Prudential 2003 Annual Report Download

Download and view the complete annual report

Please find the complete 2003 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.

Page out of 180

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154
  • 155
  • 156
  • 157
  • 158
  • 159
  • 160
  • 161
  • 162
  • 163
  • 164
  • 165
  • 166
  • 167
  • 168
  • 169
  • 170
  • 171
  • 172
  • 173
  • 174
  • 175
  • 176
  • 177
  • 178
  • 179
  • 180

Prudential Financial 2003 Annual Report
Growing and Protecting Your Wealth®
Prudential Financial, Inc. 2003 Annual Report
.25" Face Trim

Table of contents

  • Page 1
    Prudential Financial 2003 Annual Report Growing and Protecting Your Wealth ®

  • Page 2
    Prudential Financial's Board of Directors at the January meeting (Clockwise, front to back) Richard M.Thomson Franklin E. Agnew William H. Gray III James A. Unruh Ida F. S. Schmertz Karl J. Krapek Glen H. Hiner Jon F. Hanson Stanley C.Van Ness James G. ...

  • Page 3
    ... These include life insurance, disability insurance, long term care insurance, annuities, securities brokerage, pension and retirement services. We also offer mutual funds, banking and trust services, asset management, real estate brokerage franchises and relocation services. We serve individual and...

  • Page 4
    ... businesses through acquisition Prudential Financial's life as a public company began In May of 2003, Prudential Financial finalized the acquiwith a historic and very successful IPO in 2001. In 2003, our second full year under public ownership, we consition of American Skandia. This transaction...

  • Page 5
    ..., accounting for more than 40 percent of the company's before-tax adjusted operating income. Our life planner force, made up of highly trained insurance professionals, grew more than 10 percent with double-digit increases in our two major markets, Japan and Korea. Globally, new annualized premiums...

  • Page 6
    ... Income (loss) after income taxes: Continuing operations Discontinued operations Net income (loss): Financial Services Businesses Closed Block Business Consolidated net income (loss) FINANCIAL POSITION Total investments Total assets Attributed equity: Financial Services Businesses Closed Block...

  • Page 7
    ... for the Financial Services Businesses. Both income amounts above give effect to the direct equity adjustment for the earnings per share calculation. The Financial Services Businesses and Closed Block Business were established in connection with demutualization and, as a result, operating return on...

  • Page 8
    .... Growth through acquisitions Last year Prudential Financial strengthened our competitive position by acquiring American Skandia, a leading annuities provider. Then, in mid-November, we announced the largest acquisition in our history-a definitive agreement to purchase CIGNA Corp.'s retirement...

  • Page 9
    ...the death of the second insured. The breadth of our product offerings helps our customers effectively manage their retirement and insurance portfolios. We continued to exercise pricing discipline throughout the year on both group life and disability products. These actions supported our objective in...

  • Page 10
    ... a compelling marketing case for third-party distribution channels. In 2003, we introduced a new planning platform for use by our agents and financial planners to help them meet their clients' key financial needs and goals. This state-of-the-art process-called Prudential Financial Solutions-is...

  • Page 11
    ... 50,000 sales professionals. Prudential Real Estate plays an important role in promoting our brand. "For Sale" signs prominently featuring our Rock logo are on display every day in neighborhoods across North America. Prudential Relocation, the world's second-largest relocation company, increased its...

  • Page 12
    ... management." RODGER LAWSON Vice Chairman, International Insurance & Investments Division Japan Prudential of Japan is the leading life planner business in the country. It relies on its life planner distribution force-made up of welleducated, highly trained, commission-compensated career agents...

  • Page 13
    ...in Taiwan Prudential owns a successful asset management operation, Prudential Financial Securities Investment Trust Enterprise, which manages 15 investment funds and a discretionary asset management program. Prudential also provides separate private client services under the Dryden Wealth Management...

  • Page 14
    ... real estate investment activities in the region. April 14, 2003 Prudential Relocation acquired Asian Relocation Management Pte Ltd., a Singapore-based relocation firm. Enhances Prudential Relocation's mobility management services presence to the largest in Asia. May 1, 2003 Acquired American...

  • Page 15
    ...rm,Wachovia Securities, LLC, is the thirdlargest full-service retail brokerage firm in the U.S. August 20, 2003 Prudential Real Estate Investors formed a joint venture with Corporacion Geo S.A. de C.V. to develop residential properties in Mexico. Increases PREI's presence in the Mexican market and...

  • Page 16
    ... world-class financial services to a worldwide market.We're proud of our employees and honored that they chose us as their employer. We're also proud that others are recognizing our accomplishments in this area. Most Admired Companies Insurance, Life and Health category Fortune America's 50...

  • Page 17
    ... Bank James A. Unruh Founding Principal Alerion Capital Group, L.L.C. Stanley C. Van Ness Partner Herbert, Van Ness, Cayci and Goodell Bringing Resources to Communities Each year The Prudential Foundation funds hundreds of community organizations with a focus on education, affordable housing, job...

  • Page 18
    ... Real Estate Affiliates, Inc. Most franchisees are independently owned and operated. Equal Housing Opportunity. Securities products and services are distributed by Prudential Investment Management Services LLC, Three Gateway Center, Newark, NJ 07102, and Pruco Securities, LLC, 751 Broad Street...

  • Page 19
    Financial Section Prudential Financial 2003 Annual Report 17

  • Page 20

  • Page 21
    ... Services Businesses and the Closed Block Business. The Financial Services Businesses refer to the businesses in our three operating divisions and our Corporate and Other operations. The Insurance division consists of our Individual Life and Annuities and Group Insurance segments. The Investment...

