Prudential 2003 Annual Report Download - page 55

Income From Continuing Operations Before Income Taxes
2003 to 2002 Annual Comparison. Income from continuing operations before income taxes decreased $418
million, from income of $71 million in 2002 to a loss of $347 million in 2003. The loss in 2003 includes a charge of
$491 million, which primarily reflects the write-down of the assets to be sold to fair value and management’s best
estimate of the cost of retained liabilities. The retained liabilities include pre-closing litigation and obligations under
reinsurance contracts provided in connection with potential adverse loss development on the business sold to Liberty
Mutual. Excluding the $491 million charge recorded in the 2003 period, income from continuing operations increased
by $73 million, primarily reflecting improved underwriting results.
2002 to 2001 Annual Comparison. Income from continuing operations before income taxes decreased $129
million, from $200 million in 2001 to $71 million in 2002. Results for 2002 reflected a $102 million lower net benefit
from prior accident-year development and a $39 million lower benefit from stop-loss reinsurance recoveries.
Other Divested Businesses
The results for the Prudential Securities capital markets businesses in 2003 include the gain from a $332 million
settlement of an arbitration award. Partly offsetting this gain in 2003, are losses related to the residual investment
portfolio of the business that continues to be liquidated. The losses in 2002 and 2001 also reflect the liquidation of the
residual investment portfolio, as well as costs related to the wind-down of the business.
The results for the Gibraltar Casualty Company, a commercial property and casualty insurer that we sold in
September 2000 to Everest Re Group, Ltd. (“Everest”), reflect losses of $81 million in 2003 and $79 million in 2002
from a stop-loss reinsurance agreement we entered into pursuant to the sale, whereby if and when aggregate post-sale
claim and claim-related payments exceed Gibraltar Casualty’s reserves recorded at the time of sale, we will pay
Everest for 80% of the first $200 million of such excess. As of December 31, 2003, we are fully reserved for future
payments under this agreement.
Also reflected in other divested businesses are the results of the Prudential Home Mortgage business and certain
international securities operations, as well as the operations of certain Japanese asset management units.
Sales Practices Remedies and Costs
Our income from continuing operations before income taxes for the year ended December 31, 2002 includes a
pre-tax charge of $20 million of additional individual life sales practices costs including related administrative costs,
litigation costs and settlements, which is reflected in our Corporate and Other operations.
Demutualization Costs and Expenses
We incurred costs and expenses related to demutualization totaling $588 million for the year ended December 31,
2001, which are reflected in our Corporate and Other operations. Demutualization costs in 2001 included $340 million
of demutualization consideration paid to our former Canadian branch policyholders. Demutualization expenses
consisted primarily of the 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 Business
We established the Closed Block Business effective at the date of demutualization. The Closed Block Business
includes our in force traditional participating life insurance and annuity products and assets that are being used for the
payment of benefits and policyholder dividends on these policies, as well as other assets and equity and related
liabilities that support these policies. We no longer offer these traditional participating policies. See
“—Overview—Financial Services Businesses and Closed Block Business” for additional details.
Prudential Financial 2003 Annual Report 53