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Prudential Financial 2001 Annual Report

Table of contents

  • Page 1
    Prudential Financial 2001 Annual Report

  • Page 2
    ... me $100 - Billio n 2 2 % Equity 1 3 % Non-proprietary wrap-fee & other 1 0 % Inte rnatio nal 3 % Re al e s tate '99 '00 '01 On the date of demutualization, Prudential Financial established the Financial Services Businesses and Closed Block Business. The Common Stock reflects the performance of the...

  • Page 3
    ... and Closed Block Business. The Financial Services Businesses and Closed Block Business were established in connection with demutualization. As a result, book value per share and attributed equity for periods prior to demutualization are not presented. Book value per share excludes the effect of net...

  • Page 4
    Managing we alth to day is a two -s ide d c halle nge . The re 's gro wing it. And the re 's pro te c ting it. One c o mpany is unique ly s uite d to he lp o ur c lie nts do bo th s uc c e s s fully. Prudential... a ye ar in Ne w Yo rk City's Time s Square . 2 Gro wing and Pro te c ting Yo ur We alth

  • Page 5
    ...we call "advised choice," which makes selective use of outside asset managers to provide investment advice for our products. Additionally, we've consolidated our self-managed equity products under the highly regarded Jennison Associates, to bring a stronger growth orientation to our product mix. The...

  • Page 6
    ... acquisition of Kyoei Life Insurance, now called Gibraltar Life. Gibraltar was the 11th-largest insurance company in Japan at the time we purchased it. It has given us instant access to the middle-market consumer and added more than 6,000 agents, 500 offices and nearly 5 million in-force policies...

  • Page 7
    ... over $2 billion in cash at the parent company which may be used to accelerate growth of existing businesses, buy back stock, or make acquisitions. Our selection among these alternatives will be driven by our commitment to building shareholder value through ROE growth. In addition, we believe that...

  • Page 8
    ... fundame ntal s tre ngth o f The Ro c k.® People Growth of Volunteers - 4 0 ,0 0 0 - 3 0 ,0 0 0 - 2 0 ,0 0 0 M aking a difference Emplo ye e vo lunte e rs gathe r in Ne w Yo rk City's Eas t Rive r Park. 1 0 / 6 / 0 1 Emplo ye e s , frie nds and familie s pitc he d in o n a habitat re s to ratio...

  • Page 9
    ... Day has grown to become one of the largest corporate-sponsored volunteer programs in the world. On October 6, 2001, in cities from Washington, D.C., to Tokyo, Japan, nearly half of all Prudential employees donated an unprecedented 300,000 hours to 849 organized community projects in 17 countries...

  • Page 10
    ... c lie nts is the c halle nge o f o ur U.S. Co ns ume r bus ine s s , whic h c o ns is ts o f fo ur primary are as o f bus ine s s : life ins uranc e , we alth manage me nt s e rvic e s , inve s tme nt pro duc ts and pro pe rty and c as ualty ins uranc e . Our go al is to...

  • Page 11
    ... strength is one reason why so many Americans rely on Prudential to help them protect the things that matter most. Nine million Americans now rely on Prudential Financial for insurance to secure their families, businesses, homes, cars and other high-value assets. This number is a tremendous source...

  • Page 12
    ...to work with us the way they want to-from fee-based accounts to online trading and full-time portfolio management. We believe our commitment to service, choice and performance sets our securities brokerage apart from competitors on Wall Street. A simple idea with a powerful impact for investors Two...

  • Page 13
    ...rmatio n s ys te ms - inc luding s to c k-trading and We b applic atio ns - within 4 8 ho urs o f the attac ks . Claims paying func tio ns fo r o ur pro pe rty and c as ualty, life ins uranc e and annuity bus ine s s e s re maine d uninte rrupte d. Prude ntial Financ ial 2 0 0 1 Annual Re po rt 11

  • Page 14
    Rock Solid® Protection Te rm Life Ins uranc e Variable Life Ins uranc e Unive rs al Life Ins uranc e Who le Life Ins uranc e Dis ability Inc o me Ins uranc e Liability Ins uranc e Auto Ins uranc e Ho me o wne rs Ins uranc e Lo ng Te rm Care Ins uranc e Wate rc raft Ins uranc e Annuitie s Financ ial...

  • Page 15
    .... Clients can talk to a Prudential Financial professional to help assess their need for long term care insurance, and plan accordingly. They can also find a wealth of information on the Web at the Prudential Long Term Care Learning Center. Prude ntial Financ ial 2 0 0 1 Annual Re po rt 13

  • Page 16
    ... of our asset-gathering strategy is to expand our distribution platform across multiple points of access-Prudential's sales force, independent retail brokers, wholesalers and employee retirement plans. In 2001, more third-party brokers, agents and other intermediaries sold Prudential products than...

  • Page 17
    ... rs Large Cap Gro wth Fund Large Cap Value Fund S mall Cap Gro wth Fund S mall Cap Value Fund Inte rnatio nal Equity Fund To tal Re turn Bo nd Fund Strategic Partners Funds: a model of Advised Choice Prudential Financial is working with other elite asset managers to create an innovative group of...