  • Page 22
    ...the time of sale. Gibraltar Casualty had no impact on results in 2001 and incurred pre-tax losses of $6 million in 2000, and $72 million in 1999. On December 18, 2001, Prudential Insurance converted from a mutual life insurance company owned by its policyholders to a stock life insurance company and...

  • Page 23
    ... investments excluding policy loans ...Separate account assets ...Total assets ...Future policy benefits, policyholders' account balances and unpaid claims and claim adjustment expenses ...Separate account liabilities ...Short-term debt ...Long-term debt ...Total liabilities ...Guaranteed beneficial...

  • Page 24
    ...Advisory, Retirement, and Other Asset Management segments. The International Insurance and Investments division consists of our International Insurance and International Investments segments. We also have Corporate and Other operations, which includes our real estate and relocation services business...

  • Page 25
    ...to purchase a guaranteed investment contract to fund a portion of the bond insurance cost associated with that debt, were allocated 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 include...

  • Page 26
    ... individual life insurance, annuities, group life and disability insurance and pension and retirement services. We also offer mutual funds, asset management, real estate and relocation services and, through our investment in Wachovia Securities, securities brokerage services. We serve individual...

  • Page 27
    ... millions) Adjusted operating income before income taxes for segments of the Financial Services Businesses: International Insurance ...Individual Life and Annuities ...Retirement ...Group Insurance ...Investment Management ...Financial Advisory ...Remaining segments and Corporate and Other ...Items...

  • Page 28
    ... expected growth in capital requirements, including the acquisition of the CIGNA retirement business, while maintaining balance sheet strength consistent with our ratings objectives. See "-Liquidity and Capital Resources" for additional information. Accounting Policies & Pronouncements Application...

  • Page 29
    ... 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's historical...

  • Page 30
    ... average remaining life of our variable annuity contracts in force as of December 31, 2003, our evaluation of deferred policy acquisition costs is based on a 7.7% annual blended rate of return that reflects an assumed rate of return of 8.9% for equity type assets. Deterioration in market conditions...

  • Page 31
    ... of future returns on plan assets, expected increases in compensation levels and trends in health care costs. See "-Corporate and Other Operations" for a discussion of our pension assumptions and related returns. Another example is the recognition of deferred tax assets, which depends on management...

  • Page 32
    ... and the Closed Block Business as well as other components comprising net income. Year ended December 31, 2003 Financial Services Businesses by segment: Individual Life and Annuities ...Group Insurance ...Total Insurance Division ...Investment Management ...Financial Advisory ...Retirement ...Other...

  • Page 33
    ... deferred policy acquisition cost amortization. For a discussion of these items see "-Realized Investment Gains and General Account Investments -Realized Investment Gains." On May 1, 2003, we completed our acquisition of Skandia U.S. Inc., which included American Skandia for a total purchase price...

  • Page 34
    ...offset by less favorable mortality experience in 2002, as well as a $47 million increase in amortization of deferred policy acquisition costs, primarily due to a market decline and related policy lapses associated with declines in variable life insurance account values. Results for 2001 included $25...

  • Page 35
    ... in amortization of deferred policy acquisition costs, due primarily to less favorable claims experience and lower policy surrenders. Benefits and expenses of the segment's individual annuity business increased $98 million, from $786 million in 2002 to $884 million in 2003, which included $249...

  • Page 36
    ...Total ...Life Insurance sales by distribution channel(1)(2): Prudential Agents ...Third party ...Total ...Variable Annuities(3): Beginning total account value ...Sales ...Surrenders and withdrawals ...Change in market value, interest credited and other activity(4) ...Acquisition of American Skandia...

  • Page 37
    ...in 2003 associated with selective hiring of new agents and closures of several offices to promote the cost effectiveness of the Prudential Agent distribution channel as well as some attrition of agents resulting from the Company's sale of its property and casualty insurance businesses in 2003. Sales...

  • Page 38
    ...' account balances and separate account balances decreased from 2002 to 2003, reflecting a higher level of lapses in 2002 associated with declines in variable life insurance account values due to adverse equity market conditions. 2002 to 2001 Annual Comparison. The total cash value of surrenders...

  • Page 39
    ... a result of the refinements in group life reserves for waiver of premium features discussed above, while the prior year benefited $19 million from reduction in benefits due to the refinement in reserves relating to our group long-term disability product. Prudential Financial 2003 Annual Report 37

  • Page 40
    ... change in policy reserves, reflecting the growth of business in force. Beginning in 2002, we refocused group life and disability on improved risk selection and reduced benefits ratios. We continuously make pricing adjustments, when contractually permitted, which consider the emerging experience...

  • Page 41
    ... of 2003 by $22 million. 2002 to 2001 Annual Comparison. Adjusted operating income for 2002 was essentially unchanged from 2001. Lower fee revenues resulting from declines in market value of the underlying equity assets under management as well as lower average mutual fund customer account balances...

  • Page 42
    ... variable life insurance asset management revenues from our separate accounts. This also includes funds invested in proprietary mutual funds through our defined contribution plan products. Revenues from fixed annuities and the fixed rate options of both variable annuities and variable life insurance...

  • Page 43
    ... basis. $1,306 1,417 $ (111) $2,421 2,464 $ (43) $2,712 2,852 $ (140) On July 1, 2003, we completed the previously announced agreement with Wachovia to combine each company's respective retail securities brokerage and clearing operations forming Wachovia Securities, a joint venture headquartered...

