Prudential 2002 Annual Report Download

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Table of contents

  • Page 1

  • Page 2
    ... financial products and services, including life insurance, property and casualty insurance, mutual funds, annuities, pension and other retirement services and administration, asset management, securities brokerage, banking and trust services, real estate brokerage franchises and relocation services...

  • Page 3
    ... Life and Annuities, Group Insurance, and Property and Casualty Insurance segments; the Investment Division, which encompasses our Investment Management, Financial Advisory, Retirement and Other Asset Management segments; and the International Insurance and Investments Division. At the same time...

  • Page 4
    ... and significant life insurance rate increases in many of the countries we operate in, over the last five years we have grown the number of policies in force at a compound annual growth rate of 22 percent, and new annualized premiums have increased 17 percent. Our life planner force has also grown...

  • Page 5
    ...to strengthen the premier banking partners in Italy to managing company's long-term prospects and Germany. These moves have for growth. We're in attractive strengthened our international asset Prudential Financial markets. We're competitive. We management growth platform. as a company have scale. We...

  • Page 6
    Financial highlights Financial Ser vices Businesses In millions, except per share amounts For the years ended D ecember 31, RESULTS BASED O N AD J USTED O PERATIN G IN CO ME (A) Revenues Benefits and expenses Adjusted operating income before income taxes GAAP RESU LTS Revenues Benefits and expenses ...

  • Page 7
    ...equivalent share basis whereby shares of Common Stock issued in the demutualization were assumed to be outstanding for the entire period, and earnings were not adjusted for demutualization or related transactions, including establishment of the Financial Services Businesses and Closed Block Business...

  • Page 8
    ...hours to 750 projects in 600 cities around the world. Today, our Global Volunteer Day event is one of the largest corporate-sponsored volunteer programs in the world. for our children. Last year, The Prudential Foundation awarded more than $28 million in grants to innovative direct-service programs...

  • Page 9
    ..., promotes innovation, increases productivity and will help us achieve our business goals. W ith employees throughout the United States and nearly 30 countries around the world, we know that our work force must be as diverse as the products we sell and the markets in which we sell them.That's why...

  • Page 10
    ... more than 1,350 distribution arrangements with brokerages and other financial institutions. That's a valuable channel through which to distribute our own annuity, mutual fund and life insurance products. International markets continue to present growth potential for us. We increased our presence in...

  • Page 11
    ... Europe's leading real estate investment managers, supplements PREI's long-standing activities in the region. D ecember 20, 2002 Signed a definitive purchase agreement to acquire American Skandia, the largest distributor of variable annuities through independent financial planners in the United...

  • Page 12
    ... consumer desires for greater an industry where distribution is premium flexibility, cost effiquickly overtaking manufacturing ciency and death benefit as the key driver of business, we guarantees inside a permanent life contract. In addibelieve our competitive products and strong brand put tion, we...

  • Page 13
    ...one company, but from the entire investment industry. The funds employ a rigorous investment management research process to select and monitor investment managers as sub-advisors. In 2002, we added to the lineup with the Strategic Partners Mid-Cap Value Fund, which combines the skills of two premier...

  • Page 14
    ... loans online. We also created more flexibility for participants in our group variable universal life product by enabling them to transfer assets among any plan investment options. We broke new ground for third-party distributors with the XpressLife Program. Our Web-based Prudential Xpress business...

  • Page 15
    ... tests. We track the effectiveness Our life insurance business in Korea delivered of these training programs through continuous feedextraordinary results. It recorded a 91 percent back and analysis of performance data. 12-month life planner retention rate and 9.2 policies We're paying our new agents...

  • Page 16
    ... life insurance operation in Korea has been rated the best company in the industry at meeting customers' needs. According to the N ational Customer Satisfaction Index- co-sponsored by the Korea Productivity Center, the Chosun Ilbo daily newspaper and the University of Michigan- Prudential of Korea...

  • Page 17
    ...growth oppor tunities and boost shareholder value, while maintaining or enhancing our financial strength and credit ratings." is part of our capital management strategy. In 2002, we bought back 26 million shares at a total cost of $800 million. In 2003, the Board of Directors approved a new program...

  • Page 18
    ...are located at 213 Washington Street, Newark, NJ 07102. Strategic Partners variable annuities are issued by Pruco Life Insurance Company (in New York, issued by Pruco Life Insurance Company of New Jersey). LTC By Design is underwritten by The Prudential Insurance Company of America, 751 Broad Street...

  • Page 19
    Financial Section Prudential Financial 2002 Annual Report 17

  • Page 20
    ...Closed Block Business. The Financial Services Businesses refer to the businesses in our three operating divisions and our Corporate and Other operations. The Insurance division consists of our Individual Life and Annuities, Group Insurance and Property and Casualty Insurance segments. The Investment...

  • Page 21
    ... business, and pre-tax income of $35 million in 2002. On December 18, 2001, Prudential Insurance converted from a mutual life insurance company owned by its policyholders to a stock life insurance company and became an indirect, wholly owned subsidiary of Prudential Financial. "Demutualization costs...

  • Page 22
    ...per share-Class B Stock ...Ratio of earnings to fixed charges(2) ...Division and Segment Data: Income (loss) from continuing operations before income taxes(3): Individual Life and Annuities ...Group Insurance ...Property and Casualty Insurance ...Total Insurance ...Investment Management ...Financial...