  • Page 18
    ... me nt o pe ratio n. Fro m Main Stre e t to Wall Stre e t, individuals and ins titutio ns e ntrus t us with $ 3 8 8 billio n in as s e ts , making Prude ntial Financ ial o ne o f the large s t as s e t manage rs in the wo rld. Asset Management Investment savvy Ne wark's Gate way Ce nte r is he...

  • Page 19
    ... mutual fund choices Investors who choose Prudential Financial will find a diverse array of Prudential-managed mutual funds covering a wide range of asset classes and investment styles-stock, bond and money market, growth and value, domestic and international, and sector funds-each designed to help...

  • Page 20
    ... e to pe ns io n fund manage me nt- to he lp the m re c ruit, re tain, ins ure and e nric h the ir wo rkfo rc e . On the move Prude ntial Re lo c atio n Se rvic e s is a le ading c ho ic e amo ng e mplo ye rs . Employee Benefits Protection at work Wo rke rs at Is...

  • Page 21
    ... e s . Making connections online At Prudential Financial, we do business with more than 12 million employee benefit plan participants. By using Web-based technology, we're bringing our products and services right to their computer desktops. Account information, planning tools, customer service and...

  • Page 22
    ... re nt, but o ur mis s io n is the s ame : to he lp c lie nts gro w and pro te c t the ir we alth. Personal service, advice and guidance outside the U.S. International Financ ial advis o rs in Bue no s Aire s c o nduc t a po rtfo lio re vie w fo r a c lie nt. An advis o r in Taiwan dis...

  • Page 23
    ...acquisition of Kyoei Life Insurance Co. Ltd., now called Gibraltar Life Insurance Company, Ltd., which was the 11th-largest insurer in Japan in terms of assets. Gibraltar adds distribution scale and more middle-market focus to our Japanese operations. Growth of international new annualized premiums...

  • Page 24
    ... managed funds is one of today's largest index fund families overseas, which enables clients to diversify among many markets, asset classes and currencies throughout the world. And Prudential also brings clients a wide range of products from third-party asset managers, each carefully selected...

  • Page 25
    ...ve lo p, pro vide s a s tro ng fo undatio n fo r brand building into the ne xt c e ntury. In 2 0 0 1 we intro duc e...a ne w glo bal brand, Prume ric a Financ ial. Rock around the world Prude ntial's Ro c k lo go - alre... as s e ts unde r manage me nt. Prude ntial Financ ial 2 0 0 1 Annual Re po rt 23

  • Page 26
    ... U.S. Equal Employment Opportunity Commission James G. Cullen Retired President and COO Bell Atlantic Corporation Carolyne K. Davis Independent Health Care Consultant Allan D. Gilmour Retired Vice Chairman Ford Motor Company William H. Gray III President and CEO The College Fund/ UNCF Jon F. Hanson...

  • Page 27
    ... products and services are distributed by Prudential Investment Management Services LLC, Three Gateway Center, 14th Floor, Newark, NJ 07102, Prudential Securities, 199 Water Street, New York, NY 10292, and Pruco Securities Corporation, 751 Broad Street, Newark, NJ 07102. Best on the Street Analysts...

  • Page 28
    Notes This page intentionally left blank 26 Growing and Protecting Your Wealth

  • Page 29
    Financial Section Prudential Financial 2001 Annual Report 27

  • Page 30
    28 Growing and Protecting Your Wealth

  • Page 31
    ... Closed Block Business. The Financial Services Businesses refer to the businesses in our four operating divisions and our Corporate and Other operations. The U.S. Consumer division consists of our Individual Life Insurance, Private Client Group, Retail Investments and Property and Casualty Insurance...

  • Page 32
    ...that we sold in a prior period resulted in a pretax loss of $41 million in 1998 and a pre-tax profit of $9 million in 1997, primarily related to our remaining obligations with respect to this business. On December 18, 2001, Prudential Insurance converted from a mutual life insurance company owned by...

  • Page 33
    ... Employee Benefits ...International Insurance ...International Securities and Investments ...Total International ...Investment Management and Advisory Services ...Other Asset Management ...Total Asset Management ...Corporate and Other ...Total-Financial Services Businesses ...Closed Block Business...

  • Page 34
    ... Businesses and our Closed Block Business. In addition, within the Financial Services Businesses we analyze our operating performance using a non-GAAP measure we call "adjusted operating income." Prior to the date of demutualization, we also analyzed results of our Traditional Participating Products...

  • Page 35
    ...Closed Block Business ...Total consolidated revenues ...Financial Services Businesses: Adjusted operating income (loss) (2): Individual Life Insurance ...Private Client Group ...Retail Investments ...Property and Casualty Insurance ...Total U.S. Consumer ...Group Insurance ...Other Employee Benefits...

  • Page 36
    ... pay pre-acquisition Gibraltar Life policyholders a dividend generally equal to 70% of any net realized investment gains from the collection or disposition of loans and investment real estate in excess of the value of such assets included in the Reorganization Plan. The related charge for dividends...

  • Page 37
    ... Individual Life Insurance, Private Client Group, Retail Investments and Property and Casualty Insurance segments. The Employee Benefits division consists of our Group Insurance and Other Employee Benefits segments. The International division consists of our Prudential Financial 2001 Annual Report...