  • Page 44
    ...net, on change in reserves and deferred policy acquisition cost amortization. For a discussion of these items see "-Realized Investment Gains and General Account Investments-Realized Investment Gains." Adjusted Operating Income 2003 to 2002 Annual Comparison. Adjusted operating income increased $51...

  • Page 45
    ... 31, 2001 includes increases to account values of $433 million added to customer accounts due to Common Stock received as demutualization consideration. (2) Prudential's retirement plan accounted for 15%, 32% and 29% of sales for the years ended December 31, 2003, 2002 and 2001, respectively. This...

  • Page 46
    ... decline was partially offset by net sales of $610 million and $808 million added to customer accounts from inclusion of amounts not previously reflected in this segment and Common Stock received as demutualization consideration. Account values for guaranteed products amounted to $39.1 billion as...

  • Page 47
    ... of Gibraltar Life's business in force as expected during the period following its restructuring and a less favorable level of policy benefits and expenses in 2003 than the yearago period. Adjusted operating income from our international insurance operations, other than Gibraltar Life, increased...

  • Page 48
    ...and the reduction in benefits for in force policies, when we established Gibraltar Life's initial liability for future policy benefits, we assumed a higher than normal level of policy surrenders for the near term. Our surrender rate assumptions commencing at the date of reorganization were 6% in the...

  • Page 49
    ... increase in our international insurance operations, other than Gibraltar Life, reflects an increase in policyholders' benefits, including changes in reserves, and an increase in amortization of deferred policy acquisition costs resulting from the aging of business in force and a greater volume...

  • Page 50
    ... Life's sales force sold policies for our existing Japanese insurance operation during a portion of the year, pending the completion of Gibraltar Life's reorganization. Since the first quarter of 2001, the Gibraltar Life sales force has distributed only Gibraltar Life products. Sales in Japan...

  • Page 51
    ... that we do not allocate to our business segments, real estate and relocation services, and international ventures and businesses that we have placed in wind-down status but have not divested, which, collectively, we refer to as "Other Businesses." Prudential Financial 2003 Annual Report 49

  • Page 52
    ...: Corporate-level activities(1) ...Other businesses: Real Estate and Relocation Services ...Other ...Adjusted operating income ...Realized investment gains (losses), net, and related adjustments(2) ...Divested businesses(3) ...Sales practices remedies and costs(4) ...Demutualization(5) ...Income...

  • Page 53
    ... a death claim but where death had occurred, due to a change in our estimate. Other businesses included in Corporate and Other operations resulted in adjusted operating income of $51 million in 2003 compared to $39 million in 2002. The improvement relates to our real estate and relocation business...

  • Page 54
    ... Individual Life and Annuities segment has been compensated for property and casualty insurance products sold through its distribution network. Following the sale of the property and casualty insurance operations, Prudential Agents will have continued access to non-proprietary property and casualty...

  • Page 55
    ...costs of engaging independent accounting, actuarial, investment banking, legal and other consultants that advised us and insurance regulators in the demutualization process and related matters as well as printing and postage for communication with policyholders. Results of Operations of Closed Block...

  • Page 56
    ... and past experience, including investment income, net realized investment gains over a number of years, mortality experience and other factors. As required by GAAP, we developed an actuarial calculation of the timing of the maximum future earnings from the policies included in the Closed Block, and...

  • Page 57
    ...in 2003. We expect the decline in premiums for this business to continue as the policies in force mature or terminate in this closed block of traditional participating insurance. 2002 to 2001 Annual Comparison. Revenues decreased $607 million, or 8%, from 2001 to 2002. Net investment income declined...

  • Page 58
    ... forth policy surrender experience for the Closed Block Business, measured by cash value of surrenders, for the periods indicated. In managing this business, we analyze the cash value of surrenders because it is a measure of the degree to which policyholders are maintaining their in force business...

  • Page 59
    ... and related charges and adjustments. Related charges, which are not applicable to the Closed Block Business, pertain to policyholder dividends, deferred policy acquisition costs and reserves for future policy benefits. A percentage of net realized investment gains on specified Gibraltar Life assets...

  • Page 60
    ... portfolio and related results, including overall income yield and investment income, as well our policies regarding other than temporary declines in investment value, see "-General Account Investments" below. Year ended December 31, 2003 2002 2001 Realized investment gains (losses), net: Financial...

  • Page 61
    ...of sales of equity securities. For the Closed Block Business, net realized investment losses for 2002 were $587 million compared to $543 million for 2001. Realized losses in 2002 include fixed maturity impairments of $302 million and credit related losses Prudential Financial 2003 Annual Report 59

  • Page 62
    ... Risk Management, approves the investment policy for the general account assets of our insurance subsidiaries and oversees the investment process for our general account. Under his direction, the Asset Liability and Risk Management Group works with our business units to develop investment objectives...

  • Page 63
    ... or return of premium; and • guaranteed products for which there are price or rate guarantees for the life of the contract, such as GICs. We determine a target asset mix for each product class, which we reflect in our investment policies. Our asset/ liability management process has permitted...

  • Page 64
    ... (1) Other long-term investments consist of real estate and non-real estate related investments in joint ventures (other than our equity investment in Wachovia Securities) and partnerships, investment real estate held through direct ownership, our interest in separate account investments and other...

  • Page 65
    ... activity are calculated net of corresponding liabilities and rebate expenses. Yields for 2002 are presented on a basis consistent with our current reporting practices. (2) Investment income of securities brokerage and securities trading operations. Prudential Financial 2003 Annual Report 63

  • Page 66
    ... foreign government securities. We manage our public portfolio to a risk profile directed by the Asset Liability and Risk Management Group and, in the case of our international insurance portfolios, to a profile that reflects local market regulations and our investment competencies in these markets...