  • Page 23
    ... policy loans ...Separate account assets ...Total assets ...Future policy benefits, policyholders' account balances and unpaid claims and claim adjustment expenses ...Separate account liabilities ...Short-term debt ...Long-term debt ...Total liabilities ...Guaranteed beneficial interest in Trust...

  • Page 24
    ... life insurance company and became an indirect, wholly owned subsidiary of Prudential Financial. On that date, eligible policyholders, as defined in the Plan of Reorganization, received shares of Prudential Financial's Common Stock or the right to receive cash or policy credits, which are increases...

  • Page 25
    ... Corporate and Other operations, collectively, as our Financial Services Businesses. The Insurance division consists of our Individual Life and Annuities, Group Insurance and Property and Casualty Insurance segments. The Investment division consists of our Investment Management, Financial Advisory...

  • Page 26
    ... cost of administering insurance contracts and providing asset management products and services; • our returns on invested assets, net of the amounts we credit to policyholders' accounts; • our ability to earn commissions and fees from the sale and servicing of mutual funds, annuities, defined...

  • Page 27
    ... For traditional participating life insurance products of our Closed Block Business, the mortality and interest rate assumptions we apply are those used to calculate the policies' guaranteed cash surrender values. For life insurance and annuity products of our Financial Services Businesses, expected...

  • Page 28
    ... claims experience can also be less favorable than that assumed in establishing reserves, which can require a charge to earnings to increase reserves. For most life insurance and annuity products that we sell, we defer costs that vary with and are related primarily to the production of new business...

  • Page 29
    ..., accounting for pension and other postretirement and postemployment benefits requires estimates of future returns on plan assets, expected increases in compensation levels and trends in health care costs. See "-Corporate and Other Operations" for a discussion of our pension assumptions and related...

  • Page 30
    ... investment gains, net of losses including impairments and sales of credit-impaired securities and related charges and adjustments. The timing of impairments and losses from sales of credit-impaired securities is largely dependent on market credit cycles and Prudential Financial 2002 Annual Report...

  • Page 31
    ... Services Businesses: Insurance Division ...Investment Division ...International Insurance and Investments Division ...Corporate and Other ...Total Financial Services Businesses ...Closed Block Business(1) ...Income (loss) from continuing operations before income taxes ...Income tax expense (benefit...

  • Page 32
    ... 31, 2002 Financial Services Businesses: Individual Life and Annuities ...Group Insurance ...Property and Casualty Insurance ...Insurance Division ...Investment Management ...Financial Advisory ...Retirement ...Other Asset Management ...Investment Division ...International Insurance ...International...

  • Page 33
    .... Related charges, which pertain to the Financial Services Businesses and not to the Closed Block Business, pertain to policyholder dividends, deferred policy acquisition costs and reserves for future policy benefits. A percentage of net realized investment gains on specified Gibraltar Life assets...

  • Page 34
    ... gains on sales of fixed income securities and prepayment premiums. 2001 to 2000 Annual Comparison. Consolidated realized investment losses, net of gains and related charges and adjustments, were $679 million in 2001, compared to $317 million in 2000. The Financial Services Businesses' net realized...

  • Page 35
    ... businesses for 2002 primarily relate to Gibraltar Casualty Company, a commercial property and casualty insurer that we sold in September 2000, to Everest Re Group, Ltd. ("Everest"). Pursuant to the sale we entered into a stop-loss reinsurance agreement whereby if and when aggregate post-sale claim...

  • Page 36
    ... primarily of the costs of engaging independent accounting, actuarial, investment banking, legal and other consultants that advised us and insurance regulators in the demutualization process and related matters as well as printing and postage for communication with policyholders. Taxes Shown below...

  • Page 37
    ... before income taxes: Financial Services Businesses: Individual Life and Annuities ...Group Insurance ...Property and Casualty Insurance ...Total Insurance Division ...Investment Management ...Financial Advisory ...Retirement ...Other Asset Management ...Total Investment Division ...International...

  • Page 38
    ... that excludes realized investment gains, net of losses and related adjustments; results of divested businesses and discontinued operations; sales practices remedies and costs; and demutualization costs and expenses. (2) International Insurance segment results include Gibraltar Life, which has...

  • Page 39
    ... of individual mutual funds, including investments in our mutual funds through wrap-fee products, and both variable annuities and variable life insurance assets in our separate accounts. Fixed annuities and the fixed rate options of both variable annuities and variable life insurance are included in...

  • Page 40
    ... as well as a $47 million increase in amortization of deferred policy acquisition costs, primarily due to a market decline and related policy lapses associated with declines in variable life insurance account values. The segment's individual annuity business reported a loss, on an adjusted operating...

  • Page 41
    ... a $23 million one-time increase in reserves related to a portion of our variable life insurance business in force. However, amortization of deferred policy acquisition costs increased $60 million in 2001 from 2000, and we recorded net losses of $25 million from insurance claims arising from the...

  • Page 42
    ... those based on net deposits paid into the contract. To the extent that the guaranteed minimum death benefit is higher than the current account value at the time of death, we incur a cost. This results in increased annuity policy benefits in periods of declining financial markets and in periods of...