  • Page 38
    ...be used exclusively for the payment of benefits and policyholder dividends, expenses and taxes with respect to these products, in a regulatory mechanism referred to as the "Closed Block." We selected the amount and type of Closed Block assets and Closed Block liabilities included in the Closed Block...

  • Page 39
    ... earn commissions and fees from the sale and servicing of mutual funds, annuities, defined contribution and other investment products at a level that enables us to earn a margin over the expense of providing such services; • the amount of our assets under management and changes in their fair value...

  • Page 40
    ... 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 mortality is generally based on the Company...

  • Page 41
    ...Businesses and our Closed Block Business. In addition, within the Financial Services Businesses, we analyze our operating performance using a non-GAAP measure we call "adjusted operating income." Prior to the date of demutualization, we also analyzed results of our Traditional Participating Products...

  • Page 42
    ...for the Financial Services Businesses, as well as the divisions thereof and Corporate and Other operations, and the Closed Block Business. We also discuss the items excluded from adjusted operating income, i.e., realized investment gains, sales practices remedies and costs, demutualization costs and...

  • Page 43
    ... in both segments in the division. Adjusted operating income of the Closed Block Business decreased $111 million, or 20%, from 2000 to 2001, primarily from a $144 million reserve for unreported death claims and related expenses and a decline in net Prudential Financial 2001 Annual Report 41

  • Page 44
    ... our dividend scale and the Gibraltar Life dividends. See "-Results of Operations for Financial Services Businesses by Division and Closed Block Business" below. We amortize deferred policy acquisition costs for interest sensitive products based on estimated gross profits, which include net realized...

  • Page 45
    ... realized net gains on sales of equity securities of $450 million in 2000, compared to $223 million in 1999. We realized net gains from disposals of direct real estate and real estate related joint ventures of $149 million in 2000 compared to $703 million Prudential Financial 2001 Annual Report 43

  • Page 46
    ... from divested businesses primarily relate to the former lead-managed equity underwriting for corporate issuers and institutional fixed income businesses of Prudential Securities and the operations of Gibraltar Casualty Company, a commercial property and casualty insurer that we sold in September...

  • Page 47
    ... before income taxes in 1999. This increase in the effective rate was due primarily to the mutual life insurance company tax discussed above and an increase in demutualization expenses. Discontinued Operations In December 1998, we entered into a definitive agreement to sell our healthcare operations...

  • Page 48
    ...before income taxes: Financial Services Businesses: U.S. Consumer ...Employee Benefits ...International ...Asset Management ...Corporate and Other ...Total Financial Services Businesses ...Closed Block Business (2) ...Total ...Assets: Financial Services Businesses: U.S. Consumer ...Employee Benefits...

  • Page 49
    ... pays the Individual Life Insurance and Private Client Group segments for distribution of its products by Prudential Agents and Financial Advisors. The Individual Life Insurance, Retail Investments and Property and Casualty Insurance segments also pay our Investment Management and Advisory Services...

  • Page 50
    .... We have taken actions to reduce the operating cost structures and overhead levels of the businesses of the U.S. Consumer division. In the Individual Life Insurance segment, a program to restructure our field management and agency structure resulted in a reduction in the number of sales territories...

  • Page 51
    .... (3) Related charges consist of the following: Year Ended December 31, 2001 2000 1999 (in millions) $ (1) $ (4) $ - 13 6 1 $ 12 $ 2 $ 1 Reserves for future policy benefits ...Amortization of deferred policy acquisition costs ...Total ... 2001 to 2000 Annual Comparison. Adjusted operating income of...

  • Page 52
    ... costs for this program were substantially completed in 2001. Additionally, in 2000 we recorded 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...

  • Page 53
    ... insurance solutions in support of estate and wealth transfer planning for affluent individuals and corporate-owned life insurance for businesses, toward the mass affluent market. We believe the 2001 sales results for the PruSelect channel for products other than corporate-owned life insurance...

  • Page 54
    ... 1999 Annual Comparison. The total cash value of surrenders increased $44 million, or 7%, in 2000 from 1999. The level of surrenders as a percentage of mean future policy benefits, policyholders' account balances and separate account balances remained constant from 1999 to 2000. Private Client Group...

  • Page 55
    ... benefited in 2000 from the sale of a major portion of the consumer bank's credit card receivables. The Private Client Group segment had a loss of $79 million, on an adjusted operating income basis, for the fourth quarter of 2001. 2000 to 1999 Annual Comparison. Adjusted operating income increased...

  • Page 56
    .... 2000 to 1999 Annual Comparison. Total non-interest expenses increased $192 million, or 8%, from 1999 to 2000. The increase came primarily from employee compensation and benefits at our retail securities brokerage operations, which increased by $108 million, or 8%, due to higher commissions paid to...

  • Page 57
    ..., reflecting growth in our average assets under management for these products. In addition, premiums increased by $19 million as a result of increased conversions of deferred annuities by our customers to income-paying status. Net investment income declined $13 million, from $491 million in 1999 to...