  • Page 67
    ... as of December 31, 2002. As of December 31, 2003, 92% of the mortgage-backed securities in the Financial Services Businesses were publicly traded agency pass-through securities related to residential mortgage loans. Collateralized mortgage obligations represented the remaining 8% of mortgage-backed...

  • Page 68
    ... sector as of December 31, 2002. As of December 31, 2003, 73% of the mortgage-backed securities in the Closed Block Business were publicly traded agency pass-through securities related to residential mortgage loans. Collateralized mortgage obligations represented the remaining 27% of mortgage-backed...

  • Page 69
    ... of the Japanese government. The Financial Services Agency has its own investment quality criteria and risk control standards. Our Japanese insurance companies comply with the Financial Services Agency's credit quality review and risk monitoring guidelines. The credit quality ratings of the non...

  • Page 70
    ... for investments of the international insurance operations that are not rated by U.S. insurance regulatory authorities. (2) Includes, as of December 31, 2003 and December 31, 2002, respectively, 196 securities with amortized cost of $2,803 million (fair value, $2,876 million) and 280 securities with...

  • Page 71
    ...NAIC designations pending receipt of SVO ratings. Unrealized Losses from Fixed Maturity Securities The following table sets forth the amortized cost and gross unrealized losses of fixed maturity securities attributable to the Financial Services Businesses where the estimated fair value had declined...

  • Page 72
    ... good standing and all other public watch list assets as closely monitored. For private placements our credit and portfolio management processes help ensure prudent controls over valuation and management. We have separate pricing and authorization processes to establish "checks and balances" for new...

  • Page 73
    ... to Company standards using our proprietary quality rating system that has been developed from our experience in real estate and mortgage lending. Our loan portfolio strategy emphasizes diversification by property type and geographic location. Consumer loans are loans extended by Gibraltar Life to...

  • Page 74
    ... Closed Block Financial Services Closed Block Businesses Business Businesses Business Gross Gross Gross Gross Carrying % of Carrying % of Carrying % of Carrying % of Value Total Value Total Value Total Value Total ($ in millions) Commercial loans by property type: Apartment complexes ...Office...

  • Page 75
    .... The following tables set forth the gross carrying value for commercial loans by loan classification as of the dates indicated: As of December 31, 2003 As of December 31, 2002 Financial Closed Financial Closed Services Block Services Block Businesses Business Businesses Business (in millions) $11...

  • Page 76
    ... equity securities consist principally of investments in common stock of publicly traded companies, and to a lesser extent privately held companies. The following table sets forth the composition of our equity securities portfolio attributable to the Financial Services Businesses and the associated...

  • Page 77
    ... adjusts the cost basis. The new cost basis of an impaired security is not adjusted for subsequent increases in fair value. Estimated fair values for publicly traded equity securities are based on quoted market prices or prices obtained from independent pricing services. Fair values for privately...

  • Page 78
    ... of December 31, 2003 Financial Services Closed Block Businesses Business (in millions) Joint ventures and limited partnerships: Real estate related ...Non real estate related ...Real estate held through direct ownership ...Separate accounts ...Other ...Total other long-term investments ...$ 84 482...

  • Page 79
    ... date without exceeding the limit. As of December 31, 2003, the overall outstanding borrowings of the Financial Services Businesses included approximately $1 billion the proceeds of which were temporarily invested in cash and short-term investments or loans Prudential Financial 2003 Annual Report...

  • Page 80
    ... capital described above to fund the acquisition of CIGNA's retirement business, which is expected to close during the first half of 2004. Share Repurchases. During the fourth quarter of 2003, the Company acquired 6.5 million shares of its Common Stock at a total cost of approximately $252 million...

  • Page 81
    ... of funds by customers from annuity contracts and deposit liabilities. 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. Prudential Financial 2003 Annual Report...

  • Page 82
    ...of annuity reserves and deposit fund liabilities that are not subject to early withdrawal as of December 31, 2003. The domestic insurance operations' cash flows from investment activities result from repayments of principal, proceeds from maturities and sales of invested assets and investment income...

  • Page 83
    ... that were in force at the time of the acquisition: 2002 2003 2004 2005 2006 2007 2008 2009 15% 14% 12% 10% 8% 6% 4% 2% Policies issued by Gibraltar Life post acquisition are not subject to the above restructured policy surrender charge schedule. Policies issued post acquisition are subject...

  • Page 84
    ... funds from various sources to meet its capital needs, as well as the capital needs of its subsidiaries. The following table sets forth the outstanding short- and long-term debt of Prudential Financial, including that related to the Equity Security Units, as of the dates indicated: December 31, 2003...

  • Page 85
    ... Prudential Funding and a $300 million surplus note maturity at Prudential Insurance. In addition, direct third party borrowings of subsidiaries declined by $539 million, primarily due to reduced bank borrowings of $374 million at Prudential Securities Group. Prudential Financial 2003 Annual Report...

  • Page 86
    ... and real estate related investments held in consolidated joint ventures, as well as institutional and insurance company portfolio cash flow timing differences. Securities business related debt consists of debt issued to finance primarily the liquidity of our broker-dealers and our capital markets...

  • Page 87
    ... - 5,902 2,324 $8,226 $4,757 3,469 $8,226 $6,476 1,750 $8,226 (1) Long-term debt as of December 31, 2003, includes debt related to the Prudential Financial's equity security units, previously included in "Guaranteed beneficial interest in Trust holding solely debentures of parent" as of December 31...

