Prudential 2001 Annual Report Download - page 75

Prudential Financial, Inc.
Sales Results
In managing our international insurance business, we analyze new annualized premiums, which do not correspond
to revenues under GAAP, as well as revenues, because new annualized premiums measure the current sales
performance of the business unit, while revenues reflect the renewal persistency and aging of in force policies
written in prior years and net investment income in addition to current sales.
2001 to 2000 Annual Comparison. New annualized premiums increased $183 million, or 36%, from $509 million
in 2000 to $692 million in 2001, including $110 million from Gibraltar Life and reflecting the unfavorable impact of
currency exchange rate fluctuations. On a constant exchange rate basis, new annualized premiums increased $240
million, or 53%, from 2000 to 2001, including $110 million from Gibraltar Life. On that basis, new annualized
premiums from our operations other than Gibraltar Life increased $130 million, or 29%. The $130 million increase
included $51 million from our existing operation in Japan, reflecting an increase in the number of Life Planners
from 1,811 at December 31, 2000 to 1,992 at December 31, 2001 as well as $25 million of new annualized
premiums 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 $79 million, or 59%, with $76 million of the
increase coming from our operations in Korea and Taiwan. The increase in countries other than Japan reflects an
increase in the number of Life Planners, from 1,684 at December 31, 2000 to 2,112 at December 31, 2001, as well
as an increase in Life Planner productivity.
2000 to 1999 Annual Comparison. New annualized premiums increased $111 million, or 28%, from $398 million
in 1999 to $509 million in 2000, including the favorable impact of currency exchange fluctuations. On a constant
exchange rate basis, new annualized premiums increased $82 million, or 22%. For all countries other than Japan, on
a constant exchange rate basis, new annualized premiums increased $45 million, or 51%, with $44 million of the
increase coming from our operations in Korea and Taiwan. The increase in countries other than Japan reflects an
increase in the number of Life Planners, from 1,203 at December 31, 1999 to 1,684 at December 31, 2000, which
we attribute to our recruitment program and retention of existing Life Planners. New annualized premiums in Japan,
on a constant exchange rate basis, increased $37 million, or 13%, reflecting an increase in the number of Life
Planners from 1,681 at December 31, 1999 to 1,811 at December 31, 2000. As discussed below under
“—Investment Margins and Other Profitability Factors,” in April 1999 Japanese regulators approved a reduction in
the required interest rates for most of the products we sell due to the low interest rate environment in that country.
We believe that customer purchases of life insurance in 1999 in anticipation of this change before it was
implemented benefited 1999 sales, partially offsetting the impact of additional Life Planners in 2000.
Investment Margins and Other Profitability Factors
Many of our insurance products sold in international markets provide for the buildup of cash values for the
policyholder at mandated guaranteed interest rates. The spread between the actual investment returns and these
guaranteed rates of return to the policyholder is an element of the profit or loss that we will experience on these
products. Interest rates guaranteed in our Japanese insurance contracts are regulated by Japanese authorities.
Between July 1, 1996 and April 1, 1999, we guaranteed premium rates using an interest rate of 3.1% on most of the
products we sold even though the yield on Japanese government and high-quality corporate bonds was less than that
much of this time. This resulted in some negative investment spreads over this period. As a consequence, our
profitability with respect to these products in Japan during that period resulted primarily from margins on mortality
charges and expenses. In response to the low interest rate environment, Japanese regulators approved a reduction in
the required rates for most of the products we sell to 2.35% in April of 1999, which has allowed us to charge higher
premiums on new business for the same amount of insurance. While this has also resulted in an improvement in
investment spreads, these spreads had a negative impact on adjusted operating income from our Japanese insurance
operations other than Gibraltar Life in each of the three years ended December 31, 2001 and the profitability of
these products in Japan continues to result primarily from margins on mortality charges and expenses. In 2001,
Japanese regulators approved further reductions in the required interest rates applicable to most of the products we
sell. As a result, we increased premium rates on most of our products sold in Japan when the new rates were
implemented, in April 2001 for some products and in October 2001 for other products. Additionally, interest rates
on our guaranteed products sold in Korea are regulated by Korean authorities, who implemented, in April 2001, a
reduction in the required rates for most of the products we sell, allowing us to charge higher premiums on new
business for the same amount of insurance. While these actions enhance our ability to set rates commensurate with
available investment returns, the major sources of profitability on our products in Korea, as in Japan, are margins
from mortality and expense charges rather than investment spreads.
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