Prudential 2001 Annual Report Download - page 63

Prudential Financial, Inc.
Benefits and Expenses
The following table shows our calendar year loss, expense and combined ratios, the impact on these calendar year
ratios of catastrophic losses and our accident year combined ratios based on loss experience for the periods indicated
(all based on statutory accounting principles).
Year Ended December 31,
2001 2000 1999
Loss ratio(1):
Automobile .......................................................................... 70.6% 64.0% 71.1%
Homeowners ......................................................................... 76.5 72.4 70.7
Overall .......................................................................... 70.8 65.8 71.1
Expense ratio(2):
Automobile .......................................................................... 30.8 35.3 30.5
Homeowners ......................................................................... 36.6 45.3 39.1
Overall .......................................................................... 32.1 37.8 33.1
Combined ratio(3):
Automobile .......................................................................... 101.4 99.3 101.6
Homeowners ......................................................................... 113.1 117.7 109.8
Overall .......................................................................... 102.9 103.6 104.2
Effect of catastrophic losses included in combined ratio(4): ......................................... 2.2 2.7 3.3
Accident year combined ratio(5): ............................................................. 107.0 114.6 107.5
(1) Represents ratio of incurred losses and loss adjustment expenses to earned premium. Ratios reflect the favorable development in the calendar
period from prior accident year reserves of $106 million in the year ended December 31, 2001, $165 million in 2000, and $150 million in
1999. Ratios also reflect recoveries from current accident year stop-loss reinsurance contracts of $80 million in each of the years ended
December 31, 2001 and 2000.
(2) Represents ratio of operating expenses to net written premium.
(3) Represents the sum of (1) and (2).
(4) Represents losses and loss adjustment expenses attributable to catastrophes that are included in the combined ratio. Our calendar year
catastrophe losses include both current and prior accident year losses. We classify as catastrophes those events that are declared catastrophes
by Property Claims Services, which is an industry organization that declares and tracks all property-related catastrophes causing insured
property damage in the United States. Property Claims Services declares an event a catastrophe if it causes in excess of a specified dollar
amount of insured property damage, which was $25 million throughout the periods presented, and affects a significant number of
policyholders and insurance companies.
(5) Accident year combined ratios for annual periods reflect the combined ratios for accidents that occur in the indicated calendar year, restated
to reflect subsequent changes in loss estimates for those claims based on cumulative loss data through December 31, 2001. These ratios
reflect the recoveries from stop-loss reinsurance contracts as noted above. We analyze accident-year combined ratios because they reflect the
actual loss experience of accidents that occur in a given period excluding the effect of accidents that occur in other periods.
2001 to 2000 Annual Comparison. Our automobile loss ratio, as shown in the table immediately above, increased
from 2000 to 2001 primarily due to the lower net benefit from prior accident-year reserve development in 2001. The
impact of experience on new automobile business also contributed to the increase in this ratio, since the experience
on our seasoned automobile business was relatively consistent. We added significant new automobile business
during 2001, primarily in the first half of the year, which we expected would produce less favorable experience in
its initial year than similarly priced seasoned business. However, based on our evaluation of the quality of the new
business produced, particularly the major portion of the business which was sold through the new distribution
channels we implemented in 1999 and 2000 as noted above, we have suspended our mailing solicitations for the
direct distribution channel and limited the 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. We have also commenced re-underwriting and non-renewal of business that has produced adverse loss
experience, to the extent permitted contractually and by state insurance regulations. The increase in the
homeowners’ loss ratio came from a 16% increase in claim severity and a 3% increase in claim frequency. Our stop-
loss reinsurance recoveries resulted in decreases in the homeowners’ combined ratio of 5.4 percentage points in
2001 and had no impact in 2000.
Our calendar year catastrophe losses, net of reinsurance, amounted to $42 million for 2001 compared to $45 million
for 2000.
Losses that we ceded through reinsurance, including stop-loss reinsurance, resulted in decreases in the total
combined ratio of 7.3 percentage points for 2001 and 8.3 percentage points for 2000.
Prudential Financial 2001 Annual Report 61