  • Page 58
    ... and our variable annuity products. Sales Results and Assets Under Management The following table sets forth the changes in the total mutual fund assets, excluding wrap-fee products, and the balance of wrap-fee product assets and annuities, at fair market value for mutual funds and account value for...

  • Page 59
    ... product assets at end of period ...Net mutual fund sales (redemptions) other than money market(3) ...Variable Annuities(1): Beginning total account value ...Sales, excluding exchanges ...Exchanges sales ...Surrenders, withdrawals and exchange redemptions ...Change in market value, interest credited...

  • Page 60
    ... 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. 2000 to 1999 Annual Comparison. Mutual funds and wrap-fee product assets under management amounted to $77...

  • Page 61
    ... distribution capabilities in direct, affinity group, property and casualty agent and independent agent channels, and a provision for refunds or credits to certain New Jersey automobile policyholders under insurance regulations based on profits generated from that business, as noted above. While, as...

  • Page 62
    ... limited the growth of new business from some of these other distribution channels, based on our evaluation of the quality of the business. 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...

  • Page 63
    ... growth of business from some of our distribution channels, other than Prudential Agents, 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...

  • Page 64
    ... forces for distribution of products, and pay the Individual Life Insurance and Private Client Group segments within the U.S. Consumer division for distribution of their products through Prudential Agents and Financial Advisors. These segments also pay our Investment Management and Advisory Services...

  • Page 65
    ... Ended December 31, 2001 2000 1999 (in millions) $ 7 $(32) $(147) 7 1 4 $14 $(31) $(143) Reserves for future policy benefits ...Amortization of deferred policy acquisition costs ...Total ... 2001 to 2000 Annual Comparison. Adjusted operating income of our Employee Benefits division decreased $204...

  • Page 66
    ... the growth in business in force resulting from new sales, which increased in 2000. Persistency increased from 88% in 1999 to 91% in 2000. The remainder of the increase in revenues came primarily from higher fees on products sold to employers for funding of employee benefit programs and retirement...

  • Page 67
    ...or 22%, in policyholders' benefits, including the change in policy reserves. This increase reflected less favorable group life insurance claims experience in 2001, which included an increase in our estimate of incurred but not reported claims, as well as the growth of business in force. Based on our...

  • Page 68
    ... that build cash value but do not purchase face amounts of group universal life insurance. (2) Includes long-term care products. 2001 to 2000 Annual Comparison. Total new annualized premiums increased $147 million, or 30%, from 2000 to 2001, with an increase of $162 million in group life sales...

  • Page 69
    ...in connection with our participation in the rehabilitation of another life insurance company was essentially offset by higher fee-based revenues resulting from growth in our full service defined contribution and real estate and relocation businesses in 2000. Benefits and Expenses 2001 to 2000 Annual...

  • Page 70
    ... of client balances to products currently included in this business and a further increase of $2 million as a result of policyholder credits issued in connection with Prudential's demutualization. 2001 to 2000 Annual Comparison. Assets under management in our full service defined contribution...

  • Page 71
    ... contributions, reflecting an increased participant base. However, the $1.5 billion net sales in 2000 were largely offset by negative changes in market value of $1.2 billion resulting from poor performance in the equity markets. Assets under management for guaranteed products at December 31...

  • Page 72
    ... Annual Comparison. Adjusted operating income of our International division increased $201 million, or 62%, in 2001 from 2000. The increase came from an increase of $315 million in adjusted operating income from our International Insurance segment, including $262 million from Gibraltar Life which...

  • Page 73
    ... in Korea and Taiwan more than offset continued costs associated with our expansion into additional countries. Our Japanese insurance operations reported continuing improved results, with adjusted operating income of $335 million in 2001 compared to $315 Prudential Financial 2001 Annual Report 71

  • Page 74
    ... administrative expenses associated with the greater volume of business in force and increased expenses related to opening additional agencies in existing markets and expansion into new markets. On a constant exchange rate basis, benefits and expenses increased $235 million, or 19%. 72 Growing and...

  • Page 75
    ... sold by the Gibraltar Life sales force for our existing operation prior to the acquisition 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...

  • Page 76
    ... expansion of this developing business essentially offset its revenue growth. The International Securities and Investments segment reported a loss of $47 million on an adjusted operating income basis, for the fourth quarter of 2001. 2000 to 1999 Annual Comparison. Adjusted operating income increased...

  • Page 77
    ... underwriters, engages in equity securities sales and trading, manages our hedge portfolios. We include the division's asset-based management fees in the line captioned "Commissions and other income" in our consolidated statements of operations. The Asset Management division pays the expenses of its...

  • Page 78
    ... from declines in market value of the underlying assets on which our fees are based. Although 2000 adjusted operating income reflected expenses related to the consolidation of substantially all of our public equity management capabilities into our Jennison unit, these expenses were largely offset by...

  • Page 79
    ... management of institutional customer assets reflected a $25 million performance incentive fee earned in 2000. Revenues from management of general account assets increased $21 million, reflecting increased market values on fixed income securities. 2000 to 1999 Annual Comparison. Revenues increased...

  • Page 80
    ... individual health insurance, group credit insurance and Canadian life insurance. The divested businesses include the lead-managed equity underwriting for corporate issuers and institutional fixed income businesses of Prudential Securities, Gibraltar Casualty Company, a Canadian life insurance...

