Prudential 2003 Annual Report Download - page 56

At the end of each year, the Board of Directors of Prudential Insurance determines the dividends payable for
participating policies for the following year based on its statutory results 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 if actual cumulative earnings in any given period are greater than the cumulative earnings we
expect, we will record this excess as a policyholder dividend obligation. We will subsequently pay this excess to
Closed Block policyholders as an additional dividend unless it is otherwise offset by future Closed Block performance
that is less favorable than we originally expected. The policyholder dividends we charge to expense within the Closed
Block Business will include any policyholder dividend obligations that we recognize for the excess of actual
cumulative earnings in any given period over the cumulative earnings we expect in addition to the actual policyholder
dividends declared by the Board of Directors of Prudential Insurance. If cumulative performance is less favorable than
we expected, the policyholder dividends we charge to expense within the Closed Block Business will be the actual
dividends declared by the Board of Directors. Subsequent to the date of demutualization, there was no required charge
to expense to recognize a policyholder dividend obligation for the excess of actual cumulative earnings in any given
period over the cumulative earnings we expect. However, net unrealized investment gains that have arisen subsequent
to the establishment of the Closed Block have been reflected as a policyholder dividend obligation to be paid to Closed
Block policyholders, unless otherwise offset by future experience, with an offsetting amount reported in accumulated
other comprehensive income, and, as such, we have a policyholder dividend obligation to Closed Block policyholders
of $2.443 billion recorded as of December 31, 2003.
Operating Results
Management does not consider adjusted operating income to assess operating performance of the Closed Block
Business. Consequently, results of the Closed Block Business for all periods are presented only in accordance with
GAAP. The following table sets forth the Closed Block Business GAAP results for the periods indicated.
Year ended December 31,
2003 2002 2001
(in millions)
GAAP results:
Revenues ................................................................................ $7,982 $7,121 $7,728
Benefits and expenses ...................................................................... 7,612 7,878 8,347
Income (loss) from continuing operations before income taxes .......................................... $ 370 $ (757) $ (619)
Income from Continuing Operations Before Income Taxes
2003 to 2002 Annual Comparison. Income from continuing operations before income taxes increased $1.127
billion to $370 million in 2003, from a loss of $757 million in 2002. The increase in income from continuing
operations before income taxes reflects an increase in realized investment gains (losses), net, of $1.013 billion in 2003
from 2002. In addition, dividends to policyholders decreased by $54 million, reflecting reductions in the dividend scale
for 2003, and a decline in operating expenses of $49 million. For a discussion of Closed Block Business realized
investment gains (losses), net, see “—Realized Investment Gains and General Account Investments—Realized
Investment Gains.”
2002 to 2001 Annual Comparison. Loss from continuing operations before income taxes increased $138 million,
to $757 million for 2002 from $619 million in 2001. The increase in the loss from continuing operations before income
taxes reflects a decline in net investment income, including interest expense on the IHC debt, of $402 million. This
decline reflects our transfer of $5.6 billion of net assets previously associated with the former Traditional Participating
Products segment at the date of our demutualization in late 2001 and a lower investment yield on the assets remaining
in the Closed Block Business, as well as interest expense associated with the IHC debt that we issued in December
2001. Partially offsetting these items was a decrease in the charge for policyholder dividends of $127 million,
reflecting changes in the dividend scale for 2002 and 2003. In addition, we established $144 million of reserves in 2001
Growing and Protecting Your Wealth54