  • Page 88
    ... bear all of the investment and asset/liability management risk on these contracts. Examples of these types of products include GICs, funding agreements, and annuities without life contingencies. These liabilities are reflected within "Policyholders' account balances" on our consolidated statements...

  • Page 89
    ... unconsolidated investor has borrowed funds, and we have guaranteed their obligation to their lender. In some cases, the investor is an affiliate, and in other cases an unaffiliated investor purchases the real estate investment from us. We provide these Prudential Financial 2003 Annual Report 87

  • Page 90
    ... 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 91
    ... to "other than trading" liabilities, we are exposed to interest rate risk through policyholder account balances relating to interest-sensitive life insurance, annuity and investment-type contracts and through outstanding short-term and long-term debt. Prudential Financial 2003 Annual Report 89

  • Page 92
    ...sale ...Held to maturity ...Commercial loans ...Mortgage securitization inventory ...Policy loans ...Derivatives: Swaps ...Futures ...Options ...Forwards ...Financial liabilities with interest rate risk: Short-term and long-term debt ...Investment contracts ...Guaranteed beneficial interest in Trust...

  • Page 93
    ... statistical technique estimates, at a specified confidence level, the potential pre-tax loss in portfolio market value that could occur over an assumed time horizon due to adverse market movements. We calculate this using a variance/covariance approach. Prudential Financial 2003 Annual Report 91

  • Page 94
    ... whose values are derived from interest rates, foreign exchange rates, financial indices, or the prices of securities or commodities. Derivative financial instruments may be exchange-traded or contracted in the over-the-counter market and include swaps, futures, options and forward contracts. See...

  • Page 95
    ..., expressed in terms of adverse changes to fair value with a 95% confidence level over a one-day time horizon, was $2 million during 2003 and $4 million during 2002. The following table sets forth a breakdown of this VaR by risk component as follows: As of December 31, 2003 Interest rate risk...

  • Page 96
    ... their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is...

  • Page 97
    ... collateral for borrowed securities ...Other long-term investments ...Short-term investments ...Total investments ...Cash and cash equivalents ...Accrued investment income ...Broker-dealer related receivables ...Deferred policy acquisition costs ...Other assets ...Separate account assets ...TOTAL...

  • Page 98
    ...' account balances ...Dividends to policyholders ...General and administrative expenses ...Demutualization costs and expenses ...Loss on disposition of property and casualty insurance operations ...Total benefits and expenses ...INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ...Income...

  • Page 99
    ... on Class B Stock ...- Comprehensive income: Net income ...- Other comprehensive income, net of tax ...- Total comprehensive income ...Balance, December 31, 2002 ...560.2 Treasury stock acquired ...(29.1) Stock-based compensation programs ...3.7 Adjustments to policy credits issued and cash payments...

  • Page 100
    ...Change in: Deferred policy acquisition costs ...Future policy benefits and other insurance liabilities ...Trading account assets ...Income taxes payable ...Broker-dealer related receivables/payables ...Securities purchased under agreements to resell ...Cash collateral for borrowed securities ...Cash...

  • Page 101
    ... its international insurance companies, its principal asset management operations, its international securities and investments operations, its domestic banking operations and its residential real estate brokerage franchise and relocation services operations. Prudential Financial 2003 Annual Report...

  • Page 102
    ... amounts of assets and liabilities, in particular deferred policy acquisition costs, value of business acquired, investments, future policy benefits, disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period...

  • Page 103
    ... principally by cash or U.S. government securities. For securities repurchase agreements and securities loaned transactions used to generate income, the cash received is typically invested in cash equivalents, short-term investments or fixed maturities. Prudential Financial 2003 Annual Report...

  • Page 104
    ... long-term investments consist of the Company's investments in joint ventures and limited partnerships in which the Company does not exercise control as well as investments in the Company's own separate accounts, which are carried at estimated fair value, and investment real estate. Joint venture...

  • Page 105
    ... programs under which policyholders, for a selected product or group of products, can exchange an existing policy or contract issued by the Company for another form of policy or contract. These transactions are known as internal replacements. If policyholders surrender traditional life insurance...

  • Page 106
    ... stocks, fixed maturities, real estate related investments, real estate mortgage loans and short-term investments. The assets of each account are legally segregated and are generally not subject to claims that arise out of any other business of the Company. Investment risks associated with market...

  • Page 107
    ...-sensitive life contracts, deferred annuities, structured settlements and other contracts without life contingencies, and participating group annuities are reported as deposits to "Policyholders' account balances." Revenues from these contracts are reflected in "Policy charges and fee income," or...

  • Page 108
    ... exchange rates, financial indices, or the values of securities or commodities. Derivative financial instruments used by the Company include swaps, futures, forwards and option contracts and may be exchange-traded or contracted in the over-thecounter market. Derivative positions are carried at...

  • Page 109
    ... on a variable-rate asset or liability are recorded in earnings). At that time, the related portion of deferred gains or losses on the derivative instrument is reclassified and reported in the income statement line item associated with the hedged item. Prudential Financial 2003 Annual Report 107

  • Page 110
    ... in "Realized investment gains (losses), net." Income Taxes The Company and its eligible domestic subsidiaries file a consolidated federal income tax return that includes both life insurance companies and non-life insurance companies. In addition to taxes on operations, the Internal Revenue Code...