  • Page 43
    ... benefit coverage in force represents the excess of the guaranteed benefit amount over the fair value of the underlying mutual fund investments. Partially offsetting the increase in amortization of deferred policy acquisition costs was lower asset management expense on our variable annuity products...

  • Page 44
    ... with the Company's demutualization. 2001 includes increases to policyholder account values as a result of the issuance of the policyholder credits of $429 million for variable annuities and $157 million for fixed annuities. 2002 to 2001 Annual Comparison. Sales of new life insurance, as measured...

  • Page 45
    ... of fixed and variable annuities in 2001 were partially offset by policy credits we issued in connection with our demutualization, which increased policyholders' account values by $586 million. Policy Surrender Experience The following table sets forth the individual life insurance business's policy...

  • Page 46
    ...on group life insurance was partially offset by earned premium growth and improved morbidity on group disability products. In addition, adjusted operating income benefited $32 million in 2000 from refinements in our calculations of reserves and return premiums for waiver of premium features. However...

  • Page 47
    ...Group life insurance premiums increased by $350 million, or 21%, to $2.005 billion primarily due to growth in business in force resulting from new sales and continued strong persistency, which increased from 95% in 2000 to 97% in 2001. Group disability premiums, which include long-term care products...

  • Page 48
    ... policies, from additional coverage issued 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. (2) Includes long-term care products. 2002 to 2001 Annual Comparison. Total new...

  • Page 49
    ... Life and Annuities segment is compensated for property and casualty insurance products sold through its distribution network. In the event of a sale of the property and casualty operations that resulted in continued access to non-proprietary property and casualty products by the Prudential Agents...

  • Page 50
    ...than Prudential Agents, based on our evaluation of the quality of the business from these alternative channels. In October 2001, we announced that we would no longer write business through our property and casualty insurance career agency channel except in a few selected markets. Since that time, we...

  • Page 51
    ... premiums mentioned above. The remaining $121 million increase came primarily from new distribution channels we implemented during 1999 and 2000, including career agents focused on selling property and casualty insurance, workplace and affinity marketing, direct distribution, and independent agents...

  • Page 52
    ... and limited the growth of business from some of our other distribution channels, commencing in the third quarter of 2001. In October 2001, we announced that we would no longer write business through our property and casualty insurance career agency channel except in a few selected markets. We...

  • Page 53
    ...2001. Lower fee revenues resulting from declines in market value of the underlying equity assets under management as well as lower average mutual fund customer account balances on which our fees are based, and lower mortgage loan origination and servicing revenue were largely offset by a decrease in...

  • Page 54
    ... insurance asset management revenues in our separate accounts. Fixed annuities and the fixed rate options of both variable annuities and variable life insurance are included in general account. Also includes funds invested in proprietary mutual funds through our defined contribution plan products...

  • Page 55
    ...Prudential Securities earned as co-manager in the initial public offering of our Common Stock during the fourth quarter of 2001, which is offset by a corresponding charge in our Corporate and Other results. The improved results of our equity sales and trading operations are due primarily to our cost...

  • Page 56
    ... an increase in account service fees, reflecting a revised pricing schedule implemented at the beginning of 2002. However, the negative impact of market value declines on wrap-fee managed account assets under management, competitive pricing pressures, changes in product mix and market value declines...

  • Page 57
    ... wrap-fee products, reflecting competitive pricing pressures and changes in product mix, as well as the negative impact of market value declines. The negative impact of market value declines on wrap-fee and managed account assets under management essentially offset the impact of new assets gathered...

  • Page 58
    ... million for the years ended December 31, 2002, 2001, and 2000, respectively. (2) Benefits and expenses exclude the impact of net realized investment gains and losses on change in reserves and deferred policy acquisition cost amortization of $(7) million, $(14) million, and $31 million for the years...

  • Page 59
    ... of income from a mortgage loan prepayment. Premiums increased $57 million on our guaranteed products business primarily due to increased sales of structured settlement and single sum products and the recording of increased estimates of policy liabilities for return premiums in 2001. 2001 to 2000...

  • Page 60
    ...: Beginning total account value ...Sales ...Withdrawals ...Change in market value, interest credited and other activity(1) ...Ending total account value ...Net sales ...Guaranteed Products(2): Beginning total account value ...Sales ...Withdrawals and benefits ...Change in market value and interest...

  • Page 61
    ... primarily due to a decline in market value of mutual funds reflecting the general downturn in the equity markets. In addition, net sales decreased $1.2 billion in 2001 from 2000, reflecting a decrease in new institutional clients. Account values for guaranteed products amounted to $39.8 billion at...

  • Page 62
    ... for Gibraltar Life for the year ended December 31, 2002 exclude the portion of net realized investment gains required to be paid as dividends to policyholders of $16 million. Gibraltar Life had no such activity for the year ended December 31, 2001. Prudential Financial 2002 Annual Report 61

  • Page 63
    ... of policyholders' benefits, including changes in reserves, $89 million in interest credited to policyholders' account balances, $101 million in dividends to policyholders and $497 million of general and administrative expenses, including distribution costs. As a result of Gibraltar Life's emergence...