  • Page 81
    ... income on pension assets and amortization of deferred gains. This income is partially offset in our consolidated results by charges for our other retirement plans allocated both to Corporate and Other operations and our business segments. On a consolidated basis, our net pension credit related...

  • Page 82
    ... our business segments. On a consolidated basis, our net pension credit related to continuing operations amounted to $362 million in 2000 and $201 million in 1999. The increase in pension plan income came primarily from a reduction in the number of plan participants due to the sale of our healthcare...

  • Page 83
    ... date of demutualization. The Closed Block Business, which represents results of our Traditional Participating Products segment prior to the demutualization, includes our in force traditional participating life insurance and annuity products, and assets that will be used for the payment of benefits...

  • Page 84
    ... of deferred policy acquisition costs, and a $26 million decline in operating expenses. The $141 million reduction in the charge for policyholder dividends, which excludes the portion of the dividend related to net realized investment gains, reflects dividend scale changes for 2002. Income from...

  • Page 85
    ... whole life into variable life insurance products. We ceased sales of traditional participating products in connection with our demutualization. Policy Surrender Experience The following table sets forth policy surrender experience for the Closed Block Business, measured by cash value of surrenders...

  • Page 86
    ... cash value of surrenders increased $29 million, or 2%, from 2000 to 2001, primarily as a result of our efforts to locate policyholders in connection with our demutualization. The level of surrenders as a percentage of mean future policy benefit reserves was unchanged from 2000 to 2001. 2000 to 1999...

  • Page 87
    ... relation to deferred policy acquisition costs, deferred taxes, reserve calculation assumptions and required investment reserves, including the asset valuation reserve and the interest maintenance reserve. The New Jersey insurance regulator is also authorized to disallow the payment of any dividend...

  • Page 88
    ... and lends the proceeds of its borrowings to Prudential Insurance and its subsidiaries, generally at cost. Borrowings of the destacked subsidiaries from Prudential Funding have been repriced to market terms as of the date of demutualization. Prudential Securities also engages in external unsecured...

  • Page 89
    ... 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 Business...

  • Page 90
    ...a bond insurer. We expect that the IHC debt will be serviced by, and holders of the Class B Stock will receive as dividends, net cash flows of the Closed Block Business over time if and when such funds are dividended out of Prudential Insurance. Insurance, Annuities and Guaranteed Products Liquidity...

  • Page 91
    ... require new underwriting and acquisition costs to replace. Therefore, our exposure to increased surrenders is considerably less for life insurance policies than for annuities. In addition, many of our contracts contain provisions that discourage early surrender. Market value adjustment features in...

  • Page 92
    ...based borrowings. Prudential Securities Group finances its balance sheet through asset-backed financing, including repurchase transactions, securities lending arrangements and free credit balances in customers' accounts, as well as internal short-term and long-term borrowings from Prudential Funding...

  • Page 93
    ... to fund investments in private placement securities and unused credit card and home equity lines. In connection with our consumer banking business, loan commitments for credit cards, home equity lines of credit and other lines of credit include agreements to lend up to specified limits to customers...

  • Page 94
    ... changes in the value of the liabilities relating to the underlying products. For variable annuities and variable life insurance products, excluding the fixed rate options in these products, mutual funds and most separate accounts, our main exposure to the market is the risk that asset management...

  • Page 95
    ...through policyholder account balances relating to interest-sensitive life insurance, annuity and investment-type contracts and through outstanding short-term and long-term debt. We assess interest rate sensitivity for "other than trading" financial assets, financial liabilities and derivatives using...

  • Page 96
    ... billion increase in the total estimated potential loss at December 31, 2001 from December 31, 2000 resulted from our acquisition of Gibraltar Life in April 2001. The estimated changes in fair values of our financial assets shown above relate to assets invested to support our insurance liabilities...

  • Page 97
    ... hypothetical changes that illustrate the potential impact of such events. Market Risk Related to Foreign Currency Exchange Rates We are exposed to foreign currency exchange rate risk in our general account and through our operations in foreign countries. In our international life insurance business...

  • Page 98
    ... In addition, derivatives are used in our securities operations for trading purposes. Trading Activities We engage in trading activities primarily in connection with our securities businesses. We maintain trading inventories in various equity and fixed-income securities, foreign exchange instruments...

  • Page 99
    ...VaR model does not estimate the greatest possible loss. We use these models together with other risk management tools, including stress testing. The results of these models and analysis thereof are subject to the judgment of our risk management personnel. Prudential Financial 2001 Annual Report 97

  • Page 100
    ... we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used...

  • Page 101
    ...balances ...Unpaid claims and claim adjustment expenses ...Policyholders' dividends ...Securities sold under agreements to repurchase ...Cash collateral for loaned securities ...Income taxes payable ...Broker-dealer related payables ...Securities sold but not yet purchased ...Short-term debt ...Long...

  • Page 102
    ... Per Share Amounts) 2001 REVENUES Premiums ...Policy charges and fee income ...Net investment income ...Realized investment gains (losses), net ...Commissions and other income ...Total revenues ...BENEFITS AND EXPENSES Policyholders' benefits ...Interest credited to policyholders' account balances...

