Prudential 2001 Annual Report Download - page 38

Prudential Financial, Inc.
International Insurance and International Securities and Investments segments. The Asset Management division
consists of our Investment Management and Advisory Services and Other Asset Management segments. We also
have Corporate and Other operations, which contain corporate items and initiatives that are not allocated to the
business segments. Corporate and Other operations also include businesses that we have divested or placed in wind-
down status (other than our divested healthcare business, which is treated as a discontinued operation). The principal
corporate items are the expense of corporate management and earnings on equity not allocated to our businesses.
We attribute financing costs to each segment based on its use of financing and reflect financing costs in each
segment’s results. The net investment income of each segment includes earnings on the amount of equity which
management believes is necessary to support the risks of that segment.
Closed Block Business
Effective with the date of demutualization, we established the Closed Block Business. For periods prior to the date
of demutualization, the results of the Closed Block Business are those of our former Traditional Participating
Products segment. Upon the establishment of the Closed Block Business, we transferred $5.6 billion of net assets
previously associated with the Traditional Participating Products segment, including the majority of the net proceeds
of the Class B Stock and the IHC debt issuances, to the Financial Services Businesses. This capital was initially
allocated to our Corporate and Other operations as of the date of demutualization. As a result, adjusted operating
income of the Closed Block Business does not include returns on these net assets, which were historically included
in adjusted operating income of the Traditional Participating Products segment.
In connection with the demutualization, we ceased offering domestic participating products. The liabilities for our
individual in force participating products were segregated, together with assets which will 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 so that the Closed Block assets initially had a lower book
value than the Closed Block liabilities. We expect that the Closed Block assets will generate sufficient cash flow,
together with anticipated revenues from the Closed Block policies, over the life of the Closed Block to fund
payments of all expenses, taxes and policyholder benefits to be paid to, and the reasonable dividend expectations of,
policyholders of the Closed Block policies. We also segregated for accounting purposes the assets that we need to
hold outside the Closed Block to meet capital requirements related to the policies included within the Closed Block.
No policies sold after demutualization will be added to the Closed Block and its in force business is expected to
ultimately decline as we pay policyholder benefits in full. We expect the proportion of our business represented by
the Closed Block to decline as we grow other businesses. A minor portion of our former Traditional Participating
Products segment, which included the policies now included in the Closed Block Business prior to our
demutualization, consisted of other traditional insurance products that were not included in the Closed Block.
The Closed Block Business consists principally of the Closed Block, assets held outside the Closed Block that
Prudential Insurance needs to hold to meet capital requirements related to the Closed Block policies, invested assets
held outside the Closed Block that represent the difference between the Closed Block assets and Closed Block
liabilities and the interest maintenance reserve, deferred policy acquisition costs related to Closed Block policies,
the principal amount of the IHC debt and related hedging activities and certain other related assets and liabilities.
We allocated the net proceeds from the issuance of the Class B Stock and IHC debt, except for $72 million used to
purchase a guaranteed investment contract to fund a portion of the bond insurance cost associated with that debt, to
the Financial Services Businesses. However, we expect that the IHC debt will be serviced by the net cash flows of
the Closed Block Business over time, and we report results of the Closed Block Business, including interest
expenses associated with the IHC debt.
Revenues and Expenses
We earn our revenues principally from insurance premiums; mortality, expense, and asset management fees from
insurance and investment products; commissions and other revenues from securities brokerage transactions; and
investment of general account and other funds. We earn premiums primarily from the sale of individual life
insurance, group life and disability insurance and automobile and homeowners insurance. We earn mortality,
expense, and asset management fees from the sale and servicing of separate account products including variable life
insurance and variable annuities. We also earn asset management and administrative fees from the sale and
servicing of mutual funds, retirement products and other asset management products and services. Our operating
expenses principally consist of insurance benefits provided, general business expenses, dividends to policyholders,
commissions and other costs of selling and servicing the various products we sell and interest credited on general
account liabilities.
Growing and Protecting Your Wealth36