  • Page 64
    ...in 2001 to $439 million in 2002, and premiums in our Japanese operation other than Gibraltar Life increased $75 million primarily the result of strong persistency and new sales partially offset by the impact of currency exchange rate fluctuations. Premium Prudential Financial 2002 Annual Report 63

  • Page 65
    ... and the aging of business in force in markets where our operations are more mature. On a constant exchange rate basis, total segment benefits and expenses increased $2.046 billion. Sales Results In managing our international insurance business, we analyze new annualized premiums, which do not...

  • Page 66
    ... date. After that date, the Gibraltar Life sales force has distributed only Gibraltar products. For all countries other than Japan, also on a constant exchange rate basis, new annualized premiums increased $79 million, or 59%, with $78 million of the increase coming from our operations in Korea...

  • Page 67
    ... allocate to our business segments. It also consists of real estate and relocation services, international ventures, divested businesses and businesses that we have placed in wind-down status but have not divested. Corporate-level activities consist primarily of corporate-level income and expenses...

  • Page 68
    ...: Corporate-level activities(1) ...Other businesses: Real estate and relocation services ...International ventures ...Other ...Adjusted operating income ...Realized investment gains (losses), net, and related adjustments ...Sales practices remedies and costs ...Divested businesses ...Demutualization...

  • Page 69
    ... pension plan to adjusted operating income, if all other assumptions were applied without change. Corporate-level activities in 2002 includes expenses of $96 million related to supplemental benefits paid to policyholders whom we had previously agreed to provide insurance for reduced or no premium...

  • Page 70
    ... the Closed Block Business effective at the date of demutualization. The Closed Block Business, which represents results of our former Traditional Participating Products segment prior to the demutualization, includes our in force traditional participating life insurance and annuity products, and...

  • Page 71
    ... of Directors of Prudential Insurance. If cumulative performance is less favorable than we expected, the policyholder dividends we charge to expense within the Closed Block Business will be the actual dividends declared by the Board of Directors. Subsequent to the date of demutualization, there was...

  • Page 72
    ... costs for this program incurred by the Closed Block Business in 2001. An increase in interest expense associated with the IHC debt we issued in December 2001, was a partial offset. Policyholder benefits and related changes in reserves, including interest credited to policyholders' accounts...

  • Page 73
    ... sources of funds available to Prudential Financial, the parent holding company, to meet its obligations, including the payment of shareholder dividends, debt service, capital contributions to subsidiaries and operating expenses, are cash and short-term investments, dividends and returns of capital...

  • Page 74
    ... were established on the date of demutualization. Our insurance, broker-dealer and various other companies are subject to regulatory limitations on the payment of dividends and on other transfers of funds to affiliates. With respect to Prudential Insurance, New Jersey insurance law provides that...

  • Page 75
    ...the cost of merging the businesses. Our share of such funding, excluding related tax benefits, is expected to be approximately $400 million. That need is expected to be partially offset at closing with cash that will be distributed to Prudential Securities Group, Inc. from Prudential Securities, Inc...

  • Page 76
    ..., real estate, and real estate related investments held in consolidated joint ventures, as well as institutional and insurance company portfolio cash flow timing differences. Securities business related debt consists of debt issued to finance primarily the liquidity of our broker-dealers and...

  • Page 77
    ... ...Investment related ...Securities business related ...Specified other businesses ...Total general obligations ...Limited and non-recourse debt ...Total borrowings ...Long-term debt ...Short-term debt ...Total borrowings ...Borrowings of Financial Services Businesses ...Borrowings of Closed Block...

  • Page 78
    ... factors including future securities market conditions, changes in interest rate levels and policyholder perceptions of our financial strength, which could lead to reduced cash inflows or increased cash outflows. Prudential Insurance and Insurance Subsidiaries We manage cash flow at these entities...

  • Page 79
    ...496 billion, respectively, and fixed maturity investments classified as "available for sale" with fair values of $92.8 billion and $79.2 billion at those dates, respectively. Gibraltar Life Insurance Company, Ltd. As of December 31, 2002 and 2001, Gibraltar Life, which we acquired in April 2001, had...

  • Page 80
    ... guarantees ...Total ...$ 815 2,224 266 841 $4,146 Deferred Policy Acquisition Costs We capitalize costs that vary with and are related primarily to the production of new insurance and annuity business. These costs include commissions, costs to issue and underwrite the policies and certain variable...

  • Page 81
    ... be lower. For variable annuity and variable life insurance products with minimum guaranteed death benefits, we also face the risk that declines in the value of underlying investments as a result of changes in prices of securities may increase our net exposure to death benefits under these contracts...

  • Page 82
    ...this cash flow testing reveals to determine if we need to increase statutory reserves or adjust portfolio management strategies. Market Risk Related to Interest Rates Our "other than trading" assets that subject us to interest rate risk include fixed maturity securities, commercial loans and policy...

  • Page 83
    ...sale ...Held to maturity ...Commercial loans ...Mortgage securitization inventory ...Policy loans ...Derivatives: Swaps ...Futures ...Options ...Forwards ...Financial liabilities with interest rate risk: Short-term and long-term debt ...Investment contracts ...Guaranteed beneficial interest in Trust...

  • Page 84
    ... December 31, 2001 resulted primarily from the increase in our portfolio of fixed maturities available for sale during 2002. The estimated changes in fair values of our financial assets shown above relate primarily to assets invested to support our insurance liabilities, but do not include assets...