  • Page 103
    ...Stock issued in demutualization ...Policy credits issued and cash payments to be made to eligible policyholders ...Initial public offering of Common Stock ...Private placement of Class B Stock ...Equity security units ...Comprehensive income: Net loss before the date of demutualization ...Net income...

  • Page 104
    ... credited to policyholders' account balances ...Depreciation and amortization, including premiums and discounts ...Loss (gain) on disposal of healthcare operations, net of taxes ...Change in: Deferred policy acquisition costs ...Future policy benefits and other insurance liabilities ...Trading...

  • Page 105
    ... Closed Block Business, which is managed separately from the Financial Services Businesses, was established on the date of demutualization and includes the Company's in force participating insurance and annuity products and assets that are used for the payment of benefits and policyholder dividends...

  • Page 106
    ... in "Commissions and other income." Equity securities, available for sale, are comprised of common and non-redeemable preferred stock and are carried at estimated fair value. The associated unrealized gains and losses, net of income tax and the effect on deferred policy acquisition costs and future...

  • Page 107
    .... At that time, the carrying value of the investment real estate is written down to fair value. Depreciation on real estate held for the production of income is computed using the straight-line method over the estimated lives of the properties, and is included in "Net investment income." Short-term...

  • Page 108
    ...DAC. For group life and disability insurance, group annuities and guaranteed investment contracts, acquisition costs are expensed as incurred. Separate Account Assets and Liabilities Separate account assets and liabilities are reported at estimated fair value and represent segregated funds which are...

  • Page 109
    ..., policy administration 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...

  • Page 110
    ... 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 are required to receive demutualization compensation in the form of cash. All demutualization costs...

  • Page 111
    ... 1999 closing date and an increase in the Company's estimated obligation under the MLR Agreement. Actual pretax losses of $370 million during that period exceeded the original estimate of $160 million. In 2000, upon the completion of the period covered by the MLR Agreement Prudential Financial 2001...

  • Page 112
    ...by an additional $16 million, net of taxes. Pursuant to a coinsurance agreement with Aetna, the Company was required to issue additional policies for new customers in response to proposals made to brokers or customers within six months after the closing date and to renew insurance policies until two...

  • Page 113
    ...• Gibraltar Life's in force insurance policies, except for group life, collective term and reinsurance policies, were restructured as follows: - The guaranteed interest rate on in force policies was reduced to 1.75%. - Except for individual annuities, cash surrender values before surrender charges...

  • Page 114
    Prudential Financial, 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, 2001 Gross Gross ...

  • Page 115
    ... cost of the 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 2001 Annual Report...

  • Page 116
    ... 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 ... Impaired commercial loans identified in management's specific review of probable loan losses and the related allowance...

  • Page 117
    ... 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 liabilities and partners' capital ...Equity in partners...

  • Page 118
    ...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 income ...Gross investment...

  • Page 119
    ... (gains) losses on deferred policy acquisition costs ...Impact of net unrealized investment (gains) losses on future policy benefits ...Balance, December 31, 2001 ... The table below presents unrealized gains (losses) on investments by asset class: At December 31, 2001 2000 1999 (In Millions) $2,478...

  • Page 120
    ...,859 Life insurance ...Annuities ...Other contract liabilities ...Total future policy benefits ... The Company's participating insurance is included within the Closed Block Business. Participating insurance represented 37% and 40% of domestic individual life insurance in force at December 31, 2001...

  • Page 121
    ...(b) Estimation Method Net level premium (a) Life insurance ...For Closed Block Business, rates guaranteed in calculating cash surrender values; for Financial Services Businesses, based on company experience or standard industry tables established at policy issue (a) Individual annuities ...1971 IAM...

  • Page 122
    ... 2001 accident and health increase relates to the acquisition of Gibraltar Life. The reduction in the 2000 property and casualty balance is primarily attributable to the sale of Gibraltar Casualty Company; the 1999 accident and health reduction relates to the sale of Prudential's healthcare business...

  • Page 123
    ... 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 to pay experience-based policy dividends. Assets have been...

  • Page 124
    ... the actual earnings in income. However, the Company may change policyholder dividend scales in the future, which would be intended to increase future actual earnings until the actual cumulative earnings equal the expected cumulative earnings. On November 13, 2001, Prudential Insurance's Board of...

  • Page 125
    ... provide additional capacity for future growth and limit the maximum net loss potential arising from large risks. Life reinsurance is accomplished through various plans of reinsurance, primarily yearly renewable term and coinsurance. Property and casualty reinsurance is placed on a prorata basis and...

  • Page 126
    ... 82 76 $1,571 $1,378 Life insurance ...Property and casualty ...Other reinsurance ...Total reinsurance recoverable ... Three major reinsurance companies account for approximately 48% of the reinsurance recoverable at December 31, 2001. The Company periodically reviews the financial condition of its...

  • Page 127
    ... Note 19 for additional information on the Company's use of derivative instruments. Interest expense for short-term and long-term debt was $647 million, $1,056 million, and $863 million, for the years ended December 31, 2001, 2000, and 1999, respectively. Securities business related interest expense...

