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Prudential Financial 2001 Annual Report - page 39 / 172





39 / 172

Prudential Financial, Inc.

Profitability Our profitability depends principally on our ability to price and manage risk on insurance products, our ability to attract and retain customer assets, and our ability to manage expenses. Specific drivers of our profitability include:

  • our ability to manufacture and distribute products and services and to introduce new products gaining market acceptance on a timely basis;

  • our ability to price our insurance products at a level that enables us to earn a margin over the cost of providing benefits and the expense of acquiring customers and administering those products;

  • our mortality and morbidity experience on individual and group life insurance, annuity and group disability insurance products;

  • our persistency experience, which affects our ability to recover the cost of acquiring new business over the lives of the contracts;

  • our management of our exposure to catastrophic and other losses on our property and casualty insurance products;

  • our cost of administering insurance contracts and providing asset management products and services;

  • our returns on invested assets, net of the amounts we credit to policyholders’ accounts;

  • our ability to earn commissions and fees from the sale and servicing of mutual funds, annuities, defined contribution and other investment products at a level that enables us to earn a margin over the expense of providing such services;

  • the amount of our assets under management and changes in their fair value, which affect the amount of asset management fees we receive;

  • our ability to generate commissions and fees from securities activities at a level that enables us to earn a margin over the expenses of providing such services; and

  • our ability to generate favorable investment results through asset-liability management and strategic and tactical asset allocation.

In addition, factors such as regulation, competition, interest rates, taxes, foreign exchange rates, securities market conditions and general economic conditions affect our profitability. In some of our product lines, particularly those in the Closed Block Business, we share experience on mortality, morbidity, persistency and investment results with our customers, which can offset the impact of these factors on our profitability from those products.

Historically, the participating products included in the Closed Block have yielded lower returns on capital invested than many of our other businesses. Following the demutualization, we expect that the proportion of the traditional participating products in our in force business will gradually diminish as these older policies age and we grow other businesses. However, the relatively lower returns to us on this existing block of business will continue to affect our consolidated results of operations for many years. Our Common Stock reflects the performance of our Financial Services Businesses, but there can be no assurance that the market value of the Common Stock will reflect solely the performance of these businesses. The Financial Services Businesses include the capital previously included in the Traditional Participating Products segment in excess of the amount necessary to support the Closed Block Business. The Financial Services Businesses also includes other traditional insurance products previously included in the Traditional Participating Products segment but which are not included in the Closed Block. The Class B Stock reflects the financial performance of our Closed Block Business.

In February 1998, we announced our intention to seek legislation that would permit our demutualization. The publicity about our possible demutualization may have contributed to improvements in our sales, our persistency experience or both in a number of product lines since that time, although we cannot be certain of this.

Critical Accounting Policies The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires the application of accounting policies that often involve a significant degree of judgment. Management, on an ongoing basis, reviews estimates and assumptions. If management determines, as a result of its consideration of facts and circumstances, that modifications in assumptions and estimates are appropriate, results of operations and financial position as reported in the Consolidated Financial Statements may change significantly.

The following sections discuss accounting policies applied in preparing our financial statements that management believes are most dependent on the application of estimates and assumptions.

Prudential Financial 2001 Annual Report


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