  • Page 85
    ... manage exposure to interest rate, currency and other market risks. Most of our derivative transactions involve exchange-listed contracts and are short-term in duration. We act both as a broker, by selling exchangelisted contracts, and as a dealer, by entering into futures and security transactions...

  • Page 86
    ... currency exchange rate risk and commodity risk in our trading activities was immaterial. Limitations of VaR Models Although VaR models represent a recognized tool for risk management, they have inherent limitations, including reliance on historical data that may not be indicative of future market...

  • Page 87
    ... 8, the Company adopted Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets as of January 1, 2002. New York, New York February 11, 2003 86...

  • Page 88
    ... ...Trading account assets, at fair value ...Equity securities, available for sale, at fair value (cost: 2002-$2,849; 2001-$2,252) ...Commercial loans ...Policy loans ...Securities purchased under agreements to resell ...Cash collateral for borrowed securities ...Other long-term investments ...Short...

  • Page 89
    ..., except per share amounts) 2002 REVENUES Premiums ...Policy charges and fee income ...Net investment income ...Realized investment losses, net ...Commissions and other income ...Total revenues ...BENEFITS AND EXPENSES Policyholders' benefits ...Interest credited to policyholders' account balances...

  • Page 90
    ...in demutualization ...457.1 Policy credits issued and cash payments to be made to eligible policyholders ...- Initial public offering of Common Stock ...126.5 Private placement of Class B Stock ...- Equity security units ...- Comprehensive income: Net loss before the date of demutualization ...- Net...

  • Page 91
    ...Interest credited to policyholders' account balances ...Depreciation and amortization, including premiums and discounts ...Change in: Deferred policy acquisition costs ...Future policy benefits and other insurance liabilities ...Trading account assets ...Income taxes payable ...Broker-dealer related...

  • Page 92
    ... in Prudential Insurance were extinguished and eligible policyholders collectively received shares of Common Stock, the rights to receive cash and increases to their policy values in the form of policy credits. The demutualization was accounted for as a reorganization. Accordingly, the Company...

  • Page 93
    ... Stock-Based Compensation," as amended, prospectively for all new awards granted to employees on or after January 1, 2003. The Company accounts for non-employee stock options using the fair value method. See Note 16 for pro forma net income and earnings per share, as well as additional information...

  • Page 94
    ... as necessary. Substantially all of the Company's securities borrowed transactions are with brokers and dealers, commercial banks and institutional clients. Substantially all of the Company's securities loaned transactions are with large brokerage firms. Prudential Financial 2002 Annual Report 93

  • Page 95
    ...in value (credit event, interest related or market fluctuation); (4) the Company's ability and intent to hold the investments for a period of time to allow for a recovery of value; and (5) the financial condition of and near-term prospects of the issuer. Provisions for losses on commercial loans are...

  • Page 96
    ... value and represent segregated funds which are invested for certain policyholders, pension funds and other customers. The assets consist of common stocks, fixed maturities, real estate related investments, real estate mortgage loans and short-term investments. The assets of each account are legally...

  • Page 97
    ..., INC. Notes to Consolidated Financial Statements 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) other business of the Company. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to...

  • Page 98
    ... charges and surrender charges. Benefits and expenses for these products include claims in excess of related account balances, expenses of contract administration, interest credited and amortization of DAC. For group life and disability insurance, and property and casualty insurance, premiums are...

  • Page 99
    ...by changes in interest rates, foreign exchange rates, financial indices, value of securities or commodities, credit spreads, market volatility and liquidity. Values can also be affected by changes in estimates and assumptions used in pricing models. Derivatives are used to manage the characteristics...

  • Page 100
    ... mutual life insurance companies. Subsequent to the demutualization, the Company is no longer subject to the equity tax. Subsidiaries operating outside the United States are taxed, and income tax expense is recorded, based on applicable foreign statutes. Prudential Financial 2002 Annual Report 99

  • Page 101
    ... Prudential Insurance transferred to London Life Insurance Company in 1996 in connection with the sale of most of its Canadian branch operations. Under the Plan of Reorganization, these policyholders were required to receive demutualization compensation in the form of cash. All demutualization costs...

  • Page 102
    ... and related activities. As a result of exiting these activities, the primary business of Prudential Securities Group Inc. in Europe is the provision of private banking and wealth management services to high net worth individuals. Institutional services in Europe are limited primarily to the sale of...

  • Page 103
    ... at December 31, 2001. 4. CAPITAL MARKETS RESTRUCTURING In the fourth quarter of 2000, Prudential Securities Group Inc. exited the lead-managed equity underwriting for corporate issuers and institutional fixed income businesses. Exiting these businesses resulted in staff reductions of approximately...

  • Page 104
    ... Life's in force insurance policies, except for group life, collective term and reinsurance policies, were restructured such that guaranteed interest rates and cash surrender values were reduced and special surrender charges imposed. Pursuant to the Reorganization Plan, on April 19, 2001 the Company...

  • Page 105
    ..., INC. Notes to Consolidated Financial Statements 6. INVESTMENTS Fixed Maturities and Equity Securities The following tables provide additional information relating to fixed maturities and equity securities (excluding trading account assets) at December 31, 2002 Gross Gross Unrealized Unrealized...

  • Page 106
    ...cost of "held to maturity" securities transferred to the "available for sale" portfolio was $11,937 million. Unrealized investment gains of $94 million, net of tax, were recorded in "Accumulated other comprehensive income (loss)" at the time of the transfer in 2001. Prudential Financial 2002 Annual...

