Prudential 2002 Annual Report Download - page 78
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Please find page 78 of the 2002 Prudential annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.Insurance, Annuities and Guaranteed Products Liquidity
General
Our principal cash flow sources from insurance, annuities and guaranteed products are premiums and annuity
considerations, investment and fee income, and investment maturities and sales. We supplement these cash
inflows with financing activities. We actively use our balance sheet capacity for financing activities on a secured
basis through securities lending, repurchase and dollar roll transactions and on an unsecured basis for temporary
cash flow mismatch coverage. Historically, we have also used our balance sheet capacity to earn additional spread
income, primarily through our debt-financed investment portfolio included in Corporate and Other operations,
although this portfolio was substantially reduced in 2001, with the remainder liquidated in 2002.
Cash outflow requirements principally relate to benefits, claims, dividends paid to policyholders, and
payments to contract holders as well as amounts paid to policyholders and contract holders in connection with
surrenders, withdrawals and net policy loan activity. Uses of cash also include commissions, general and
administrative expenses, purchases of investments, and debt service and repayments in connection with financing
activities.
We believe that cash flows from operating and investing activities of our insurance, annuity and guaranteed
products operations are adequate to satisfy liquidity requirements of these operations based on our current liability
structure and considering a variety of reasonably foreseeable stress scenarios. The continued adequacy of this
liquidity will depend upon 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 to ensure that all liquidity requirements are satisfied. Some of our
products, such as guaranteed products offered to institutional customers of the Retirement segment, provide for
payment of accumulated funds to the contract holder at a specified maturity date unless the contract holder elects
to roll over the funds into another contract with us. We regularly monitor our liquidity requirements associated
with policyholder and contractholder obligations so that we can manage cash inflows to match anticipated cash
outflow requirements.
Gross account withdrawals for Prudential Insurance and its insurance subsidiaries amounted to $6.608 billion
and $7.156 billion for the years ended December 31, 2002 and 2001, respectively. These withdrawals include
contractually scheduled maturities of traditional guaranteed investment contracts totaling $1.064 billion and
$1.671 billion in 2002 and 2001, respectively. We experienced these withdrawals on guaranteed products as a
result of contractual expirations of products sold in the late 1980s and early 1990s. Since these contractual
withdrawals, as well as the level of surrenders experienced, were consistent with our assumptions in asset liability
management, the associated cash outflows did not have an adverse impact on our overall liquidity.
We use surrender charges and other contract provisions to mitigate the extent, timing and profitability impact
of withdrawals of funds by customers from annuity contracts. The following table sets forth withdrawal
characteristics of our general account annuity reserves and deposit liabilities (based on statutory liability values)
as of the dates indicated.
As of December 31,
2002 2001
Amount % of Total Amount % of Total
($ in millions)
Not subject to discretionary withdrawal provisions ............................... $17,566 54% $17,593 57%
Subject to discretionary withdrawal, with adjustment:
Withmarketvalueadjustment ............................................ 5,282 16% 4,489 15%
At contract value, less surrender charge of 5% or more ........................ 2,065 6% 1,285 4%
Subtotal ......................................................... 24,913 76% 23,367 76%
Subject to discretionary withdrawal at contract value with no surrender charge or
surrender charge of less than 5% ............................................ 8,053 24% 7,239 24%
Total annuity reserves and deposit liabilities ..................................... $32,966 100% $30,606 100%
Prudential Financial 2002 Annual Report 77