  • Page 128
    ... the Closed Block Business and the ability of Prudential Insurance, the sole direct subsidiary of PHLLC, to dividend such funds to PHLLC. The payment of scheduled principal and interest on the Series A notes and the Series B notes is insured by a financial guarantee insurance policy. The payment of...

  • Page 129
    ... Statements 12. Equity Security Units On the date of demutualization, Prudential Financial issued 13,800,000 6.75% equity security units (the "Units") to the public at an offering price of $50 per Unit for gross proceeds of $690 million. The Units are traded on the New York Stock Exchange under the...

  • Page 130
    ...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 at a price of $87.50 per share. The Class B Stock is a separate class of...

  • Page 131
    ... time in the event that (a) the Class B Stock will no longer be treated as equity of Prudential Financial for federal income tax purposes or (b) the New Jersey Department of Banking and Insurance amends, alters, changes or modifies the regulation of the Closed Block, the Closed Block Business, the...

  • Page 132
    ...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 133
    ... "Accounting for Stock Based Compensation," the Company's net income and earnings per common share would have been reduced to the proforma amounts indicated below: Employee Stock Option Grants 2001 (In Millions) (Except Per Share Data) Financial Closed Services Block Businesses Business Net Income...

  • Page 134
    ... rate ...Expected life of stock option ...1% 37% 4.05% 4 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 employee stock option grants at December 31, and changes during the year...

  • Page 135
    ... 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 grants at December 31 and changes during the year ended is presented below: 2001 Weighted Average Exercise Shares Price - 773,760 - (1,920...

  • Page 136
    ... contribute annually an amount necessary to satisfy the Internal Revenue Code contribution guidelines. The Company provides certain life insurance and health care benefits ("other postretirement benefits") for its retired employees, their beneficiaries and covered dependents. The health care plan is...

  • Page 137
    ..., bonds, real estate and short-term investments, of which $6,867 million and $7,381 million are included in Separate Account assets and liabilities at September 30, 2001 and 2000, respectively. In 2001, the pension plan purchased a variable annuity contract for $232 million from Prudential Insurance...

  • Page 138
    ...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 debt. Plan assets...

  • Page 139
    ... Financial Statements 16. Employee Benefit Plans (continued) The assumptions at September 30, used by the Company to calculate the benefit obligations as of that date and to determine the benefit cost in the subsequent year are as follows: Pension Benefits 2001 2000 1999 Weighted-average assumptions...

  • Page 140
    ... income tax expense (benefit) ... Deferred tax assets and liabilities at December 31, resulted from the items listed in the following table: 2001 2000 (In Millions) Deferred tax assets Insurance reserves ...Net operating loss carryforwards ...Policyholder dividends ...Litigation related reserves...

  • Page 141
    ...pricing services. Generally, fair values for private placement fixed maturities are estimated using a discounted cash flow model which considers the current market spreads between the U.S. Treasury yield curve and corporate bond yield curve, adjusted for the type of issue, its current credit quality...

  • Page 142
    ... ...Policy loans ...Short-term investments ...Mortgage securitization inventory ...Cash and cash equivalents ...Restricted cash and securities ...Separate account assets ...Trading Trading account assets ...Broker-dealer related receivables ...Securities purchased under agreements to resell ...Cash...

  • Page 143
    ...Company's commercial mortgage securitization business. Trading derivative positions are carried at estimated fair value, generally by obtaining quoted market prices or through the use of pricing models. Values are affected by changes in interest rates, currency exchange rates, credit spreads, market...

  • Page 144
    ..., changes in its fair value are recorded in "Accumulated other comprehensive income (loss)" until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings). At that time, the related portion of deferred...

  • Page 145
    ...in "Net investment income." Net interest receipts (payments) were $(29) million in 2001, $11 million in 2000 and $(4) million in 1999. Exchange-traded futures and options are used by the Company to reduce market risks from changes in interest rates, to alter mismatches between the duration of assets...

  • Page 146
    ... at each due date. Forward contracts are used by the Company to manage market risks relating to interest rates and commodities and trades in mortgage-backed securities forward contracts. The latter activity was exited in connection with the restructuring of Prudential Securities Group Inc.'s capital...

  • Page 147
    ...31, 2001 Other than Trading Total Non-Hedge Hedge Accounting Accounting Estimated Estimated Estimated Estimated Fair Fair Fair Fair Notional Value Notional Value Notional Value Notional Value (In Millions) Swap Instruments Interest rate Asset ...Liability ...Currency Asset ...Liability ...Equity and...

  • Page 148
    ... 31, 2000 Trading Other than Trading Non-Hedge Hedge Accounting Accounting Estimated Estimated Fair Fair Notional Value Notional Value (In Millions) Total Notional Swap Instruments Interest rate Asset ...Liability ...Currency Asset ...Liability ...Equity and commodity Asset ...Liability ...Forward...

  • Page 149
    ...Services Businesses as well as the Closed Block Business correspond to businesses for which discrete financial information is available and reviewed by management. The U.S. Consumer division consists of the Individual Life Insurance, Private Client Group, Retail Investments and Property and Casualty...