  • Page 107
    ...loans acquired from Gibraltar Life ...Addition (release) of allowance for losses ...Charge-offs, net of recoveries ...Change in foreign exchange ...Allowance for losses, end of year ... Non-performing commercial loans identified in management's specific review of probable loan losses and the related...

  • Page 108
    ...millions) STATEMENTS OF FINANCIAL POSITION Investments in real estate ...Investments in securities ...Cash and cash equivalents ...Other assets ...Total assets ...Borrowed funds-third party ...Borrowed funds-Prudential Financial ...Other liabilities ...Total liabilities ...Partners' capital ...Total...

  • Page 109
    ... sale ...Fixed maturities held to maturity ...Trading account assets ...Equity securities available for sale ...Commercial loans ...Policy loans ...Securities purchased under agreements to resell ...Broker-dealer related receivables ...Short-term investments and cash equivalents ...Other investment...

  • Page 110
    ... Gains (Losses) Net unrealized investment gains and losses on securities available for sale and certain other long-term investments are included in the Consolidated Statements of Financial Position as a component of "Accumulated other comprehensive income (loss)." Changes in these amounts include...

  • Page 111
    ... at December 31, 2002 and 2001, respectively, related to sales practices matters described in Note 22. The remainder relates to trusts established to fund guaranteed dividends to certain policyholders and to fund certain employee benefits. Assets valued at $424 million and $158 million at December...

  • Page 112
    .... The changes in the book value of goodwill by segment for the year ended December 31, 2002 are as follows: Balance at January 1, 2002 Individual Life and Annuities ...Property and Casualty Insurance ...Investment Management ...Other Asset Management ...International Investments ...Corporate and...

  • Page 113
    ... consist of unearned premium and benefit reserves for group health products and property and casualty insurance. Future policy benefits for individual participating traditional life insurance are based on the net level premium method, calculated using the guaranteed mortality and nonforfeiture...

  • Page 114
    ... unamortized policy acquisition costs. Premium deficiency reserves have been recorded for the group single premium annuity business, which consists of limited-payment, long duration traditional and non-participating annuities; structured settlements and single premium immediate annuities with life...

  • Page 115
    ... the auto line of business and a release of prior year reserves for group personal catastrophe coverage. The amounts incurred for claims and claim adjustment expenses for accident and health related to prior years were primarily due to long-term disability claim termination experience. 114 Growing...

  • Page 116
    ... income at the date of demutualization. The policies included in the Closed Block are specified individual life insurance policies and individual annuity contracts that were in force on the effective date of the Plan of Reorganization and for which Prudential Insurance is currently paying or expects...

  • Page 117
    ......Policyholders' account balances ...Other Closed Block liabilities ...Total Closed Block Liabilities ...Closed Block Assets Fixed maturities: Available for sale, at fair value ...Equity securities, available for sale, at fair value ...Commercial loans ...Policy loans ...Other long-term investments...

  • Page 118
    ... the reinsurers were unable to meet their obligations to the Company under the terms of the reinsurance agreements. Reinsurance premiums, commissions, expense reimbursements, benefits and reserves related to reinsured longduration contracts are accounted for over the life of the underlying reinsured...

  • Page 119
    ... 71 82 $1,418 $1,571 Life insurance ...Property and casualty ...Other reinsurance ...Total reinsurance recoverable ... Three major reinsurance companies account for approximately 50% of the reinsurance recoverable at December 31, 2002. The Company periodically reviews the financial condition of its...

  • Page 120
    ... long-term debt ...Maturity Dates Rate 2002 2001 (in millions) $ 333 777 640 1,131 384 785 - 17 690 $4,757 $ 333 777 640 1,147 348 975 80 15 989 $5,304 2017(a) 2023(a) 2023(a) 2003-2035 2010 2003-2035 2003 2005-2010 2003-2025 (b) 7.245% 8.695% 5.97%-15.00% (c) (d) (e) (f) (g) (a) Annual scheduled...

  • Page 121
    ...primarily the "debt coverage service account" discussed below. PHLLC's ability to meet its obligations under the IHC debt is dependent principally upon sufficient available funds being generated by the Closed Block Business and the ability of Prudential Insurance, the sole direct subsidiary of PHLLC...

  • Page 122
    ... than $34.10, the settlement rate will be equal to $50 divided by the "applicable market value" of Common Stock per purchase contract. At the time of issuance of the Units by Prudential Financial, the Trust also issued 426,805 shares of common securities to Prudential Financial at a price of $50 per...

  • Page 123
    ... the life of the redeemable capital securities. 14. STOCKHOLDERS' EQUITY Preferred Stock Prudential Financial adopted a shareholder rights plan (the "rights plan") under which each outstanding share of Common Stock is coupled with a shareholder right. The rights plan is not applicable to any Class...

  • Page 124
    ...allotment option granted to underwriters in the initial public offering. The Common Stock is traded on the New York Stock Exchange under the symbol "PRU." Also on the date of demutualization, Prudential Financial completed the sale, through a private placement, of 2.0 million shares of Class B Stock...

