Prudential 2003 Annual Report Download - page 35

Revenues from our individual annuity business declined $57 million, from $801 million in 2001 to $744 million
in 2002. Policy charges and fees and asset management fees decreased $48 million from $315 million in 2001 to $267
million in 2002, driven primarily from our variable annuity products, reflecting a decline in the average market value
of customer accounts on which our fees are based. Net investment income declined $22 million, from $440 million in
2001 to $418 million in 2002, primarily due to lower yields on our investment portfolio. These declines were partially
offset by higher premiums resulting from increased sales of our immediate income annuity product.
Benefits and Expenses
2003 to 2002 Annual Comparison. Benefits and expenses, as shown in the table above under “—Operating
Results,” of the segment’s individual life insurance business increased $59 million from $1.520 billion in 2002 to
$1.579 billion in 2003. The increase reflects a $97 million increase in policyholder benefits and related changes in
reserves, from $676 million in 2002 to $773 million in 2003, as well as an increase in employee termination and related
costs. The increase in policyholder benefits and related changes in reserves came primarily from claims experience, net
of reinsurance, less favorable than the prior year, partially offset by decreased policy reserves on term insurance,
corresponding to the decreased premiums discussed above. Partially offsetting these increases was a decrease 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 million of expenses related to American Skandia. Benefits and
expenses of the segment’s existing individual annuity business decreased $151 million, from $786 million in 2002 to
$635 million in 2003. Amortization of deferred policy acquisition costs declined $178 million from 2002 to 2003,
primarily as a result of the changes in our estimated future gross profits as discussed above. Partially offsetting this was
a $28 million increase in policyholder benefits and related change in reserves, reflecting the $36 million charge to
strengthen reserves for our periodic income annuities discussed above, which resulted from refinements in our
calculation of these reserves. Benefits and expenses of our individual annuity business include $69 million of
guaranteed minimum death benefits in 2003 of which $35 million is associated with the American Skandia business.
Effective January 1, 2004, we adopted SOP 03-01, which requires the recognition of a liability for a guaranteed
minimum death benefit (“GMDB”) feature, as well as a change in the valuation and presentation of our liability
associated with a market value adjustment (“MVA”) feature, both of which are contained in certain of our annuity
contracts. We estimate the effect of adopting SOP 03-01 resulting from our annuities business will be a net charge of
approximately $26 million after taxes. This charge will be recorded as a cumulative effect of change in accounting
principle. The net impact of recognition of a liability for GMDB provisions associated with the American Skandia
business and the change in the liability for the MVA feature associated with the American Skandia business will be
largely offset by a net decrease in VOBA of approximately $130 million, since the expected cash flows on American
Skandia’s business in force at the time of the acquisition that correspond to the obligations covered by SOP 03-01 were
considered in establishing the initial VOBA.
2002 to 2001 Annual Comparison. Benefits and expenses of our individual life insurance business decreased
$105 million, or 6%, from $1.625 billion in 2001 to $1.520 billion in 2002. Operating expenses, including distribution
costs that we charge to expense, decreased $150 million, from $557 million in 2001 to $407 million in 2002, reflecting
savings from our program to restructure our field management and agency structure, for which expenses in 2001
included $90 million of implementation costs. Policyholder benefits and related changes in reserves decreased $12
million, from $688 million in 2001 to $676 million in 2002, as the impact of claims arising from the September 11,
2001 terrorist attacks on the U.S. on 2001 benefits and expenses was partially offset by less favorable mortality
experience in 2002 than that of 2001, other than the impact of those claims. A $47 million increase in amortization of
deferred acquisition costs, primarily due to the market impact of declines in variable life insurance account values, was
a partial offset to the aforementioned decreases in benefits and expenses.
The segment’s individual annuity business reported benefits and expenses of $786 million in 2002, compared to
$694 million in 2001, an increase of $92 million, or 13%. The increase reflects an increase in amortization of deferred
policy acquisition costs of $87 million, which primarily includes charges for additional amortization of $137 million in
Prudential Financial 2003 Annual Report 33