  • Page 150
    ... individual health insurance, group credit insurance and Canadian life insurance. The divested businesses include the results of the lead-managed equity underwriting for corporate issuers and institutional fixed income businesses of Prudential Securities Group Inc. (see Note 4), Gibraltar Casualty...

  • Page 151
    ... and losses relates to policyholder dividends, amortization of deferred policy acquisition costs, and reserves for future policy benefits. Net realized investment gains is one of the elements that the Company considers in establishing the dividend scale, and the related policyholder dividend charge...

  • Page 152
    ... Insurance ...Other Employee Benefits ...Total Employee Benefits Division ...International Insurance ...International Securities and Investments ...Total International Division ...Investment Management and Advisory Services ...Other Asset Management ...Total Asset Management Division ...Corporate...

  • Page 153
    ... Insurance ...Other Employee Benefits ...Total Employee Benefits Division ...International Insurance ...International Securities and Investments ...Total International Division ...Investment Management and Advisory Services ...Other Asset Management ...Total Asset Management Division ...Corporate...

  • Page 154
    ... Insurance ...Other Employee Benefits ...Total Employee Benefits Division ...International Insurance ...International Securities and Investments ...Total International Division ...Investment Management and Advisory Services ...Other Asset Management ...Total Asset Management Division ...Corporate...

  • Page 155
    ... the Company's reportable segments: Year ended December 31, 2001 Interest Amortization 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...

  • Page 156
    ... Net Policyholders' Policy Investment Policyholders' Account Dividends to Interest Acquisition Revenues Income Benefits Balances Policyholders Expense Costs (In Millions) Financial Services Businesses: Individual Life Insurance ...Private Client Group ...Retail Investments ...Property and Casualty...

  • Page 157
    ...31, 1999 Interest Amortization 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 Insurance ...$ 1,703 Private...

  • Page 158
    ... Information (continued) The summary below presents total assets for the Company's reportable segments at December 31, 2001 Individual Life Insurance ...Private Client Group ...Retail Investments ...Property and Casualty Insurance ...Total U.S. Consumer Division ...Group Insurance ...Other Employee...

  • Page 159
    ...litigation involving individual life insurance sales practices. In 1996, the Company entered into settlement agreements with relevant insurance regulatory authorities and plaintiffs in the principal life insurance sales practices class action lawsuit covering Prudential Financial 2001 Annual Report...

  • Page 160
    ... life insurance policies issued in the United States from 1982 to 1995. Pursuant to the settlements, the Company agreed to various changes to its sales and business practices controls, to a series of fines, and to provide specific forms of relief to eligible class members. Virtually all claims...

  • Page 161
    ... 21. Commitments and Guarantees, Contingencies and Litigation (continued) terms of the settlement and the number of claim forms received. The Company also recorded additional charges of $390 million before taxes to recognize the increase in estimated total additional sales practices costs. In 1998...

  • Page 162
    ...operations before income taxes ...Net income (loss) ...Basic and diluted earnings per share - Common Stock ...Basic and diluted earnings per share - Class B Stock ...2000 Total revenues ...Total benefits and expenses ...Income (loss) from continuing operations before income taxes ...Net income (loss...

  • Page 163
    ...balances ...Unpaid claims and claim adjustment expenses ...Policyholders' dividends ...Securities sold under agreements to repurchase ...Cash collateral for loaned securities ...Income taxes payable ...Broker-dealer related payables ...Securities sold but not yet purchased ...Short-term debt ...Long...

  • Page 164
    ... Per Share Amounts) Financial Services Businesses REVENUES Premiums ...Policy charges and fee income ...Net investment income ...Commissions and other income ...Total revenues ...BENEFITS AND EXPENSES Policyholders' benefits ...Interest credited to policyholders' account balances ...Dividends to...

  • Page 165
    ... of other traditional insurance products that are now included in the Financial Services Businesses and not in the Closed Block Business. The Financial Services Businesses consist of the U.S. Consumer, Employee Benefits, International and Asset Management divisions and Corporate and Other operations...

  • Page 166
    ...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 167
    ...tax basis, as direct equity adjustments to the respective equity balances of each business. The direct equity adjustments are used to adjust net income to determine the earnings available to each of the classes of common stockholders for earnings per share purposes. Prudential Financial 2001 Annual...

  • Page 168
    ...our Financial Services Businesses, was issued to eligible policyholders in Prudential Insurance's demutualization (457.1 million shares) and sold to investors in Prudential Financial's initial public offering (126.5 million shares). The Common Stock began trading on the New York Stock Exchange under...

  • Page 169
    Notes This page intentionally left blank Prudential Financial 2001 Annual Report 167

  • Page 170
    ... deferred policy acquisition costs; our exposure to contingent liabilities; catastrophe losses; investment losses and defaults; changes in our claims-paying or credit ratings; competition in our product lines and for personnel; ï¬,uctuations in foreign currency exchange rates and foreign securities...

  • Page 171
    ...other members of the professional financial community can contact our Investor Relations department via e-mail at investor.relations@ prudential.com, or visit the Investor Relations web pages at www.prudential.com. Corporate Office Address Prudential Financ ial, Inc . 7 5 1 Broad Street, Newark, NJ...

  • Page 172