  • Page 125
    ..., respectively, were paid as of December 31, 2002. Stock Conversion Rights of the Class B Stock Prudential Financial may, at its option, at any time, exchange all outstanding shares of Class B Stock into such number of shares of Common Stock as have an aggregate average market value equal to 120...

  • Page 126
    ...charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions as well as valuing investments and certain assets and accounting for deferred taxes on a different basis. Statutory net income (loss) of Prudential Insurance...

  • Page 127
    ... attributable to the Financial Services Businesses available to holders of Common Stock after direct equity adjustment ...Effect of dilutive securities and compensation programs Stock options ...Deferred and long-term compensation programs ...Put options ...Diluted earnings per share Income from...

  • Page 128
    ... dilutive shares associated with the Class B Stock. 16. STOCK-BASED COMPENSATION Stock Options The Company's Board of Directors adopted the Prudential Financial, Inc. Stock Option Plan (the "Plan"). Nonqualified Stock Options and Incentive Stock Options as well as Stock Appreciation Rights ("SARs...

  • Page 129
    ... the fair value recognition provisions of SFAS No. 123, "Accounting for StockBased Compensation," as amended, prospectively for all new awards granted to employees on or after January 1, 2003. Generally, awards under the Plan vest over three years. The expense related to employee stock options to be...

  • Page 130
    ... The Company applies SFAS No. 123 in accordance with Emerging Issues Task Force Issue No. 96-18 "Accounting for Equity Instruments That Are Issued to Other Than Employees" and related interpretations in accounting for its non-employee stock options. Prudential Financial 2002 Annual Report 129

  • Page 131
    ... interest rate ...Expected life of stock option ...1.30% 35.60% 2.15% 3.21 years 2001 1% 37% 4.07% 3.95 years The dividend yield reflects the assumption that the current dividend payout will continue with no anticipated increases. A summary of the status of the Company's non-employee stock option...

  • Page 132
    ... held in participants' accounts and related remaining deferred compensation expense amounted to $21 million. Forfeited shares are reflected as treasury stock of the Company as of the date of forfeiture. 17. EMPLOYEE BENEFIT PLANS Pension and Other Postretirement Plans The Company has funded and non...

  • Page 133
    ...Annuity purchase ...Employer contributions ...Plan participants' contributions ...Benefits paid ...Foreign currency changes ...Fair value of plan assets at end of period ...Funded status Funded status at end of period ...Unrecognized transition (asset) liability ...Unrecognized prior service costs...

  • Page 134
    ... January 1, 2001 for new employees and January 1, 2002 for existing employees. Other postretirement benefit plan assets consist of group and individual life insurance policies, common stocks, corporate debt securities, U.S. government securities, short-term investments and tax-exempt municipal...

  • Page 135
    ... cost. Market related value is a measure of asset value that reflects the difference between actual and expected return on assets over a 5 year period. The expected rates of return for 2003 for pension benefits and other postretirement benefits are 8.75% and 7.75%, respectively. Assumed health care...

  • Page 136
    ... taxes ...Change in valuation allowance ...Non-deductible expenses ...Other ...Total income tax expense (benefit) ...$ 23 (183) - (64) (41) 37 16 20 $(192) 2001 (in millions) $ (49) - (200) (63) (9) 17 241 29 $ (34) 2000 $253 - 100 (5) (4) 14 31 9 $398 Prudential Financial 2002 Annual Report 135

  • Page 137
    ... ...Investments ...Litigation related reserves ...Other ...Deferred tax assets before valuation allowance ...Valuation allowance ...Deferred tax assets after valuation allowance ...Deferred tax liabilities Net unrealized investment gains ...Deferred policy acquisition costs ...Employee benefits...

  • Page 138
    ... private placement fixed maturities is based on amounts estimated by management. Commercial Loans The estimated fair value of commercial loans is primarily based upon the present value of the expected future cash flows discounted at the appropriate U.S. Treasury rate or Japanese Government Bond rate...

  • Page 139
    ...fair value for the following instruments: fixed maturities available for sale, equity securities, short-term investments, cash and cash equivalents, restricted cash and securities, separate account assets and liabilities, trading account assets, broker-dealer related receivables/payables, securities...

  • Page 140
    ... on the Company's investment portfolio by providing comparable exposure to fixed income securities that might not be available in the primary market. Credit derivatives are sold for a premium and are recorded at fair value. Forward contracts are used by the Company to manage market risks relating to...

  • Page 141
    ... fair value (market value) of contracts with a positive fair value (market value) at the reporting date. Because exchange-traded futures and options are effected through regulated exchanges, and positions are marked to market on a daily basis, the Company has little exposure to credit-related losses...

  • Page 142
    ...life, term life, universal life, other non-participating individual life insurance and variable and fixed annuity products primarily to the U.S. mass affluent market and mass market. The Group Insurance segment manufactures and distributes a full range of group life, group disability, long-term care...

  • Page 143
    ... INFORMATION (continued) and Canadian life insurance. The divested businesses consist primarily of the lead-managed equity underwriting for corporate issuers and institutional fixed income businesses of Prudential Securities Group Inc. (see Note 4), and also include Gibraltar Casualty, residential...

  • Page 144
    ... business operations. The related charges offset against net realized investment gains and losses relate to policyholder dividends, amortization of deferred policy acquisition costs and reserves for future policy benefits. A percentage of net realized investment gains on specified Gibraltar Life...