  • Page 111
    ... $340 million of demutualization consideration paid to former Canadian branch policyholders pertaining to certain policies that Prudential Insurance transferred to London Life Insurance Company in 1996. New Accounting Pronouncements In December 2003, the Financial Accounting Standards Board ("FASB...

  • Page 112
    ... the impact of converting a large group annuity contract and certain individual market value adjusted ("MVA") annuity contracts from separate account accounting treatment to general account accounting treatment and an increase in reserves for guaranteed minimum death benefits. In addition, the FASB...

  • Page 113
    ... of common stock representing 90% of the outstanding common stock of Skandia U.S. and one share of a newly issued class of preferred stock (collectively the "Shares") and entered into an agreement at the date of acquisition whereby the Company had the Prudential Financial 2003 Annual Report 111

  • Page 114
    ... as costs to administer the contracts and benefit payments including payments under guaranteed minimum death benefit ("GMDB") provisions. Certain contracts issued by American Skandia include a MVA feature that requires the Company to pay to the contract holder upon surrender the accreted value of...

  • Page 115
    ... expected cash flows on American Skandia's business in force at the time of acquisition that corresponds to the obligations covered by SOP-03-01 were considered in establishing the initial VOBA. As of December 31, 2003, the Company's VOBA was $489 million, principally related to the American Skandia...

  • Page 116
    ... other claims. Gibraltar Life's in force insurance policies, except for group life, collective term and reinsurance policies, were restructured such that guaranteed interest rates and cash surrender values were reduced and special surrender charges imposed. Pursuant to the Reorganization Plan, on...

  • Page 117
    ...for the year ended December 31, 2002 includes a pre-tax impairment charge of $32 million on the Company's investment in a vendor of that distribution platform, as well as a pre-tax charge of $7 million related to severance and contract termination costs. Prudential Financial 2003 Annual Report 115

  • Page 118
    ... and work-place distribution property and casualty insurance operations, which the Company sold in 2003 and early 2004, respectively. (e) Other includes the results of the consumer banking operations, which the Company decided to exit in the third quarter of 2003, and the retail broker-dealer...

  • Page 119
    PRUDENTIAL FINANCIAL, INC. Notes to Consolidated Financial Statements 4. INVESTMENTS (continued) 2003 Gross Gross Unrealized Unrealized Gains Losses (in millions) $ 2 12 28 42 $ 3 - 23 $ 26 $ Amortized Cost Fixed maturities held to maturity Foreign government bonds ...Corporate securities ......

  • Page 120
    ... cost of "held to maturity" 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. Commercial Loans The Company...

  • Page 121
    ... related ...Total joint venture and limited partnerships ...Real estate held through direct ownership ...Separate accounts ...Other ...Total other long-term investments ...$ 368 1,245 1,613 1,204 1,273 1,519 $5,609 $ 685 1,120 1,805 1,217 1,051 1,335 $5,408 Prudential Financial 2003 Annual Report...

  • Page 122
    ...31, 2003 2002 (in millions) STATEMENTS OF FINANCIAL POSITION Investments in 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...

  • Page 123
    ... sources: 2003 Fixed maturities available for sale ...Fixed maturities held to maturity ...Trading account assets ...Equity securities available for sale ...Commercial loans ...Policy loans ...Broker-dealer related receivables ...Short-term investments and cash equivalents ...Other investment income...

  • Page 124
    ...on deferred policy acquisition costs ...Impact of net unrealized investment (gains) losses on future policy benefits ...Impact of net unrealized investment (gains) losses on policyholders' dividends ...Balance, December 31, 2003 ... Unrealized Deferred Deferred Gains Policy Future Income Tax (Losses...

  • Page 125
    ...a review of the above information in conjunction with other factors as outlined in the policy surrounding other than temporary impairments (see Note 2), the Company has concluded that an adjustment for other than temporary impairments is not warranted at December 31, 2003. Prudential Financial 2003...

  • Page 126
    ... carrying value of investments pledged to third parties as reported in the Consolidated Statements of Financial Position included the following: 2003 2002 (in millions) $13,537 $15,600 1,927 1,799 3,196 2,496 $18,660 $19,895 Fixed maturities available for sale ...Trading account assets ...Separate...

  • Page 127
    ... value of goodwill by segment, are as follows: Year Ended December 31, 2003 Disposal of Impairment Reporting Acquisitions Charge Unit (in millions) $- $- $ - 14 - - 3 - - 1 - - $ 18 $- $- Balance at January 1 Investment Management ...International Insurance ...International Investments ...Corporate...

  • Page 128
    ...for group health products and, for periods prior to December 31, 2003, property and casualty insurance. Future policy benefits for individual participating traditional life insurance are based on the net level premium method, calculated using the guaranteed mortality and nonforfeiture interest rates...

  • Page 129
    ...life and investment-type contracts represent an accumulation of account deposits plus credited interest less withdrawals, expenses and mortality charges, if applicable. Included in funding agreements at December 31, 2003, are $1,052 million of medium-term notes of consolidated trust entities secured...

  • Page 130
    ... offset by long-term disability claim termination experience, and long-term disability claim termination experience for 2002 and 2001. 8. CLOSED BLOCK On the date of demutualization, Prudential Insurance established a Closed Block for certain individual life insurance policies and annuities issued...

  • Page 131
    ... included 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...

  • Page 132
    ...' account balances ...Other Closed Block liabilities ...Total Closed Block Liabilities ...Closed Block Assets Fixed maturities, available for sale, at fair value ...Equity securities, available for sale, at fair value ...Commercial loans ...Policy loans ...Other long-term investments ...Short-term...

