Prudential 2015 Annual Report Download - page 84

The decrease in other capital debt from December 31, 2014 primarily reflects a reduction in capital required as a result of positive net
cash flows, including proceeds from the Closed Block restructuring received as part of a dividend from Prudential Insurance, and a
reduction in capital debt through proceeds received from an issuance of junior subordinated debt.
Insurance Regulatory Capital
We manage Prudential Insurance, Prudential of Japan, Gibraltar Life, and our other domestic and international insurance subsidiaries
to regulatory capital levels consistent with our “AA” ratings targets. We utilize the RBC ratio as a primary measure of the capital adequacy
of our domestic insurance subsidiaries and the solvency margin ratio as a primary measure of the capital adequacy of our Japanese
insurance subsidiaries.
RBC is calculated based on statutory financial statements and risk formulas consistent with the practices of the NAIC. RBC considers,
among other things, risks related to the type and quality of the invested assets, insurance-related risks associated with an insurer’s products
and liabilities, interest rate risks and general business risks. RBC ratio calculations are intended to assist insurance regulators in measuring
an insurer’s solvency and ability to pay future claims. The reporting of RBC measures is not intended for the purpose of ranking any
insurance company or for use in connection with any marketing, advertising or promotional activities, but is available to the public.
The RBC ratios for Prudential Insurance and Prudential Annuities Life Assurance Corporation (“PALAC”) were 498% and 647%,
respectively, as of December 31, 2014. As of December 31, 2015, the RBC ratio for each of these subsidiaries was greater than 400%.
Similar to the RBC ratios that are employed by U.S. insurance regulators, regulatory authorities in the international jurisdictions in
which we operate generally establish some form of minimum solvency margin requirements for insurance companies based on local
statutory accounting practices. These solvency margins are a primary measure of the capital adequacy of our international insurance
operations. Maintenance of our solvency margins at certain levels is also important to our competitive positioning, as in certain
jurisdictions, such as Japan, these solvency margins are required to be disclosed to the public and therefore impact the public perception of
an insurer’s financial strength.
The solvency margin ratios for Prudential of Japan and Gibraltar Life were 853% and 900%, respectively, as of September 30, 2015.
As of December 31, 2015, the solvency margin ratio for each of these subsidiaries was greater than 700%.
All of our domestic and international insurance subsidiaries have capital levels that substantially exceed the minimum level required
by applicable insurance regulations.
We evaluate the regulatory capital of our domestic and international insurance operations under reasonably foreseeable stress
scenarios and believe we have adequate resources to maintain our capital levels comfortably above regulatory requirements under these
scenarios. For further information on the calculation of RBC and solvency margin ratios, as well as regulatory minimums, see Note 15 to
the Consolidated Financial Statements.
Capital Protection Framework
We employ a “Capital Protection Framework” (the “Framework”) to ensure that sufficient capital resources are available to maintain
adequate capitalization on a consolidated basis and competitive RBC ratios and solvency margins for our insurance subsidiaries under
various stress scenarios. The Framework incorporates the potential impacts from market related stresses, including equity markets, real
estate, interest rates, credit losses, and foreign currency exchange rates. In evaluating these potential impacts, we assess risk holistically at
the enterprise level, recognizing that our business mix may produce results that partially offset on a net basis. The Framework addresses the
potential capital consequences, under stress scenarios, of certain of these net risks and the strategies we use to mitigate them, including the
following:
• Equity market exposure affecting the statutory capital of the Company as a whole, which we manage through our equity hedge
program and on-balance sheet and contingent sources of capital;
• Our decision to manage a portion of our interest rate risk internally, on a net basis, at an enterprise level. In implementing this
strategy, we execute intercompany derivative transactions between our Corporate and Other operations and certain business
segments. We limit our exposure to the resulting net interest rate risk at the enterprise level through options embedded in our
hedging strategy that may be exercised if interest rates decline below certain thresholds. The results of this strategy are described
under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Corporate and Other”; and
• Activities of our business segments, including those for which specific risk mitigation strategies have been implemented, such as
our living benefits hedging program that covers certain risks associated with our variable annuity products.
We periodically recalibrate our hedging strategies in response to changing market conditions. The Framework accommodates periodic
volatility within ranges that we deem acceptable, while also providing for additional potential sources of capital, including on-balance sheet
capital, derivatives, and contingent sources of capital. Although we continue to enhance our approach, we believe we currently have access
to sufficient resources to maintain adequate capitalization and competitive RBC ratios and solvency margins under a range of potential
stress scenarios.
Captive Reinsurance Companies
We use captive reinsurance companies in our domestic insurance operations to more effectively manage our reserves and capital on an
economic basis and to enable the aggregation and transfer of risks. Our captive reinsurance companies assume business from affiliates
82 Prudential Financial, Inc. 2015 Annual Report