  • Page 145
    ... Adjustments Net and Costs Businesses Expenses Taxes (in millions) Individual Life and Annuities ...$ 390 $(162) $ 15 243 Group Insurance ...155 (129) - - - - 26 Property and Casualty Insurance ...10 (6) - - - - 4 Total Insurance Division ...Investment Management ...Financial Advisory ...Retirement...

  • Page 146
    ... Adjustments Net and Costs Businesses Expenses Taxes (in millions) Individual Life and Annuities ...$ 380 $(108) $ 12 284 Group Insurance ...70 (72) - - - - (2) Property and Casualty Insurance ...95 (4) - - - - 91 Total Insurance Division ...Investment Management ...Financial Advisory ...Retirement...

  • Page 147
    ... Adjustments Net and Costs Businesses Expenses Taxes (in millions) Individual Life and Annuities ...$ 261 $ (14) $ 2 249 Group Insurance ...158 (2) - - - - 156 Property and Casualty Insurance ...150 16 - - - - 166 Total Insurance Division ...Investment Management ...Financial Advisory ...Retirement...

  • Page 148
    ... Credited to of Deferred Net Policyholders' Policy Investment Policyholders' Account Dividends to Interest Acquisition Revenues Income Benefits Balances Policyholders Expense Costs (in millions) Financial Services Businesses: Individual Life and Annuities ...Group Insurance ...Property and Casualty...

  • Page 149
    ... Credited to of Deferred Net Policyholders' Policy Investment Policyholders' Account Dividends to Interest Acquisition Revenues Income Benefits Balances Policyholders Expense Costs (in millions) Financial Services Businesses: Individual Life and Annuities ...Group Insurance ...Property and Casualty...

  • Page 150
    ... Credited to of Deferred Net Policyholders' Policy Investment Policyholders' Account Dividends to Interest Acquisition Revenues Income Benefits Balances Policyholders Expense Costs (in millions) Financial Services Businesses: Individual Life and Annuities ...Group Insurance ...Property and Casualty...

  • Page 151
    ...International Insurance ...International Investments ...Total International Insurance and Investments Division ...Corporate and Other ...Total Financial Services Businesses ...Closed Block Business ...Total ... 22. COMMITMENTS AND GUARANTEES, CONTINGENCIES AND LITIGATION Commitments and Guarantees...

  • Page 152
    ... $266 million. Any such payments would result in increases in goodwill. A number of guarantees provided by the Company relate to sales or transfers of real estate, in which the unconsolidated investor has borrowed funds, and the Company has guaranteed their obligation to their lender. In some cases...

  • Page 153
    ... claims relating to events that occurred prior to the closing date. This litigation includes purported class actions and individual suits involving various issues, including payment of claims, denial of benefits, vicarious liability for malpractice claims, and contract disputes with provider groups...

  • Page 154
    ... the award is ultimately confirmed, the Company's share of damages, with interest, would exceed $300 million and would be recorded as revenue. In 1999, a class action lawsuit was filed in the Marion County, Ohio Court of Common Pleas against Jeffrey Pickett (a former Prudential Securities financial...

  • Page 155
    ... of directors and shareholders of the mutual funds advised by Skandia U.S.'s subsidiaries. In February 2003, the Company announced an agreement with Wachovia Corporation ("Wachovia") to combine each company's respective retail securities brokerage and clearing operations to form a new firm, which...

  • Page 156
    ...) 2002 Financial Services Businesses ASSETS Fixed maturities: Available for sale, at fair value ...Held to maturity, at amortized cost ...Trading account assets, at fair value ...Equity securities, available for sale, at fair value ...Commercial loans ...Policy loans ...Securities purchased under...

  • Page 157
    ...) Financial Services Businesses REVENUES Premiums ...Policy charges and fee income ...Net investment income ...Realized investment losses, net ...Commissions and other income ...Total revenues ...BENEFITS AND EXPENSES Policyholders' benefits ...Interest credited to policyholders' account balances...

  • Page 158
    ...instances, the Company may not change the allocation methodology or accounting policies for the allocation of earnings between the Financial Services Businesses and Closed Block Business without the prior consent of the Class B Stock investors or IHC debt bond insurer. General corporate overhead not...

  • Page 159
    ...the Financial Services Businesses. Results of the Financial Services Businesses also include the cost of supplemental benefits paid to policyholders that the Company had previously agreed to provide insurance for reduced or no premium in accordance with contractual settlements related to prior sales...

  • Page 160
    ... of the Closed Block Business. The Common Stock was issued to eligible policyholders in Prudential Insurance's demutualization and sold to investors in Prudential Financial's initial public offering. The Common Stock began trading on the New York Stock Exchange under the symbol "PRU" on December...

  • Page 161
    ...markets; reestimates of our reserves for future policy benefits and claims; changes in our assumptions related to deferred policy acquisition costs; our exposure to contingent liabilities; catastrophe losses; investment losses and defaults; changes in our claims-paying or credit ratings; competition...

  • Page 162
    ... shareholder, you may access your account online or send an e-mail by visiting prudential.equiserve.com or contacting EquiServe. By phone: 800-305-9404 (U.S.) Stock and General Information 732-512-3782 (O utside U.S.) 800-619-2837 (TDY/TD D # hearing-impaired) Customer Service Representatives...