  • Page 133
    ...the reinsurers were unable to meet their obligations to the Company under the terms of the reinsurance agreements. Reinsurance premiums, commissions, expense reimbursements, benefits and reserves related to reinsured long-duration contracts are accounted for over the life of the underlying reinsured...

  • Page 134
    ... 66 71 $587 $1,132 Life insurance ...Property and casualty ...Other reinsurance ...Total reinsurance recoverable ... Three major reinsurance companies account for approximately 65% of the reinsurance recoverable at December 31, 2003. The Company periodically reviews the financial condition of its...

  • Page 135
    ... derivative instruments. Interest expense for short-term and long-term debt was $403 million, $427 million and $647 million, for the years ended December 31, 2003, 2002 and 2001, respectively. Securities business related interest expense of $82 million, Prudential Financial 2003 Annual Report 133

  • Page 136
    ... by 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...

  • Page 137
    ...31, 2003, the Company was in compliance with all IHC debt covenants. 11. EQUITY SECURITY UNITS On the date of demutualization, Prudential Financial and Prudential Financial Capital Trust I (the "Trust") coissued 13,800,000 6.75% equity security units (the "Units") to the public at an offering price...

  • Page 138
    ... date. Prudential Financial has the option to defer contract fee payments on the purchase contracts; however, the payments cannot be deferred beyond the settlement date. Holders of the redeemable capital securities receive, from the Trust, quarterly cumulative cash distributions at an annual rate...

  • Page 139
    ... 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 common stock which is not publicly traded...

  • Page 140
    ...are cash and shortterm investments, dividends, returns of capital, and interest from its subsidiaries. The regulated insurance and various other subsidiaries are subject to regulatory limitations on their payment of dividends and other transfers of funds to Prudential Financial. New Jersey insurance...

  • Page 141
    ... at any 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...

  • Page 142
    ...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 143
    ... the Financial Services Businesses available to holders of Common Stock after direct equity adjustment ...Effect of dilutive securities and compensation programs Stock options ...Deferred and long-term compensation programs ...Put options ...Equity security units ...Diluted earnings per share Income...

  • Page 144
    ... shares associated with the Class B Stock. 14. STOCK-BASED COMPENSATION In March 2003, the Company's Board of Directors adopted the Prudential Financial, Inc. Omnibus Incentive Plan (the "Omnibus Plan"). Upon adoption of the Omnibus Plan, the Prudential Financial, Inc. Stock Option Plan previously...

  • Page 145
    ...07 .06 $ - 3 1.50 1.50 1.50 1.50 Grants of stock options since the demutualization include the one-time Associates Grant in December 2001 and the Executive Grants during 2002 and 2003. The Executive Grants replace a portion of long-term cash compensation, which would have been expensed. The table...

  • Page 146
    PRUDENTIAL FINANCIAL, INC. Notes to Consolidated Financial Statements 14. STOCK-BASED COMPENSATION (continued) The fair value of each option issued prior to January 1, 2003 was estimated on the date of grant using a BlackScholes option-pricing model. For options issued on or after January 1, 2003, ...

  • Page 147
    ... related interpretations in accounting for its non-employee stock options. Prior to January 1, 2003, the fair value of each option was estimated on the balance sheet date for nonvested options and on the vesting date for vested options using a Black-Scholes option-pricing model. In 2003, the Company...

  • Page 148
    PRUDENTIAL FINANCIAL, INC. Notes to Consolidated Financial Statements 14. STOCK-BASED COMPENSATION (continued) A summary of the status of the Company's non-employee stock option grants is as follows: Weighted Average Exercise Price $ - 27.50 - 27.50 - 27.50 27.50 33.96 27.50 27.54 - 27.70 28.14 28....

  • Page 149
    ... the quoted fair value of the Company's Common Stock on the date of grant. The weighted average price of non-employee restricted stock shares is based on the Company's Common Stock price at the balance sheet date. Compensation Expense for Year Ended December 31, 2003 Employee Non-Employee Total (in...

  • Page 150
    ...based on an account balance that takes into consideration age, service and salary during their career. The Company provides certain life insurance and health care benefits for its retired employees, their beneficiaries and covered dependents ("other postretirement benefits"). The health care plan is...

  • Page 151
    PRUDENTIAL FINANCIAL, INC. Notes to Consolidated Financial Statements 15. EMPLOYEE BENEFIT PLANS (continued) Prepaid and accrued benefits costs are included in "Other assets" and "Other liabilities," respectively, in the Company's Consolidated Statements of Financial Position. The status of these ...

  • Page 152
    ... Securities Inc. employees that transferred to Prudential Financial effective July 1, 2003. The benefit obligation for other postretirement benefits decreased by $141 million in 2002 for changes in the substantive plan made to medical and dental benefits. The significant cost reduction relates...

  • Page 153
    ... interest rate environment as of the measurement date and then add a risk premium. The risk premium is a range of percentages and is based upon historical information and other factors such as expected reinvestment returns and asset manager performance. Prudential Financial 2003 Annual Report 151

  • Page 154
    ... periodic benefit cost. Market related value is a measure of asset value that reflects the difference between actual and expected return on assets over a 5 year period. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage...

  • Page 155
    ...44% 0% 27% 0% 22% Management reviews its investment strategy on an annual basis. The investment goal of the domestic pension plan assets is to generate an above benchmark return on a diversified portfolio of stocks, bonds and real estate, while meeting the cash requirements for a pension obligation...

