar-equivalent earnings:
Forward currency hedging program(1) ...................................................................... $ 1.9 $ 2.0
Instruments hedging foreign currency exchange rate exposure on U.S. dollar-equivalent equity:
U.S. dollar-denominated assets held in yen-based entities(2):
Available-for-sale U.S. dollar-denominated investments, at amortized cost ......................................... 13.0 12.2
Held-to-maturity U.S. dollar-denominated investments, at amortized cost .......................................... 0.0 0.1
Other ................................................................................................ 0.1 0.1
Subtotal .......................................................................................... 13.1 12.4
Yen-denominated liabilities held in U.S. dollar-based entities(3) ..................................................... 0.0 0.8
Dual currency and synthetic dual currency investments(4) .......................................................... 0.8 0.8
Total instruments hedging foreign currency exchange rate exposure on U.S. dollar-equivalent equity ........................ 13.9 14.0
Total hedges .................................................................................................. $15.8 $16.0
(1) Represents the notional amount of forward currency contracts outstanding.
(2) Excludes $30.5 billion and $29.1 billion as of December 31, 2015 and 2014, respectively, of U.S. dollar assets supporting U.S. dollar liabilities related
to U.S. dollar-denominated products issued by our Japanese insurance operations.
(3) The yen-denominated liabilities are reported in Corporate and Other operations.
(4) Dual currency and synthetic dual currency investments are held by our yen-based entities in the form of fixed maturities and loans with a yen-
denominated principal component and U.S. dollar-denominated interest income. The amounts shown represent the present value of future U.S. dollar
cash flows.
The U.S. dollar-denominated investments that hedge the U.S. dollar-equivalent shareholder return on equity from our Japanese
insurance operations are reported within yen-based entities and, as a result, foreign currency exchange rate movements will impact their
value reported within our yen-based Japanese insurance entities. We seek to mitigate the risk that future unfavorable foreign currency
exchange rate movements will decrease the value of these U.S. dollar-denominated investments reported within our yen-based Japanese
insurance entities, and therefore negatively impact their equity and regulatory solvency margins, by employing internal hedging strategies
between a subsidiary of Prudential Financial and these yen-based entities. These internal hedging strategies have the economic effect of
moving the change in value of these U.S. dollar-denominated investments due to foreign currency exchange rate movements from our
Japanese yen-based entities to our U.S. dollar-based entities.
These U.S. dollar-denominated investments also pay a coupon which is generally higher than what a similar yen-denominated
investment would pay. The incremental impact of this higher yield on our U.S. dollar-denominated investments, as well as our dual
currency and synthetic dual currency investments discussed below, will vary over time, and is dependent on the duration of the underlying
investments as well as interest rate environments in both the U.S. and Japan at the time of the investments. See “—General Account
Investments—Investment Results” for a discussion of the investment yields generated by our Japanese insurance operations.
Impact of foreign currency exchange rate movements on earnings
Forward currency hedging program
The financial results of our International Insurance segment reflect the impact of an intercompany arrangement with Corporate and
Other operations pursuant to which certain of the segment’s non-U.S. dollar-denominated earnings are translated at fixed currency
exchange rates. The fixed rates are determined in connection with a foreign currency income hedging program designed to mitigate the
impact of exchange rate changes on the segment’s U.S. dollar-equivalent earnings. Pursuant to this program, Corporate and Other
operations execute forward currency contracts with third parties to sell the net exposure of projected earnings for certain currencies in
exchange for U.S. dollars at specified exchange rates. The maturities of these contracts correspond with the future periods (typically on a
three year rolling basis) in which the identified non-U.S. dollar-denominated earnings are expected to be generated. In establishing the level
of non-U.S. dollar-denominated earnings that will be hedged through this program, we exclude the anticipated level of U.S. dollar-
denominated earnings that will be generated by dual currency and synthetic dual currency investments, as well as the anticipated level of
non-yen denominated earnings that will be generated by non-yen denominated products and investments. For the twelve months ended
December 31, 2015, approximately 36% of the segment’s earnings were yen-based and, as of December 31, 2015, we have hedged 100%,
73% and 28% of expected yen-based earnings for 2016, 2017 and 2018, respectively. To the extent currently unhedged, our International
Insurance segment’s future expected U.S. dollar-equivalent of yen-based earnings will be impacted by yen exchange rate movements.
As a result of this intercompany arrangement, our International Insurance segment’s results for 2013, 2014 and 2015 reflect the impact
of translating yen-denominated earnings at fixed currency exchange rates of 80, 82 and 91 yen per U.S. dollar, respectively, and Korean
won-denominated earnings at fixed currency exchange rates of 1160, 1150 and 1120 Korean won per U.S. dollar, respectively. Our results
for 2016 will reflect the impact of translating yen-denominated earnings at a fixed currency exchange rate of 106 yen per U.S. dollar and
Korean won-denominated earnings at a fixed currency exchange rate of 1100 Korean won per U.S. dollar. Since determination of the fixed
currency exchange rates for each respective year is impacted by changes in foreign currency exchange rates over time, the segment’s future
earnings will ultimately be impacted by these changes in exchange rates.
42 Prudential Financial, Inc. 2015 Annual Report