  • Page 156
    ... at December 31, 2003 and 2002, was $52 million and $91 million, respectively, and is included in "Other liabilities." Other Employee Benefits The Company sponsors voluntary savings plans for employees (401(k) plans). The plans provide for salary reduction contributions by employees and matching...

  • Page 157
    ... valuation allowance ...Valuation allowance ...Deferred tax assets after valuation allowance ...Deferred tax liabilities Net unrealized investment gains ...Deferred policy acquisition costs ...Employee benefits ...Other ...Deferred tax liabilities ...Net deferred tax liability ...$ 1,247 1,077 248...

  • Page 158
    ... rate or Japanese Government Bond rate for yen based loans, adjusted for the current market spread for similar quality loans. Policy Loans The estimated fair value of U.S. insurance policy loans is calculated using a discounted cash flow model based upon current U.S. Treasury rates and historical...

  • Page 159
    ... at each due date. 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 in a portfolio and the duration of liabilities supported by those Prudential Financial 2003 Annual Report 157

  • Page 160
    ... determined by the value of designated classes of securities, and to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. The Company enters into exchange-traded futures and options with regulated futures commissions merchants who...

  • Page 161
    ...'s investment portfolio by providing comparable exposure to fixed income securities that might not be available in the primary market. Credit derivatives are sold for a premium and are recorded at fair value. Forward contracts are used by the Company to manage market risks relating to interest rates...

  • Page 162
    ... group disability, long-term care and corporate-owned and trust-owned life insurance products in the U.S. to institutional clients primarily for use in connection with employee and membership benefit plans. The Investment division consists of the Investment Management, Financial Advisory, Retirement...

  • Page 163
    ... life planners. In addition, as a result of the acquisition of Gibraltar Life, similar products are offered to the broad middle income market across Japan through life advisors, the proprietary distribution channel of Gibraltar Life. The International Investments segment offers private banking...

  • Page 164
    ... for future policy benefits. The related charges associated with policyholder dividends include a percentage of net realized investment gains on specified Gibraltar Life assets that is required to be paid as dividends to Gibraltar Life policyholders. Deferred policy acquisition costs for certain...

  • Page 165
    ... income taxes for Financial Services Businesses by Segment: Individual Life and Annuities ...Group Insurance ...Total Insurance Division ...Investment Management ...Financial Advisory ...Retirement ...Other Asset Management ...Total Investment Division ...International Insurance ...International...

  • Page 166
    ...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 and Annuities ...Group Insurance ...Total Insurance Division ...Investment...

  • Page 167
    ...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 and Annuities ...Group Insurance ...Total Insurance Division ...Investment...

  • Page 168
    ... 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 and Annuities ...$ 2,708 Group Insurance ...3,248 Total...

  • Page 169
    ... Company's reportable segments at December 3l, 2003 Individual Life and Annuities ...Group Insurance ...Total Insurance Division ...Investment Management ...Financial Advisory ...Retirement ...Other Asset Management ...Total Investment Division ...International Insurance ...International Investments...

  • Page 170
    ... party. These contracts are accounted for as derivatives, at fair value, in accordance with SFAS No. 133. At December 31, 2003, such contracts in force carried a total guaranteed value of $1,567 million. A number of guarantees provided by the Company relate to real estate investments, in which...

  • Page 171
    PRUDENTIAL FINANCIAL, INC. Notes to Consolidated Financial Statements 20. COMMITMENTS AND GUARANTEES, CONTINGENCIES AND LITIGATION (continued) the October 2003 California wild fires; stop-loss protection on losses occurring after the sale and arising from those same distribution channels of up to $...

  • Page 172
    .... COMMITMENTS AND GUARANTEES, CONTINGENCIES AND LITIGATION (continued) The MSD filed an administrative complaint against three former brokers and two former managers of a branch office in Boston, MA (the "Boston Branch") of the retail brokerage business formerly owned by Prudential Securities, Inc...

  • Page 173
    ... of the Company's property and casualty insurance operations, as discussed in Note 3. Results for the third quarter of 2002 include a $183 million benefit from the favorable resolution of a tax issue pertaining to the 1995 disposition of a subsidiary. Prudential Financial 2003 Annual Report 171

  • Page 174
    ... collateral for borrowed securities ...Other long-term investments ...Short-term investments ...Total investments ...Cash and cash equivalents ...Accrued investment income ...Broker-dealer related receivables ...Deferred policy acquisition costs ...Other assets ...Separate account assets ...TOTAL...

  • Page 175
    ... - $ 239 2002 Closed Block Business $4,022 - 3,618 (587) 68 7,121 4,305 139 2,506 928 - 7,878 (757) (272) (485) - $ (485) $ Financial Services Businesses REVENUES Premiums ...Policy charges and fee income ...Net investment income ...Realized investment gains (losses), net ...Commissions and other...

  • Page 176
    ...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 177
    ... of American International Group, Inc. and Pacific Life Corp.) in a private placement pursuant to Section 4(2) of the Securities Act of 1933 on the date of demutualization. There is no established public trading market for the Class B Stock. During the fourth quarter of 2002 and 2003, Prudential...

  • Page 178
    ... in the securities markets; reestimates of our reserves for future policy benefits and claims; changes in our assumptions related to deferred policy acquisition costs; our exposure to contingent liabilities; catastrophe losses; investment losses and defaults; changes in our claims-paying or credit...

  • Page 179
    ...-related services, including change of address, transfer of stock, direct deposit of dividends and other account services. Contact Information As a registered shareholder, you may access your account online or send an e-mail by visiting prudential.equiserve.com or by contacting EquiServe. By phone...

  • Page 180